<PAGE>
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:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) 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)(4) 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 pervious 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.
2 GREENWOOD SQUARE
3331 STREET ROAD, SUITE 275
BENSALEM, PENNSYLVANIA 19020
---------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 25, 1998
---------------------------------------
To our Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders of
US WATS, Inc. (the "Company") to be held on Wednesday, November 25, 1998, at
11:00 a.m., local time, at the Holiday Inn, 3499 Street Road, Bensalem,
Pennsylvania 19020, for the following purposes:
1. To elect four directors to serve until the next annual meeting of
shareholders and until their successors have been elected and
qualified.
2. To transact such other business as may properly come before the Annual
Meeting or any postponement or adjournment thereof.
The Board of Directors of the Company has fixed the close of business on
October 23, 1998 as the record date for determination of the shareholders of the
Company entitled to notice of, and to vote at, the Annual Meeting and any
postponement or adjournment thereof.
By Order of the Board of Directors,
Artie Regan, Secretary
Date: October 30, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE MARK,
DATE AND SIGN YOUR PROXY, AND MAIL IT IN THE STAMPED ENVELOPE ENCLOSED FOR YOUR
CONVENIENCE. IN ORDER TO AVOID THE ADDITIONAL EXPENSE TO THE COMPANY OF FURTHER
SOLICITATION, WE ASK YOUR COOPERATION IN MAILING YOUR PROXY PROMPTLY. RETURNING
THE PROXY DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON ON ALL MATTERS BROUGHT
BEFORE THE ANNUAL MEETING, BUT WILL HELP ASSURE A QUORUM IF YOU DO NOT ATTEND.
<PAGE>
US WATS, INC.
2 GREENWOOD SQUARE
3331 STREET ROAD, SUITE 275
BENSALEM, PENNSYLVANIA 19020
-------------------------------------
PROXY STATEMENT
-------------------------------------
INTRODUCTION:
The enclosed proxy is solicited by and on behalf of the Board of Directors
(the "Board of Directors" or the "Board") of US WATS, Inc. (the "Company") for
use at the Annual Meeting of Shareholders to be held on Wednesday, November 25,
1998, at 11:00 a.m., local time, and at any postponement or adjournment thereof
(the "Meeting"). This Proxy Statement and the enclosed form of proxy are first
being mailed to shareholders of the Company on or about October 30, 1998.
At the Meeting, the shareholders will be asked to consider and take action
on the following matters:
1. The election of four directors to serve as members of the Board
of Directors until the next annual meeting of shareholders and until their
successors have been elected and qualified.
2. The transaction of such other business as may properly come
before the Meeting or any postponement or adjournment thereof.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS EACH OF THE NOMINEES FOR
DIRECTOR DESCRIBED HEREIN AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR EACH OF
SUCH NOMINEES AT THE MEETING.
The Board of Directors knows of no business that will be presented for
consideration at the Meeting other than the matters described in this Proxy
Statement. If any other matter should be presented at the Meeting for action,
the persons named in the accompanying proxy card will vote the proxy in
accordance with their best judgment on such matter.
In the event that there are not sufficient votes to approve any one or more
of the matters properly coming before the Meeting, it is expected that the
Meeting will be postponed or adjourned in order to permit further solicitation
of proxies by the Company.
The delivery of this Proxy Statement shall not, under any circumstances,
create any implication that the information contained herein is correct after
the date hereof, October 30, 1998.
RECORD DATE, QUORUM AND VOTE REQUIRED:
The record date for the determination of shareholders entitled to notice
of, and to vote at, the Meeting is the close of business on October 23, 1998.
The presence, in person or by proxy, of holders of Common Stock representing a
majority of all votes entitled to be cast at the Meeting will constitute a
quorum for the transaction of business at the Meeting. All valid proxies
returned will be included in the determination of whether a quorum is present at
the Meeting. As of the Record Date, 20,075,394 shares of common stock of the
Company ("Common Stock") were issued and outstanding. Each share of Common
Stock is entitled to one vote on each matter to be voted on at the Meeting.
Shareholders have no cumulative voting rights. The Company also has outstanding
a class of preferred stock known as "9% Series of Preferred Stock." This
outstanding Preferred Stock does not have voting rights.
<PAGE>
Assuming that a quorum is present, election of Directors requires the vote
of a plurality of all votes cast on the matter in person or by proxy.
Common Stock represented by Proxies marked "For" the election of Directors
will be counted in favor of all nominees, except to the extent the Proxy
withholds authority to vote for, or indicates a vote against, a specified
nominee. Common Stock represented by Proxies marked "Abstain" or withholding
authority to vote will not be counted in favor of any nominee. However, because
Directors are elected by a plurality vote, abstentions will not affect the
election of the candidates receiving the most votes. IN THE ABSENCE OF SPECIFIC
DIRECTION, COMMON STOCK REPRESENTED BY A PROXY WILL BE VOTED "FOR" THE ELECTION
OF ALL NOMINEES.
REVOCATION:
Execution and delivery of the enclosed proxy will not affect the right of
any person to attend the 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, at its address above, or by a request in
person to the Secretary of the Company to return the executed proxy. The
presence of a shareholder at the Meeting will not operate to revoke a proxy, but
the casting of a ballot by a shareholder who is present at the 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 for
such activity.
-2-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 23, 1998, information
concerning the shares of Common Stock beneficially owned by: (a) each person or
group known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock; (b) each director and named executive
officer; and (c) all directors and officers as a group. Except as indicated
below, to the Company's knowledge, 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.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE
OWNER OR IDENTITY OF GROUP OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
- - ------------------------------ ----------------------- ----------------
<S> <C> <C>
Aaron R. Brown 916,800 4.6%
2 Greenwood Square
3331 Street Road, Suite 275
Bensalem, PA 19020
Murray Goldberg 2,295,000(1) 11.4%
26 Anthony Drive
Malvern, PA 19355
Artie Regan 57,000(2) *
15 Park Row
New York, NY 10038
Walter Anderson 10,119,934(3)(4) 50.4%
c/o Gold & Appel Transfer, S.A.
Omar Hodge Building
Wickhams Cay
Road Town
Tortula, British Virgin Islands
Gold & Appel Transfer, S.A. 10,119,934(4) 50.4%
Omar Hodge Building
Wickhams Cay
Road Town
Tortula, British Virgin Islands
David B. Hurwitz 436,000(5) 2.1%
48 Dalton Way
Holland, PA 18966
Steven J. Parker(6) 131,000 *
10 Abordeau
Devon, PA 19333
All Directors and Executive Officers as a 13,867,734 67.4%
group (6 persons)
</TABLE>
- - -------------------
* Less than 1%
-3-
<PAGE>
(1) Consists of 2,270,000 shares of Common Stock and options to purchase 25,000
shares of Common Stock at $1.1875 per share.
(2) Consists of 12,000 shares of Common Stock, options to purchase 25,000
shares of Common Stock at $1.1875 per share and options to purchase 20,000
shares of Common Stock at $1.69 per share.
(3) All of such shares are held of record by Gold & Appel Transfer, S.A.
Pursuant to a power of attorney, Mr. Anderson has sole investment power
over such shares and as a result may be deemed to be the beneficial owner
of such shares. Mr. Anderson, however, has declaimed such beneficial
ownership. Excludes 870,000 shares of Common Stock held by the
International Non-Governmental Development of Space, of which Mr. Anderson
is the president and a director. Mr. Anderson has disclaimed beneficial
ownership of such shares.
(4) Based on a joint Schedule 13D/A dated October 23, 1998 filed by Gold &
Appel Transfer, S.A. and Mr. Anderson with the Securities and Exchange
Commission.
(5) Consists of 61,000 shares of Common Stock, options to purchase 250,000
shares of Common Stock at $1.03125 per share, options to purchase 100,000
shares of Common Stock at $1.30 per share and options to purchase 25,000
shares of Common Stock at $1.1875 per share.
(6) Mr. Parker is a former executive officer of the Company.
-4-
<PAGE>
ELECTION OF DIRECTORS
Four Directors, constituting the entire membership of the Board of
Directors of the Company, are to be elected at the Meeting to hold office until
the next annual meeting of shareholders and until the election and qualification
of their successors. Messrs. Brown, Goldberg, Regan and Anderson 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 identified in this
Proxy Statement. 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.
The Company's Board of Directors met six times during 1997. Each incumbent
Director attended at least 75% of the meetings of the Board.
The names of the nominees, and certain information about them, are set
forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION DIRECTOR SINCE
- - ---- --- -------- --------------
<S> <C> <C> <C>
Aaron R. Brown 45 Chairman, President and
Chief Executive Officer (1) 1997
Murray Goldberg 56 Director (2) 1996
Artie Regan 35 Director and Secretary (3) 1997
Walt Anderson 45 Director (4) 1998
</TABLE>
AARON R. BROWN was named Chairman of the Board of Directors of the Company
in November 1997. He was named interim President and Chief Executive Officer in
August 1998. Mr. Brown had previously served as Chairman of the Board and
President of the Company from its inception in November 1989 until May 1995 and
as Chief Executive Officer from the Company's inception until December 1996.
Mr. Brown is a certified public accountant. He currently devotes all of his
time to the management and affairs of the Company.
MURRAY GOLDBERG has been a Director of the Company since November 1996 and
an independent sales agent of the Company since 1993. Mr. Goldberg is also the
owner and a Vice-President of Jamco, Inc., a discount shoe distributor in
Florida, and the owner and Director of Doxs, Inc., an anesthesia equipment
developer and distributor. From June 1994 until May 1996, he was also an owner
of Strathmore Bagel Franchise Company.
ARTIE REGAN has been a director of the Company since August 1997. Since
1991, Mr. Regan has been President of Regan & Associates, Inc., a proxy
solicitation/shareholder services firm in New York, New York that has been a
vendor of the Company since 1993. Since 1988, Mr. Regan has also been the
Chairman, President and Chief Executive Officer of RD's Place, Inc., a
messenger/courier company located in Jersey City, New Jersey.
WALT ANDERSON has been a director of the Company since May 1998. Since
1992, Mr. Anderson has been the financial advisor to Gold & Appel Transfer,
S.A., a venture capital company which owns substantial positions in several
public and private telecommunications companies, including the Company.
Pursuant to a power of attorney, Mr. Anderson has sole investment power over the
shares of Common Stock owned by Gold & Appel Transfer, S.A. Since 1997, he has
served as a director of Esprit Telecom, a European telecommunications company.
-5-
<PAGE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR
THE ELECTION OF EACH OF THE NOMINEES AS DIRECTORS.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The audit committee of the Board of Directors (the "Audit
Committee") currently consists of Messrs. Goldberg and Regan, neither of whom is
an employee of the Company, and Mr. Brown. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of the Company's internal accounting controls. One meeting of the
Audit Committee was held in 1997 to discuss the 1997 audit with Deloitte &
Touche, LLP, the Company's independent public accountants.
Compensation Committee. In October 1998, the Board established a
compensation committee of the Board of Trustees (the "Compensation Committee")
consisting of Messrs. Goldberg, Regan and Anderson, none of whom is an employee
of the Company. The Compensation Committee is authorized to determine
compensation for the Company's executive officers. During 1997, formal action
on compensation matters was taken by the full Board (with interested members of
the Board abstaining).
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. Brown,
the Company has two additional executive officers, David B. Hurwitz and Michael
McAnulty. Mr. Hurwitz became the Executive Vice President of Sales and
Marketing of the Company in December 1996. From 1995 to 1996, he served as the
Vice President of Sales and Marketing of Commonwealth Long Distance, a C-TEC
company. From 1993 to 1995, he served as Executive Vice President and Chief
Operating Officer of InterNet Communications Services, Inc. and from 1992 to
1995, he served as General Manager of FiberNet. 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. McAnulty started
with the Company in 1996 and became the Chief Financial Officer of the Company
in May 1998. From 1992 to 1996, he was the Accounting Manager for PageNet Inc.
Before joining PageNet, he was employed by Crown, Cork and Seal Co., Inc. as a
plant controller.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Through MEG Associates, Mr. Goldberg acts as a sub-agent for the Company in
connection with the sale of the Company's products and services. During 1997,
the Company paid Mr. Goldberg and such company an aggregate of $136,983 in
commissions for sales agency services rendered to the Company. The compensation
paid to Mr. Goldberg and such company was determined on the basis of the
Company's pre-determined commission rates for sales agents unaffiliated with the
Company.
In August 1990, the Company entered into indemnification agreements with
Mr. Brown and Stephen J. Parker, the Company's former Chief Executive Officer
and a former Director. In addition, in July 1997, the Company entered into an
indemnification agreement with Kevin O'Hare, a former executive officer of the
Company. In general, the indemnification agreements obligate the Company to
indemnify each of Messrs. Brown, Parker and O'Hare against the liabilities and
expenses incurred by them in acting as a director or officer of the Company to
the maximum extent allowed by law. The Company, together with Messrs. Brown,
Parker and O'Hare, have been sued by Mark Scully, the Company's former President
for various claims asserted by him in connection with his termination of
employment with the Company on December 30, 1996. The Company and Messrs.
Brown, Parker and O'Hare have selected joint counsel to defend the action. The
Board of Directors of the Company has authorized the Company to advance the
expenses of
-6-
<PAGE>
the individual defendants incurred in defending this action, having received an
undertaking from each of them to repay any amounts so advanced in the event it
is determined that they are not entitled to indemnification under applicable
law.
Upon the resignation of Mr. Parker as President and Chief Executive Officer
of the Company and as a Director of the Company on August 21, 1998, the Company
paid him $300,000 in full satisfaction of any entitlement to unpaid salary or
bonus. In addition, Mr. Parker sold the Company 869,000 of the 1,000,000 shares
of Common Stock then held by him for an aggregate purchase price of $1,042,800
($1.20 per share).
Mr. Regan is the President of Regan & Associates, a proxy
solicitation/shareholder services firm that has been a vendor of the Company
since 1993.
-7-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid for the years ended December 31, 1997, 1996 and 1995: (i) to
the Company's President and Chief Executive Officer, (ii) the other two most
highly compensated executive officers having a combined salary and bonus during
the year ended December 31, 1997 exceeding $100,000 and (iii) the Company's
former President and Chief Executive Officer.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION
-------------------
COMMON
STOCK ALL
UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION
- - --------------------------- ---- -------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Aaron R. Brown 1997 $ 7,305 -- -- $119,792
President and Chief 1996 $165,000 -- -- $ 1,116(2)
Executive Officer(1) 1995 $160,000 -- 600,000(3) $ 1,932(2)
David B. Hurwitz 1997 $150,000 $69,821 300,000(4) --
Executive Vice President 1996 $ 6,250 -- 700,000 --
of Sales and Marketing 1995 N/A N/A N/A N/A
Stephen J. Parker 1997 $169,125 -- -- $ 9,890(2)
Former President and 1996 $165,000 -- -- $ 2,065(2)
Chief Executive Officer (5) 1995 $160,000 -- 600,000(3) $ 4,332(2)
Kevin M. O'Hare 1997 $125,000 -- 500,000(4) $ 66,667
Former President and 1996 $ 8,333 -- 1,100,000 --
Chief Executive Officer (6) 1995 N/A N/A N/A N/A
</TABLE>
(1) 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. He became a consultant to the
Company in January 1997 at a fee of $125,000 per annum. He became
President and Chief Executive Officer in August 1998, upon Mr. Parker's
retirement, at an annual salary of $178,000.
(2) Includes amounts paid for life insurance of the named officer where the
Company is not the beneficiary of the policy and auto expense
reimbursements.
(3) On May 11, 1995, the Company issued to each of Messrs. Brown and Parker
warrants to purchase 600,000 shares of Common Stock at a price per share of
$1.0625 in consideration for their limited personal guarantees provided in
connection with the Company's revolving credit facility.
(4) These options were issued on January 10, 1997 in replacement of options
granted in December 1996. The options granted in 1996 had previously vested
upon the attainment of certain performance criteria.
(5) Mr. Parker became President and Chief Executive Officer of the Company on
October 1, 1997. He retired in August 1998.
-8-
<PAGE>
(6) Effective September 30, 1997, Kevin O'Hare, then President and Chief
Executive Officer of the Company, terminated his employment with the
Company. Mr. O'Hare was immediately replaced by Mr. Parker as President
and Chief Executive Officer. Upon termination, Mr. O'Hare received a
severance payment of approximately $67,000, retained options to purchase
100,000 shares of Common Stock at $1.03125 per share and relinquished
options to purchase 500,000 shares of Common Stock at $1.03125 per share
and options to purchase an additional 500,000 shares of Common Stock at
$1.30 per share.
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes the number of options granted to named
executive officers during the year ended December 31, 1997. The Company did not
grant any stock appreciation rights in 1997.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF POTENTIAL REALIZABLE
COMMON STOCK PERCENT OF VALUE OF ASSUMED
UNDERLYING TOTAL OPTIONS ANNUAL RATES OF STOCK
OPTIONS GRANTED IN EXERCISE EXPIRATION PRICE APPRECIATION FOR
NAME GRANTED FISCAL YEAR(1) PRICE DATE OPTION TERM(2)
---- ------------ -------------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
5% 10%
-- ---
Aaron R. Brown
President and Chief -- -- -- -- -- --
Executive Officer
David B. Hurwitz
Executive Vice
President of Sales
and Marketing 300,000(3) 18.6% $1.30 12/16/01 $107,750 $238,099
Stephen J. Parker
Former President -- -- -- -- -- --
and Chief Executive
Officer
Kevin M. O'Hare(4)
Former President
and Chief Executive
Officer 500,000(3) 30.9% $1.30 01/15/02 $179,583 $396,832
</TABLE>
(1) Based upon options to purchase a total of 1,616,000 shares of Common Stock
granted to all officers and employees of the Company in 1997 under its
Amended and Restated Stock Option Plan or its predecessor plans.
(2) These amounts represent hypothetical gains that could be achieved for the
respective stock options if exercised at the end of the option term. These
gains are based on assumed rates of stock appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date.
(3) These options were issued on January 10, 1997 in replacement of options
granted in December 1996. The options granted in 1996 had previously vested
upon the attainment of certain performance criteria.
(4) Mr. O'Hare terminated his employment during 1997 and relinquished all of
such options.
-9-
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table summarizes the number and value of unexercised options
held by the named officers as of December 31, 1997.
<TABLE>
<CAPTION>
NUMBER NUMBER OF SHARES OF
OF SHARES COMMON STOCK UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS OR IN-THE-MONEY OPTIONS OR
ON VALUE WARRANTS AT FISCAL WARRANTS AT FISCAL
EXERCISE REALIZED YEAR-END YEAR-END(1)
-------- -------- ------------------------------ -----------------------
UN- UN-
EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE
NAME (#) ($) ( #) ( #) ($) ($)
- - ---- ----------- --- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Aaron R. Brown
President and Chief
Executive Officer(2)(3) 31,000 5,812 809,000(4) 60,000(5) 936,250 56,250
David B. Hurwitz
Executive Vice
President of Sales and
Marketing 50,000 54,688 250,000 400,000 320,313 431,875
Stephen J. Parker
Former President and
Chief Executive
Officer(2)(3) 31,000 5,812 809,000(4) 60,000(5) 936,250 56,250
Kevin M. O'Hare
Former President and
Executive Officer N/A N/A 100,000(6) -- 128,125 --
</TABLE>
(1) Based upon a market price of the Common Stock on December 31, 1997 of
$2.3125 per share (last trading day in December 1997).
(2) Options to purchase 300,000 shares of 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.
(3) In April 1998, Messrs. Brown and Parker exercised all of their outstanding
options and warrants.
(4) Includes options to purchase 240,000 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 569,000 shares of Common
Stock issued on May 11, 1995 at an exercise price of $1.0625 per share.
(5) Represents options to purchase 60,000 shares of Common Stock issued on
September 1, 1993 under the Executive Plan at an exercise price of $1.375
per share.
(6) Mr. O'Hare terminated his employment during 1997. These options were
exercised in 1998.
-10-
<PAGE>
COMPENSATION OF DIRECTORS
Directors who also serve as salaried employees of the Company do not
receive any additional compensation for their services as directors. Beginning
in 1997, non-employee directors became entitled to receive $1,000 for each Board
meeting attended in person, and $500 for participation in each Board meeting
conducted by telephone conference call. In addition, the Company granted to
each non-employee director options to purchase 20,000 shares of Common Stock for
his services as a director during 1997. These grants consisted of options to
purchase 20,000 shares of Common Stock at $1.43 per share granted to Mr.
Sugarman, a former director, and options to purchase 20,000 shares of Common
Stock at $1.69 per share granted to Mr. Regan.
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 either party gives thirty-days written
notice of its intention 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. In August 1998, Mr. Brown became
Interim President and Chief Executive Officer at a salary of $178,000 which
compensation is in lieu of his compensation under the consulting agreement. If
and when he steps-down from these positions, his consulting agreement will
resume under the original terms and conditions.
EMPLOYMENT AGREEMENT
Mr. Hurwitz entered into a three-year employment agreement terminating
January 5, 2000. The employment agreement provides for an annual base salary of
not less than $200,000 subject to annual cost-of-living increases as measured by
the Consumer Price Index.
REPORT ON REPRICING OF OPTIONS
Pursuant to Mr. Kevin O'Hare's (the former Chief Executive Officer)
employment agreement, the Company granted Mr. O'Hare five-year options to
purchase up to an aggregate of 1,100,000 shares of Common Stock. The exercise
price of 600,000 of these options was $1.03125 per share. Of these 600,000
options, 300,000 were immediately exercisable and 150,000 became exercisable on
each successive anniversary of the grant date.
The options to purchase the remaining 500,000 shares of Common Stock
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 equaled or
exceeded $1.50, the second when it equaled or exceeded $2.00, the third when it
equaled or exceeded $2.50 and the fourth when it equaled or exceeded $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 was 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 per share. On September 30,
1997, Mr. O'Hare's employment was terminated. All 500,000 of the repriced
options as well as 500,000 of the options exercisable at $1.03125 per share were
terminated on that day. Mr. O'Hare retained 100,000 options exercisable at
$1.03125 per share upon his termination.
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. 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 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
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<PAGE>
75,000 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 equaled
or exceeded $1.50, the second when it equaled or exceeded $2.00, the third when
it equaled or exceeded $2.50 and the fourth when it equaled or exceeded $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 was 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 $1.30 per share.
The following table summarizes certain information pertaining to the
repricing of any options held by executive officers during the last ten
completed fiscal years.
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF EXERCISE
COMMON STOCK PRICE AT LENGTH OF ORIGINAL
UNDERLYING TIME OF NEW EXERCISE TERM REMAINING
OPTIONS REPRICING PURCHASE AT DATE OF
NAME DATE REPRICED ($) ($) PRICE ($) REPRICING
---- ---- ------------ --------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
David B. Hurwitz
Executive Vice
President of Sales and
Marketing 1/10/97 300,000 (1) 1.30 5 years
Kevin M. O'Hare
Former President and
Chief Executive 1/10/97 500,000(2) (1) 1.30 5 years
Officer
</TABLE>
(1) Each one-fourth of such options had an exercise price equal to 85% of the
arithmetic mean of the closing bid and asked prices of the Common Stock
during the thirty-day period on which the average of the closing bid and
asked prices of the Common Stock equaled or exceeded $1.50, $2.00, $2.50
and $3.00, respectively.
(2) On September 30, 1997, all such options were terminated in connection with
the termination of Mr. O'Hare's employment with the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, all deliberations and decisions concerning executive officer
compensation were conducted and made by the Board of Directors (with interested
members of the Board abstaining). From January 1, 1997 through September 31,
1997, Mr. O'Hare served as a Director of the Company while employed as its
President and Chief Executive Officer. From October 1, 1997 through December
31, 1997, Mr. Parker served as a Director of the Company while employed as its
President and Chief Executive Officer.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Board's compensation policies with respect to the Company's executive
officers are based on the principles that compensation should, to a significant
extent, be reflective of the financial performance of the Company, and that a
significant portion of executive officers' compensation should provide long-term
incentives. The Board seeks to set executive compensation at levels that are
sufficiently competitive so that the Company may
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<PAGE>
attract, retain and motivate high quality executives to contribute to the
Company's financial success. In establishing compensation for executive
officers, the Board considers industry data generally, the recommendations of
third-party consultants and the Company's financial performance and industry
position. The Board exercises judgment and discretion in the information it
analyzes and considers.
In approving the following compensation arrangements, the Board considered
a number of factors, including: (i) the Company's financial position; (ii) the
Company's market capitalization ; (iii) compensation levels of executives of the
Company's competitors; and (iv) the impact of the arrangements on the Company's
future earnings. The Board did not separately rank the importance of each of
these factors and did not follow a formula in arriving at the compensation
arrangements that were approved.
During 1997, Mr. Brown received certain compensation as consideration for
his previous employment as Chief Executive Officer of the Company. Mr. Brown
resigned from such position effective December 16, 1996. All other compensation
paid to Mr. Brown during 1997 was paid pursuant to his consulting agreement with
the Company which was unanimously approved by the Board.
Mr. Hurwitz's 1997 base salary was established under the terms of his
employment agreement which was unanimously approved by the Board. The Board
also unanimously approved Mr. Hurwitz's 1997 bonus.
Mr. Parker's 1997 base salary was established under the terms of his
employment agreement which was unanimously approved by the Board.
All base salary and severance payments made to Messrs. O'Hare, Mendes and
Shannon during 1997 were paid pursuant to the terms of their employment and
severance agreements which were unanimously approved by the Board.
This report is made by the undersigned Directors constituting the entire
Board.
Aaron R. Brown
Murray Goldberg
Artie Regan
Walt Anderson
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<PAGE>
PERFORMANCE GRAPH
The Securities and Exchange Commission requires the Company to present a
chart comparing the cumulative total shareholder return on the Common Stock with
the cumulative total shareholder return of (i) a broad equity index and (ii) a
published industry or peer group index. The following chart compares the
cumulative total shareholder return for the Common Stock with the cumulative
shareholder return of companies on (i) the NASDAQ Stock Market (U.S.) Index and
(ii) the NASDAQ Telecommunications Index for the period beginning December 31,
1992 and ending December 31, 1997.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/92 12/93 12/94 12/95 12/96 12/97
US Wats, Inc. 100.00 60.00 13.75 17.50 25.00 46.25
NASDAQ Stock Market (U.S.) Index 100.00 114.79 112.21 158.69 195.18 239.48
NASDAQ Telecommunications Index 100.00 154.19 128.69 168.51 172.29 255.08
</TABLE>
-14-
<PAGE>
RELATIONSHIP WITH INDEPENDENT PUBLIC AUDITORS
On March 14, 1997, the Company replaced Rudolph, Palitz LLP ("Rudolph") as
the principal accountant for the Company and its subsidiaries with Deloitte &
Touche LLP. Rudolph's report on the Company's consolidated financial statements
for the fiscal year ended December 31, 1995 did not contain an adverse opinion
or a disclaimer of opinion, nor was Rudolph's opinion contained therein
qualified or modified as to uncertainty, audit scope or accounting principles.
The Company's decision to replace Rudolph was approved by the Board of
Directors. During the Company's fiscal year ended December 31, 1995 and the
subsequent interim period preceding the Company's replacement of Rudolph, there
were no disagreements with Rudolph 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 Rudolph, would have caused
it to make reference to the subject matter of the disagreement in connection
with its report.
The shareholders will not be asked to approve the appointment of Deloitte &
Touche LLP at the Meeting. A representative of Deloitte & Touche LLP is
expected to be present at the Meeting and will have the opportunity to make a
statement if he or she desires to do so. The representative is also expected to
be available to respond to appropriate questions of shareholders.
OTHER BUSINESS
The Board of Directors knows of no business which will be presented for
action at the Meeting other than as set forth in this Proxy Statement. However,
if other matters should properly come before the Meeting or any postponement or
adjournment 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, 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, 1997, or written representations that no reports were required to
be filed, the Company believes that all Section 16(a) filing requirements
applicable to its officers, directors and 10% Shareholders were complied with.
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
The Company expects to hold its 1999 Annual Meeting of Shareholders on or
about July 1, 1999. Accordingly, shareholders wishing to submit proposals for
inclusion in the Board of Director's proxy statement for the 1999 Annual Meeting
of Shareholders must submit their proposals to the Company at its principal
executive offices (attention: Secretary) no later than February 1, 1999. The
execution of a proxy solicited by the Company in connection with its 1999 Annual
Meeting of Shareholders shall confer on the designated proxyholder discretionary
voting authority to vote on any matter for which the Company has not received
notice on or prior to April 15, 1999.
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<PAGE>
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997 accompanies this Proxy Statement. THE COMPANY HAS ALSO FILED ITS
ANNUAL REPORT ON FORM 10-K WITH THE SECURITIES AND EXCHANGE COMMISSION.
SHAREHOLDERS WISHING TO RECEIVE A COPY OF THE DOCUMENTS INCORPORATED BY
REFERENCE IN THE COMPANY'S 1997 FORM 10-K, EXCEPT FOR THE EXHIBITS TO SUCH
DOCUMENTS, MAY RECEIVE THEM WITHOUT CHARGE BY WRITING TO AARON R. BROWN, CHIEF
EXECUTIVE OFFICER, US WATS, INC., 2 GREENWOOD SQUARE, SUITE 275, 3331 STREET
ROAD, BENSALEM, PA 19020.
By Order of the Board of Directors,
Artie Regan
Secretary
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<PAGE>
US WATS, INC.
2 GREENWOOD SQUARE
3331 STREET ROAD, SUITE 275
BENSALEM, PENNSYLVANIA 19020
Proxy--Annual Meeting of Shareholders--November 25, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Aaron R. Brown and Artie Regan 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 October 23,
1998 at the Annual Meeting of Shareholders to be held on November 25, 1998 or
at any postponement or adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THE PROXY WILL BE
VOTED IN FAVOR OF PROPOSAL NO. 1 AND IN ACCORDANCE WITH THE PROXIES' BEST
JUDGMENT UPON OTHER MATTERS PROPERLY COMING BEFORE THE MEETING AND ANY
ADJOURMENTS 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 a full corporate name by President or
other authorized officer. If a partnership, please sign in partnership name by
authorized person.
(Continued and to be marked, signed and dated on the reverse side)
<PAGE>
1. ELECTION OF DIRECTORS: Aaron R. Brown, Artie Regan, Murray Goldberg, Walt
Anderson
FOR all WITHHOLD (INSTRUCTIONS: To withhold
nominees AUTHORITY to authority to vote for any
listed above vote for the individual nominee, strike
(except as nominees a line through the
marked to the listed nominee's name in the list
contrary above [_] above.)
above) [_]
--------------------------------------
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any postponement or
adjournment.
----------------------------------
Name(s) (PLEASE PRINT)
----------------------------------
Signature
----------------------------------
Signature, if held jointly
----------------------------------
Date
PLEASE MARK, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE PAID ENVELOPE.
