SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission
[ ] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11 or Rule 14a-12
US WATS, Inc.
- ------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- ------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No Fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
___________________________________________________________________
2) Aggregate number of securities to which transaction applies:
___________________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined).
__________________________________________________________________
4) Proposed maximum aggregate value of transaction:
__________________________________________________________________
5) Total fee paid:
__________________________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount Previously Paid:
____________________________________________________________________
2) Form, Schedule or Registration Statement no.:
____________________________________________________________________
3) Filing Party:
____________________________________________________________________
4) Date Filed:
____________________________________________________________________
<PAGE>
US WATS, INC.
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
_________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 18, 1997
__________________________
To our Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders of US
WATS, Inc. (the "Company") to be held on September 18, 1997 at 10:00 a.m. at
the Philadelphia Park Hyatt Hotel, 200 South Broad Street, Philadelphia,
Pennsylvania, for the following purposes:
1. To elect five directors to serve until the next annual meeting of
shareholders;
2. To approve the reincorporation of the Company in Delaware;
3. To approve the adoption of the Company's 1997 Stock Option Plan;
4. To transact such other business as may properly come before the
Annual Meeting.
Only shareholders of record at the close of business on August 12, 1997 will be
entitled to notice of and to vote at the Annual Meeting.
If you do not expect to attend the Annual Meeting in person but wish to have
your shares voted, please promptly sign, date and mail the enclosed proxy in
the envelope provided in order that your shares may be represented at the
Annual Meeting.
By Order of the Board of Directors,
Stephen J. Parker
Secretary
Date: August 18, 1997
(1)
<PAGE>
US WATS, INC.
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
__________________
PROXY STATEMENT
__________________
This proxy statement is furnished to shareholders of US WATS, Inc. (the
"Company") in connection with the solicitation of proxies on behalf of the
Board of Directors of the Company for use at the Annual Meeting of Shareholders
to be held on September 18, 1997 at 10:00 a.m. at the Philadelphia Park Hyatt
Hotel, 200 South Broad Street, Philadelphia, Pennsylvania.
The approximate date of mailing of this proxy statement and accompanying proxy
is August 18, 1997. If the enclosed form of proxy is duly executed and
returned, the shares represented will be voted in accordance with the
instructions marked on the proxy.
REVOCATION
Execution and delivery of the enclosed proxy will not affect the right of any
person to attend the Annual Meeting and vote in person. Any shareholder who
gives a proxy has the power to revoke it at any time before it is voted by
delivery of a written instrument of revocation or a duly executed proxy bearing
a later date to the Secretary of the Company or by a request in person to the
Secretary of the Company to return the executed proxy. The presence of a
shareholder at the Annual Meeting will not operate to revoke a proxy, but the
casting of a ballot by a shareholder who is present at the Annual Meeting will
revoke a proxy as to the matter on which the ballot is cast.
COST OF SOLICITATION
The cost of soliciting proxies is being borne by the Company. In addition to
solicitation by mail, arrangements will be made with brokerage houses and other
custodians, nominees and fiduciaries to send proxies and proxy statements to
their principals, and the Company will reimburse them for their expense in so
doing. Officers, directors and employees of the Company may solicit proxies in
person or by telephone, but will not receive any additional compensation
therefor.
(2)
<PAGE>
VOTING SECURITIES
The Common Stock is the only voting security of the Company outstanding, and
the holders thereof are entitled to one vote per share on each matter. The
holders of the Company's 9% Series Convertible Preferred Stock (the "9% Series
of Preferred Stock") do not have voting rights and are not entitled to vote on
any proposal to be acted on at the annual meeting. Only shareholders of record
at the close of business on August 12, 1997 will be entitled to notice of and
to vote at the Annual Meeting. On July 11, 1997 there were 15,927,100 shares
of Common Stock outstanding. The presence, in person or by proxy, of the
holders of a majority of the outstanding shares of Common Stock will constitute
a quorum at the Annual Meeting for each item of business.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of July 29, 1997
concerning beneficial ownership of the Company's shares of Common Stock by the
only persons or groups known to the Company to be the beneficial owners of more
than 5% of the outstanding shares of Common Stock, and information as of July
11, 1997 concerning beneficial ownership by (a) each director and nominee; (b)
each of the executive officers named in the Summary Compensation Table below,
and (c) all directors and executive officers as a group. Except as otherwise
indicated, each person named or included in a group has sole voting and
investment power with respect to his or its shares of Common Stock. To the
Company's knowledge, no officer or director of the Company owns any shares of
the 9% Series of Preferred Stock.
Name and Address of Beneficial Amount and Nature
Owner or Identity of Group of Beneficial Ownership Percent of Class(1)
- ------------------------------ ----------------------- -------------------
Gold & Appel Transfer, S.A. 1,646,735 10.3%
Omar Hodge Building
Wickhams Cay
Road Town
Tortula, British Virgin Islands
Kevin M. O'Hare 310,000(2) 2.0%
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
Stephen Parker 2,930,000(3) 17.5%
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
Aaron R. Brown 2,400,000(4) 14.5%
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
Murray Goldberg 2,270,000(5) 14.3%
26 Anthony Drive
Malvern, PA 19355
Mark Scully 150,000(6) *
P.O. Box 9260
Incline, NV 89452
(3)
<PAGE>
Name and Address of Beneficial Amount and Nature
Owner or Identity of Group of Beneficial Ownership Percent of Class(1)
- ------------------------------ ----------------------- -------------------
Ward G. Schultz 24,000 *
1240 Turnbury Lane
North Wales, PA 19454
Tansukh Ganatra --(7) --
6523 Ashdale Place
Charlotte, NC 28215
Gary L. Sugarman -- --
Richfield Associates, Inc.
400 Andrews Street, Suite 301
Rochester, NY 14604
All Current Directors and Executive 6,070,000(8) 34.6%
Officers as a group (8 persons)
- -----------------
* Less than 1%
(1) Based on 15,927,100 shares of Common Stock outstanding on July 11, 1997.
Shares which are not outstanding but which a person has the right to
acquire within sixty (60) days of July 11, 1997, are considered as shares
outstanding for purposes of computing the percentage of Common Stock owned
by such person, but such shares are not deemed outstanding for purposes of
computing the percentage of Common Stock owned by any other person.
(2) Includes 300,000 shares issuable to Mr. O'Hare upon exercise of options
granted under the Company's Amended and Restated Stock Option Plan.
10,000 shares are held jointly by Mr. O'Hare and his wife.
(3) Includes 180,000 shares issuable to Mr. Parker upon exercise of options
granted under the Company's Executive Plan and 600,000 shares issuable
upon exercise of warrants issued in consideration of Mr. Parker's limited
personal guarantee of the Company's revolving credit facility (See
"Certain Relationships and Related Transactions").
(4) Includes 600,000 shares issuable upon exercise of warrants issued in
consideration of Mr. Brown's limited personal guarantee of the Company's
revolving credit facility (See "Certain Relationships and Related
Transactions"). 1,000,000 shares are held jointly by Mr. Brown and his
wife.
(5) Does not include 6,000 shares of common stock of the Company owned by two
of Mr. Goldberg's children, as to which Mr. Goldberg disclaims beneficial
ownership.
(6) Represents 150,000 shares issuable to Olney Telecom, Inc. upon exercise of
options, of which Mr. Scully is the sole owner.
(7) Does not include 1,500 shares of common stock of the Company owned by Mr.
Ganatra's son, as to which Mr. Ganatra disclaims beneficial ownership.
(8) Includes shares issuable to Messrs. O'Hare and Parker upon the exercise of
options and warrants described in notes 2 and 3 as well as 11,000 and
9,000 shares held by Messrs. Hurwitz and Shannon, respectively, and shares
issuable to Messrs. Hurwitz (200,000), Mendes (170,000) and Shannon
(170,000) upon the exercise of options.
(4)
<PAGE>
* * * *
ELECTION OF DIRECTORS
(PROPOSAL NO. 1)
Five Directors, constituting the entire membership of the Board of Directors of
the Company, are to be elected at the 1997 Annual Meeting to hold office until
the next Annual Meeting of Shareholders and until the election and
qualification of their successors. All of the nominees are currently Directors
of the Company. All have indicated their willingness to serve if elected.
Unless authority is withheld with respect to any individual nominee or all of
the nominees, the shares represented by the proxies received as a result of
this solicitation will be voted in favor of the nominees listed below. In the
event any nominee declines or is unable to serve, proxies will be voted for the
election of the others so named, and may be voted for such substitute nominees
as the Board may recommend, or the Board may reduce the number of Directors to
eliminate the vacancy. The Board of Directors, however, does not anticipate
that any nominee will decline or be unable to serve.
Directors are elected by a plurality of the votes cast at the Annual Meeting by
the holders of shares entitled to vote. Abstentions and broker non-votes will
not be treated as votes cast.
The Company's Board of Directors met three times during 1996. The Company is
continuing to conduct a search for additional independent Directors to serve on
the Board of Directors. During 1996, the Company's Board of Directors
administered the Company's Stock Option Plan. The Company did not have in
1996, and does not currently have, a stock option, nominating, audit or
compensation committee.
The names of the nominees, and certain information about them, are set forth
below:
Name Age Position Director Since
- --------------- ---- ----------------------------- --------------
Kevin M. O'Hare (36) Director, President and Chief 1996
Executive Officer (1)
Stephen J. Parker (59) Vice Chairman and Secretary (2) 1989
Tansukh Ganatra (53) Director (3) 1997
Murray Goldberg (54) Director (4) 1996
Gary L. Sugarman (44) Principal of Richfield
Associates, Inc. (5) 1997
(1) Kevin M. O'Hare served from 1995 to 1996 as the Corporate Executive Vice
President of C-TEC, a publicly-held telecommunications company. Before
joining C-TEC, Mr. O'Hare served in a general management capacity with ACC
Long Distance Corp. from 1994 to 1995. From 1985 to 1993, Mr. O'Hare
managed telephone companies for Rochester Telephone Corp. (now Frontier
Corporation), including two local exchange carriers, Seneca Gorham
Telephone Company and Ausable Valley Telephone Company. Mr. O'Hare became
a Director, Chief Executive Officer and President of the Company on
December 16, 1996.
(2) Stephen J. Parker holds a Ph.D. from Ohio University. He was employed
part-time by the Company from October 1989 until March 1990. He joined
the Company full-time in March 1990 as Vice President of Operations.
(5)
<PAGE>
Prior to his employment with the Company, and in August 1989, Mr. Parker
and Aaron Brown, a former Director, Chief Executive Officer and Treasurer
of the Company, founded Parker Brown, Inc. ("PBI"), a broker-dealer that
became licensed with the NASD in November 1990. PBI did not conduct any
business, and Mr. Parker sold all of his interest in PBI in September
1991. Mr. Parker and Mr. Brown also founded Parker Brown Partners ("PBP")
in August 1989. PBP was organized to operate as a branch office of Morgan
Gladstone, a registered broker-dealer, and to provide investment banking
and consulting services to start-up and development stage businesses. PBP
operated as a branch office of Morgan Gladstone until April 1990. Mr.
Parker is a former stockbroker, and in addition to his association with
PBI and Morgan Gladstone in 1989-1990, he was employed as a stockbroker
with Princeton Financial, and with Profile Investments, both in
Philadelphia, during 1989. Mr. Parker was Executive Vice President of the
Company until May 24, 1995 and Chief Operating Officer and Chairman of the
Board from that date until December 16, 1996. He has been Vice Chairman
since that date. Mr. O'Hare and Mr. Parker anticipate that the Company
will nominate Mr. Parker as a director of the Company, provided
Mr. Parker's Employment Agreement is still in effect and, provided
further, that Mr. Parker is a principal shareholder in the Company.
(3) Tansukh Ganatra currently serves as President and Chief Operating Officer
for US LEC, a privately- held local exchange carrier in Charlotte, North
Carolina. Prior to founding US LEC, Mr. Ganatra was employed by ACC Corp.
during various periods from 1987 on. At ACC, Mr. Ganatra held various
positions, including President and Chief Operating Officer and Executive
Vice President, and Vice President of Engineering/Operations and President
of ACC Long Distance Corp. Prior to joining ACC Corp., Mr. Ganatra held
various positions with Rochester Telephone Corp. (now Frontier
Corporation). Mr. Ganatra was elected a Director of the Company on
February 11, 1997.
(4) Murray Goldberg, a shareholder of the Company since 1989, and an
independent sales agent of the Company since 1993, is also currently
employed as a sales agent for MEG Associates, a partnership, Mr. Goldberg
also is the owner and a Vice-President of Jamko, Inc., a discount shoe
distributor in Florida and the owner and Director of Doxs, Inc., an
anaesthesia equipment developer and distributor. Jamko, Inc. was in
Chapter 11 bankruptcy for a period of three months in 1996. Prior to
January 1993, Mr. Goldberg worked as an anesthesiologist at Paoli Memorial
Hospital. From June 1994 until May 1996, he was an owner of Strathmore
Bagel Franchise Company. Mr. Goldberg was elected a Director of the
Company in November 1996.
(5) Gary L. Sugarman currently services as the principal of Richfield
Associates Inc., based in Rochester, NY. Richfield Associates provides
investment and strategic banking services, specializing in rural local
exchange, catv and wireless transactions to individuals and companies.
Mr. Sugarman also serves as CEO and has an equity investment in a rural
local exchange company in central Maine, Mid-Maine Telecom. Mr. Sugarman,
who has an MBA from the University of Buffalo, was at Frontier Corporation
from 1984 to 1991 in a variety of positions. He was Manager of
Construction and Engineering and directed their telecommunications
acquisition program from 1988 to 1991. From mid-1991 to April 1993, Mr.
Sugarman was director of telecommunications for Lynch Corporation, a
diversified holding company with operations in manufacturing,
communications and finance and currently serves as a director of
West Enfield Communications, the parent company of Mid-Maine Telecom,
and Hancock Telephone Company. Mr. Sugarman started Richfield Associates
Inc. in early 1993 to provide consulting services to entities and
individuals related to all aspects of telecommunications mergers and
acquisitions and strategic planning. Mr. Sugarman was elected a Director
of the Company in July 1997.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF
ITS NOMINEES.
* * * *
(6)
<PAGE>
REINCORPORATION IN DELAWARE
(PROPOSAL NO. 2)
General
The Board of Directors approved in June 1997, and recommends for shareholder
approval, the change of the Company's state of incorporation from New York to
Delaware (the "Reincorporation"). The Reincorporation will not result in any
change in the capitalization, business, management, assets, liabilities or net
worth of the Company. Reincorporation in Delaware will, however, allow the
Company to take advantage of the modern and flexible provisions of the
corporate laws of Delaware which are periodically updated and revised to meet
changing business needs. The purpose and effects of the Reincorporation are
summarized below.
Following the consummation of the Reincorporation, the separate corporate
existence of US WATS, Inc., a New York corporation, shall cease. A Delaware
corporation to be formed as a wholly-owned subsidiary of the Company will
succeed by operation of law to all of the business, assets and liabilities of
the Company. The mailing address, principal executive offices and telephone
number of the Delaware corporation will be the same as those of the Company.
The Company has preliminarily determined to use the name USWI Corp. ("USWI")
for the Delaware corporation, although it is still assessing the most
appropriate name to be used and may determine the final name of the Delaware
corporation before or after the Annual Meeting. The name "USWI" has been used
throughout the Proxy Statement and the Exhibits for purposes of convenience
only.
AT THE EFFECTIVE TIME OF THE REINCORPORATION THE COMPANY WILL BE GOVERNED BY
DELAWARE LAW, BY A NEW CERTIFICATE OF INCORPORATION AND BY NEW BY-LAWS, EACH
OF WHICH WILL RESULT IN CHANGES IN THE RIGHTS OF THE SHAREHOLDERS.
Upon shareholder approval of the Reincorporation, the Company will be merged
with and into USWI pursuant to the Agreement and Plan of Merger (the "Merger
Agreement"), resulting in a change in the Company's state of incorporation.
The Company will then be subject to the Delaware General Corporation Law and
the Certificate of Incorporation and By-laws of USWI. These differ in certain
respects from the Company's Certificate of Incorporation and By-laws and the
New York Business Corporation Law ("NYBCL") which currently govern the Company.
See "Changes in the Certificate of Incorporation and By-laws" on pages 9
through 14 hereof. Upon the effective date of the Reincorporation (the
"Effective Date"), each outstanding share of Common Stock and the 9% Series of
Preferred Stock of the Company automatically will be converted into one share
of Common Stock or 9% Series of Preferred Stock, respectively, of USWI. Each
share of Common Stock held in the Company's treasury will be cancelled.
Outstanding options to purchase shares of Common Stock of the Company will be
converted into options to purchase the same number of shares of Common Stock of
USWI. Each employee stock option plan and any other employee benefit plan to
which the Company is a party, whether or not such plan relates to the Company's
Common Stock, will be assumed by USWI and, to the extent any such plan provides
for the issuance or purchase of the Company's Common Stock, will be deemed to
provide for the issuance or purchase of shares of Common Stock of USWI.
The Common Stock of USWI will be listed on the NASDAQ Small-Cap market.
Delivery of certificates for the Company's Common Stock issued prior to the
effectiveness of the Reincorporation will constitute "good delivery" of shares
in transactions subsequent to Reincorporation. Certificates representing
shares of USWI Common Stock will be issued with respect to transfers
consummated after the Reincorporation. New certificates will also be issued
(7)
<PAGE>
upon the request of any shareholder, subject to normal requirements as to
proper endorsement, signature guarantee, if required, and payment of applicable
taxes.
IT WILL NOT BE NECESSARY FOR SHAREHOLDERS OF THE COMPANY TO EXCHANGE THEIR
EXISTING STOCK CERTIFICATES FOR CERTIFICATES OF USWI. OUTSTANDING STOCK
CERTIFICATES OF THE COMPANY SHOULD NOT BE DESTROYED OR SENT TO THE COMPANY.
As part of its approval and recommendation of the Company's reincorporation in
Delaware, the Board has approved, and recommends to the shareholders for their
approval, the Merger Agreement pursuant to which the Company will be merged
into USWI. The full text of the Merger Agreement is set forth as Exhibit A
hereto. The discussion contained in this Proxy Statement is qualified in its
entirety by reference to such Exhibit. For additional information and details
relating to these and other changes, reference is made to the Certificate of
Incorporation of USWI attached to this Proxy Statement as Exhibit B, the By-
laws of USWI attached to this Proxy Statement as Exhibit C and the discussions
in this Proxy Statement under "Principal Reasons for Changing the Company's
State of Incorporation," "Changes in the Certificate of Incorporation and By-
laws" and "Certain Differences Between the Corporation Laws of New York and
Delaware." The discussion herein of the provisions of the Certificate of
Incorporation and By-laws of USWI is qualified in its entirety by Exhibits B
and C. Copies of the Certificate of Incorporation and By-laws of the Company
are available for inspection at the principal office of the Company and copies
will be sent to shareholders upon request.
Principal Reasons for Changing the Company's State of Incorporation
The Company's Board of Directors believes that the Reincorporation will provide
flexibility for both the management and business of the Company.
Delaware is a favorable legal and regulatory environment in which to operate
and where a substantial number of Fortune 500 companies are incorporated today.
For many years, Delaware has followed a policy of encouraging incorporation in
that state and, in furtherance of that policy, has adopted comprehensive,
modern and flexible corporate laws which are periodically updated and revised
to meet changing business needs. As a result, many corporations have initially
chosen Delaware for their domicile or have subsequently reincorporated in
Delaware in a manner similar to that proposed by the Company. Because of
Delaware's long-standing policy of encouraging incorporation in that state, and
consequently its preeminence as the state of incorporation for many major
corporations, the Delaware courts have developed a considerable expertise in
dealing with corporate issues and a substantial body of case law has developed
construing Delaware law and establishing public policies with respect to
Delaware corporations. It is anticipated that Delaware corporate law will
continue to be interpreted and explained in a number of significant court
decisions which may provide greater predictability with respect to the
Company's corporate legal affairs. Certain aspects of Delaware corporate law
have, however, been criticized on the ground that they do not afford minority
shareholders the same substantive rights and protections as are available in a
number of other states. For a discussion of certain differences in
shareholders rights and the powers of management under the Delaware General
Corporation law and the NYBCL, see "Certain Differences Between the Corporation
Laws of New York and Delaware" on pages 14 through 16 hereof.
Securities Act Consequences
The shares of USWI Common Stock to be issued in exchange for shares of
Company Common Stock are not being registered under the Securities Act of 1933,
as amended (the "1933 Act"). In that respect, USWI is relying on Rule
145(a)(2) of the Securities and Exchange Commission (the "SEC") under the 1933
Act, which provides that a merger which has as its sole purpose a change in the
(8)
<PAGE>
domicile of the corporation does not involve the sale of securities for
purposes of the 1933 Act. After the Merger, USWI will be a publicly held
company, its Common Stock is expected to be quoted on the NASDAQ Small-Cap
Market and it will file with the SEC and provide to its shareholders the same
type of information that the Company has previously filed and provided.
Shareholders whose Company stock is fully tradable before the Merger will
receive freely tradable USWI stock. Shareholders holding restricted stock of
the Company will receive stock certificates of USWI bearing the same
restrictive legend as appears an their present stock certificates, and their
shares of stock in USWI will be subject to the same restrictions on transfer as
those to which their present shares of stock in the Company are subject. For
purposes of computing compliance with the holding period of Rule 144,
shareholders will be deemed to have acquired their shares in USWI on the date
they acquired their shares in the Company. In summary, USWI and its
shareholders will be in the same respective position under the federal
securities laws after the Merger as were the Company and its shareholders prior
to the Merger.
No Change in Business and Capitalization
The Reincorporation will not result in any change in the capitalization,
business, management, assets, liabilities or net worth of the Company. The
Company's stock certificates will automatically be deemed to represent the same
number of USWI shares as are represented by the Company's certificates prior to
the Reincorporation. Upon consummation of the Reincorporation, the authorized
number of shares of capital stock of USWI will be the same as that of the
Company, and will consist of 30,000,000 shares of Common Stock, with a par
value of one tenth of one cent ($.001) per share and 1,000,000 shares of
Preferred Stock, with a par value of one cent ($.01) per share.
Changes in the Certificate of Incorporation and By-laws
The Merger Agreement provides that the Certificate of Incorporation and By-laws
of USWI shall, at the effective time of the Merger, be the Certificate of
Incorporation and the By-laws of the surviving corporation. Therefore, if the
Merger Agreement is approved by the shareholders, and the Merger is
consummated, certain rights of shareholders and directors of the Company that
previously were governed by the Company's Certificate of Incorporation and By-
laws will be governed by USWI's Certificate and By-laws. USWI's Certificate
and By-laws are being presented to the shareholders of the Company for their
approval as a part of the Reincorporation proposal. The following discussion
sets forth the significant provisions of USWI's Certificate of Incorporation
and By-laws and certain important differences between such new charter
documents and the present charter documents of the Company. The discussion
herein is qualified in its entirety by reference to USWI's Certificate of
Incorporation and By-laws, which are attached as Exhibits B and C,
respectively, to this Proxy Statement. Copies of the Company's existing
Certificate of Incorporation and By-Laws are available to any shareholder upon
request.
Capital Stock. The authorized capital stock of the Company currently consists
of 30,000,000 shares of Common Stock, par value $.001 per share, and 1,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock').
The Company previously designated 150,000 shares of the Preferred Stock as the
9% Series of Preferred Stock.
The authorized capital stock of USWI will also consist of 30,000,000 shares of
Common Stock, par value $.001 per share, and 1,000,000 shares of preferred
stock, par value $.01 per share. The Board of Directors of USWI will be
authorized to provide for the issuance of the preferred stock in series and to
fix the number, designation, powers, preferences and rights of the shares of
such series. Prior to the Merger, the Board of Directors of USWI will
authorize the creation and issuance of the 9% Series of Preferred Stock that
will be issued in the Merger in exchange for the outstanding shares of the 9%
Series of Preferred Stock of the Company.
(9)
<PAGE>
Preemptive Rights and Cumulative Voting. The Company's Certificate of
Incorporation provides that no shareholder shall have preemptive rights to
acquire unissued shares of the stock of the Company or ungranted rights or
options to purchase such stock. Because such preemptive rights are not granted
in the Certificate of Incorporation of USWI, similarly, shareholders will not
have preemptive rights to subscribe to any additional shares of stock of USWI.
The Certificate of Incorporation of USWI, like the Company's current
Certificate of Incorporation, does not provide for cumulative voting in the
election of directors. Therefore, under Delaware law, in the election of
directors of USWI, the holders of a majority of the voting power of the Company
will be entitled to elect all of the directors of USWI.
Compromises with Creditors and Shareholders. Delaware law provides that a
certificate of incorporation may contain a provision allowing for a compromise
or arrangement between a corporation and its creditors or shareholders. Under
such provision, whenever such a compromise or arrangement is proposed, a
Delaware court may order a meeting for the purpose of eliciting an agreement to
the compromise or the arrangement which would be binding on all such creditors
and/or shareholders and the corporation. The Certificate of USWI contains such
a provision, whereas the same is not available under the Company's current
charter documents.
Adoption, Amendment or Repeal of By-laws. The Company's By-laws provide that
the By-laws may be altered, amended, repealed or made, and the By-laws of USWI
may be altered, amended, repealed or adopted, by a vote of the shareholders
representing a majority of all of the shares outstanding and entitled to vote,
at any annual shareholders' meeting or at any special shareholders' meeting
called for that purpose, or by a majority of the Board of Directors at any
regular or special meeting.
The Certificate of Incorporation and the By-laws of USWI also provide that both
the Board of Directors and the shareholders of USWI have the right to alter or
repeal the By-laws, or to adopt new By-laws.
Limitation of Liability of Directors. The Company's Certificate of
Incorporation provides that the personal liability of a Director is eliminated
to the fullest extent permitted by Section 402(b) of the NYBCL. Under the
NYBCL, a corporation may eliminate or limit the personal liability of directors
to the corporation or its shareholders for damages for any breach of duty in
such capacity, but personal liability may not be eliminated or limited in the
case of a judgment or final adjudication adverse to the director in which it is
established that (1) his acts or omissions were in bad faith or involved
intentional misconduct or knowing violation of law, or that he personally
gained a financial profit or other advantage to which he was not legally
entitled, or (ii) he voted for or concurred in a corporate action that violated
the NYBCL with respect to the declaration of dividends, purchase of shares of
the corporation, distribution of assets after dissolution or making loans. The
Certificate of USWI provides that a director of USWI will not be personally
liable to USWI or its shareholders for monetary damages for breach of fiduciary
duty as a director, except to the extent that Delaware law expressly provides
that a director's liability may not be limited. This provision, which is
permitted under Delaware law, does not limit the personal liability of a
director: (i) for any breach of the director's duty of loyalty to the
corporation or its shareholders, (i) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
the unlawful payment of a dividend or an unlawful stock purchase or redemption
by USWI, or (iv) for any transaction from which the director derived an
improper personal benefit. The directors of USWI have a personal interest in
these provisions and may personally benefit from them, even at the potential
expense of the shareholders of USWI.
Indemnification of Directors and Officers. In general, the provisions of
Delaware and New York law regarding indemnification of directors and officers
of a corporation are similar. Under each state's law, a corporation generally
has the power to indemnify any person who was or is a party, or is threatened
to be made a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, other
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than one brought by or in the right of the corporation, because such person is
or was a director or officer of the corporation, against expenses, judgments,
fines, and amounts paid in settlement that are incurred in connection with such
action, suit or proceeding, if he acted in good faith and, under Delaware law,
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, or under New York law, in a manner which he
reasonably believed to be in the best interests of the corporation, and, in any
criminal action or proceeding, in addition, had no reasonable cause to believe
his conduct was unlawful. The laws of both states also provide that a
corporation may indemnify any officer or director involved in any action, suit
or proceeding brought against him by or in the right of the corporation against
expenses, and under New York law, amounts paid in settlement, if his actions
met the above described standard of conduct. Both states' laws also provide
that a corporation must indemnify an officer or director who is successful on
the merits otherwise in the defense of any such action, suit or proceeding.
Indemnification is prohibited under both states' laws in actions brought by the
corporation where the director or officer has been adjudged liable to the
corporation or under New York law where the action is settled or otherwise
disposed of, unless the court determines that under the circumstances he is
fairly and reasonably entitled to indemnity for such portion of his expenses as
the court deems proper. Delaware and New York law permit the corporation to
pay expenses in advance of the final disposition of the action, suit or
proceeding, provided the director or officer agrees to repay such amounts if it
is subsequently determined by a court that he is not entitled to
indemnification. Under New York law, if indemnification payments made to an
officer or director have not been approved by a court or the shareholders, the
Company must give notice to its shareholders of the person to whom
indemnification payments have been made and the amounts paid for
indemnification and the nature and status of the litigation. In addition,
under New York law, if action with respect to the indemnification of any
director or officer is taken by an amendment to the By-laws, resolution of
directors or agreement, shareholders also must be similarly notified. Delaware
law does not require that notice of indemnification be given to shareholders.
Both New York and Delaware law authorize the corporation to provide its
directors and officers with insurance against liabilities that they may incur
as directors and officers.
The By-laws of USWI provide that USWI must indemnify its directors and officers
to the maximum extent allowed by Delaware law. The By-laws of USWI also
require USWI to pay reasonable expenses in advance of the final disposition of
any action, suit or proceeding in the manner and to the full extent permissible
under Delaware law. The general effect of the By-laws of USWI is to require
that USWI indemnify its directors and officers in cases where Delaware law
would otherwise permit, but not require, indemnification. The directors and
officers of USWI have a personal interest in these provisions and may
personally benefit from them, even at the potential expense of the shareholders
of USWI.
The rights to indemnification provided in the By-laws of USWI are not exclusive
of any other rights which may be available under any insurance or other
agreement, by vote of shareholders or disinterested directors or otherwise. In
addition, the By-laws of USWI authorize USWI to maintain insurance an behalf of
any person who is or was a director, officer, employee or agent of USWI or is
or was serving at the request of the Company as a director, officer, employee,
agent, fiduciary or other representative of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, whether or not
USWI would have the power to provide indemnification to such person.
The Company's Certificate of Incorporation currently provides for
indemnification of its officers and directors, to the fullest extent permitted
under the NYBCL. The general effect of this provision is to require the
Company to indemnify its directors and officers in cases where New York law
would otherwise permit, but not require indemnification. This right to
indemnity is not exclusive of any other right to indemnification which such
person may be entitled by resolution, By-law, agreement or otherwise as to any
action in any capacity in which such person served at the request of the
Company.
(11)
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The Company has entered into indemnification agreements with each of Messrs.
Aaron Brown, Stephen Parker and Kevin O'Hare. These indemnification agreements
contractually obligate the Company to indemnify each of such persons for
actions taken, or omitted to be taken, by them as officers and directors of the
Company to the maximum extent allowed by law.
There is currently pending against the Company, and Messrs. O'Hare, Brown and
Parker, a lawsuit instituted by a former officer of the Company. The Company
intends to advance to these individuals amounts sufficient to pay their
expenses in defending this suit. ( See "Legal Proceedings").
Shareholder Action by Written Consent. Under New York law, any action required
or permitted to be taken at a meeting of the shareholders may be taken without
a meeting if a written consent thereto is signed by shareholders of all
outstanding shares entitled to vote thereon. The Company's current By-laws
expressly provide that any action required or permitted to be taken at a
meeting of the shareholders may be taken without a meeting if a written consent
to such action is signed by the holders of all of the outstanding shares
entitled to vote on such action.
Under Delaware law and USWI By-laws, any action required or permitted to be
taken at any annual or special meeting of shareholders may be taken without a
meeting by majority shareholder consent. Thereafter, under Delaware law, prompt
notice of action taken without a meeting by less than unanimous written consent
must be sent to the shareholders of the corporation who have not consented in
writing.
The Board of Directors believes that the ability of the shareholders to take
action by majority shareholder consent is in the best interests of USWI and its
shareholders. The majority shareholder consent procedure may allow the company
to take certain corporate action on a more expeditious basis than would be
possible if it had to call a shareholders' meeting to consider the matter.
Quorum; Required Vote for Shareholder Action. The Company's current By-laws
provide that, except in the case of a special election of directors under
Section 603 of the NYBCL, in which case the shareholders attending the meeting
shall constitute a quorum, a majority of the outstanding shares of the Company
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. The current By-laws of the Company provide that
directors shall be elected by a plurality of the votes cast, and that other
actions must be approved by a majority of the votes cast, unless New York law
requires a different percentage for approval of the matter. The NYBCL,
requires, in general, that certain fundamental corporate transactions,
including a merger, consolidation, sale of assets or dissolution of a
corporation be approved by the affirmative vote of two-thirds of the
outstanding shares entitled to vote thereon.
The By-laws of USWI provide that the holders of a majority of the stock issued
and outstanding and entitled to vote, present in person or represented by
proxy, shall constitute a quorum at all meetings of the shareholders, except as
otherwise provided by law or by the Certificate of Incorporation. The
Certificate of USWI does not contain any provisions with respect to shareholder
quorums. The By-laws of USWI also provide that when a quorum is present at any
meeting, except for elections of directors, which shall be decided by plurality
vote, the vote of the holders of a majority of the stock having voting power
present in person or represented by proxy shall decide any question brought
before such meeting, unless the question is one upon which by express provision
of statute or of the Certificate of Incorporation, a different vote is
required, in which case such express provision shall govern and control the
decision of such question. Delaware law requires, in general, that certain
fundamental corporate transactions, including a merger, consolidation, sale of
assets or dissolution of a corporation be approved by the affirmative vote of a
majority of the outstanding shares entitled to vote thereon.
Record Dates. The current By-laws of the Company authorize the directors of
the Company to fix a record date for determining shareholders entitled to vote
at any meeting of shareholders, to express consent to corporate action in
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writing without a meeting, or for the purpose of determining shareholders
entitled to receive payment of any dividend or distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change,
conversion, or exchange of shares or any other lawful action. Such record date
must be not more than 50 days or not less than 10 days prior to the date of
such meeting nor more than 50 days prior to any other action which the
particular action requiring such determination of shareholders is to be taken.
The By-laws of USWI authorize the directors of the Company to fix a record date
for similar purposes, as well as to determine the shareholders entitled to
consent to corporate action in writing without a meeting. Such record date
must not precede the date on which the resolution fixing the record date is
adopted by the Board. In the case of a meeting of shareholders, the record
date cannot be more than 60 nor less than 10 days before the date of the
meeting; and in the case of consents in writing without a meeting, the record
date cannot be more than 10 days after the date the resolution fixing the
record date is adopted by the directors. In other cases, the record date may
not be more than 60 days before the payment, allotment, change, conversion,
exchange or other action.
Special Meetings of Shareholders. Pursuant to the Company's current By-laws,
special meetings of shareholders generally may be called at any time by the
president, a majority of the entire Board of Directors or the holders of not
less than one-third of the number of shares entitled to vote if requested in
writing. Under the By-laws of USWI, special meetings of the shareholders of
USWI may be called by the Chief Executive Officer or a majority of the Board of
Directors.
Filling Vacancies on the Board of Directors. The By-laws of USWI provide that
vacancies on the Board of Directors and newly-created directorships resulting
from any increase in the number of directors, may be filled by a majority of
the remaining directors, though less than a quorum, or by a sole remaining
director. Under the By-laws of USWI and Delaware law, if, at the time of
filling any vacancy or newly created directorship, the directors then in office
constitute less than a majority of the entire Board of Directors (as
constituted immediately prior to any such increase), the Delaware Court of
Chancery may, upon application of shareholders holding at least 10 percent of
the total number of shares at the time outstanding having the right to vote for
such directors, order an election to be held to fill any such vacancies or
newly created directorships, or to replace the directors chosen by the
directors then in office.
The Company's current By-laws provide that any Director may tender his
resignation at any time. Any Director or the entire Board of Directors may be
removed, with or without cause, by vote of the shareholders. In the interim
between annual meetings of shareholders or special meetings of shareholders
called for the election of Directors or for the removal of one or more
Directors and for the filling of any vacancy in that connection, newly created
Directorships and any vacancies in the Board of Directors, including unfilled
vacancies resulting from the resignation or removal of Directors for cause or
without cause, may be filled by the vote of a majority of the remaining
Directors then in office, although less than a quorum, or by the sole remaining
Director.
Notifications of Nominations and Proposed Business. USWI's By-laws provide
that nominations for the election of directors and business to be brought
before any stockholders' meeting may be made or proposed by or at the direction
of the Board of Directors of USWI, USWI's Chief Executive Officer, a proxy
committee appointed by the Board of Directors, or by any stockholder entitled
to vote in the election of directors generally. Under the USWI By-laws, a
stockholder wishing to nominate a person for election as a director or to
propose business to be brought before a stockholders' meeting, must give USWI
prior written notice of his intent to make the nomination or to propose
business a specified period of time prior to the meeting. To be timely, a
stockholder's notice must be received by USWI not less than 70 days nor more
than 90 days prior to the first anniversary of the previous year's Annual
Meeting or, in the case of a Special Meeting, not earlier than the 90th day
before such meeting and not later than the later of the 70th day prior to such
meeting and the 10th day following the day on which notice of the meeting was
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mailed or public announcement of the date of such meeting was made, whichever
first occurs. The stockholder's notice must set forth: (1) the name and
address of the stockholder intending to make a nomination or propose business
and the name of the person or persons to be nominated or the business to be
presented; (2) a representation that the proposing stockholder is a holder of
record of stock of USWI and is entitled to vote at the meeting and that he
intends to appear in person or by proxy at the meeting to nominate the person
specified in the notice or to make the proposal to the meeting; (3) a
description of all arrangements or understandings between the proposing
stockholder and each nominee for director and any other person or persons
pursuant to which the nomination or nominations are to be made by the
stockholder or the business is to be proposed; (4) such other information
regarding the nominee or business to be proposed by such stockholder as would
be required to be included in a proxy statement filed under the SEC's rules had
the nominee been nominated or the matter been proposed by the Board of
Directors; and (5) if applicable, a consent of each nominee to serve as
director of the Company if elected.
The Company's existing By-laws do not contain any provision for advance
notification to the Company of a stockholder's intention to nominate
individuals for election as directors or to propose business at a stockholders'
meeting.
Certain Differences Between the Corporation Laws of New York and Delaware
Although it is impractical to compare all of the differences between the laws
of New York and the laws of Delaware, among the differences are the right under
Delaware law to merge or dissolve the Company with the approval of the holders
of only a majority of, rather than two-thirds of, the Company's shares, as
provided under the NYBCL, the right under Delaware law to take corporate action
without a shareholders' meeting upon the written consent of less than all
shareholders, which under the NYBCL and the Company's charter documents
requires the written consent of all shareholders, the minimum size of the Board
of Directors and committees of the Board of Directors, the right of a Board of
Directors of a Delaware corporation to authorize loans to corporate directors
who are officers or employees and the right under Delaware law to issue stock
options without seeking shareholder approval. In addition, Delaware's
appraisal rights provisions are more limited. This summary does not purport to
be a complete statement of the differences between the NYBCL and the DGCL and
related laws affecting shareholders, rights, and the summary is qualified in
its entirety by reference to the provisions of these laws.
Vote Required for Certain Extraordinary Corporate Transactions. New York law
requires the affirmative vote of the holders of two-thirds of all of a
corporation's outstanding shares entitled to vote thereon to authorize a
merger, consolidation, share exchange, dissolution or disposition of
substantially all of its assets. The DGCL requires the affirmative vote of
only a majority of the outstanding stock entitled to vote thereon to authorize
any such action, unless otherwise expressly provided in the certificate of
incorporation. In addition, Delaware law permits a merger without approval of
the shareholders of the surviving corporation if, among other things, no
charter amendment is involved, each outstanding share of Common Stock is to be
an identical share of the surviving corporation after the merger, and the
merger results in no more than a 20% increase in outstanding shares of Common
Stock of such corporation, unless otherwise expressly provided in the
certificate of incorporation.
Corporate Action without a Shareholders Meeting. New York law does not permit
shareholders to take corporate action by majority written consent. Delaware
law permits corporate action without a meeting of shareholders upon the written
consent of the holders of that number of shares necessary to authorize the
proposed corporate action being taken, unless the certificate of incorporation
expressly provides otherwise. Thereafter, under Delaware law, prompt notice of
such action must be sent to all shareholders of the Company who did not consent
to such action.
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Dissenters' Rights. New York law provides that, upon compliance with the
applicable requirements and procedures, a dissenting shareholder has the right
to receive the fair value of his or her shares if he is entitled to vote and
objects to (i) certain mergers, (ii) certain share exchanges, (iii) a
consolidation, (iv) a disposition of assets requiring shareholder approval and
(v) certain amendments to the certificate of incorporation which adversely
affect the rights of such shareholder. Delaware law provides such appraisal
rights only in the case of a shareholder objecting to certain mergers or
consolidations, and such appraisal rights do not apply (i) to shareholders of
the surviving corporation in a merger if shareholder approval of the merger is
not required or (ii) to any class of stock which is either listed on a national
securities exchange or held of record by more than 2,000 holders unless
shareholders are required to accept for their shares in the merger or
consolidation anything other than Common Stock of the surviving or resulting
corporation or Common Stock of another corporation that is so listed or held
(and cash in lieu of fractional shares).
Preemptive Rights. Under the NYBCL, unless a corporation's certificate of
incorporation provides otherwise, shareholders generally have preemptive rights
to acquire unissued securities or rights to purchase securities of a New York
corporation before a corporation may offer them to other persons. Under
Delaware law, stockholders do not have preemptive rights unless the Certificate
of Incorporation specifies that they do. The Certificate of Incorporation of
US WATS New York expressly disclaims preemptive rights and the Certificate of
Incorporation of USWI does not provide preemptive rights. Accordingly, the
Reincorporation will not change the current rights of the Company's
shareholders in this regard.
Dividends. Under both New York and Delaware law, a corporation may generally
pay dividends out of surplus. In addition, Delaware law permits a corporation,
under certain circumstances, to pay dividends, if there is no surplus, out of
its net profits for the fiscal year in which the dividend is declared and/or
the preceding fiscal year. The Company currently has no plans to pay dividends
on its Common Stock.
Number of Directors; Size of Committees. Under New York law, the board of
directors and each committee of the board of directors of corporations such as
the Company must consist of three or more directors. The number of directors
may be increased or decreased to not less than three by amendment of the by-
laws or by action of the shareholders or of the board under the specific
limitation of a by-law adopted by the shareholders, subject to certain
limitations. Under Delaware law, a board of directors or a committee of the
board of directors may consist of a single director. If the certificate of
incorporation does not specify the number of directors, the board of directors
may fix or change the authorized number of directors pursuant to a provision of
the by-laws.
Classification of the Board of Directors. New York law permits a classified
board of directors with as many as four classes but forbids fewer than three
directors in any class. Delaware law permits a classified board of directors
with as many as three classes with staggered terms of office with only one
class of directors coming up for election each year, and does not forbid fewer
than three directors in any class.
Loans to Directors. New York law prohibits loans to directors unless
authorized by a vote of shareholders other than the borrower. Delaware law
permits transactions between a company and a director if a majority of
disinterested directors are made aware of the material facts of the transaction
and approve such transaction. Delaware law permits the Board of Directors,
without shareholder approval, to authorize loans to officers and employees,
including officers who are also corporate directors, whenever the directors
reasonably expect such loan to benefit the corporation.
Rights and Options. New York law requires shareholder approval of the issuance
of any rights or options to directors, officers or employees. Delaware law
does not require shareholder approval of such issuances.
(15)
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Consideration for Shares. New York law provides that neither obligations of
the subscriber for future payments nor obligations of the subscriber for future
services shall constitute payment or part payment for the issuance of shares by
a corporation. Furthermore, certificates for shares may not be issued until
the full amount of the consideration therefor has been paid (except in the case
of shares purchased pursuant to stock options under a plan permitting
installment payments). Delaware law provides that shares of stock may be
issued, and deemed to be fully paid and nonassessable, if the corporation
receives consideration (in the form of cash, services rendered, personal
property, real property, leases of real property, or a combination thereof)
having a value not less than the par value of such shares and the corporation
receives a binding obligation of the subscriber to pay the balance of the
subscription price.
Inspection of Shareholder's List. New York law provides that a shareholder may
inspect a shareholders' list on at least 5 days' written demand if such person
(i) has been a shareholder for at least 6 months immediately preceding his
demand or (ii) holds, or is authorized in writing by the holders of, at least
5% of any class of outstanding shares. The corporation has certain rights
calculated to assure itself that the demand for inspection is not for a purpose
or interest other than that of the corporation. Delaware law permits any
shareholder, upon written demand, to inspect the shareholder's list for a
purpose reasonably related to such person's interest as a shareholder and,
during the 10 days preceding a shareholders' meeting, for any purpose germane
to that meeting.
Business Combination Statutes. New York law restricts certain business
combinations between a "resident domestic corporation" and an interested
shareholder. The NYBCL defines "resident domestic corporation" as any
corporation that, among other things, has its principal executive offices and
significant business operations in New York or has at least 250 or 25% of its
employees in New York. As a result, these provisions currently would not apply
to the Company. Delaware prohibits any "business combination" between a
Delaware corporation and an "interested shareholder" for three years following
the date that the interested shareholder became an interested shareholder
unless (i) prior to that date the Board approved the business combination or
the transaction that resulted in the interested shareholder becoming an
interested shareholder, (ii) upon consummation of the transaction that resulted
in the interested shareholder becoming an interested shareholder the interested
shareholder held at least 85% of the outstanding voting stock of the
corporation at the time the transaction commenced (not counting shares owned by
persons who are both officers and directors and certain shares in employee
stock plans), or (iii) on or subsequent to such date the business combination
is approved by the board and at least two-thirds of the outstanding shares of
voting stock not owned by the interested shareholder. The Delaware statute
defines "interested shareholder" as any person who beneficially owns, directly
or indirectly, 15% or more of the outstanding voting stock of the corporation
at any time within the 3-year period immediately prior to the date on which it
is determined whether a shareholder is interested. Unlike New York, Delaware
does not require that the corporation's principal executive office and
significant operations be located within the state in order to be covered by
this law.
The Board of Directors of the Company may terminate the Reincorporation at any
time prior to the effective date of the merger, whether before or after
approval by the shareholders of the Company, if (i) the Reincorporation shall
not have received the requisite approval of the shareholders of the Company; or
(ii) the Board of Directors of the Company determines, in its sole discretion,
that the Reincorporation would be inadvisable or not in the best interests of
the Company and its shareholders.
Federal Income Tax Consequences
Under current law the Reincorporation will constitute a tax-free reorganization
under Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the principal Federal income tax consequences of the
Reincorporation will be as set forth below. No ruling has been requested from
the Internal Revenue Service confirming the Federal income tax consequences of
the Reincorporation.
(16)
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Assuming the Reincorporation qualifies as a reorganization under Section 368 of
the Code, no gain or loss will be recognized to holders of US WATS New York
shares who exchange their US WATS New York shares solely for USWI shares.
Current holders of US WATS New York shares will have the same tax basis in the
shares of USWI received in the Reincorporation as the basis in the shares of US
WATS New York exchanged therefor, and their holding period for the shares of
USWI will include the period during which the shares of US WATS New York were
held, provided such shares of US WATS New York were held as capital assets on
the Effective Date.
No Dissenters' Rights of Appraisal
Shareholders who do not consent to the Reincorporation proposal do not have
dissenters' appraisal rights with respect to the shares held by them.
Required Vote
Shareholder approval of the Reincorporation proposal is required by the NYBCL.
Approval of the Reincorporation proposal requires the affirmative vote of the
holders of two-thirds of the outstanding shares of the Company's Common Stock.
If a proxy is marked as "withhold authority" or "abstain" on this proposal, or
if instructions are given that no vote be cast on this proposal, the shares
represented by such proxy will not be voted on this proposal. Abstentions and
broker and other specified non-votes on the Reincorporation proposal will have
the same effect as casting a vote against the Reincorporation proposal.
Approval of the Reincorporation proposal constitutes approval of the Merger
Agreement and Merger, and USWI's Certificate of Incorporation and By-Laws.
THE BOARD OF DIRECTORS HAS APPROVED AND RECOMMENDS A VOTE "FOR" THE
REINCORPORATION FROM NEW YORK TO DELAWARE.
* * * * *
APPROVAL OF THE 1997 STOCK OPTION PLAN
(PROPOSAL NO. 3)
In June 1997, the Board of Directors approved the US WATS, Inc. 1997 Stock
Option Plan (the "Plan") in order to provide an incentive to non-employee
directors and to officers and certain other key employees of and consultants to
the Company by making available to them an opportunity to acquire a proprietary
interest or to increase their proprietary interest in the Company. The Plan
provides for the award of options (each an "Award") representing or
corresponding to up to 3,000,000 shares of Common Stock. The market value of
the shares reserved for issuance under the Plan at July 11, 1997, was
$4,593,750 or $1.53125 per share (based on the last sale price of the Company's
Common Stock on such date). Any Award issued under the Plan which is
forfeited, expires or terminates prior to vesting or exercise will again be
available for Award under the Plan.
Description
THE FOLLOWING DESCRIPTION OF THE PLAN IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE PLAN WHICH IS SET FORTH AS EXHIBIT D TO THIS
PROXY STATEMENT.
(17)
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The Committee Administers the Plan. The Committee, as defined in the
Plan, or, if there is no Committee, the full Board of Directors of the Company
(the "Board"), has the full power and authority, subject to the provisions of
the Plan, to designate participants, grant Awards and determine the terms of
all Awards. The Committee or full Board, as appropriate, has the right to make
adjustments with respect to Awards granted under the Plan in order to prevent
dilution of the rights of any holder. Members of the Committee are non-
employee directors within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, and outside directors within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
Options Issued Under the Plan. The terms of specific options are
determined by the Committee or full Board, as appropriate. Options granted may
be non-qualified stock options ("NQSO's") or incentive stock options within the
meaning of Code Section 422 ("ISO's"). The exercise price per share for an
NQSO is subject to the determination of the Committee or full board, as
appropriate (except that those who own over 10% of the Company's voting stock
and reside in California are granted NQSO's at 110% of the fair market value on
the date of grant). Incentive stock options may not be granted at less than
100% of the fair market value of the Common Stock of the Company at the date of
grant, except for owners of over 10% of the Company's voting stock, who are
granted ISO's at 110% of the fair market value. Each option will be
exercisable for the period or periods specified in the option agreement, which
will not exceed 10 years from the date of grant. The option will be
exercisable in such installments and on such dates as the Committee or full
Board specifies, except that options given to California residents will be
exercisable at a rate of at least 20% per year over five year from the date of
grant.
Upon the exercise of an option, the optionee shall pay to the Company the
exercise price plus the amount of the required Federal and state withholding
taxes, if any. Options may be exercised and the withholding obligation may be
paid for with cash and, with the consent of the Committee or full Board, as
appropriate, shares of Common Stock, other securities (including options) or
other property. The period after termination of employment during which an
option may be exercised is as determined by the Committee, or full Board, as
appropriate. Each option is nontransferable other than by will or the laws of
descent and distribution, except where an NQSO agreement provides otherwise.
Amendment. The full Board may suspend or terminate the Plan and the Committee
may alter outstanding options, except that shareholders' consent is necessary
to change the class of employees eligible to receive ISOs, increase the maximum
number of ISOs to be granted (except for capital adjustments), alter the
duration of any ISO or for amendments requiring shareholder approval pursuant
to Treas. Reg. Sec. 1.162- 27(e)(4)(vi).
Indemnification. The Committee, or full Board, as appropriate, is indemnified
under the Plan against certain costs and expenses reasonably incurred by them
in connection with a claim, and amounts to be paid to settle or paid in
satisfaction of a judgment if no finding of willful misconduct or recklessness
is made.
Awards Granted
No options have been granted to date under the Plan. Eligible persons may
receive grants under the Plan in the future at the discretion of the
Compensation Committee or Board, as appropriate.
Federal Income Tax Consequences
Based on the advice of counsel, the Company believes that the normal operation
of the Plan should generally have, under the Code and the regulations and
rulings thereunder, all as in effect on July 1, 1997, the principal Federal
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income tax consequences described below. It should be noted that the
consequences described below do not take into account any changes to the Code
or the regulations thereunder which may occur after July 1, 1997.
(a) Incentive Stock Options. To the extent options issued under the Plan
qualify as ISOs under Section 422 of the Code, the principal Federal income tax
consequences to each optionee and to the Company should generally be as
follows:
(1) The optionee will not recognize taxable income and the Company will
not be entitled to a deduction upon the grant of an ISO. Moreover, the
optionee will not recognize taxable income and the Company will not be entitled
to a deduction upon the exercise by the optionee of an ISO, provided the
optionee was an employee of the Company or any of its subsidiary corporations,
as defined in Section 424(f) of the Code during the entire period from the date
of grant of the ISO until three months before the date of exercise (increased
to 12 months if employment ceased due to total and permanent disability).
However, an amount, generally equal to the excess of the fair market value of
the Common Stock over the exercise price at the time of exercise, will
ordinarily be included in the optionee's alternative minimum taxable income in
the year of exercise. The employment requirement is waived in the event of the
optionee's death. (Of course, in all of these situations, the ISO itself may
provide a shorter exercise period after employment ceases than the allowable
period under the Code.)
If the employment requirements described above are not met, the tax
consequences relating to NQSOs (discussed below) will apply.
(2) If the optionee disposes of the Common Stock acquired under an ISO
after at least two years following the date of grant of the ISO and at least
one year following the date of transfer of the Common Stock to the optionee
following exercise of the ISO, the optionee will recognize a long-term capital
gain or loss equal to the difference between the amount realized upon the
disposition and the exercise price, assuming such Common Stock was held by the
optionee as capital assets.
(3) If the optionee makes a disqualifying disposition of the Common Stock
(that is, disposes of the Common Stock within two years after the date of grant
of the ISO or within one year after the transfer of the Common Stock to the
optionee), but all other requirements of Section 422 of the Code are met, the
optionee will generally recognize ordinary income upon disposition of the
Common Stock in an amount equal to the lesser of (i) the fair market value of
the Common Stock on the date of exercise minus the exercise price, or (ii) the
amount realized on disposition minus the exercise price. Disqualifying
dispositions of Common Stock may also, depending upon the sales price, result
in either long-term or short-term capital gain or loss under the Code rules
which govern other stock dispositions, assuming that the Common Stock is held
as a capital asset.
(4) Where all requirements of Section 422 of the Code, including the
holding and employment requirements described in (1) and (2) above, are met,
the Company is not entitled to any Federal income tax deduction with respect to
the ISO. In those cases where any of such requirements are not met, the
Company will be allowed a Federal income tax deduction to the extent of the
ordinary income includible in the optionee's gross income in accordance with
the provisions of Section 83 of the Code (and Section 162(m) of the Code, to
the extent applicable) and the regulations thereunder.
(b) Nonqualified Stock Options. To the extent options, when granted, are
NQSOs, or to the extent options, when granted, are intended to be ISOs but fail
to qualify as such, the principal Federal income tax consequences to each
optionee and to the Company should generally be as follows:
(1) The optionee will not recognize taxable income and the Company will
not be entitled to a deduction upon the grant of an NQSO.
(19)
<PAGE>
(2) Generally, the optionee will recognize ordinary income at the time of
the exercise of the NQSO, in an amount equal to the excess of the fair market
value of the Common Stock at the time of such exercise over the exercise price.
(3) The Company will be entitled to a deduction to the extent of the
ordinary income recognized by the optionee in accordance with the rules of
Section 83 of the Code (and Section 162(m), to the extent applicable) and the
regulations thereunder.
(4) Gain or loss recognized by the recipient upon a subsequent disposition
of such Common Stock will be short- or long-term capital gain or loss, if such
Common Stock is otherwise a capital asset in the hands of the recipient.
(5) Section 162(m) of the Code limits the extent to which the remuneration
paid to the Chief Executive Officer and the four highest compensated executives
(other than the Chief Executive Officer) (collectively, the "Covered
Employees") is deductible by a corporation when the annual remuneration for any
of these officers exceeds $1,000,000 in a calendar year. Remuneration for
purposes of Section 162(m) includes cash compensation and noncash benefits paid
for services (including, with respect to NQSOs, the difference between the
exercise price and the market value of the stock at the time of exercise),
subject to certain exclusions. Approval of the Plan by the Company's
stockholders will prevent the spread upon exercise of NQSOs from treatment as
remuneration for purposes of Section 162(m) so that if any remuneration paid to
any of the Covered Employees exceeds $1,000,000 in the future, any compensation
recognized upon the exercise of the NQSOs granted under the Plan will be
deductible by the Company.
Required Vote
Stockholder approval of the Plan is required under the NYBCL and for purposes
of Section 422 of the Code (relating to the federal income tax treatment of
ISOS described under the caption, "Federal Income Tax Consequences" above). If
not approved by the stockholders, the Plan will be null and void. To date, no
options have been granted under the Plan. Upon stockholder approval of the
Plan, the Company will have the authority to grant options to its directors,
officers, and key employees from time to time as determined by the Committee.
Consequently, the Company's executive officers and directors have an interest
in the approval of the Plan.
Adoption of the Plan will require the affirmative vote of the holders of a
majority of the shares of the Company's Common Stock. If a proxy is marked as
"withhold authority" or "abstain" on this proposal, or if specific instructions
are given that no vote be cast on this proposal ("specified non-vote"), the
shares represented by such proxy will not be voted on this matter.
Accordingly, abstentions and broker and other specified non-votes will have the
effect of a vote against the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE
1997 STOCK OPTION PLAN.
* * * * *
RELATIONSHIP WITH INDEPENDENT PUBLIC AUDITORS
On January 12, 1996, the Company replaced Baratz & Associates, P.A. as the
principal accountant for the Company and its subsidiaries. The former
(20)
<PAGE>
principal accountant's reports on the Company's financial statements for the
most recent two fiscal years audited by them (i.e. 1994 and 1995) did not
contain an adverse opinion or a disclaimer of opinion, nor were its opinions
qualified or modified as to uncertainty, audit scope or accounting principles.
The Company's decision to replace Baratz & Associates as its principal
accountant was approved by the Board of Directors. During such two most recent
fiscal years and the subsequent interim period preceding the Company's
replacement of its principal accountant, there were no disagreements with the
former accountant on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the former accountant,
would have caused it to make reference to the subject matter of the
disagreement in connection with its report.
Rudolph, Palitz LLP was the Company's independent accountant with respect to
the consolidated financial statements of the Company during the fiscal year
ended December 31, 1996. On March 14, 1997, the Company replaced Rudolph,
Palitz LLP as the principal accountant for the Company and its subsidiaries.
The former principal accountants' report on the Company's consolidated
financial statements for 1996 did not contain an adverse disclaimer or opinion,
nor was its opinion qualified or modified as to uncertainly, audit scope or
accounting principles. The decision to replace Rudolph, Palitz as its
accountant was approved by the Board of Directors. During 1996 and through the
date of their replacement, there were no disagreements with Rudolph Palitz on
any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of the former accountant, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report.
On March 14, 1997, the Company engaged as its new principal accountant Deloitte
& Touche LLP. During the two most recent fiscal years and through the date of
their appointment, the Company has not consulted with Deloitte & Touche LLP on
matters of the type contemplated by Item 304(a)(2) of Regulation S-K. Deloitte
& Touche will be the Company's principal accountant for the 1997 fiscal year. A
representative of Deloitte & Touche is expected to be present at the Annual
Meeting and will have the opportunity to make a statement if he desires to do
so. The representative is also expected to be available to respond to
appropriate questions of shareholders.
* * * * *
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows for the years ended December 31, 1994, 1995 and 1996,
certain compensation paid or accrued by the Company for services by the
Company's Chief Executive Officer and its next four most highly compensated
executive officers (the "Named Officers") for the years indicated. Although
several of the Company's Named Officers are no longer employed by the Company,
information is provided with respect to these officers because the rules and
regulations of the Securities and Exchange Commission require disclosure for
those officers who were employed by the Company at the end of 1996 and/or
received salaries from the Company in excess of $100,000 in fiscal 1996. For
information about the employment status of the Named Officers and the current
executive officers of the Company, see the footnotes to this Summary
Compensation Table and the section entitled "Executive Officers."
(21)
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
- ----------------------------------------------------------------------------------------------------------------------------------
Name Other Restricted Common All
and Annual Stock Stock LTIP Other
Principal Salary Bonus Comp.(1) Awards Underlying Payouts Comp.
Position Year ($) ($) ($) ($) Options (#) ($) ($) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kevin M. O'Hare, '96 8,333 -- -- -- 1,000,000 -- --
President and '95 N/A N/A N/A N/A N/A -- N/A
Chief Executive '94 N/A N/A N/A N/A N/A -- N/A
Officer(3)
Aaron R. Brown, '96 165,000 -- -- -- -- -- 1,116
Former Chief '95 160,000 -- -- -- 600,000(5) -- 1,932
Executive Officer '94 149,063 -- -- -- -- -- 1,070
and Treasurer(4)
Stephen J. Parker, '96 165,000 -- -- -- -- -- 2,065
Secretary(6) '95 160,000 -- -- -- 600,000(5) -- 4,332
'94 149,063 -- -- -- -- -- 3,098
Mark Scully, '96 150,000 -- -- -- -- -- --
Former President(7) '95 100,000 -- -- N/A 850,000(8) -- --
'94 N/A N/A N/A N/A 150,000(9) N/A N/A
Ward G. Schultz '96 121,666 -- -- -- -- -- --
Chief Financial '95 94,000 37,500(11) -- -- 100,000 -- --
Officer(10) '94 75,301 -- -- -- 200,000 -- --
</TABLE>
(1) For 1994, 1995 and 1996 the aggregate amount of such Other Annual
Compensation for each named officer is not reportable under SEC rules
because such amount is neither $50,000 or 10% of the total salary and
bonus for such named officer.
(2) Includes amounts paid for life insurance of the named officer where the
Company is not the beneficiary of the policy.
(3) Mr. O'Hare became President and Chief Executive Officer of the Company on
December 16, 1996.
(4) Mr. Brown resigned his positions with the Company as Chief Executive
Officer and Treasurer effective December 16, 1996, but remained a Director
of the Company at the end of fiscal 1996.
(5) On May 11, 1995, the Company agreed to issue each of Messrs. Brown and
Parker warrants to purchase 600,000 shares of the Company's Common Stock
in consideration for their limited personal guarantees provided in
connection with the Company's revolving credit facility. The warrants
were issued after the rescission of a transaction consisting of a stock
grant and option cancellation described under "Certain Relationships and
Related Transactions."
(6) Mr. Parker resigned his position with the Company as Chief Operating
Officer on December 16, 1996.
(7) Mr. Scully terminated employment as President of the Company on December
30, 1996.
(22)
<PAGE>
(8) Mr. Scully's options to purchase 850,000 shares of the Company's Common
Stock terminated upon his termination as President on December 30, 1996.
Mr. Scully has instituted litigation against the Company and Messrs.
O'Hare, Brown and Parker in connection with his termination. (See "Legal
Proceedings").
(9) Represents options to purchase 150,000 shares of the Company's Common
Stock granted outside of any benefit plan granted to Olney Telecom, Inc.
on December 12, 1994, as compensation for its services as an independent
contractor. Mr. Scully, the sole owner of Olney Telecom, may be deemed to
be the beneficial owner of such options and underlying shares.
(10) Mr. Schultz terminated employment as Chief Financial Officer of the
Company on February 27, 1997. Mr. Schultz' options to purchase 300,000
shares of Common Stock terminated upon his termination as Chief Financial
Officer on February 27, 1997.
(11) Represents the fair market value on April 27, 1995 ($.75 per share) of
50,000 shares of the Company's Common Stock awarded to Mr. Schultz as
compensation for his services as an executive officer of the Company.
Option Grants In Last Fiscal Year
The following table summarizes the number of options granted to Named Officers
during the year ended December 31, 1996. The Company did not grant any stock
appreciation rights in 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Potential Realizable
Number of Shares of Value of Assumed
Common Stock Percent of Total Annual Rates of Stock
Underlying Options Options Granted Exercise Expiration Price Appreciation for
Name Granted in Fiscal Year(1) Price Date Option Term(2)
- --------------------------------------------------------------------------------------------------------------------------------
5% 10%
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kevin M. O'Hare 600,000 29% $1.03125 12/16/01 $170,949 $377,753
125,000(3) 6% $1.50000 12/16/01 $ 5,146 $ 48,230
125,000(3) 6% $2.00000 12/16/01 $ 0 $ 0
125,000(3) 6% $2.50000 12/16/01 $ 0 $ 0
125,000(3) 6% $3.00000 12/16/01 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------------------------------
Aaron R. Brown -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Stephen J. Parker -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Mark Scully -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Ward G. Schultz -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon options to purchase a total of 2,045,000 shares granted to all
officers and employees of the Company in 1996 under its Amended and
Restated Stock Option Plan or its predecessor plans.
(2) These amounts represent hypothetical gains that could be achieved for the
respective stock options if exercised at the end of the option term.
These gains are based on assumed rates of stock appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date.
(23)
<PAGE>
(3) Options to purchase a total of 500,000 shares of the Company's Common
Stock were granted to Mr. O'Hare that will vest upon the attainment of
certain performance criteria. Each 125,000 share increment underlying the
option becomes exercisable, or vests, provided the average of the closing
bid and asked prices of the Common Stock equals or exceeds $1.50, $2.00,
$2.50 and $3.00 per share, respectively, for at least thirty (30)
consecutive trading days within the period ending on the third anniversary
of the date of grant. In the event that the option shall have so vested,
the per share exercise price shall equal the product of (i) the arithmetic
mean of the closing bid and asked prices of the Common Stock for such
thirty (30) day period, and (ii) 85%. On January 10, 1997, these options
were replaced with a grant of 500,000 options with an exercise price of
$1.30. (See "Employment Agreements").
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option
Values
The following table summarizes the number and value of unexercised options held
by the Named Officers as of December 31, 1996. No Named Officer exercised any
options in 1996.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Number of Number of Shares of Common
Shares Stock Value of Unexercised
Acquired on Value Underlying Unexercised Options In-The-Money Options
Exercise Realized or Warrants at Fiscal Year-End at Fiscal Year-End(1)
---------------------------------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME # # $ $
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kevin M. O'Hare -0- N/A 300,000(2) 800,000(3) $65,625 $65,625
- ----------------------------------------------------------------------------------------------------------------
Aaron R. Brown(4) -0- N/A 780,000(5) 120,000(6) 112,500 none
- ----------------------------------------------------------------------------------------------------------------
Stephen J. Parker(4) -0- N/A 780,000(5) 120,000(6) 112,500 none
- ----------------------------------------------------------------------------------------------------------------
Mark Scully(7) -0- N/A 150,000(8) -0- 37,500 none
- ----------------------------------------------------------------------------------------------------------------
Ward G. Schultz -0- N/A 130,000(9) 170,000(10) 5,000 20,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon a market price of the Company's Common Stock on December 31,
1996 of $1.25 per share.
(2) Represents options to purchase the Common Stock of the Company issued to
Mr. O'Hare on December 16, 1996 under its Amended and Restated Stock
Option Plan at a price of $1.03125 per share, which vested immediately.
(3) Includes 300,000 options issued to Mr. O'Hare on December 16, 1996 under
its Amended and Restated Stock Option Plan, at a price of $1.03125 per
share, 125,000 of which will each vest in 1997 and 1998, respectively, and
500,000 options issued to Mr. O'Hare under the same plan which will vest
in 125,000 share increments in accordance with certain stock price
performance criteria described in footnote 3 to the Option Grant table,
above.
(4) Options to purchase 300,000 shares of the Company's Common Stock issued on
September 1, 1993 to each of Messrs. Brown and Parker that vested upon the
attainment of certain performance goals were terminated on December 16,
1996, the date Messrs. Brown and Parker resigned certain executive
positions with the Company.
(24)
<PAGE>
(5) Includes options to purchase 180,000 shares of Common Stock issued on
September 1, 1993 under the Company's 1993 Executive Stock Option Plan
(the "Executive Plan", now consolidated with the Employee Compensation
Stock Option Plan in the Amended and Restated Stock Option Plan) at an
exercise price of $1.375 per share and warrants to purchase 600,000 shares
of the Company's Common Stock issued on May 11, 1995 at $1.0625 per share
(See "Certain Relationships and Related Transactions").
(6) Represents options to purchase 120,000 shares of Common Stock issued on
September 1, 1993 under the Company's Executive Plan at a price of $1.375
per share.
(7) Options to purchase 850,000 shares of Common Stock granted under the
Executive Plan on May 1, 1995 with an exercise price of $.75 per share
were terminated upon Mr. Scully's termination on December 30, 1996.
(8) Represents options to purchase 150,000 shares of Common Stock granted to
Olney Telecom, Inc., a company of which Mr. Scully is the sole owner,
outside of any formal benefit plan as compensation for its services on
December 19, 1994 at an exercise price of $1.00 per share.
(9) Includes options to purchase 50,000 shares of Common Stock granted under
the 1992 Employee Compensation Stock Option Plan on August 5, 1994 at an
exercise price of $1.53 per share, options to purchase 60,000 shares of
Common Stock granted under the Executive Plan on August 5, 1994 at an
exercise price of $1.53 per share and options to purchase 20,000 shares of
Common Stock granted under the Executive Plan on April 27, 1995 at an
exercise price of $1.00 per share.
(10) Includes options to purchase 90,000 shares of Common Stock granted under
the Executive Plan on August 5, 1994 at an exercise price of $1.53 per
share and options to purchase 80,000 shares of Common Stock granted under
the Executive Plan on April 27, 1995 at an exercise price of $1.00 per
share.
Compensation of Directors
Directors who also serve as salaried employees of the Company do not receive
any additional compensation for their services as directors.
During 1996, no compensation was paid to non-employee directors of the Company
for their services as Directors. In 1997, directors who are not employees of
the Company will receive $1,000 for each directors' meeting attended in person,
and $500 for participation in each Board meeting conducted by telephone
conference call. In addition, the Company will grant each non-employee
director options to purchase 20,000 shares of Common Stock of the Company for
his services as a director during 1997. To date, the Company has granted
options to purchase 20,000 shares to each of Messrs. Ganatra and Sugarman,
which options have a term of 5 years. Mr. Ganatra's options have an exercise
price $1.13 per share and Mr. Sugarman's options have an exercise price of
$1.43 per share. The options become exercisable at the end of one year after
the date of grant, provided each of Messrs. Ganatra and Sugarman have served
as a director for a full year.
Employment Agreements
Employment Agreement with Mr. O'Hare. The Company executed an employment
agreement with Mr. O'Hare effective December 16, 1996. The Agreement provides
for Mr. O'Hare's employment as Chief Executive Officer and, at Mr. O'Hare's
discretion, as a director of the Company for a three year term beginning
December 16, 1996. The base salary payable to Mr. O'Hare under the Agreement
is $200,000.00. This base salary is subject to an annual increase by the Board
of Directors, which increase will not be less than an amount equal to his base
(25)
<PAGE>
salary then in effect multiplied by the percentage increase in the Consumer
Price Index from the preceding year.
The Agreement also provides for Mr. O'Hare's participation in a profit sharing
bonus pool to be implemented by the Compensation Committee of the Board of
Directors under which up to seven (7%) percent of the Company's annual pre-tax
income will be paid as bonuses to Mr. O'Hare, Mr. Hurwitz, Mr. Mendes, and
other executive officers selected by the Compensation Committee. If for any
reason the bonus pool is not implemented, then Mr. O'Hare is entitled to
receive an annual cash bonus equal to 3.5% of the Company's annual net pre-tax
income.
Under the Agreement, the Company is also obligated to provide Mr. O'Hare with
term life insurance in an amount of not less than two times Mr. O'Hare's annual
salary, payable to a beneficiary designated by Mr. O'Hare, and an automobile
allowance of $600.00 per month.
Pursuant to his Employment Agreement, the Company also granted Mr. O'Hare five
year options to purchase up to an aggregate of 1,100,000 shares of Common Stock
of the Company. The exercise price of 600,000 of Mr. O'Hare's options is
$1.03125 per share. Of these 600,000 options, 300,000 are immediately
exercisable and 150,000 become exercisable on each successive anniversary of
the grant date.
The options to purchase the remaining 500,000 shares of the Company's Common
Stock that were granted to Mr. O'Hare became exercisable in four, 125,000 share
increments upon the attainment of certain performance criteria. The first
125,000 share increment underlying this option was to become exercisable as and
when the average of the closing bid and asked prices of the Common Stock equals
or exceeds $1.50, the second when it equals or exceeds $2.00, the third when it
equals or exceeds $2.50 and the fourth when it equals or exceeds $3.00 per
share, in each case for at least thirty (30) consecutive trading days within
the period ending on the third anniversary of the date of grant. The per share
exercise price of each such option increment is 85% of the arithmetic mean of
the closing bid and asked prices of the Common Stock for such thirty (30) day
period. On January 10, 1997, these 500,000 options were replaced with a grant
of 500,000 options with an exercise price of $1.30. (See "January 1997
Amendments to Employment Agreements" below).
Mr. O'Hare's Employment Agreement also provides that if a change of control of
the Company occurs, and his employment with the Company is terminated, the
Company is obligated to pay Mr. O'Hare an amount equal to the amount of his
base salary which he would have earned for the remainder of the term of his
employment agreement. In addition, upon the occurrence of a change of control,
all options granted to Mr. O'Hare immediately vest and become exercisable by
him. A change of control includes (1) if any change of control of the Company
occurs of a nature that would be required to be reported to the SEC on Form 8-
K; (2) if any person becomes the beneficial owner of securities of the Company
having twenty-five (25%) percent or more of the combined voting power of the
Company's outstanding securities ordinarily having the right to vote at
elections of directors; (3) if the Company sells all or substantially all of
its assets; or (4) if individuals who constitute the incumbent Board of
Directors of the Company cease for any reason to constitute at least a majority
thereof. For this purpose, any person becoming a director subsequent to the
date of Mr. O'Hare's Employment Agreement whose election or nomination for
election by the Company's shareholders was approved by a vote by at least
three-quarters of the directors comprising the incumbent Board shall be treated
as though he were a member of the incumbent Board of Directors.
Employment Agreement with Mr. Hurwitz. The Company executed an employment
agreement with David B. Hurwitz effective December 16, 1996. The Agreement
provides for Mr. Hurwitz's employment as Executive Vice President of Sales and
Marketing of the Company for a three year term beginning December 16, 1996.
The base salary payable to Mr. Hurwitz under the Agreement is $150,000.00.
(26)
<PAGE>
This base salary is subject to an annual increase by the Board of Directors,
which increase will not be less than an amount equal to the base salary then in
effect multiplied by the percentage increase in the Consumer Price Index from
the preceding year. The Agreement also provides for Mr. Hurwitz's
participation in the Company's profit sharing bonus pool under which he may
earn an annual bonus not in excess of his current annual salary. During the
first six months of his employment and thereafter until the bonus pool is
implemented, Mr. Hurwitz is entitled to a monthly cash bonus equal to one
quarter of one percent of the Company's revenue during such month, up to a
maximum monthly bonus equal to one twelfth of his annual salary.
Under the Agreement, the Company is also obligated to provide Mr. Hurwitz with
term life insurance in an amount of not less than two times Mr. Hurwitz's
annual salary, payable to a beneficiary designated by Mr. Hurwitz, and an
automobile allowance of $600.00 per month.
Pursuant to his employment agreement, the Company also granted Mr. Hurwitz five
year options to purchase up to an aggregate of 700,000 shares of Common Stock
of the Company. The exercise price of 400,000 of Mr. Hurwitz's options is
$1.03125 per share. Of these 400,000 options, 200,000 were immediately
exercisable and 100,000 were to become exercisable on each successive
anniversary of the grant date.
The options to purchase the remaining 300,000 shares of the Company's Common
Stock that were granted to Mr. Hurwitz became exercisable in four, 75,000 share
increments upon the attainment of certain performance criteria. The first
75,000 share increment underlying this option would become exercisable as and
when the average of the closing bid and asked prices of the Common Stock equals
or exceeds $1.50, the second when it equals or exceeds $2.00, the third when it
equals or exceeds $2.50 and the fourth when it equals or exceeds $3.00 per
share, in each case for at least thirty (30) consecutive trading days within
the period ending on the third anniversary of the date of grant. The per share
exercise price of each such option increment is 85% of the arithmetic mean of
the closing bid and asked prices of the Common Stock for such thirty (30) day
period. On January 10, 1997, these options were replaced with a grant of
300,000 options with an exercise price of $1.30 per share. (See "January 1997
Amendments to Employment Agreements").
Mr. Hurwitz's Employment Agreement also provides that if a change of control of
the Company occurs, and his employment is terminated, the Company is obligated
to pay Mr. Hurwitz an amount equal to the amount of his base salary which he
would have earned for the remainder of the term of his employment agreement.
In addition, upon the occurrence of a change of control, all options granted to
Mr. Hurwitz immediately vest and become exercisable by him.
Employment Agreement with Mark Mendes. The Company executed an employment
agreement with Mark Mendes on January 10, 1997. The Agreement provides for Mr.
Mendes' employment as Chief Operating Officer of the Company for a three year
term beginning January 31, 1997. The base salary payable to Mr. Mendes under
the Agreement is $162,000. This base salary is subject to an annual increase
by the Board of Directors, which increase will not be less than an amount equal
to the base salary then in effect multiplied by the percentage increase in the
Consumer Price Index from the preceding year. The Agreement also provides for
Mr. Mendes's participation in the Company's profit sharing bonus pool.
Under the Agreement, the Company is also obligated to provide Mr. Mendes with
term life insurance in an amount of not less than two times Mr. Mendes' annual
salary, payable to a beneficiary designated by Mr. Mendes, and an automobile
allowance of $600.00 per month.
(27)
<PAGE>
Pursuant to his Employment Agreement, the Company also granted Mr. Mendes
options to purchase up to an aggregate of 350,000 shares of Common Stock of the
Company. The exercise price of Mr. Mendes' options is $1.25 per share.
Mr. Mendes' Employment Agreement also provides that if a change of control of
the Company occurs, and his employment is terminated, the Company is obligated
to pay Mr. Mendes an amount equal to the amount of his base salary which he
would have earned for the remainder of the term of his employment agreement.
In addition, upon the occurrence of a change of control, all options granted to
Mr. Mendes immediately vest and become exercisable by him.
Employment Agreement with Christopher Shannon. The Company executed an
employment agreement with Christopher Shannon effective March 3, 1997. The
Agreement provides for Mr. Shannon's employment as Chief Financial Officer of
the Company for a three year term beginning March 3, 1997. The base salary
payable to Mr. Shannon under the Agreement is $156,000. This base salary is
subject to an annual increase by the Board of Directors, which increase will
not be less than an amount equal to the base salary then in effect multiplied
by the percentage increase in the Consumer Price Index from the preceding year.
The Agreement also provides for Mr. Shannon's participation in the Company's
profit sharing bonus pool and his eligibility for additional stock option
grants.
Under the Agreement, the Company is also obligated to provide Mr. Shannon with
term life insurance in an amount of not less than two times Mr. Shannon's
annual salary, payable to a beneficiary designated by Mr. Shannon, and an
automobile allowance of $600.00 per month.
Pursuant to his Employment Agreement, the Company also granted Mr. Shannon
options to purchase up to an aggregate of 350,000 shares of Common Stock of the
Company. The exercise price of Mr. Shannon's options is $1.25 per share.
Mr. Shannon's Employment Agreement also provides that if a change of control of
the Company occurs, and his employment is terminated, the Company is obligated
to pay Mr. Shannon an amount equal to the amount of his base salary which he
would have earned for the remainder of the term of his employment agreement.
In addition, upon the occurrence of a change of control, all options granted to
Mr. Shannon immediately vest and become exercisable by him.
January 1997 Amendments to Employment Agreements. In January 1997, the Company
amended Mr. O'Hare's Employment Agreement to substitute for the 500,000 share
option previously granted to him pursuant to the agreement, new, five year
options to purchase 500,000 shares at an exercise price of $1.30 per share.
The new options become exercisable as follows: 170,000 on the first
anniversary of employment; 165,000 on the second anniversary; and 165,000 on
the third anniversary.
In January 1997, the Company also amended Mr. Hurwitz's Employment Agreement to
substitute for the 300,000 share option previously granted to him pursuant to
the agreement, new, five year options to purchase 300,000 shares at an exercise
price of $1.30 per share. The new options become exercisable as follows:
100,000 on the first anniversary of employment; 100,000 on the second
anniversary; and 100,000 on the third anniversary.
July 1997 Amendments to Executive Employment Agreements. In July 1997, the
Board of Directors approved an amendment to the Employment Agreements between
the Company and each of Messrs. O'Hare, Hurwitz, Mendes and Shannon described
above amending the change of control provisions of their Employment Agreements.
Under the amendment, if the employment of an executive is terminated following
a change of control of the Company, the Company would be obligated to pay the
executive an amount equal to 2.9 times his annual salary and bonus in effect at
the time of his termination. The amendment also changes the approach to be
used for calculating the bonus pool from which bonuses will be paid to the
(28)
<PAGE>
executives. Under the new approach, the size of the bonus pool would be based
on the Company's achievement of targets for gross profitability and revenue
growth established by the Board of Directors prior to the beginning of each
fiscal year, rather than a multiple of net income.
Employment Agreement with Mr. Parker. Mr. Parker has a seven year Employment
Agreement terminating December 31, 2000, which is automatically renewable for
an additional five years unless either party provides written notice of non-
renewal no later than thirty (30) days prior to the expiration of the initial
term. The contract provides for an annual base salary of not less than
$165,000 subject to annual cost of living increases as measured by the growth
in the Consumer Price Index--Urban Consumer, All Items, U.S. Cities' Average.
Upon the death of Mr. Parker, the Company is obligated to pay his beneficiary
his annual salary in effect at the time of his death for the remainder of the
term of the agreement. Mr. Parker's Employment Agreement provides that Mr.
Parker may not be terminated by the Company except for the conviction of a
felony. Any costs of legal counsel engaged by Mr. Parker relating to the
Company's failure to comply with the terms of the Employment Agreement will be
paid by the Company. The Company has agreed to amend Mr. Parker's Employment
Agreement so that, upon a change of control, all options granted to Mr. Parker
will immediately vest and become exercisable by him.
Consulting Agreement with Mr. Brown. Mr. Brown had an Employment Agreement
that was substantially similar to the Employment Agreement the Company has with
Mr. Parker, described above. Effective January 14, 1997, Mr. Brown released the
Company from its obligations under the Agreement. On January 14, 1997, Mr.
Brown entered into a Consulting Agreement with the Company. The Consulting
Agreement, which is for a term of six years with an automatic extension of one
year unless a party gives thirty-days written notice of its intent not to
renew, provides that Mr. Brown will be compensated at a rate of $125,000
annually, to be increased each year in accordance with the Consumer Price
Index.
Consulting Agreement with Mr. Ganatra. On June 30, 1997 the Company entered
into a Consulting Agreement with Mr. Ganatra pursuant to which Mr. Ganatra was
granted on June 4, 1997 100,000 warrants to purchase Common Stock in exchange
for his consultation services on network efficiencies and training support.
The warrants have a grant price of $1.19, and vest in 50,000 share increments
on each of the first and second anniversary of the date of grant.
Executive Officers
The Company's executive officers are appointed by the Board of Directors and,
except as described herein, hold office at the pleasure of the Board until
their successors are appointed and have qualified. In addition to Mr. O'Hare,
who serves as an executive officer, the Company has three additional executive
officers, David B. Hurwitz, Mark Mendes and Christopher J. Shannon. Mr.
Hurwitz, who joined the Company as the Executive President of Sales and
Marketing on December 16, 1996, age 34, served from 1995 to 1996 as the Vice
President of Sales and Marketing of Commonwealth Long Distance, a C-TEC
company. Prior to the position with Commonwealth, he served as Executive Vice
President and Chief Operating Officer of InterNet Communications Services, Inc.
and as General Manager of FiberNet from 1992 to 1995. Both InterNet and
FiberNet are affiliated with one another. From 1985 to 1992 Mr. Hurwitz held
sales and sales management positions with RCI Long Distance, a subsidiary of
Rochester Telephone Corp. (now Frontier Corporation). Mr. Mendes, who joined
the Company as the Chief Operating Officer on January 10, 1997, age 35, served
as the Vice President, Service & Technology for ACCESS Teleconferencing
International from 1995 to 1997. Prior to joining ACCESS, Mr. Mendes was Vice
President of Engineering and Operations of Internet Communications Services,
Inc. from 1993 to 1995, and a Director of Network Development at FiberNet from
1992 to 1993. From 1986 to 1992, Mr. Mendes was employed at Rochester
Telephone in various management positions relating to service and maintenance
of subscriber lines. Mr. Shannon, who joined the Company as the Chief
Financial Officer on March 3, 1997, age 36, served as the Director of Business
Development for Teleglobe International Corporation in 1996. Prior to joining
Teleglobe International, Mr. Shannon served as a Senior Manager with Price
Waterhouse LLP's International Telecommunications Group from 1995 to 1996. In
1994, Mr. Shannon served as a merger and acquisition consultant with John
Staurulakis, Inc., a Washington, DC, based telecommunications consulting firm.
From 1984 to 1994, Mr. Shannon was employed at Rochester Telephone Corp. in
various financial management positions and was involved in its acquisition
program.
(29)
<PAGE>
Certain Relationships and Related Transactions
Loan Guaranties. On May 11, 1995, the Company entered into a Loan and Security
Agreement with Century Business Credit Corporation ("Century") for a revolving
credit facility of $2,000,000. On April 27, 1995, the Company issued 500,000
shares of restricted Common Stock to each of Aaron R. Brown and Stephen J.
Parker in consideration for their limited personal guarantee given to Century
equal to 25% of the indebtedness incurred with Century. In connection with
this transaction each of these two officers also terminated 420,000 stock
options. After review of the transaction by a Special Committee appointed by
the Board of Directors, the issuance of the restricted stock and the
cancellation of options was rescinded. In its place, the Company agreed to
issue each of Messrs. Brown and Parker 600,000 warrants to purchase Common
Stock of the Company in consideration for the limited personal guarantees given
by each in connection with the credit facility.
Each warrant issued in the transaction described in the above paragraph
entities the holder to purchase one share of Common Stock of the Company at
price of $1.0625 per share until May 11, 2000. The warrants are non-
transferable by the officers and the stock issuable upon exercise of the
warrants is restricted stock under the federal securities laws.
Indemnification Arrangements. The Company is a party to indemnification
agreements with each of Aaron Brown and Stephen Parker dated August, 1990. In
addition, the Company has entered into an indemnification agreement with Kevin
O'Hare dated July, 1997. In general, the indemnification agreements obligate
the Company to indemnify each of Messrs. Brown, Parker and O'Hare against
liabilities and expenses incurred by them in acting as a director or officer of
the Company to the maximum extent allowed by law. As described below under
"Legal Proceedings", the Company, together with Messrs. Parker, Brown and
O'Hare, have been sued by the Company's former president for various claims
asserted by the plaintiff in connection with his termination of employment with
the Company on December 30, 1996. The Company and the individual defendants
have selected counsel to defend the action. The Board of Directors of the
Company has authorized the Company to advance the expenses of the individual
defendants incurred in defending this action upon the receipt of an undertaking
from each of them to repay the amounts so advanced in the event it is
determined that they are not entitled to indemnification under applicable law.
Sales Agency. Murray Goldberg acts as a sub-agent for the Company and is the
co-owner of a company that acts as an agent for the Company in the sale of the
Company's products and services. During 1996, the Company paid Mr. Goldberg
and the company a total of $224,467 in commissions for their services as the
Company's sales agents.
Loans. During the first quarter of 1996, Aaron Brown loaned the Company
$100,000. During 1996, Mr. Brown was repaid $10,000. On January 7, 1997, the
Company repaid the entire loan to Mr. Brown with interest.
Compensation Committee Interlocks and Insider Participation.
During the year ended December 31, 1996, Messrs. Brown, Parker and Goldberg
participated in deliberations of the Company's Board of Directors concerning
executive officer compensation. Messrs. Brown and Parker served as executive
officers during fiscal 1996. The Company did not have a Compensation
Committee in 1996.
Legal Proceedings
On June 13, 1997, Mark Scully, the former President and Chief Operating Officer
of the Company, filed a complaint against the Company, Kevin O'Hare, Aaron
Brown and Stephen Parker in the United States District Court for the Eastern
District of Pennsylvania. Mr. Scully asserts various claims in connection with
his termination of employment with the Company on December 30, 1996. In
particular he alleges, among other things, breach of contract in connection
with the termination of certain stock options, breach of the alleged contract
for employment, breach of an asserted duty of good faith and fair dealing,
fraudulent and negligent misrepresentation, and civil conspiracy. Mr. Scully
alleges damages of at least $1.6 million, plus attorneys' fees, costs and other
disbursements and the cost of COBRA payments and interest; $1 million of the
(30)
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alleged damages claimed are punitive. The Company contests the allegations of
the complaint and intends to vigorously defend against the action.
Report of the Board of Directors on Executive Compensation in Fiscal 1996
The Company is engaged in an intensely competitive industry. In order to
succeed, the Company believes that it must be able to attract and retain
qualified executives. To achieve this objective, the Company believes that
providing executive compensation that is tied to operating results allows the
company to attract and retain key employees.
During 1996, the Board of Directors had the responsibility for establishing
executive compensation packages. The Company aims to select high-quality,
experienced and talented individuals to serve as officers and employees of the
Company. To that end, the compensation offered by the Company is designed to
be competitive and to reward superior individual and Company performance with
superior levels of compensation. The primary components of the executive
compensation program are base salary, cash bonus compensation and stock based,
longer term incentives. Base salary levels are intended to be competitive and
are based on the executive's background, qualifications and job performance at
the Company. Cash bonuses are awarded based upon achievement of individual and
Company goals.
The Company's stock option plan is its longer-term incentive plan for officers
and employees. The stock option plan is designed to align the interests of the
Company's executives and its shareholders by creating a direct link between
long-term executive compensation and long-term increases in shareholder value.
The Board of Directors will periodically review the compensation packages for
the Company's officers and make changes that reflect the changing nature of the
industry in which the Company operates This will allow the Company to retain
and recruit the most qualified individuals within the industry.
The Board of Directors
of US WATS, Inc. for
fiscal year 1996
Aaron R. Brown
Stephen J. Parker
Murray Goldberg
(31)
<PAGE>
Performance Graph
The following graph shows the cumulative total return for the last five years,
calculated as of December 31 of each year, for the Company's Common Stock, the
NASDAQ Stock Market (U.S.) Index and the NASDAQ Telecommunications Index. The
graph assumes that the value of the investment in Company stock was $100 at
January 29, 1992 and $100 in each of the other indices on December 31, 1991 and
that all dividends were reinvested.
[graph]
- -----------------------------------------------------------------------------
Cumulative Total Returns
----------------------------------------------
1/29/92 12/92 12/93 12/94 12/95 12/96
- -----------------------------------------------------------------------------
US Wats Inc. USWI 100 571 343 79 100 143
- -----------------------------------------------------------------------------
NASDAQ Stock Market (US) INAS 100 116 134 131 185 227
- -----------------------------------------------------------------------------
NASDAQ Telecommunications INAT 100 123 189 158 207 211
- -----------------------------------------------------------------------------
OTHER MATTERS
The Board of Directors knows of no matters to be presented for action at the
Annual Meeting other than those set forth in the attached notice and customary
procedural matters. However, if other matters should properly come before the
Annual Meeting or any adjournments thereof, the proxies solicited hereby will
be voted on such matters, to the extent permitted by applicable law, in
accordance with the judgment of the persons voting such proxies.
(32)
<PAGE>
SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Shareholders wishing to submit proposals for inclusion in the Board of
Director's proxy statement for the next Annual Meeting of Shareholders must
submit their proposals to be received by the Company no later than April 16,
1998.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers, and persons who own more than ten percent of the
Company's Common Stock ("10% Shareholders") to file reports of ownership and
reports of changes in ownership of the Company's Common Stock with the
Securities and Exchange Commission ("SEC"). Officers, directors and 10%
Shareholders are required by SEC regulation to furnish the Company with copies
of all forms they file under Section 16(a). Based solely on its review of the
copies of such forms received by it with respect of its fiscal year ended
December 31, 1995, the Company believes that all Section 16(a) filing
requirements applicable to its officers, directors and 10% Shareholders were
complied with.
By Order of the Board of Directors,
Stephen J. Parker
Secretary
THE COMPANY'S ANNUAL REPORT TO SECURITY HOLDERS SENT WITH THIS PROXY STATEMENT
INCLUDES A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996, INCLUDING THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS. THE COMPANY WILL FURNISH TO ANY SECURITY HOLDER ON REQUEST ANY
EXHIBIT DESCRIBED IN THE LIST ACCOMPANYING SUCH REPORT UPON PAYMENT OF
REASONABLE FEES RELATING TO THE COMPANY'S FURNISHING SUCH EXHIBITS. REQUESTS
FOR COPIES SHOULD BE DIRECTED TO KEVIN O'HARE, CHIEF EXECUTIVE OFFICER, US
WATS, INC., 111 PRESIDENTIAL AVENUE, SUITE 114, BALA CYNWYD, PA 19004.
(33)
<PAGE>
COMMON SHAREHOLDERS
US WATS, INC.
111 Presidential Boulevard, Suite 114
Bala Cynwyd, Pennsylvania 19004
PROXY -- Annual Meeting of Shareholders -- September 18, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Kevin M. O'Hare and Christopher J. Shannon
as proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote, as designated below, all the Common
Stock of US WATS, Inc. held of record by the undersigned on the close of
business on August 12, 1997 at the Annual Meeting of Shareholders to be held on
September 18, 1997 or at any adjournment thereof.
1. ELECTION OF DIRECTORS FOR all nominees listed WITHHOLD AUTHORITY
below (except as marked to vote for all nominees
to the contrary below) [ ] listed below [ ]
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
Kevin M. O'Hare
Steven J. Parker
Tansukh Ganatra
Murray Goldberg
Gary L. Sugarman
2. PROPOSAL TO APPROVE THE REINCORPORATION OF THE COMPANY IN DELAWARE.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO APPROVE THE 1997 STOCK OPTION PLAN.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED IN FAVOR OF PROPOSALS NO. 1, 2 AND 3, AND IN ACCORDANCE WITH THE
PROXIES' BEST JUDGMENT UPON OTHER MATTERS PROPERLY COMING BEFORE THE MEETING
AND ANY ADJOURNMENTS THEREOF.
When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate name by President or
other authorized officer. If a partnership, please sign in partnership name by
authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS
PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
______________________________________________________
Name(s) (Please Print)
______________________________________________________
Signature
______________________________________________________
Signature, if held jointly
______________________________________________________
Date
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger (the "Plan of Merger") made as of the ____
day of ___________ 1997, by and between US WATS, Inc., a New York corporation
("US WATS New York") and USWI Corp., a Delaware corporation ("USWI"); (US WATS
New York and USWI are hereinafter sometimes collectively referred to as the
"Constituent Corporations"). USWI will be the surviving corporation, sometimes
hereinafter referred to as the "Surviving Corporation".
W I T N E S S E T H:
WHEREAS, US WATS New York has an authorized capital stock consisting of
30,000,000 shares of common stock, $.001 par value, of which 15,975,100
shares are issued and outstanding and 250,000 shares are held as treasury
shares, and 1,000,000 shares of preferred stock, 30,000 of which are
issued and outstanding; and
WHEREAS, USWI has an authorized capital stock consisting of 30,000,000
shares of common stock, $.001 par value, of which 100 shares are issued and
outstanding, and 1,000,000 shares of preferred stock, none of which are issued
and outstanding; and
WHEREAS, all of the outstanding shares of USWI are held by US WATS
New York;
WHEREAS, the Board of Directors of each of the Constituent Corporations
deems it advisable and generally to the advantage and welfare of the respective
Constituent Corporations and shareholders that US WATS New York merge with and
into USWI, with USWI to be the Surviving Corporation, pursuant to the
provisions of Section 907 of the Business Corporation Law of the State of New
York (the "NYBCL") and Section 253 of the General Corporation Law of the State
of Delaware;
NOW, THEREFORE, subject to the approval of this Plan of Merger by the
shareholders of US WATS New York, the Constituent Corporations hereby agree as
follows:
1. Merger. At the Effective Time (as hereinafter defined), US WATS New
York will be and it hereby is merged with and into USWI (the "Merger").
2. Effective Time. The Merger will become effective immediately upon the
last to occur of the filing of a Certificate of Merger with the Department of
State of the State of New York and the filing of a Certificate of Ownership and
Merger with the Secretary of State of Delaware. The date and time of such
filing is herein referred to as the "Effective Time."
3. Plan of Merger. This Plan of Merger constitutes a plan of merger
pursuant to Section 905 of the NYBCL, to be carried out in the manner, on the
terms and subject to the conditions herein set forth.
4. Surviving Corporation. At the Effective Time the separate existence
of US WATS New York will cease, and USWI, as the surviving corporation of the
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Merger, will continue to exist under and be governed by the laws of the State
of Delaware. The name of the Surviving Corporation will remain USWI Corp.
5. Terms and Conditions of the Merger.
a. Rights and Liabilities of the Surviving Corporation. At and
after the Effective Time, the Surviving Corporation will succeed to and
possess, without further act or deed, all of the estate, rights, privileges,
powers, and franchises, both public and private, and all of the property, real,
personal and mixed, of the Constituent Corporations; all debts due either of
the Constituent Corporations will be vested in the Surviving Corporation; all
claims, demands, property, rights, privileges, powers and franchises and every
other interest of either of the Constituent Corporations will be the property
of the Surviving Corporation; the title to any real property of either of the
Constituent Corporations will not revert or be in any way impaired by reason of
the Merger, but will be vested in the Surviving Corporation; all rights of
creditors and all liens upon any property of either of the Constituent
Corporations will be preserved unimpaired, limited in lien to the property
affected by such lien at the Effective Time; and all debts, liabilities and
duties of the Constituent Corporations will thenceforth attach to the Surviving
Corporation and may be enforced against it to the same extent as if such debts,
liabilities, and duties had been incurred or contracted by it.
b. Conversion of Outstanding Common Stock. At the Effective Time,
(i) each issued and outstanding share of the common stock of USWI will
automatically be canceled, and (ii) without the surrender of stock certificates
or any other action, each share of the common stock of US WATS New York which
is issued and outstanding immediately prior to the Merger will be converted
into and become one share of the issued and outstanding common stock of the
Surviving Corporation. The shares of common stock of US WATS New York held as
Treasury shares will be canceled.
c. Conversion of Outstanding Preferred Stock. At the Effective
Time, without the surrender of stock certificates or any other action, each
share of the 9% Convertible Preferred Stock of US WATS New York which is issued
and outstanding immediately prior to the Merger will be converted into and
become one share of the issued and outstanding 9% Convertible Preferred Stock
of the Surviving Corporation.
d. Options, Warrants And Rights. At the Effective Time, all
options, warrants or rights then outstanding, which have not been granted
pursuant to a US WATS New York employee benefit plan discussed in Paragraph (e)
below, and which immediately prior thereto had given the holder thereof the
right to purchase shares of US WATS New York stock shall, by virtue of the
Merger and without further action on the part of the holder thereof, be changed
and converted into options, warrants or rights giving the holder thereof the
right to purchase the number of shares of USWI stock at the same aggregate
exercise price and containing such other terms and conditions as pertained
under such options, warrants or rights immediately prior to the Effective Time.
e. Employee Option and Benefit Plans. Each option or other right to
purchase or otherwise acquire shares of US WATS New York granted under any
employee option, stock purchase or other benefit plan of US WATS New York
(collectively, the "Plans") which is outstanding immediately prior to the
Effective Time shall, at the Effective Time and without any action on the part
A-2
<PAGE>
of the holder thereof, be converted into and become an option or right to
acquire (and USWI hereby assumes the obligation to deliver) the same number of
shares of USWI stock, at the same price per share and upon the same terms and
subject to the same conditions as set forth in the respective Plan as in effect
immediately prior to the Effective Time. The same number of shares of USWI
stock shall be reserved for purposes of the Plans as is equal to the number of
shares of US WATS New York stock so reserved immediately prior to the Effective
Time. USWI hereby assumes, as of the Effective Time, (1) the Plans and all
obligations of US WATS New York under the Plans, including the outstanding
options, stock purchase rights or awards or portions thereof granted pursuant
to the Plans and the right to grant additional options and stock purchase
rights thereunder and (2) all obligations of US WATS New York under all other
benefit plans in effect as of the Effective Time with respect to which employee
rights or accrued benefits are outstanding as of the Effective Time.
6. Further Assurance of Title. If at any time USWI shall consider or be
advised that any acknowledgments or assurances in law or other similar actions
are necessary or desirable in order to acknowledge or confirm in and to USWI
any right, title or interest of US WATS New York held immediately prior to the
Effective Time, US WATS New York and its proper officers and directors shall
and will execute and deliver all such acknowledgments or assurances in law and
do all things necessary or desirable to acknowledge or confirm such right,
title or interest in USWI as shall be necessary to carry out the purposes of
this Agreement, and USWI and its proper officers and directors are fully
authorized to take any and all such action in the name of US WATS New York or
otherwise.
7. Certificate of Incorporation; By-laws. The certificate of
incorporation of USWI as existing at the Effective Time will be unaffected by
the Merger and will be the certificate of incorporation of the Surviving
Corporation until the same is amended or repealed in accordance with Delaware
law. The By-laws of USWI as existing at the Effective Time will continue in
full force as the By-laws of the Surviving Corporation until altered, amended
or repealed as provided therein or as provided by law.
8. Directors and Officers of Surviving Corporation. The directors and
officers of US WATS New York immediately prior to the Merger will become the
directors and officers of the Surviving Corporation at the Effective Time.
9. Termination. This Plan of Merger may be terminated and the Merger
abandoned for any reason whatsoever, by mutual consent of the Board of
Directors of the Constituent Corporations, at any time prior to the Effective
Time, notwithstanding adoption and approval of this Plan of Merger by the
shareholders of the Constituent Corporations.
10. Amendment. To the maximum extent permitted by law, this Plan of
Merger may be amended at any time prior to the Effective Time by mutual consent
of the Boards of Directors of the Constituents Corporations.
A-3
<PAGE>
IN WITNESS WHEREOF, the foregoing Agreement and Plan of Merger, which was
duly adopted by the Board of Directors of each of the Constituent Corporations,
has been executed by the _________ and _____________, and by the _____________
and _____________ of each of the Constituent Corporations on and as of the date
first set forth above.
US WATS, INC.
(a New York corporation)
By:__________________________________
Attest:_________________________
USWI CORP.
(a Delaware corporation)
By:__________________________________
Attest:_________________________
A-4
<PAGE>
EXHIBIT B
CERTIFICATE OF INCORPORATION
OF
USWI CORP.
THE UNDERSIGNED, for the purpose of forming a corporation pursuant to
the provisions of the Delaware General Corporation Law, does hereby certify as
follows:
FIRST: The name of the Corporation is USWI Corp.
SECOND: The address of the Corporation's registered office in the
State of Delaware is 1013 Centre Road, Wilmington, Delaware 19805. The name
of the Corporation's registered agent at such address is Corporation Service
Company, in the County of New Castle.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the Delaware General
Corporation Law.
FOURTH: The total number of shares of capital stock that the
Corporation shall have authority to issue is Thirty Million (30,000,000) shares
of common stock, par value $.001 per share (the "Common Stock") and One Million
(1,000,000) shares of preferred stock, par value $.01 per share (the "Preferred
Stock").
(a) Common Stock.
(i) All outstanding shares of Common Stock shall be
identical and shall entitle the holders thereof to the same rights and
privileges. The holders of shares of Common Stock shall have no preemptive or
preferential rights of subscription to any shares of any class of capital stock
of the Corporation.
(ii) When, as and if dividends or distributions are
declared on outstanding shares of Common Stock, whether payable in cash, in
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<PAGE>
property or in securities of the Corporation, the holders of outstanding shares
of Common Stock shall be entitled to share equally in such dividends and
distributions.
(iii) Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of
outstanding shares of Common Stock shall be entitled to share equally in the
assets of the Corporation to be distributed among the holders of shares of the
Common Stock.
(iv) The holders of outstanding shares of Common Stock
shall have the right to vote on (or, as provided by law, take action by consent
with respect to) the election and removal of the directors of the Corporation
and on, and with respect to, all other matters to be voted on or consented to
by the stockholders of the Corporation, and each holder shall be entitled to
one vote for each share of Common Stock held. Except as otherwise provided by
law or by the terms of a class or series of the Preferred Stock fixed by a
resolution or resolutions of the Board of Directors adopted pursuant to
paragraph (b) below, the holders of shares of Preferred Stock shall not have
any right to vote on, or consent with respect to, any matters to be voted on or
consented to by the stockholders of the Corporation and the shares of Preferred
Stock shall not be included in determining the number of shares voting or
entitled to vote on any such matters.
(b) Preferred Stock. Shares of Preferred Stock of the
Corporation may be issued from time to time in one or more classes or series,
each of which shall have such distinctive designation or title as shall be
fixed by the Board of Directors of the Corporation prior to the issuance of any
shares thereof. Each such class or series of Preferred Stock shall have such
voting powers, full or limited, or no voting powers, and such other relative
rights, powers and preferences, including, without limitation, rights to
dividends, conversion rights, if any, redemption price and liquidation
preference, and such qualifications, limitations or restrictions thereof, as
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shall be stated in such resolution or resolutions providing for the issuance of
such class or series as may be adopted from time to time by the Board of
Directors prior to the issuance of any shares thereof pursuant to the authority
hereby expressly vested in it, all in accordance with the laws of the State of
Delaware.
FIFTH: The name and mailing address of the incorporator are as
follows:
Name Mailing Address
---------------- -----------------------------------
Susan Nannelli c/o Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
SIXTH: In furtherance and not in limitation of the general powers
conferred by the laws of the State of Delaware, the Board of Directors is
expressly authorized to make, alter or repeal the Bylaws of the Corporation,
except as specifically otherwise provided therein.
SEVENTH: A director of the Corporation shall have no personal
liability to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director except to the extent that Section
102(b)(7) (or any successor provision) of the Delaware General Corporation Law,
as amended from time to time, expressly provides that the liability of a
director may not be eliminated or limited. No amendment or repeal of this
paragraph SEVENTH shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
EIGHTH: Whenever a compromise or arrangement is proposed between
this Corporation and its creditors or any class of them and/or between this
Corporation and its stock holders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
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application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8
of the Delaware Code, order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders of this Corporation, as the case may be,
and also on this Corporation.
IN WITNESS WHEREOF, the undersigned, being the incorporator
hereinabove named, does hereby execute this Certificate of Incorporation this
day of , 1997.
______________________________________________
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EXHIBIT C
BYLAWS
of
USWI CORP.
(A Delaware Corporation)
ARTICLE 1
OFFICES
Section 1.01. Offices. The Corporation may have offices at such
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
Section 2.01. Place of Meeting. Meetings of the stockholders shall
be held at such place, within the State of Delaware or elsewhere, as may be
fixed from time to time by the Board of Directors. If no place is so fixed for
a meeting, it shall be held at the Corporation's then principal executive
office.
Section 2.02. Annual Meeting. The annual meeting of stockholders
shall be held, unless the Board of Directors shall fix some other hour or date
therefor, at 10:00 o'clock A.M. on the last Thursday of May in each year, if
not a legal holiday under the laws of Delaware, and, if a legal holiday, then
on the next succeeding secular day not a legal holiday under the laws of
Delaware, at which the stockholders shall elect by plurality vote a Board of
Directors, and transact such other business as may properly be brought before
the meeting.
Section 2.03. Notice of Annual Meetings. Written notice of the
annual meeting stating the place, date and hour of the meeting shall be given
to each stockholder entitled to vote at such meeting not less than 10 days nor
more than 60 days before the date of the meeting.
Section 2.04. List of Stockholders. The officer who has charge of
the stock ledger of the Corporation shall prepare and make, at least 10 days
before every meeting of stockholders, a complete list of stockholders entitled
to vote at the meeting, arranged in alphabetical order, and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least 10 days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be so specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
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of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
Section 2.05. Special Meetings. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by
statute or by the Certificate of Incorpora tion, may be called by the Chief
Executive Officer and shall be called by the Chief Executive Officer or
Secretary at the request in writing of a majority of the Board of Directors.
Such request shall state the purpose or purposes of the proposed meeting.
Business transacted at any special meeting of stockholders shall be limited to
the purposes stated in the notice.
Section 2.06. Notice of Special Meetings. Written notice of a
special meeting stating the place, date and hour of the meeting and the purpose
or purposes for which the meeting is called, shall be given to each stockholder
entitled to vote at such meeting not less than 10 days nor more than 60 days
before the date of the meeting.
Section 2.07. Chairman and Secretary. Each meeting of the
stockholders shall be presided over by the Chairman of the Board, if any, or,
in the Chairman's absence, by the Chief Executive Officer, or, in the absence
of the Chief Executive Officer, by a chairman to be chosen at the meeting. The
Secretary shall act as secretary of each meeting of the stockholders or, if the
Secretary shall not be present, such person as may be designated by the Board
of Directors, or in the absence of such person or if there shall be no such
designation, a secretary shall be chosen at the meeting.
Section 2.08. Inspector of Election. At each meeting of
stockholders at which an election of Directors is to be held, the chairman of
the meeting may appoint one person, who need not be a stockholder, to act as an
inspector of election at such meeting. The inspector so appointed, before
entering on the discharge of his or her duties, shall take and subscribe an
oath or affirmation faithfully to execute the duties of inspector at such
meeting with strict impartiality and according to the best of his or her
ability, and thereupon the inspector shall take charge of the pools and after
the balloting shall canvas the votes and make a certificate of the results of
the vote taken. No Director or candidate for the office of Director shall be
appointed as inspector.
Section 2.09. Quorum; Voting. The holders of a majority of the
stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute or by the Certificate of Incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. At such adjourned meeting at which a quorum shall be present
or represented any business may be transacted which might have been transacted
at the meeting as originally notified. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting. When a quorum is
present at any meeting, except for elections of directors, which shall be
decided by plurality vote, the vote of the holders of a majority of the stock
having voting power present in person or represented by proxy shall decide any
question brought before such meeting, unless the question is one upon which by
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express provision of statute or of the Certificate of Incorporation, a
different vote is required, in which case such express provision shall govern
and control the decision of such question. Unless otherwise provided in the
Certificate of Incorporation, each stockholder shall at every meeting of
stockholders be entitled to one vote in person or by proxy for each share of
the capital stock having voting power held by such stockholder, but no shares
shall be voted pursuant to a proxy more than three years after the date of the
proxy unless the proxy provides for a longer period.
Section 2.10. Action Without a Meeting. Unless otherwise restricted
by the Certificate of Incorporation, any action required or permitted to be
taken at any annual or special meeting of stockholders may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing setting forth the action so taken shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and shall be delivered to the
corporation by delivery to its registered office in the State, its principal
place of business, or an officer or agent of the corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to a corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. Every written consent
shall bear the date of signa ture of each stockholder who signs the consent and
no written consent shall be effective to take the corporate action referred to
therein unless, within sixty days after the earliest dated consent delivered in
the manner required by this Section to the corporation, written consents signed
by a sufficient number of stockholders to take action are delivered in the
manner required by this Section to the Corporation. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing
and who, if the action had been taken at a meeting, would have been entitled to
notice of the meeting if the record date for such meeting had been the date
that written consents signed by a sufficient number of stockholders to take the
action were delivered to the Corporation.
Section 2.11. Notifications of Nominations and Proposed Business.
Subject to the rights of holders of any class or series of preferred stock,
(a) nominations for the election of directors, and
(b) business to be brought before any stockholder meeting
may be made or proposed by or at the direction of the Chief Executive Officer
or by the Board of Directors or a proxy committee appointed by the Board of
Directors, or by any stockholder entitled to vote in the election of directors
generally. However, any such stockholder may nominate one or more persons for
election as directors at a meeting or propose business to be brought before a
meeting, only if such stockholder has given timely notice in proper written
form of intent to make such nomination or nominations or to propose business.
To be timely, a stockholder's notice must be received by the Company not less
than 70 days nor more than 90 days prior to the first anniversary of the
previous year's annual meeting (or, in the case of a special meeting, not
earlier than the 90th day before such meeting and not later than the later of
(i) the 70th day prior to such meeting and (ii) the 10th day following the day
on which notice of the meeting was mailed or public announcement of the date of
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such meeting was made, whichever first occurs). To be in proper written form,
a stockholder's notice to the Secretary shall set forth:
(i) the name and address of the stockholder who intends to
make the nominations or propose the business and, as
the case may be, of the person or persons to be
nominated or of the business to be proposed;
(ii) a representation that the stockholder is a holder of
record of stock of the Corporation entitled to vote at
such meeting and, if applicable, intends to appear in
person or by proxy at the meeting to nominate the
person or persons specified in the notice or to make
the proposal to the meeting;
(iii) a description of all arrangements or understandings
between the stockholder and each nominee and any other
person or persons (naming such person or person)
pursuant to which the nomination or nominations are to
be made by the stockholder, or the business is to be
proposed;
(iv) such other information regarding each nominee or each
matter of business to be proposed by such stockholder
as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee
been nominated, or intended to be nominated, or the
matter been proposed, or intended to be proposed by
the Board of Directors; and
(v) if applicable, the consent of each nominee to serve as
director of the Corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination
of any person or the proposal of any business not made in compliance with the
foregoing procedures.
ARTICLE 3
DIRECTORS
Section 3.01. Number and Term of Office. The number of directors of
the Corporation shall be such number as shall be designated from time to time
by resolution of the Board of Directors and initially shall be one (1) and,
effective upon the merger of US WATS, Inc. into the Corporation, shall be
increased to five (5). The directors shall be elected at the annual meeting of
the stockholders, except as provided in Section 3.02 hereof. Each director
elected shall hold office for a term of one year and shall serve until his
successor is elected and qualified or until his earlier death, resignation or
removal. Directors need not be stockholders.
Section 3.02. Vacancies. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
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by a majority of the direc tors then in office, though less than a quorum, or
by a sole remaining director, and the directors so chosen shall hold office
until the next annual election and until their successors are duly elected and
shall qualify, unless sooner displaced. If there are no directors in office,
then an election of directors may be held in the manner provided by statute.
If, at the time of filling any vacancy or any newly created directorship, the
directors then in office shall constitute less than a majority of the whole
board (as constituted immediately prior to any such increase), the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least 10 percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office.
Section 3.03. Resignations. Any director may resign at any time by
giving written notice to the Board of Directors, the Chairman of the Board, the
Chief Executive Officer, or the Secretary. Such resignation shall take effect
at the time of receipt thereof or at any later time specified therein; and,
unless otherwise specified therein, the acceptance of such resignation shall
not be necessary to make it effective.
Section 3.04. Direction of Management. The business of the
Corporation shall be managed under the direction of its Board of Directors,
which may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute or by the Certificate of Incorporation or
by these Bylaws directed or required to be exercised or done by the
stockholders.
Section 3.05. Place of Meetings. The Board of Directors of the
Corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
Section 3.06. Annual Meeting. Immediately after each annual
election of directors, the Board of Directors shall meet for the purpose of
organization, election of officers, and the transaction of other business, at
the place where such election of directors was held or, if notice of such
meeting is given, at the place specified in such notice. Notice of such
meeting need not be given. In the absence of a quorum at said meeting, the
same may be held at any other time and place which shall be specified in a
notice given as hereinafter provided for special meetings of the Board of
Directors, or as shall be specified in a written waiver signed by the
directors, if any, not attending and participating in the meeting.
Section 3.07. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board.
Section 3.08. Special Meetings. Special meetings of the Board of
Directors may be called by the Chief Executive Officer on 2 days' notice to
each director; either personally (including telephone), or in the manner
specified in Section 4.01; special meetings shall be called by the Chief
Executive Officer or the Secretary in like manner and on like notice on the
written request of two directors.
Section 3.09. Quorum; Voting. At all meetings of the Board, a
majority of the directors shall constitute a quorum for the transaction of
business; and at all meetings of any committee of the Board, a majority of the
members of such committee shall constitute a quorum for the transaction of
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business. The act of a majority of the directors present at any meeting of the
Board of Directors or any committee thereof at which there is a quorum present
shall be the act of the Board of Directors or such committee, as the case may
be, except as may be otherwise specifically provided by statute or by the
Certificate of Incorporation. If a quorum shall not be present at any meeting
of the Board of Directors or committee thereof, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 3.10. Action Without a Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board
or committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the Board or
committee.
Section 3.11. Participation in Meetings. One or more directors may
participate in any meeting of the Board or committee thereof by means of
conference telephone or similar communications equipment by which all persons
participating can hear each other.
Section 3.12. Committees of Directors. The Board of Directors may
designate one or more committees, each committee to consist of one or more of
the directors of the Corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. Any such committee, to
the extent provided in the resolution of the Board of Directors or in these
bylaws, shall have and may exercise all of the powers and authority of the
Board of Directors and may authorize the seal of the Corporation to be affixed
to all papers which may require it, but no such committee shall have the power
or authority in reference to the following matters: (i) approving or adopting,
or recommending to the stockholders, any action or matter expressly required by
the Delaware General Corporation Law to be submitted to stockholders for
approval or (ii) adopting, amending or repealing any bylaw of the Corporation.
Such committee or committees shall have such name or names as may be determined
from time to time by resolution adopted by the Board of Directors. Each
committee shall keep regular minutes of its meetings and report the same to the
Board of Directors when requested.
Section 3.13. Compensation of Directors. Each director shall be
entitled to receive such compensation, if any, as may from time to time be
fixed by the Board of Directors. Members of special or standing committees may
be allowed like compensation for attending committee meetings. Directors may
also be reimbursed by the Corporation for all reasonable expenses incurred in
traveling to and from the place of each meeting of the Board or of any such
committee or otherwise incurred in the performance of their duties as
directors. No payment referred to herein shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE 4
NOTICES
Section 4.01. Notices. Whenever, under the provisions of law or of
the Certificate of Incorporation or of these Bylaws, notice is required to be
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given to any director or stockholder, such requirement shall not be construed
to necessitate personal notice. Such notice may in every instance be
effectively given by depositing a writing in a post office or letter box, in a
postpaid, sealed wrapper, or by dispatching a prepaid telegram, cable, telecopy
or telex or by delivering a writing in a sealed wrapper prepaid to a courier
service guaranteeing delivery within 2 business days, in each case addressed to
such director or stockholder, at his address as it appears on the records of
the Corporation in the case of a stockholder and at his business address
(unless he shall have filed a written request with the Secretary that notices
be directed to a different address) in the case of a director. Such notice
shall be deemed to be given at the time it is so dispatched.
Section 4.02. Waiver of Notice. Whenever, under the provisions of
law or of the Certificate of Incorporation or of these Bylaws, notice is
required to be given, a waiver thereof in writing, signed by the person or
persons entitled to said notice, whether before or after the time of the event
for which notice is to be given, shall be deemed equivalent thereto. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE 5
OFFICERS
Section 5.01. Number. The officers of the Corporation shall be a
Chairman of the Board, a Chief Executive Officer, a Secretary and a Treasurer,
and may also include one or more Presidents, one or more Vice Presidents, one
or more Assistant Secretaries and Assistant Treasurers, and such other officers
as may be elected by the Board of Directors. Any number of offices may be held
by the same person.
Section 5.02. Election and Term of Office. The officers of the
Corporation shall be elected by the Board of Directors. Officers shall hold
office at the pleasure of the Board.
Section 5.03. Removal. Any officer may be removed at any time by
the Board of Directors. Any vacancy occurring in any office of the Corporation
may be filled by the Board of Directors.
Section 5.04. Chairman of the Board. The Chairman of the Board,
shall preside at all meetings of the Board of Directors and shall perform such
other duties, if any, as may be specified by the Board from time to time.
Section 5.05. Chief Executive Officer. The Chief Executive Officer
shall be the chief executive officer of the Corporation and shall have overall
responsibility for the management of the business and operations of the
Corporation and shall see that all orders and resolutions of the Board are
carried into effect. In the absence of the Chairman of the Board he shall
preside over meetings of the Board of Directors. In general, he shall perform
all duties incident to the office of Chief Executive Officer, and such other
duties as from time to time may be assigned to him by the Board.
Section 5.06. Presidents. A President shall perform such duties and
have such authority as may be specified in these Bylaws or by the Board of
Directors or the Chief Executive Officer. In the absence or disability of the
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Chief Executive Officer, the Presidents, in order of seniority established by
the Board of Directors or the Chief Executive Officer, shall perform the duties
and exercise the powers of the Chief Executive Officer.
Section 5.07. Vice Presidents. The Vice Presidents shall perform
such duties and have such authority as may be specified in these Bylaws or by
the Board of Directors or the Chief Executive Officer. In the absence or
disability of a President, the Vice Presidents, in order of seniority
established by the Board of Directors or the Chief Executive Officer, shall
perform the duties and exercise the powers of a President.
Section 5.08. Secretary. The Secretary shall attend all meetings of
the Board of Directors and all meetings of the stockholders and record all the
proceedings of the meetings of the stockholders and of the Board of Directors
in a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the
Board of Directors or the Chief Executive Officer. He shall have custody of
the corporate seal of the Corporation and he, or an Assistant Secretary, shall
have authority to affix the same to any instrument, and when so affixed it may
be attested by his signature or by the signature of such Assistant Secretary.
The Board of Directors may give general authority to any other officer to affix
the seal of the Corporation and to attest the affixing by his signature.
Section 5.09. Assistant Secretaries. The Assistant Secretary or
Secretaries shall, in the absence or disability of the Secretary, perform the
duties and exercise the authority of the Secretary and shall perform such other
duties and have such other authority as the Board of Directors or the Chief
Executive Officer may from time to time prescribe.
Section 5.10. Treasurer. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all monies and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board of Directors or the Chief Executive Officer or the Chief Financial
Officer, taking proper vouchers for such disbursements, and shall render to the
Board of Directors when the Board so requires, an account of all his
transactions as Treasurer and of the financial condition of the Corporation.
Section 5.11. Assistant Treasurers. The Assistant Treasurer or
Treasurers shall, in the absence or disability of the Treasurer, perform the
duties and exercise the authority of the Treasurer and shall perform such other
duties and have such other authority as the Board of Directors may from time to
time prescribe.
ARTICLE 6
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 6.01. Indemnification. Any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was serving while a director or officer of
the Corporation at the request of the Corporation as a director, officer,
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employee, agent, fiduciary or other representative of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
shall be indemnified by the Corporation against expenses (including attorneys'
fees), judgments, fines, excise taxes and amounts paid in settlement actually
and reasonably incurred by such person in connection with such action, suit or
proceeding to the full extent permissible under Delaware law.
Section 6.02. Advances. Any person claiming indemnification within
the scope of Section 6.01 shall be entitled to advances from the Corporation
for payment of the expenses of defending actions against such person in the
manner and to the full extent permissible under Delaware law.
Section 6.03. Procedure. On the request of any person requesting
indemnification under Section 6.01, the Board of Directors or a committee
thereof shall determine whether such indemnification is permissible or such
determination shall be made by independent legal counsel if the Board or
committee so directs or if the Board or committee is not empowered by statute
to make such determination.
Section 6.04. Other Rights. The indemnification and advancement of
expenses provided by this Article 6 shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any insurance or other agreement, vote of shareholders or
disinterested directors or otherwise, both as to actions in their official
capacity and as to actions in another capacity while holding an office, and
shall continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such
person.
Section 6.05. Insurance. The Corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee, agent,
fiduciary or other representative of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have
the power to indemnify him against such liability under the provisions of these
Bylaws.
Section 6.06. Modification. The duties of the Corporation to
indemnify and to advance expenses to a director or officer provided in this
Article 6 shall be in the nature of a contract between the Corporation and each
such director or officer, and no amendment or repeal of any provision of this
Article 6 shall alter, to the detriment of such director or officer, the right
of such person to the advancement of expenses or indemnification related to a
claim based on an act or failure to act which took place prior to such
amendment, repeal or termination.
ARTICLE 7
CERTIFICATES OF STOCK
Section 7.01. Stock Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate in the form prescribed by
the Board of Directors signed on behalf of the Corporation by the Chairman of
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the Board or a President or a Vice President and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, representing the number of shares owned by him in the Corporation.
Any or all signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if such person were such
officer, transfer agent, or registrar at the date of issue.
Section 7.02. Lost Certificates. The Board of Directors may direct
a new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the Corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the Corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 7.03. Transfers of Stock. Upon surrender to the Corporation
or the transfer agent of the Corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
Section 7.04. Fixing Record Date. The Board of Directors of the
Corporation may fix a record date for the purpose of determining the
stockholders entitled to notice of, or to vote at, any meeting of stockholders
or any adjournment thereof, or to consent to corporate action in writing
without a meeting, or to receive payment of any dividend or other distribution
or allotment of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action.
Such record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors and such record date shall
not be (i) in the case of such a meeting of stockholders, more than 60 nor less
than 10 days before the date of the meeting of stockholders, or (ii) in the
case of consents in writing without a meeting, more than 10 days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, or (iii) in other cases, more than 60 days prior to the payment or
allotment or change, conversion or exchange or other action. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting unless the Board of
Directors fixes a new record date for the adjourned meeting.
Section 7.05. Registered Stockholders. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of stock to receive dividends and to vote as such owner, and shall
be entitled to hold liable for calls and assessments a person registered on its
books as the owner of stock, and shall not be bound to recognize any equitable
or other claim to, or interest in, such stock on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
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ARTICLE 8
AMENDMENTS
Section 8.01. Amendments. These Bylaws may be altered, amended or
repealed, and new Bylaws may be adopted, by the stockholders or by the Board of
Directors at any regu lar meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
Bylaws be contained in the notice of such special meeting.
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EXHIBIT D
US WATS, INC. 1997
STOCK OPTION PLAN
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Table of Contents
Page
1. Purpose................................................................ 3
2. Administration......................................................... 3
3. Eligibility............................................................ 4
4. Stock.................................................................. 4
5. Granting of Options.................................................... 5
6. Annual Limit........................................................... 5
7. Terms and Conditions of Options........................................ 5
8. Option Agreements -- Other Provisions.................................. 10
9. Capital Adjustments.................................................... 10
10. Certain Corporate Transactions......................................... 10
11. Financial Information.................................................. 11
12. Amendment or Termination of the Plan................................... 11
13. Rights................................................................. 12
14. Indemnification of Board and Committee................................. 12
15. Application of Funds................................................... 12
16. Shareholder Approval................................................... 12
17. No Obligation to Exercise Option....................................... 12
18. Termination of Plan.................................................... 12
19. Governing Law.......................................................... 13
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US WATS, INC. 1997
STOCK OPTION PLAN
WHEREAS, US WATS, Inc. desires to award incentive and nonqualified
stock options to certain of its officers and other key employees;
NOW, THEREFORE, effective as of June 25, 1997, the US WATS, Inc. 1997
Stock Option Plan is hereby adopted under the following terms and conditions:
1. Purpose. This US WATS, Inc. 1997 Stock Option Plan (the "Plan") is
intended to provide a means whereby US WATS, Inc. (the "Company") may, through
the grant of incentive stock options and nonqualified stock options
(collectively, the "Options") to purchase common shares of the Company ("Common
Stock") to officers and other key employees of the Company or a Related
Corporation (as defined below) ("Key Employees") and to Consultants (as defined
below), attract and retain such Key Employees and Consultants and motivate them
to exercise their best efforts on behalf of the Company and of any Related
Corporation.
For purposes of the Plan, a "Related Corporation" shall mean either a
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Internal Revenue Code of 1986, as amended (the "Code"), or the "parent
corporation" of the Company, as defined in Section 424(e) of the Code. A
"Consultant" shall mean any consultant of the Company or a Related Corporation
who is not an officer or employee thereof. Further, as used in the Plan, (i)
the term "ISO" shall mean an option which, at the time such option is granted,
qualifies as an incentive stock option within the meaning of Section 422 of the
Code and is designated as an ISO in the Option Agreement (as defined in Section
8 hereof); and (ii) the term "NQSO" shall mean an option which, at the time
such option is granted, does not qualify as an ISO, and is designated as a
nonqualified stock option in the Option Agreement.
2. Administration
(a) The Plan shall be administered by the Company's Stock Option
Committee (the "Committee"), which shall consist solely of not fewer than two
non-employee directors of the Company (within the meaning of Rule 16b-3(b)(3)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor thereto) who are also outside directors (within the meaning of
Treas. Reg. Sec. 1.162-27(e)(3), or any successor thereto) of the Company, and
who shall be appointed by, and shall serve at the pleasure of, the Company's
Board of Directors (the "Board"). Each member of the Committee, while serving
as such, shall be deemed to be acting in his capacity as a director of the
Company.
(b) In the event a committee has not been established in accordance
with subsection (a) above, or cannot be constituted to vote on the grant of an
Option (for example, because of state laws governing corporate self-dealing),
the entire Board shall serve as the Committee for all purposes of the Plan;
provided, however, that a member of the Board shall not participate in a vote
approving the grant of an Option to himself or herself to the extent provided
under the laws of the State of Delaware governing corporate self-dealing.
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The Committee shall have full authority, subject to the terms of the
Plan, to select the Key Employees and Consultants to be granted Options under
the Plan, to grant Options on behalf of the Company, and to set the date of
grant and the other terms of such Options; provided, however, that Consultants
shall not be eligible to receive ISOs under the Plan. The Committee may
correct any defect, supply any omission, and reconcile any inconsistency in the
Plan and in any Option granted hereunder in the manner and to the extent it
deems desirable. The Committee may also, in its discretion, adjust the price of
an Option, or cancel an Option and grant a new Option to replace the cancelled
Option; provided, that if the Committee changes the price of an Option or
replaces an Option, the resulting Option shall be treated as a new Option
granted on the date of such change or replacement and shall comply with the
terms of the Plan as such.
The Committee also shall have the authority to establish such rules
and regulations, not inconsistent with the provisions of the Plan, for the
proper administration of the Plan, to amend, modify, or rescind any such rules
and regulations, and to make such determina tions and interpretations under, or
in connection with, the Plan, as it deems necessary or advisable. All such
rules, regulations, determinations, and interpretations shall be binding and
conclusive upon the Company, its shareholders and all Key Employees and
Consultants, upon their respective legal representatives, beneficiaries,
successors, and assigns, and upon all other persons claiming under or through
any of them.
No member of the Board or the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Option granted under it.
3. Eligibility. The class of employees who shall be eligible to receive
Options under the Plan shall be the Key Employees (including any directors who
also are officers or key employees) of the Company and/or of a Related
Corporation and Consultants. More than one Option may be granted to a Key
Employee or Consultant under the Plan. A Key Employee or Consultant who has
been granted an Option under the Plan shall hereinafter be referred to as an
"Optionee."
4. Stock. Options may be granted under the Plan to purchase up to a
maximum of 3,000,000 shares of Common Stock, par value ($.001) per share;
provided, however, that no Key Employee shall receive Options for more than
1,000,000 shares of the Company's Common Stock over any one year period.
However, both limits in the preceding sentence shall be subject to adjustment
as hereinafter provided. Shares issuable under the Plan may be authorized but
unissued shares or reacquired shares, and the Company may purchase shares
required for this purpose, from time to time, if it deems such purchase to be
advisable.
If any Option granted under the Plan expires or otherwise terminates
for any reason whatsoever (including, without limitation, the Optionee's
surrender thereof) without having been exercised, the shares subject to the
unexercised portion of the Option shall continue to be available for the
granting of Options under the Plan as fully as if the shares had never been
subject to an Option. However, (i) if an Option is cancelled, the shares of
Common Stock covered by the cancelled Option shall be counted against the
maximum number of shares specified above for which Options may be granted to a
single Key Employee, and (ii) if the exercise price of an Option is reduced
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after the date of grant, the transaction shall be treated as a cancellation of
the original Option and the grant of a new Option for purposes of such maximum.
5. Granting of Options. From time to time until the expiration or
earlier suspension or discontinuance of the Plan, the Committee may, on behalf
of the Company, grant to Key Employees and Consultants under the Plan such
Options as it determines are warranted; provided, however, that grants of ISOs
and NQSOs shall be separate and not in tandem, and further provided that
Consultants shall not be eligible to receive ISOs under the Plan. In making
any determination as to whether a Key Employee or Consultant shall be granted
an Option, the type of Option to be granted, the number of shares to be covered
by the Option, and other terms of the Option, the Committee shall take into
account the duties of the Key Employee or Consultant, his present and potential
contributions to the success of the Company or a Related Corporation, the tax
implications to the Company and the Key Employee or Consultant of any Option
granted, and such other factors as the Committee may deem relevant in
accomplishing the purposes of the Plan. Moreover, the Committee may provide in
the Option that said Option may be exercised only if certain conditions, as
determined by the Committee, are fulfilled.
6. Annual Limit
(a) ISOs. The aggregate fair market value (determined under Section
7(b) hereof as of the date the ISO is granted) of the Common Stock with respect
to which ISOs are exercisable for the first time by a Key Employee during any
calendar year (counting ISOs under this Plan and incentive stock options under
any other stock option plan of the Company or a Related Corporation) shall not
exceed $100,000. If an Option intended as an ISO is granted to a Key Employee
and the Option may not be treated in whole or in part as an ISO pursuant to the
$100,000 limitation, the Option shall be treated as an ISO to the extent it may
be so treated under the limitation and as an NQSO as to the remainder. For
purposes of determining whether an ISO would cause the limitation to be
exceeded, ISOs shall be taken into account in the order granted.
(b) NQSOs. The annual limits set forth above for ISOs shall not
apply to NQSOs.
7. Terms and Conditions of Options. Options granted pursuant to the
Plan shall include expressly or by reference the following terms and
conditions, as well as such other provisions not inconsistent with the provi-
sions of the Plan (and, for ISOs granted under the Plan, the provisions of
Section 422(b) of the Code), as the Committee shall deem desirable --
(a) Number of Shares. The Option shall state the number of shares
of Common Stock to which the Option pertains.
(b) Price. The Option shall state the Option price which shall be
determined and fixed by the Committee in its discretion but, in the case of an
ISO, shall not be less than the higher of 100 percent (110 percent in the case
of a more-than-10-percent shareholder, as provided in subsection (j) below) of
the fair market value of the optioned shares of Common Stock on the date the
ISO is granted, or the par value thereof, and, in the case of an NQSO, shall
not be less than the higher of 100 percent (110 percent in the case of an NQSO
granted to a resident of the State of California who is also a more-than-10-
percent shareholder, as provided in subsection (j) below) of the fair market
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value of the optioned shares of Common Stock on the date the NQSO is granted,
or the par value thereof.
The fair market value of a share of Common Stock shall be arrived at
by a good faith determination of the Committee and shall be --
(i) if there are sales of Common Stock on a registered
securities exchange or in an over-the-counter market on the date of grant,
then the mean between the highest and lowest quoted selling price on the
date of grant; or
(ii) if there are no such sales of Common Stock on the date of
grant but there are such sales on dates within a reasonable period both
before and after the date of grant, then the weighted average of the means
between the highest and lowest selling price on the nearest date before
and the nearest date after the date of grant; or
(iii) if actual sales are not available during a reasonable
period beginning before and ending after the date of grant, then the mean
between the bid and asked price on the date of grant as reported by the
National Quotation Bureau; or
(iv) if (i) through (iii) are not applicable, such other method
of determining fair market value as shall be authorized by the Code, or
the rules or regulations thereunder, and adopted by the Committee.
Where the fair market value of the optioned shares of Common Stock is
determined under (ii) above, the average of the means between the highest and
lowest sales on the nearest date before and the nearest date after the date of
grant shall be weighted inversely by the respective numbers of trading days
between the selling dates and the date of grant (i.e, the valuation date), in
accor dance with Treas. Reg. Sec. 20.2031-2(b)(1), or any successor thereto.
(c) Term
(1) ISOs. Subject to earlier termination as provided in
subsections (e), (f), and (g) below and in Section 9 hereof, the term of each
ISO shall be not more than 10 years (five years in the case of a more-than-10-
percent shareholder, as discussed in subsection (j) below) from the date of
grant.
(2) NQSOs. Subject to earlier termination as provided in
subsections (e), (f), and (g) below and in Section 9 hereof, the term of each
NQSO shall be not more than 10 years from the date of grant.
(d) Exercise. Options shall be exercisable in such installments and
on such dates as the Committee may specify; provided that (i) in the case of
Options granted to Optionees who are residents of the State of California, such
Options shall be exercisable at the rate of at least 20% per year over five
years from the date of grant; (ii) in the case of new Options granted to an
Optionee to replace options (whether granted under the Plan or otherwise) held
by the Optionee or in the case of Options repriced by the Committee, the new or
repriced Options may be made exercisable, if so determined by the Committee, in
its discretion, at the earliest date the original Options were exercisable, but
not earlier than three months from the date of grant of the new Options or the
repricing of the original Options; and (iii) the Committee may accelerate the
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exercise date of any outstanding Options, in its discretion, if it deems such
acceleration to be desirable. However, with respect to an Optionee who is a
resident of the State of California, acceleration is permitted only if the
Optionee is an officer, director, or Consultant.
Any exercisable Options may be exercised at any time up to the
expiration or termination of the Option. Exercisable Options may be exercised,
in whole or in part and from time to time, by giving written notice of exercise
to the Company at its principal office, specifying the number of shares to be
purchased and accompanied by payment in full of the aggregate Option exercise
price for such shares. Only full shares shall be issued under the Plan, and
any fractional share which might otherwise be issuable upon exercise of an
Option granted hereunder shall be forfeited.
The Option price shall be payable in the case of an ISO, if the
Committee in its discretion causes the Option Agreement so to provide, and in
the case of an NQSO, if the Committee in its discretion so determines at or
prior to the time of exercise --
(1) in cash or its equivalent;
(2) in shares of Common Stock previously acquired by the
Optionee; provided that (i) if such shares of Common Stock were acquired
through the exercise of an ISO and are used to pay the Option price for ISOs,
such shares have been held by the Optionee for a period of not less than the
holding period described in Section 422(a)(1) of the Code on the date of
exercise, or (ii) if such shares of Common Stock were acquired through the
exercise of an NQSO and are used to pay the Option price of an ISO, or if such
shares of Common Stock were acquired through the exercise of an ISO or an NQSO
and are used to pay the Option price of an NQSO, such shares have been held by
the Optionee for a period of more than one year on the date of exercise;
(3) in Common Stock newly acquired by the Optionee upon exercise
of such Option (which shall constitute a disqualifying disposition in the case
of an Option which is an ISO);
(4) by delivering a properly executed notice of exercise of the
Option to the Company and a broker, with irrevocable instructions to the broker
promptly to deliver to the Company the amount of sale or loan proceeds
necessary to pay the exercise price of the Option;
(5) if the Optionee is designated as an "eligible participant"
by the Committee at the date of grant in the case of an ISO, or at or after the
date of grant in the case of an NQSO, and if the Optionee thereafter so
requests, (i) the Company will loan the Optionee the money required to pay the
exercise price of the Option; (ii) any such loan to an Optionee shall be made
only at the time the Option is exercised; and (iii) the loan will be made on
the Optionee's personal, negotiable, demand promissory note, bearing interest
at the lowest rate which will avoid imputation of interest under Section 7872
of the Code, and including such other terms as the Committee may prescribe; or
(6) in any combination of subsections (1), (2), (3), (4) and (5)
above.
In the event the Option price is paid, in whole or in part, with
shares of Common Stock, the portion of the Option price so paid shall be equal
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to the aggregate fair market value (determined under subsection (b) above, but
as of the date of exercise of the Option, rather than the date of grant) of the
Common Stock so surrendered in payment of the Option price.
(e) Termination of Employment. If an Optionee's employment by or
consulting relationship with the Company (and Related Corporations) is
terminated by either party prior to the expiration date fixed for his Option
for any reason other than death or disability, such Option may be exercised, to
the extent of the number of shares with respect to which the Optionee could
have exercised it on the date of such termination, or to any greater extent
permitted by the Committee, by the Optionee at any time prior to the earlier of
(i) the expiration date specified in such Option, or (ii) an accelerated
expiration date determined by the Committee, in its discretion, and set forth
in the Option Agreement; except that, subject to Section 9 hereof, in the case
of ISOs, such accelerated expiration date shall not be later than three months
after such termination of employment, and in the case of NQSOs, such
accelerated expiration date shall not be earlier than the date of the
Optionee's termination of employment or consulting relationship, however with
respect to residents of the State of California, such accelerated expiration
date shall not be earlier than 30 days from the date of the Optionee's
termination of employment or consulting relationship.
(f) Disability. If an Optionee becomes disabled (within the meaning
of Section 22(e)(3) of the Code) during his employment or consulting
relationship and, prior to the expiration date fixed for his Option, his
employment or consulting relationship is terminated as a consequence of such
disability, such Option may be exercised, to the extent of the number of shares
with respect to which the Optionee could have exercised it on the date of such
termination, or to any greater extent permitted by the Committee, by the
Optionee at any time prior to the earlier of (i) the expiration date specified
in such Option, or (ii) an accelerated termination date determined by the
Committee, in its discretion, and set forth in the Option Agreement; except
that, subject to Section 9 hereof, in the case of ISOs, such accelerated
termination date shall not be later than one year after such termination, and
in the case of NQSOs, such accelerated termination date shall not be earlier
than the date of the termination of the Optionee's employment or consulting
relationship by reason of disability, however with respect to residents of the
State of California, such accelerated termination date shall not be earlier
than six months from the date of the termination of the Optionee's employment
or consulting relationship by reason of disability. In the event of the
Optionee's legal disability, such Option may be exercised by the Optionee's
legal representative.
(g) Death. If an Optionee dies during his employment or consulting
relationship, and prior to the expiration date fixed for his Option, or if an
Optionee whose employment or consulting relationship is terminated for any
reason, dies following his termination but prior to the earliest of (i) the
expiration date fixed for his Option, (ii) the expiration of the period
determined under subsections (e) and (f) above, or (iii) in the case of an ISO,
three months following the termination of his employment or consulting
relationship, such Option may be exercised, to the extent of the number of
shares with respect to which the Optionee could have exercised it on the date
of his death, or to any greater extent permitted by the Committee, by the
Optionee's estate, personal representative, or beneficiary who acquired the
right to exercise such Option by bequest or inheritance or by reason of the
death of the Optionee. Such post-death exercise may occur at any time prior to
the earlier of (i) the expira tion date specified in such Option or (ii) an
accelerated termination date determined by the Committee, in its discretion,
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and set forth in the Option Agreement; except that, subject to Section 9
hereof, such accelerated termination date shall not be earlier than one year,
nor later than three years, after the date of death.
(h) Non-Transferability; Registration. No ISO and (except as
otherwise provided in any Option Agreement) no NQSO shall be assignable or
transferable by the Optionee other than by will or by the laws of descent and
distribution, and (subject to the preceding clause) during the lifetime of the
Optionee, shall be exercisable only by him or by his guardian or legal
representative. If the Optionee is married at the time of exercise and if the
Optionee so requests at the time of exercise, the certificate or certificates
shall be registered in the name of the Optionee and the Optionee's spouse,
jointly, with right of survivorship.
(i) Rights as a Shareholder. An Optionee shall have no rights as a
shareholder with respect to any shares covered by his Option until the issuance
of a stock certificate to him for such shares.
(j) Ten Percent Shareholder. If the Optionee owns more than 10
percent of the total combined voting power of all shares of stock of the
Company or of a Related Corporation at the time an ISO is granted to him or at
the time an NQSO is granted and he is a resident of the State of California,
the Option price for the ISO or NQSO shall be not less than 110 percent of the
fair market value (as determined under subsection (b) above) of the optioned
shares of Common Stock on the date the ISO or NQSO is granted, and such ISO or
NQSO, by its terms, shall not be exercisable after the expiration of five years
from the date the ISO or NQSO is granted. The conditions set forth in this
subsection shall not apply to NQSOs granted to Optionees who are not residents
of the State of California.
(k) Listing and Registration of Shares. Each Option shall be
subject to the requirement that, if at any time the Committee shall determine,
in its discretion, that the listing, registration, or qualification of the
shares of Common Stock covered thereby upon any securities exchange or under
any state or federal law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such Option or the purchase of shares of Common Stock
thereunder, or that action by the Company or by the Optionee should be taken in
order to obtain an exemption from any such requirement, no such Option may be
exercised, in whole or in part, unless and until such listing, registration,
qualification, consent, approval, or action shall have been effected, obtained,
or taken under conditions acceptable to the Committee. Without limiting the
generality of the foregoing, each Optionee or his legal representative or
beneficiary may also be required to give satisfactory assurance that shares
purchased upon exercise of an Option are being purchased for investment and not
with a view to distribution, and certificates representing such shares may be
legended accordingly.
(l) Withholding and Use of Shares to Satisfy Tax Obligations. The
obligation of the Company to deliver shares of Common Stock upon the exercise
of any Option (or cash in lieu thereof) shall be subject to applicable federal,
state, and local tax withholding requirements.
If the exercise of any Option is subject to the withholding
requirements of applicable federal tax law, the Committee, in its discretion,
may permit or require the Optionee to satisfy the federal withholding tax, in
whole or in part, by electing to have the Company withhold shares of Common
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Stock subject to the exercise (or by returning previously acquired shares of
Common Stock to the Company). The Company may not withhold shares in excess of
the number necessary to satisfy the minimum federal income tax withholding
requirements. Shares of Common Stock shall be valued, for purposes of this
subsection, at their fair market value under subsection (b) above, but as of
the date the amount attributable to the exercise of the Option is includable in
income by the Optionee under Section 83 of the Code (the "Determination Date").
If shares of Common Stock acquired by the exercise of an ISO are used to
satisfy the withholding requirement described above, such shares of Common
Stock must have been held by the Optionee for a period of not less than the
holding period described in Section 422(a)(1) of the Code as of the
Determination Date.
The Committee shall adopt such withholding rules as it deems
necessary to carry out the provisions of this subsection.
8. Option Agreements -- Other Provisions. Options granted under the
Plan shall be evidenced by written documents ("Option Agreements") in such form
as the Committee shall from time to time approve, and containing such
provisions not inconsistent with the provisions of the Plan (and, for ISOs
granted pursuant to the Plan, not inconsistent with Section 422(b) of the
Code), as the Committee shall deem advisable. The Option Agreements shall
specify whether the Option is an ISO or NQSO. Each Optionee shall enter into,
and be bound by, an Option Agreement as soon as practicable after the grant of
an Option.
9. Capital Adjustments. The number of shares which may be issued under
the Plan, and the maximum number of shares with respect to which Options may be
granted to any Key Employee under the Plan, both as stated in Section 4 hereof,
and the number of shares issuable upon exercise of outstanding Options under
the Plan (as well as the Option price per share under such outstanding Options)
shall, subject to the provisions of Section 424(a) of the Code, be adjusted, as
may be deemed appropriate by the Committee, to reflect any stock dividend,
stock split, share combination, or similar change in the capitalization of the
Company. In the event any such change in capitalization cannot be reflected in
a straight mathematical adjustment of the number of shares issuable upon the
exercise of outstanding Options (and a straight mathematical adjustment of the
exercise price thereof), the Committee shall make such adjustments as are
appropriate to reflect most nearly such straight mathematical adjustment. Such
adjustments shall be made only as necessary to maintain the proportionate
interest of Optionees, and preserve, without exceeding, the value of Options.
10. Certain Corporate Transactions. In the event of a corporate
transaction (as that term is described in Section 424(a) of the Code and the
Treasury Regulations issued thereunder as, for example, a merger, con-
solidation, acquisition of property or stock, separation, reorganization, or
liquidation), each outstanding Option shall be assumed by the surviving or
successor corporation; provided, however, that, in the event of a proposed
corporate transaction, the Committee may terminate all or a portion of the
outstanding Options if it determines that such termination is in the best
interests of the Company. If the Committee decides to terminate outstanding
Options, the Committee shall give each Key Employee holding an Option to be
terminated not fewer than seven days' notice prior to any such termination, and
any Option which is to be so terminated may be exercised (if and only to the
extent that it is then exercisable) up to, and including the date immediately
preceding such termination. Further, as provided in Section 7(d) hereof, the
Committee, in its discretion, may accelerate, in whole or in part, the date on
which any or all Options become exercisable.
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The Committee also may, in its discretion, change the terms of any
outstanding Option to reflect any such corporate transaction, provided that, in
the case of ISOs, such change would not constitute a "modification" under
Section 424(h) of the Code, unless the Optionee consents to the change.
11. Financial Information. With respect to Optionees (including
Optionees who have already exercised their Options or prior Options) who are
residents of the State of California, the Company will comply with Section
240.140.46 of Title 10, California Administrative Code, which requires the
Company to delivery financial statements at least annually to such Optionees.
12. Amendment or Termination of the Plan
(a) In General. The Board, pursuant to a written resolution, from
time to time may suspend or terminate the Plan or amend it, and the Committee
may amend any outstanding Options in any respect whatsoever; except that,
without the approval of the shareholders (given in the manner set forth in
subsection (b) below) --
(1) the class of employees eligible to receive ISOs shall not be
changed;
(2) the maximum number of shares of Common Stock with respect to
which ISOs may be granted under the Plan shall not be increased, except as
permitted under Section 9 hereof;
(3) the duration of the Plan under Section 17 hereof with
respect to any ISOs granted hereunder shall not be extended; and
(4) no amendment may be made which would require shareholder
approval pursuant to Treas. Reg. Sec. 1.162-27(e)(4)(vi) or any successor
thereto.
Notwithstanding the foregoing, no such suspension, discontinuance, or
amendment shall materially impair the rights of any holder of an outstanding
Option without the consent of such holder.
(b) Manner of Shareholder Approval. The approval of shareholders
must comply with all applicable provisions of the corporate charter, bylaws,
and applicable state law prescribing the method and degree of shareholder
approval required for the issuance of corporate stock or options. If the
applicable state law does not prescribe a method and degree of shareholder
approval in such case, the approval of shareholders must be effected --
(1) By a method and in a degree that would be treated as
adequate under applicable state law in the case of an action requiring
shareholder approval (i.e., an action on which shareholders would be entitled
to vote if the action were taken at a duly held shareholders' meeting); or
(2) By a majority of the votes cast (including abstentions, to
the extent abstentions are counted as voting under applicable state law), in a
separate vote at a duly held shareholders' meeting at which a quorum
representing a majority of all outstanding voting stock is, either in person or
by proxy, present and voting on the Plan.
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13. Rights. Neither the adoption of the Plan nor any action of the Board
or the Committee shall be deemed to give any individual any right to be granted
an Option, or any other right hereunder, unless and until the Committee shall
have granted such individual an Option, and then his rights shall be only such
as are provided by the Option Agreement. Notwithstanding any provisions of the
Plan or the Option Agreement with a Key Employee or Consultant, the Company and
any Related Corporation shall have the right, in its discretion but subject to
any employment contract entered into with the Key Employee or service contract
entered into with a Consultant, to retire the Key Employee at any time pursuant
to its retirement rules or otherwise to terminate the Key Employee's employment
or the Consultant's service at any time for any reason whatsoever.
14. Indemnification of Board and Committee. Without limiting any other
rights of indemnification which they may have from the Company and any Related
Corporation, the members of the Board and the members of the Committee shall be
indemnified by the Company against all costs and expenses reasonably incurred
by them in connection with any claim, action, suit, or proceeding to which they
or any of them may be a party by reason of any action taken or failure to act
under, or in connection with, the Plan, or any Option granted thereunder, and
against all amounts paid by them in settlement thereof (provided such
settlement is approved by legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any such action, suit, or proceeding,
except a judgment based upon a finding of willful misconduct or recklessness on
their part. Upon the making or institution of any such claim, action, suit, or
proceeding, the Board or Committee member shall notify the Company in writing,
giving the Company an opportunity, at its own expense, to handle and defend the
same before such Board or Committee member undertakes to handle it on his own
behalf. The provisions of this Section shall not give members of the Board or
the Committee greater rights than they would have under the Company's by-laws
or Delaware law.
15. Application of Funds. The proceeds received by the Company from the
sale of Common Stock pursuant to Options granted under the Plan shall be used
for general corporate purposes. Any cash received in payment for shares upon
exercise of an Option shall be added to the general funds of the Company and
shall be used for its corporate purposes. Any Common Stock received in payment
for shares upon exercise of an Option shall become treasury stock.
16. Shareholder Approval. This Plan shall become effective on June 25,
1997 (the date the Plan was adopted by the Board); provided, however, that if
the Plan is not approved by the shareholders, in the manner described in
Section 12(b) hereof, within 12 months before or after the date the Plan was
adopted by the Board, the Plan and all Options granted hereunder shall be null
and void and no additional Options shall be granted hereunder.
17. No Obligation to Exercise Option. The granting of an Option shall
impose no obligation upon a Key Employee or Consultant to exercise such Option.
18. Termination of Plan. Unless earlier terminated as provided in the
Plan, the Plan and all authority granted hereunder shall terminate absolutely
at 12:00 midnight on June 24, 2007, which date is within 10 years after the
date the Plan was adopted by the Board, and no Options hereunder shall be
granted thereafter. Nothing contained in this Section, however, shall
terminate or affect the continued existence of rights created under Options
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issued hereunder, and outstanding on the date set forth in the preceding
sentence, which by their terms extend beyond such date.
19. Governing Law. The Plan shall be governed by the applicable Code
provisions to the maximum extent possible. Otherwise, the laws of the State of
Delaware shall govern the operation of, and the rights of Key Employees and
Consultants under, the Plan, and Options granted thereunder.
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