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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
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 (S) 240.14a-11(c) or (S) 240.14a-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 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:
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<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 24, 1999
-----------------------------
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 24, 1999, at
11:00 a.m., local time, at the Holiday Inn, 3499 Street Road, Bensalem,
Pennsylvania 19020, for the following purposes:
1. To elect five directors.
2. To vote on an amendment to the Company's certificate of incorporation to
increase the number of authorized shares of common stock and preferred
stock.
3. To vote on the adoption of a new stock option plan by the Company.
4. To vote on the reincorporation of the Company from New York to Delaware.
5. To transact such other business as may properly come before the Annual
Meeting.
Only shareholders of record as of the close of business on October 22, 1999
are entitled to notice of, and to vote at, the Annual Meeting and any
postponement or adjournment thereof.
By Order of the Board of Directors,
/s/Artie Regan
Artie Regan, Secretary
Date: October 25, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE MARK, DATE AND SIGN
THE ENCLOSED PROXY CARD, 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 CARD PROMPTLY.
RETURNING THE PROXY CARD 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" or "Board of Directors") of US WATS, Inc. (the "Company") for use
at the Annual Meeting of Shareholders to be held on Wednesday, November 24,
1999, at 11:00 a.m., local time, at the Holiday Inn, 3499 Street Road, Bensalem,
Pennsylvania 19020 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 26, 1999.
At the Meeting, the shareholders will be asked to consider and take action
on the following matters (collectively, the "Proposals"):
1. The election of five 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. An amendment to the Company's certificate of incorporation to increase
the number of authorized shares of common stock of the Company (the "Common
Stock") from 30,000,000 to 100,000,000 and the number of authorized shares of
preferred stock of the Company (the "Preferred Stock") from 1,000,000 to
2,000,000.
3. The adoption of a new stock option plan by the Company that would permit
the grant of options with respect to 3,000,000 shares of Common Stock.
4. The reincorporation of the Company from New York to Delaware.
5. 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 Proposals.
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 22, 1999.
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, October 22, 1999, 20,551,944 shares of
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.
<PAGE>
The following outlines the vote required to approve each Proposal:
. Proposal One, to elect directors, requires approval by a plurality of the
shares of Common Stock present in person or by proxy at the Meeting.
. Proposal Two, to increase the number of authorized shares of Common Stock
and Preferred Stock, requires approval by a majority of the outstanding shares
of Common Stock.
. Proposal Three, to adopt a new stock option plan, requires approval by at
least a majority of the votes cast in person or by proxy at the Meeting.
. Proposal Four, to reincorporate the Company in Delaware, requires
approval by at least two-thirds (2/3) of the outstanding shares of Common Stock.
Abstentions and broker "non-votes" will be counted towards determining the
presence of a quorum. Abstentions and broker "non-votes" will have the effect of
a negative vote with respect to Proposals 2 and 4 and will have no effect on
Proposal 3. A broker "non-vote" occurs when a nominee holding shares for a
beneficial owner does not vote for a particular Proposal because the nominee
does not have discretionary voting power with respect to the Proposal and has
not received voting instructions from the beneficial owner.
As of the record date, the current directors and officers of the Company
have the right to vote 13,961,734 shares of Common Stock, representing
approximately 68% of the outstanding shares of Common Stock. Accordingly, such
persons own a sufficient number of shares of Common Stock to approve each of the
Proposals and intend to vote their shares for each Proposal.
Voting by Proxy; Revocation:
All properly executed proxy cards delivered by shareholders to the Company
and not revoked will be voted at the Meeting in accordance with the directions
given. If no specific instructions are given with regard to the matters to be
voted upon, the shares represented by a signed proxy card will be voted "FOR"
each of the Proposals.
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 September 15, 1999, 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.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature
Beneficial Owner of Beneficial Ownership Percent of Class
- ---------------- ----------------------- ----------------
<S> <C> <C>
Murray Goldberg
26 Anthony Drive
Malvern, PA 19355 295,000(1) 1.4%
Artie Regan
90 West Street
Suite 1505
New York, NY 10006 57,000(2) *
Walter Anderson
c/o Gold & Appel Transfer, S.A.
Omar Hodge Building
Wickhams Cay
Road Town
Tortula, British Virgin Islands 12,453,734(3)(4) 60.8%
James M. Rossi
21 East Main Street
Suite 201
Millville, NJ 08332 1,162,000(5) 5.7%
Dominic J. Romano
150 South Main Road
Vineland, NJ 08360 5,000 *
Gold & Appel Transfer, S.A.
Omar Hodge Building
Wickhams Cay
Road Town
Tortula, British Virgin Islands 12,453,734(4) 60.8%
David B. Hurwitz
2 Greenwood Square
3331 Street Road
Suite 275
Bensalem, PA 19020 661,000(6) 3.1%
Michael McAnulty
2 Greenwood Square
3331 Street Road
Suite 275
Bensalem, PA 19020 68,000(7) *
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature
Beneficial Owner of Beneficial Ownership Percent of Class
- ---------------- ----------------------- ----------------
<S> <C> <C>
All Directors and Executive Officers 14,701,734 69.2%
as a group (7 persons)
</TABLE>
- ---------------------
* Less than 1%
(1) Consists of 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 1,570,400 shares of Common Stock held by the Foundation
for the International Non-Governmental Development of Space, a non-profit
organization ("FINDS"), of which Mr. Anderson is the president and a
director. Mr. Anderson has no pecuniary interest in the shares held by
FINDS and has no power to control the voting or disposition of the shares
held by FINDS. Mr. Anderson has disclaimed beneficial ownership of such
shares. The information in this note (3) is based on a joint Schedule 13D/A
dated August 6, 1999 filed by Gold & Appel Transfer, S.A. and Mr. Anderson
with the Securities and Exchange Commission.
(4) Based on a joint Schedule 13D/A dated August 6, 1999 filed by Gold & Appel
Transfer, S.A. and Mr. Anderson with the Securities and Exchange
Commission.
(5) Based on a Schedule 13D dated August 31, 1999 filed with the Securities and
Exchange Commission. Includes 1,162,000 shares of Common Stock owned by JMR
Marketing Corporation and Solar Investment Group, LLC, entities controlled
by Mr. Rossi.
(6) Consists of 61,000 shares of Common Stock, options to purchase 350,000
shares of Common Stock at $1.03125 per share, options to purchase 200,000
shares of Common Stock at $1.30 per share and options to purchase 50,000
shares of Common Stock at $1.1875 per share. Does not include options to
purchase 100,000 shares of Common Stock at $1.30 per share, which options
do not first become exercisable until January 10, 2000.
(7) Consists of 3,000 shares of Common Stock, options to purchase 15,000 shares
of Common Stock at $1.40 per share and options to purchase 50,000 shares of
Common Stock at $1.1875 per share. Does not include options to purchase
50,000 shares of Common Stock at $1.50 per share, which options do not
first become exercisable until March 12, 2000.
-4-
<PAGE>
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
Five 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. Goldberg, Regan, Anderson, Rossi and Romano 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 names of the nominees, and certain information about them, are set
forth below:
<TABLE>
<CAPTION>
Name Age Position Director Since
- ---- --- -------- --------------
<S> <C> <C> <C>
Murray Goldberg 57 Director 1996
Artie Regan 36 Director and Secretary 1997
Walt Anderson 46 Director 1998
James M. Rossi 48 Director 1999
Dominic J. Romano 59 Director 1999
</TABLE>
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.
James M. Rossi has been a director of the Company since August 1999. Mr.
Rossi is a co-founder of Solar Communications Group, Inc., a productivity
service provider, and has been a director and Chairman and Chief Executive
Officer of Solar Communications Group, Inc. since October 1994. Mr. Rossi has
also served as a director and Chairman and Chief Executive Officer of JMR
Corporation, a telecommunication consulting firm, since 1971, as a director and
Chairman and Chief Executive Office of Cam-Comm, Inc. a data fiber optics
reseller, since 1997, and as President and a director of Camanco, Inc., a data
fiber optics reseller, since 1997.
-5-
<PAGE>
Dominic J. Romano has been a director of the Company since September 1999.
Mr. Romano has served as the managing partner of Romano, Hearing & Testa, a
certified public accounting and consulting firm located in Vineland, New Jersey,
since 1967. His areas of specialization include valuations of businesses for
acquisition purposes and financial, tax and estate planning. He currently is a
board member of Solar Communications Group, Inc. He is a certified public
accountant, registered municipal accountant, and he holds a Bachelor of Science
in Accounting degree from Seton Hall University.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE ELECTION OF EACH OF THE NOMINEES AS DIRECTORS.
Board Meetings and Committees of the Board of Directors
The Board of Directors met six times during 1998. Each incumbent Director
who served as a Director in 1998 attended at least 75% of the meetings of the
Board.
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. The Audit Committee has responsibility for making
recommendations concerning the engagement of independent public accountants,
reviewing with the independent public accountants the plans and results of the
audit engagement, approving professional services provided by the independent
public accountants, reviewing the independence of the independent public
accountants, considering the range of audit and non-audit fees and reviewing the
adequacy of the Company's internal accounting controls. One meeting of the Audit
Committee was held in 1998 to discuss the 1998 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 Directors (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 1998, formal action on
compensation matters was taken by the full Board (with interested members of the
Board abstaining).
Compensation of Directors
In 1998, non-employee directors received $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 of
Messrs. Regan and Goldberg options to purchase 25,000 shares of Common Stock at
$1.1875 per share for his services as a director during 1998.
Certain Relationships and Related Transactions
Mr. Goldberg acts as an agent for the Company and is the co-owner of
Goldberg & Associates, a company that acts as an agent for the Company in the
sale of the Company's products and services. During 1998, the Company paid Mr.
Goldberg and Goldberg & Associates a total of $84,569 in commissions for their
services as agents of the Company. These payments were based on commission
structures developed prior to Mr. Goldberg's election to the Board.
On March 23, 1999, the Company issued 900,000 shares of Common Stock to
Gold & Appel Transfer, S.A., a majority shareholder of the Company controlled by
Mr. Anderson, for an aggregate purchase price of $1,530,000 or $1.70 per share.
The Company used proceeds of the issuance for general working capital. The terms
of such transaction were negotiated between the Company and Gold & Appel
Transfer, S.A. on an arms-length basis, with Mr. Anderson abstaining from all
negotiations and approvals.
In August 1990, the Company entered into indemnification agreements with
Aaron R. Brown and Stephen J. Parker, former executive officers and directors of
the Company. In addition, in July 1997, the Company entered into
-6-
<PAGE>
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, were 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 selected joint counsel to defend the action. The Board of Directors
authorized the Company to advance the expenses of the individual defendants
incurred in defending this action. On June 9, 1999, the Court entered a judgment
in favor of Mr. Scully for the sum of approximately $626,442. The Company and
the other defendants are appealing this judgment.
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. During 1999, the Company paid this firm an aggregate of $3,500 for
services rendered to the Company in 1998.
On September 1, 1999, the Company acquired selected assets of JMR Marketing
Corporation ("JMR"), a firm that provided consulting services for telephone long
distance and related services, for 150,000 shares of Common Stock. JMR is owned
and controlled by Mr. Rossi. Upon completion of the acquisition, the Board of
Directors elected Mr. Rossi to the Board of Directors.
-7-
<PAGE>
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. The Company currently has two
executive officers, David B. Hurwitz, the President and Chief Executive Officer,
and Michael McAnulty, the Chief Financial Officer.
Mr. Hurwitz became the Executive Vice President of Sales and Marketing and
General Manager of the Company in December 1996 and was elected President and
Chief Executive Officer of the Company in February 1999. From 1995 to 1996, he
served as the Vice President of Sales and Marketing of Commonwealth Long
Distance, a company engaged in the provision of local and long distance
telephone services. From 1993 to 1995, he served as Executive Vice President and
Chief Operating Officer of InterNet Communications Services, Inc., a company
engaged in the provision of pre-paid calling card services. From 1992 to 1995,
he served as General Manager of FiberNet, a company engaged in the provision of
local and private line telephone services. 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 joined the Company in 1996 as controller and became the
Company's Chief Financial Officer in May 1998. From 1992 to 1996, he was the
Accounting Manager for PageNet Inc., a company engaged in the provision of
wireless paging services. Before joining PageNet, he was employed by Crown, Cork
and Seal Co., Inc. as a plant controller.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid for the years ended December 31, 1998, 1997 and 1996: (i) to
the Company's President and Chief Executive Officer, and (ii) to the Company's
two former Presidents and Chief Executive Officers. The combined 1998 salary and
bonus of the Company's other executive officer, Michael McAnulty, was less than
$100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- ------------
Common
Stock All
Underlying Other
Name And Principal Position Year Salary Bonus Options (#) Compensation
- --------------------------- ---- ------ ----- ----------- ------------
<S> <C> <C> <C> <C> <C>
David B. Hurwitz 1998 $215,030 $ -- 50,000 $ --
President and Chief Executive 1997 $150,000 $69,821 -- --
Officer(1) 1996 $ 6,250 -- 700,000 --
Aaron R. Brown 1998 $ 64,171 -- -- $ 82,747
Former President and Chief 1997 $ 7,305 -- -- $119,792
Executive Officer(2) 1996 $165,000 -- -- $ 1,116(4)
Stephen J. Parker, 1998 $118,133 -- -- $300,000
Former President and Chief 1997 $169,125 -- -- $ 9,890(4)
Executive Officer(3) 1996 $165,000 -- -- $ 2,065(4)
</TABLE>
-8-
<PAGE>
(1) Mr. Hurwitz became President and Chief Executive Officer on February 17,
1999. He commenced employment with the Company in December 1996 as
Executive Vice President of Sales and Marketing and General Manager.
(2) Effective August 21, 1998, Mr. Brown became the interim President and Chief
Executive Officer at a salary of $178,125 per annum. Between January 14,
1997 and August 21, 1998, Mr. Brown was a consultant to the Company, and
was compensated at $128,125 per annum. Upon Mr. Brown's resignation from
the Company effective February 17, 1999 as interim President and Chief
Executive Officer, Mr. Brown resumed his status as a consultant under his
consulting contract. This consulting contract extends until January 13,
2003 and provides, as of the date of this Proxy Statement, for a base
annual payment of $128,125, subject to a cost of living adjustment.
(3) Effective August 21, 1998, Mr. Parker, the then President and Chief
Executive Officer of the Company, terminated his employment with the
Company. Mr. Parker was immediately replaced by Mr. Brown as interim
President and Chief Executive Officer. Upon termination, Mr. Parker
received a severance payment of approximately $300,000. Mr. Parker
originally had a seven-year employment agreement with the Company which, by
its terms, continued until December 2000. This agreement was terminated
effective August 21, 1998.
(4) Includes amounts paid for life insurance of the named officer where the
Company is not the beneficiary of the policy and auto expense
reimbursements.
-9-
<PAGE>
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, 1998. The Company did not
grant any stock appreciation rights in 1998.
<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)
- ---- ------------ -------------- -------- ---------- ----------------------
5% 10%
----- -----
<S> <C> <C> <C> <C> <C> <C>
David B. Hurwitz
President and Chief
Executive Officer 50,000 10.6% $1.1875 03/10/01 $9,359 $19,653
Aaron R. Brown
Former President -- -- -- -- -- --
and Chief Executive
Officer
Stephen J. Parker,
Former President -- -- -- -- -- --
and Chief Executive
Officer
</TABLE>
(1) Based upon options to purchase a total of 473,000 shares of Common Stock
granted to all officers and employees of the Company in 1998 under the
Company's stock option plan.
(2) These amounts represent hypothetical gains that could be achieved for the
respective stock options if exercised at the end of the option term. These
gains are based on assumed rates of stock appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date.
-10-
<PAGE>
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option
Values
The following table summarizes the number and value of unexercised options
held by the named officers as of December 31, 1998.
<TABLE>
<CAPTION>
Number of Number of Shares of
Shares Common Stock Underlying Value of Unexercised
Acquired Unexercised Options or In-The-Money Options or
on Value Warrants at Fiscal Warrants at Fiscal
Exercise Realized Year-End Year-End(1)
--------- -------- --------------------------- ---------------------------
Un- Un-
Exercisable exercisable Exercisable exercisable
Name (#) ($) (#) ( #) ($) ($)
- ---- -------- ----- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
David B. Hurwitz
President and Chief
Executive Officer -- -- 475,000 225,000 $221,563 $ 61,875
Aaron R. Brown
Former President and
Chief Executive 869,000(2) -- -- -- -- --
Officer(2)(3)
Stephen J. Parker,
Former President and
Chief Executive 869,000(2) -- -- -- -- --
Officer(2)(3)
</TABLE>
(1) Based upon a market price of the Common Stock on December 31, 1998 of
$1.5625 per share (last trading day in December 1998).
(2) Includes exercise of 300,000 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 exercise of warrants to purchase 569,000 shares of Common
Stock issued on May 11, 1995 at an exercise price of $1.0625 per share.
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
$200,000 subject to annual cost-of-living increases as measured by the Consumer
Price Index. As of September 30, 1999, the base salary under the employment
agreement was approximately $207,825.
Compensation Committee Interlocks and Insider Participation
During 1998, 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, 1998 through February 17,
1999, Mr. Brown served as a Director of the Company while also employed as the
Company's interim President and Chief Executive Officer.
-11-
<PAGE>
Report of the Board of Directors on Executive Compensation
The Company currently has two executive officers, Messrs. Hurwitz and
McAnulty. The annual salary of Mr. Hurwitz was established in his three-year
employment agreement, which was entered into by the Company in December 1997 and
which continues until January 5, 2000. The annual salary and bonus of Mr.
McAnulty for 1998 were less than $100,000 and were determined by the Company's
former President and Chief Executive Officer based on the Company's industry
position.
This report is made by the incumbent directors listed below who served as
directors in 1998.
Murray Goldberg
Artie Regan
Walt Anderson
-12-
<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,
1993 and ending December 31, 1998.
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Cumulative Total Return
------------------------------------------------
12/93 12/94 12/95 12/96 12/97 12/98
<S> <C> <C> <C> <C> <C> <C>
US Wats, Inc. 100.00 23 29 42 77 52
NASDAQ Stock Market (U.S.) Index 100.00 98 138 170 208 294
NASDAQ Telecommunications Index 100.00 83 109 112 166 273
</TABLE>
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<PAGE>
PROPOSAL NO. 2 - INCREASE IN THE NUMBER OF AUTHORIZED SHARES
The Board of Directors unanimously proposes that shareholders approve an
amendment to the Company's certificate of incorporation to increase the number
of authorized shares of Common Stock from 30,000,000 to 100,000,000 and to
increase the number of authorized shares of Preferred Stock from 1,000,000 to
2,000,000.
If this Proposal 2 is approved and Proposal 3, the Reincorporation, is also
approved, the increase in the number of authorized shares of Common Stock and
Preferred Stock may be accomplished by the merger of the Company with and into a
wholly-owned subsidiary of the Company formed under the laws of the State of
Delaware. This subsidiary will be the surviving corporation after the merger and
will be authorized to issue 100,000,000 shares of common stock, $.001 par value,
and 2,000,000 shares of preferred stock, $.01 par value.
If this Proposal 2 is approved, and Proposal 3, the Reincorporation, is not
approved, the increase in the number of authorized shares of Common Stock and
Preferred Stock will be effected by amending Article FOURTH of the Company's
certificate incorporation to read as follows:
"FOURTH: The aggregate number of shares which the Corporation shall have
the authority to issue is One Hundred and Two Million (102,000,000). One Hundred
Million (100,000,000) of such shares shall be shares of a class of Common Stock,
$.001 par value per share. Two Million (2,000,0000) of such shares shall be
shares of a class of Preferred Stock, $.01 par value per share. The Board of
Directors shall have the authority to divide the authorized and unissued shares
of Preferred Stock into series, and to determine for each such series its voting
rights, designations, preferences, conversion rights, limitations and special
rights."
As of September 30, 1999, 20,551,944 shares of Common Stock were issued and
outstanding and 1,767,750 shares of Common Stock were reserved for issuance in
respect of outstanding options. As of September 30, 1999, no shares of Preferred
Stock were issued and outstanding.
Under both Delaware and New York law, the board of directors is authorized
to issue from time to time any and all unissued shares of common stock for any
proper corporate purposes without prior shareholder approval, except as may be
required for a particular transaction by law or the company's certificate of
incorporation, or by the rules of any stock exchange or self regulatory
organization on which the company's securities may then be listed.
The Board of Directors believes that the proposed increase in the number of
authorized shares of Common Stock and Preferred Stock is in the best interest of
the Company and its shareholders. While the Board of Directors has no specific
plan for the issuance of additional shares of Common Stock or Preferred Stock,
it believes that the Company should have sufficient authorized but unissued
shares for issuance in connection with implementation of employee benefit plans,
mergers and acquisitions, and other proper business purposes. In many such
situations, prompt action may be required which would not permit seeking
shareholder approval to authorize additional shares for the specific transaction
on a timely basis. The Board of Directors believes that it is important to have
the flexibility to act promptly in the best interests of the shareholders. For
example, the Board of Directors may deem it appropriate to make a private or
public offering of shares in order to raise funds for working capital or other
purposes, or shares may be issued to finance possible future acquisitions, or
for distribution to the Company's shareholders as a stock dividend or stock
split or for distribution pursuant to employee benefit plans.
Holders of Common Stock are not entitled to preemptive rights or cumulative
voting. Accordingly, the issuance of additional shares of stock might dilute the
ownership and voting rights of shareholders. The proposed increase in the number
of shares of stock the Company is authorized to issue is not in response to any
takeover attempt and is not intended to inhibit a change in control of the
Company. However, the availability for issuance of additional shares of stock
could discourage, or make more difficult, efforts to obtain control of the
Company. For example, the issuance of shares of stock in a public or private
sale, merger or similar transaction would increase the number of outstanding
shares, thereby possibly diluting the interest of a party attempting to obtain
control of the Company.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
PROPOSAL 2 TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM
30,000,000 TO 100,000,000 AND THE NUMBER OF AUTHORIZED SHARES OF PREFERRED STOCK
FROM 1,000,000 TO 2,000,000.
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<PAGE>
PROPOSAL NO. 3 - ADOPTION OF STOCK OPTION PLAN
General
At the Meeting, the shareholders will be asked to approve the US WATS, Inc.
1999 Stock Option Plan (the "Stock Option Plan"). The Board has adopted the
Stock Option Plan, subject to shareholder approval. The full text of the
Stock Option Plan is attached to this Proxy Statement as Exhibit D.
The Board believes that the adoption of the Stock Option Plan is advisable
because the award of options under that plan will promote the interests of the
Company by encouraging option recipients to remain in the service of the Company
and contribute to its success. It also gives the Company a means to attract
qualified new employees.
Summary of the Stock Option Plan
The Stock Option Plan provides for the grant of both "incentive stock
options" within the meaning of Section 422 of the Code ("ISOs") and stock
options that are non-qualified for federal income tax purposes ("NQSOs").
Persons eligible to receive awards under the Stock Option Plan include
employees, directors, consultants and advisors. Subject to certain adjustments
reflecting changes in the Company's capitalization, the total number of shares
of Common Stock for which options may be granted under the Stock Option Plan is
3,000,000. Under the Stock Option Plan, no individual may be granted Options for
more than 1,000,000 shares in any calendar year.
The Stock Option Plan is administered by the entire Board, or a committee
of the Board comprised of directors who are not also employees of the Company
(the "Committee"). The Board or its Committee determines, among other things:
which employees will receive options under the Stock Option Plan; the time when
options will be granted; the type of option (ISO or NQSO, or both) granted, the
number of shares subject to each option; the time or times when each option will
be exercisable and expire; the acceptable form(s) of payment for each option's
exercise price; and, subject to certain conditions discussed below, the exercise
price of each option. Board members administering the Stock Option Plan may vote
on any matters affecting the administration of the Plan, except that no member
may act upon the grant of an option to himself or herself.
The exercise price of the options granted under the Stock Option Plan are
determined by the Board or its Committee, but may not be less than 25% of the
fair market value per share of the Common Stock on the date the option is
granted in the case of a NQSO, or 100% of the fair market value per share of the
Common Stock on the date the option is granted in the case of an ISO. If,
however, an ISO is granted to any person who, at the time of the grant, owns
capital stock possessing more than 10% of the total combined voting power of all
classes of the Company's capital stock, then the exercise price for such ISO may
not be less than 110% of the fair market value per share of the Common Stock on
the date the option is granted.
Options are not assignable or transferable other than by will or the laws
of descent and distribution. In general, if an optionee's employment or
engagement by the Company is terminated, such optionee's options that are
exercisable on the date of termination will remain exercisable for three months
following the date of termination. However, if the Board or its Committee
determines that a terminated optionee engaged in deliberate and premeditated
acts against the interests of the Company, intentionally misappropriated funds,
engaged in gross misconduct relating to the Company, or has been convicted of a
felony, all unexercised options held by such optionee will terminate upon the
earlier of the date of such determination or the date of termination. In
addition, if an optionee's employment or engagement terminates because of
disability or death, such optionee's options that are exercisable on the date of
disability or death will remain exercisable for 12 months following the date of
termination.
In the event of a "change in control" of the Company, the Board or its
Committee may generally cause all outstanding options to vest, exchange
outstanding options for options to purchase common stock of any successor
corporation, and/or cancel the options and cause the Company to distribute cash
and/or other substitute consideration to the optionee. However, in the event of
a "change in control" that is intended to be accounted for as a pooling of
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<PAGE>
interests, the treatment of outstanding options will not be within the
discretion of the Board or its Committee. Rather, in that case, all outstanding
options will become fully vested, will apply to the stock of the surviving
company, and will be adjusted to preserve the aggregate option spread (i.e., the
difference between the fair market value of the stock subject to the option and
the aggregate exercise price of that option). A "change in control" for purposes
of the Stock Option Plan generally includes the acquisition by any person or
entity who is not a shareholder of the Company on the date of approval of the
Stock Option Plan of the beneficial ownership of 25% or more of the voting power
of the Company's stock or the sale of all or substantially all of the Company's
assets.
There are no federal income tax consequences to the Company on the grant or
exercise of an ISO. If an employee disposes of stock acquired through the
exercise of an ISO within one year after the date such stock is acquired or
within two years after the grant of the ISO (a "Disqualifying Disposition"), the
Company will be entitled to a deduction in an amount equal to the difference
between the fair market value of such stock on the date it is acquired and the
exercise price of the ISO. There are no tax consequences to the Company if an
ISO lapses before exercise or is forfeited.
An employee who receives an ISO is not subject to federal income tax on the
grant or exercise of the ISO. However, the difference between the option price
and the fair market value of the Common Stock received on the exercise of the
ISO ("ISO Stock") is an item of adjustment for purposes of the alternative
minimum tax. Upon the exercise of an ISO, an employee will have a basis in the
ISO Stock received equal to the amount paid. An employee will be subject to
capital gain or loss upon the sale of ISO Stock, equal to the difference between
the amount received for the stock and the employee's basis in such (unless such
sale constitutes a Disqualifying Disposition). The gain or loss will be long- or
short-term, depending on the length of time the ISO Stock was held prior to
disposition.
In the event of a Disqualifying Disposition, an employee will be required
to recognize (1) taxable ordinary income in an amount equal to the difference
between the fair market value of the ISO Stock on the date of exercise of the
ISO and the exercise price; and (2) capital gain or loss (long- or short-term,
as the case may be) in an amount equal to the difference between (a) the amount
realized by the employee upon the Disqualifying Disposition and (b) the exercise
price paid by the employee for the stock, increased by the amount of ordinary
income recognized by the employee, if any.
The Stock Option Plan permits an optionee to pay an option's exercise price
in cash or, in the discretion of the Board or its Committee, shares of the
Common Stock. If the employee pays the exercise price of an ISO with shares of
Common Stock that are already owned, the basis of the newly acquired ISO Stock
will depend on the tax character and number of shares of the previously owned
stock used as payment. If the employee pays with shares acquired upon other than
the exercise of an ISO ("non-ISO Stock"), the transaction will be tax-free to
the extent that the number of shares received does not exceed the number of
shares of non-ISO Stock paid. The basis of the number of shares of newly
acquired ISO Stock which does not exceed the number of shares of non-ISO Stock
paid will be equal to the basis of the shares paid. For capital gains tax
purposes, the employee's holding period with respect to such shares will include
the holding period of the shares of non-ISO Stock paid. To the extent the
employee receives more new shares than shares surrendered, the "excess" shares
of ISO Stock will take a zero basis. If an employee pay the exercise price of an
ISO using shares of previously acquired ISO Stock, however, certain special
rules apply. If the employee has not held the previously acquired ISO Stock for
at least two years from the date of grant of the related ISO and one year from
the date of the exercise of such related ISO, the use of such ISO Stock to pay
the exercise price will constitute a Disqualifying Disposition and subject the
employee to income tax with respect to the ISO Stock, as described above. In
such circumstances, the basis of the newly acquired ISO Stock will be equal to
the fair market value of the previously acquired ISO Stock used as payment.
The grant of a NQSO has no immediate tax consequences to the Company or the
optionee. Upon the exercise of a NQSO, the Company is entitled to a deduction in
an amount equal to the difference between the fair market value of the share
acquired through exercise of the NQSO and the exercise price of the NQSO. There
are no tax consequences to the Company or the optionee if a NQSO lapses before
exercise or is forfeited. The exercise of a NQSO requires an optionee to include
in gross income the amount by which the fair market value of the acquired shares
exceeds the
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<PAGE>
exercise price on the exercise date. The optionee's basis in the acquired shares
will be their fair market value on the date of exercise. Upon a subsequent sale
of such shares, the optionee will recognize capital gain or loss equal to the
difference between the sales price and the basis in the stock. The capital gain
or loss will be long- or short-term, depending on whether the optionee has held
the shares for more than one year.
If an optionee uses previously owned Common Stock as payment for the
exercise price of a NQSO, the exchange is tax-free with respect to a number of
the new shares equal to the number of shares surrendered for payment and those
new shares will have a basis equal to that of the shares surrendered. For
capital gains tax purposes, the holding period for the new shares will include
the period the optionee held the surrendered shares. To the extent the optionee
receives more new shares than shares surrendered, the excess shares are treated
as having been acquired for no consideration and the fair market value of such
excess shares is includible in the optionee's income as compensation. The basis
of the excess shares is their fair market value at the time of receipt. If the
previously owned shares consist of ISO Stock for which the holding requirements
were not met (such that their use as payment of the exercise price constitutes a
Disqualifying Disposition), the optionee will have the income tax consequences
described above.
The shares of Common Stock available for awards under the Stock Option Plan
would be in addition to the shares of Common Stock available for awards under
the Company's existing stock option plan. As of September 30, 1999, 991,616
shares of Common Stock were available for future awards under the existing stock
option plan.
The Board has authority to suspend, terminate or discontinue the Stock
Option Plan or revise or amend it without shareholder approval other than to
increase the number of shares available for award under the Plan or to change
the class of persons eligible to receive Options. Options may not be granted
under the Stock Option Plan following the tenth anniversary of the date the Plan
has been approved by shareholders.
The closing price of a share of Common Stock, as reported by NASDAQ on
September 29, 1999 was $1.875.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE PROPOSAL TO ADOPT THE STOCK OPTION PLAN.
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<PAGE>
PROPOSAL NO. 4 - REINCORPORATION IN THE STATE OF DELAWARE
General
The Board of Directors unanimously believes that the best interest of the
Company and its shareholders will be served by changing the Company's state of
incorporation from New York to Delaware (the "Reincorporation"). Throughout this
Proposal No. 4, the term "Company" refers to the existing New York corporation
and the term the "Delaware Company" refers to Capsule Communications, Inc., a
Delaware corporation and a wholly-owned subsidiary of the Company formed by the
Company for the Reincorporation. The address and phone number of the principal
executive office of the Delaware Company are the same as those of the Company.
The Reincorporation will be effected by merging the Company with and into
the Delaware Company (the "Merger") in accordance with the terms of an Agreement
and Plan of Merger (the "Merger Agreement"). Upon completion of the Merger:
. the Company will cease to exist,
. the Delaware Company will continue to operate the business of the Company
under the name "Headway Communications, Inc.," or such other name as the Board
determines is advisable,
. the shareholders of the Company will automatically become the
shareholders of the Delaware Company,
. the shareholders will have rights as shareholders of the Delaware Company
and no longer as shareholders of the Company, and such rights will be governed
by Delaware law, the Delaware Company's certificate of incorporation (the
"Delaware Company Certificate") and the Delaware Company's by-laws (the
"Delaware Company By-laws") rather than by New York law, the Company's existing
certificate of incorporation (the "Company Certificate") and the Company's
existing by-laws (the "Company By-laws"), and
. options and warrants to purchase shares of the Company's common stock
automatically will be converted into options and warrants to acquire an equal
number of shares of the Delaware Company's common stock.
The Reincorporation will not result in any change in the physical location,
business, management, assets, liabilities, net worth or employee benefit plans
of the Company. The directors and officers of the Company immediately prior to
the Reincorporation will serve as the directors and officers of the Delaware
Company following the Reincorporation. Following the Merger, the Delaware
Company's common stock is expected to be listed on The Nasdaq SmallCap Market
under the symbol "CAPS."
Approval of the Reincorporation will constitute approval of the Merger and
the Merger Agreement. Following the Meeting, if the Reincorporation is approved,
the Company, upon satisfaction of applicable regulatory requirements, will
submit the Merger Agreement to the offices of the New York Secretary of State
and the Delaware Secretary of State for filing.
The shareholders' approval of the Reincorporation will constitute their
approval of all of the provisions of the Delaware Company Certificate and
Delaware Company By-laws, including those provisions relating to the limitation
of director liability and indemnification of directors and officers under
Delaware law, and including those provisions having "anti-takeover"
implications, which may be significant to the Company and its shareholders in
the future. The governance of the Delaware Company by Delaware law, the Delaware
Company Certificate and the Delaware Company By-laws will alter certain rights
of the shareholders.
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<PAGE>
The shareholders' approval of the Reincorporation will mean that after the
Merger, the certificate of incorporation of the Delaware Company as it exists
immediately prior to the Merger will be the certificate of incorporation of the
surviving company. The Company anticipates that such certificate of
incorporation will be in the form attached as Exhibit B; however, the Board may
---------
change the name of the Delaware Company prior to the Merger if it determines
that such a change is advisable. If such a name change occurs, then the
surviving company would operate the business of the Company under the new name
selected by the Board.
Under the Merger Agreement, each outstanding share of the Company's common
stock will automatically be converted into one share of the Delaware Company's
common stock upon the Effective Time (as defined below). Each stock certificate
representing issued and outstanding shares of the Company's common stock will
continue to represent the same number of shares of common stock of the Delaware
Company. IT WILL NOT BE NECESSARY FOR SHAREHOLDERS TO EXCHANGE THEIR EXISTING
COMPANY STOCK CERTIFICATES FOR THE DELAWARE COMPANY STOCK CERTIFICATES.
Required Vote
Under New York law, the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the Company is required for
approval of the Merger and the other terms of the Merger Agreement. The Merger
Agreement has been approved unanimously by the Board of Directors. If approved
by the shareholders, the Reincorporation will become effective upon the filing
of the Merger Agreement and related documentation with the Secretary of State of
both Delaware and New York (the "Effective Time"). The Board of Directors
intends that the Reincorporation be consummated as soon as practicable following
the Meeting and the satisfaction of applicable regulatory requirements.
Nonetheless, the Merger Agreement allows for the Board of Directors to abandon
or postpone the Reincorporation or to amend the Merger Agreement either before
or after the shareholders' approval has been obtained and before the Effective
Time, if circumstances arise causing the Board of Directors to deem either such
action advisable.
The discussion set forth below is a summary of the Merger Agreement and
certain of its affects. It is qualified in its entirety by reference to the
Merger Agreement attached to this Proxy Statement as Exhibit A.
---------
Reasons for the Reincorporation
Rendering Section 912 Inapplicable. The Company periodically explores the
desirability of combining its business with the business of other companies. The
Company believes that certain business combinations would promote shareholder
interests by increasing operating efficiencies and net income and enhancing the
Company's prospects for future growth.
Section 912 of the New York Business Corporation Law (the "NYBCL")
restricts any "business combination" (as defined in Section 912) between a New
York corporation and an "interested shareholder" for five years (and thereafter,
unless certain conditions are satisfied) after the date that the interested
shareholder became an interested shareholder unless prior to that date the board
of directors of the New York corporation approved the business combination or
the transaction that resulted in the interested shareholder becoming an
interested shareholder. An "interested shareholder" is, among others, any person
who beneficially owns, directly or indirectly, 20% or more of the outstanding
voting shares of the corporation.
During the first quarter of 1998, Mr. Anderson, through a company
controlled by him, acquired in excess of 20% of the outstanding Common Stock and
thereby became an interested shareholder. Because the Board did not exempt Mr.
Anderson's acquisition, the Company is restricted from engaging in "business
combinations" with Mr. Anderson or a company controlled by him until the first
quarter of 2003.
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<PAGE>
In its exploration of potential business combinations, the Company has
identified ambiguities in Section 912 relating to whether Section 912 restricts
the Company's ability to engage in business combinations with third parties
unaffiliated with Mr. Anderson. Although the Board believes that Section 912
should not be interpreted as applying to a business combination between the
Company and a third party unaffiliated with Mr. Anderson, the Company and a
potential partner in a business combination may conclude that it is preferable
to structure the combination in a manner that avoids any ambiguities in the
application of Section 912. However, such structural alternatives may not have
the same tax and other efficiencies that could be achieved through a combination
structured without regard to Section 912. In any event, the uncertainty
surrounding this ambiguity as it relates to any potential business combination
is, in the opinion of the Board, adversely affecting the Company. Accordingly,
the Board believes it is in the best interests of the Company and its
shareholders to effect the Reincorporation.
For the reasons explained below, the Board has selected Delaware as the
preferred state in which to reincorporate the Company.
Advantages of Delaware Law. For many years, Delaware has followed a policy
of encouraging incorporation under its jurisdiction. In furtherance of that
policy, Delaware has long been the leading state in adopting, construing and
implementing comprehensive and flexible corporate laws responsive to the legal
and business needs of corporations. As a result, Delaware's General Corporation
Law has become widely regarded as the most well-defined body of corporate law in
the United States. Because of Delaware's prominence as the state of
incorporation for many major corporations, both the legislature and courts in
Delaware have demonstrated an ability and a willingness to act quickly and
effectively to meet changing business needs. The Delaware courts have developed
considerable expertise in dealing with corporate issues and a substantial body
of case law, establishing public policies with respect to corporate legal
affairs. Delaware has a more highly developed body of case law interpreting its
corporate statutes than New York, giving Delaware corporate law an added measure
of predictability that is useful in a judicial system based partly on precedent.
These factors often provide the directors and management of Delaware
corporations with greater certainty and predictability in managing the affairs
of the corporation. Furthermore, the Delaware court system provides for the
relatively expeditious resolution of corporate disputes. Delaware has a
specialized Court of Chancery which hears cases involving corporate law and
lacks jurisdiction over tort or criminal cases. Moreover, appeals to the Supreme
Court of Delaware in important cases can be made and decided relatively rapidly.
For these reasons, many American corporations have selected Delaware for their
corporate domicile either initially or through subsequent reincorporation.
The Board of Directors considered the predictability and flexibility of
Delaware law and the efficiency of its judicial process when it approved the
present proposal. In addition, the Company has never maintained executive
offices in the State of New York.
Possible Disadvantages. Despite the unanimous belief of the Board of
Directors that the Reincorporation is in the best interests of the Company and
its shareholders, Delaware law has been criticized by some commentators on the
grounds that it does not afford minority shareholders the same substantive
rights and protections as are available in a number of other states. In
addition, following a reincorporation by the Company in Delaware, the Company
may be able to complete a business combination which it would be unable to
complete if the Company remained incorporated in New York. Such a business
combination may be opposed by some shareholders. For a comparison of
shareholders' rights under Delaware and New York law, see "Comparison of
Certificate and By-laws Provisions of the Delaware Company and the Company and
Provisions in the DGCL and NYBCL" below.
Conversion of Stock Certificates
After the Reincorporation becomes effective, the Delaware Company will
issue a press release announcing that the transaction has occurred. At the same
time, the holders of the old shares of the Company will become holders of the
new shares of the Delaware Company. Shares of the Company will automatically
convert into shares of the Delaware Company, on these terms:
. The conversion will be on a one-for-one basis.
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. Each share of the common stock of the Company which is outstanding at the
effective time will become one share of the common stock of the Delaware
Company.
THIS MEANS THAT, BEGINNING AT THE EFFECTIVE TIME, EACH COMPANY STOCK
CERTIFICATE WHICH WAS OUTSTANDING JUST BEFORE THE REINCORPORATION WILL
AUTOMATICALLY REPRESENT THE SAME NUMBER OF DELAWARE COMPANY SHARES. THEREFORE,
SHAREHOLDERS OF THE COMPANY NEED NOT EXCHANGE THEIR STOCK CERTIFICATES FOR NEW
DELAWARE COMPANY STOCK CERTIFICATES. LIKEWISE, SHAREHOLDERS SHOULD NOT DESTROY
THEIR OLD CERTIFICATES AND SHOULD NOT SEND THEIR OLD CERTIFICATES TO THE
CORPORATION OR THE CORPORATION'S TRANSFER AGENT, EITHER BEFORE OR AFTER THE
EFFECTIVE TIME OF REINCORPORATION.
Trading of the Stock
After the Reincorporation, those who were formerly shareholders of the
Company may continue to make sales or transfers using their Company stock
certificates. The Delaware Company will issue new certificates representing
shares of Delaware Company common stock for transfers occurring after the
Effective Time. On request, the Delaware Company will issue new certificates to
anyone who holds Company stock certificates. Any request for new certificates
will be subject to normal stock transfer requirements including proper
endorsement, signature guarantee, if required, and payment of applicable taxes.
After the Reincorporation, the Delaware Company will continue to be a
publicly held company, with its common stock tradable on the The Nasdaq SmallCap
Market under its new symbol. The Delaware Company will also file with the
Securities and Exchange Commission and provide to its shareholders the same
types of information that the Company has previously filed and provided.
Certain Federal Income Tax Consequences
The following is a brief summary of certain federal income tax consequences
to holders of the Company's common stock who receive the Delaware Company's
common stock in exchange for their common stock as a result of the
Reincorporation. This summary is for general information only. This summary does
not address all the tax consequences of the Reincorporation that may be relevant
to particular Company shareholders, such as dealers in securities.
In view of the varying nature of such tax consequences, each shareholder is
urged to consult his or her own tax advisor as to the specific tax consequences
of the Reincorporation with respect to such shareholder, including the
applicability of federal, state, local or foreign tax laws.
The Reincorporation will constitute a tax-free reorganization under the
Internal Revenue Code. No gain or loss will be recognized by holders of Common
Stock upon receipt of common stock of the Delaware Company pursuant to the
Reincorporation. The tax basis of the common stock of the Delaware Company
received by each shareholder will be the same as the aggregate tax basis of the
common stock of the Company held by such shareholder at the time of the
Reincorporation. The holding period of the common stock of the Delaware Company
received by each shareholder of the Delaware Company will include the period for
which such shareholder held the common stock of the Company surrendered in
exchange therefore, provided that the Company's common stock was held by such
shareholder as a capital asset at the time of the Reincorporation.
State, local or foreign income tax consequences to shareholders may vary
from the federal tax consequences described above. This summary does not address
potential legislative changes that may affect these consequences.
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The Company should not recognize gain or loss for federal tax purposes as a
result of the Reincorporation, and the Delaware Company should succeed, without
adjustment, to the federal income tax attributes of the Company.
Accounting Treatment of the Merger
In accordance with generally accepted accounting principles, the Company
expects that the Merger will be accounted for as a reorganization of entities
under common control at historical cost.
Regulatory Approvals
The Merger is not expected to be consummated until the Company has obtained
all required consents of governmental authorities. To the Company's knowledge,
the only required consent to the consummation of the Merger will be the filing
of a Certificate of Merger by the Tax Commissioner of the State of New York with
the Secretary of State of the State of New York and receipt of approval of
public utility commissions in states where the Company provides
telecommunications services.
Appraisal Rights
NYBCL does not provide for appraisal rights for dissenting shareholders of
the Company in connection with the Merger.
Abandonment
The Board of Directors will have the right to abandon the Merger Agreement
and take no further action towards reincorporating the Company in Delaware at
any time before the Reincorporation becomes effective, even after shareholder
approval, if for any reason the Board of Directors determines that it is not
advisable to proceed with the Reincorporation.
Comparison of Certificate and By-laws Provisions of the Delaware Company and the
Company and Provisions in the DGCL and NYBCL
The relative rights of the shareholders of the Delaware Company and the
Company and a number of other corporate governance matters will differ between
the Delaware Company and the Company. These differences arise as a result of
differences between the General Corporation Law of Delaware ("DGCL") and the
NYBCL and differences between each company's respective certificates of
incorporation and by-laws. The following discussion identifies what the Board of
Directors, with the advice of counsel, believes to be the most significant of
these differences. Shareholders are advised that many provisions of the DGCL and
NYBCL may be subject to differing interpretations, and that those offered herein
may be incomplete in certain respects. The following discussion is qualified in
its entirety by reference to the DGCL, the NYBCL, case law applicable in
Delaware or New York, the Delaware Company Certificate attached hereto as
Exhibit B, the Delaware Company By-laws attached hereto as Exhibit C, and the
- --------- ---------
Company Certificate and Company By-laws, copies of which are available for
inspection at the principal office of the Company and copies of which will be
sent to shareholders upon request.
Payment of Dividends. Under both the NYBCL and the DGCL, a corporation may
generally pay dividends out of surplus if it would not become insolvent as a
result of such payment. In addition, the DGCL, unlike the NYBCL, 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.
Issuance of Rights and Options to Directors, Officers or Employees. Under
the NYBCL, the issuance of stock rights or stock options to directors, officers
or employees, as well as plans providing therefore, must be approved by a
majority of votes cast at a shareholders meeting. The DGCL does not require
shareholder approval of such transactions.
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<PAGE>
Amendment of By-laws. The NYBCL provides that by-laws may be adopted,
amended or repealed by a majority of shareholders. Consistent with the NYBCL,
the Company By-laws provide for the adoption, amendment or repeal of by-laws by
the board of directors; however, the NYBCL provides that any by-law adopted by
the board may be amended or repealed by the shareholders. The DGCL provides that
by-laws may be adopted, amended or repealed by a majority of shareholders.
Consistent with the DGCL, the Delaware Company Certificate allows the board of
directors to adopt, amend or repeal by-laws, but any such action is subject to
the right of the shareholders to adopt, amend and repeal by-laws.
Vote Required for Certain Transactions. The NYBCL (as applicable to the
Company) requires the holders of two-thirds of the outstanding stock to approve
certain mergers, consolidations or sales of all or substantially all of a
corporation's assets that may occur outside the ordinary course of business.
Under the DGCL, holders of a majority of the outstanding stock entitled to vote
on such transactions have the power to approve a merger, consolidation or sale
of all or substantially all the assets of a corporation. Furthermore, in the
case of a merger, the DGCL provides that shareholders of the surviving
corporation are not required to approve the merger at all, unless the
certificate of incorporation provides otherwise (the Delaware Company's does
not), if (a) no amendment of the surviving corporation's certificate of
incorporation is made by the merger agreement; (b) each outstanding share of the
surviving corporation before the merger is to be an identical outstanding or
treasury share of the surviving corporation after the merger; and (c) either no
shares of common stock of the surviving corporation and no shares, securities or
obligations convertible into such stock are to be issued or delivered under the
plan of merger, or the authorized unissued shares or the treasury shares of
common stock of the surviving corporation to be issued or delivered under the
plan of merger plus those initially issuable upon conversion of any other
shares, securities or obligations to be issued or delivered under such plan do
not exceed 20% of the shares of common stock of the surviving corporation
outstanding immediately prior to the merger.
Special voting requirements may apply to certain business combinations with
interested shareholders. See the discussion below under the heading "Business
Combinations with Interested Shareholders."
Indemnification of Directors and Officers. The NYBCL and the DGCL both
allow a corporation to indemnify its directors and officers in connection with
derivative and non-derivative actions. However, both generally require that the
person to be indemnified must have acted in good faith and in a manner the
person reasonably believed to be consistent with the best interests of the
corporation. Also, with respect to derivative actions where the person is
adjudged to be liable to the corporation, indemnification is not permitted
unless a court determines that the person is fairly entitled to such
indemnification. The NYBCL additionally provides that indemnification may not be
made in connection with derivative actions where a pending claim is settled or
otherwise disposed of, or in any action where the liability arises from actions
taken in bad faith, intentional wrongdoing, or where an improper personal
benefit was derived. Both the Company Certificate and the Delaware Company
Certificate generally provide for indemnification to the maximum extent
permitted by applicable law.
Insurance for Directors and Officers. The NYBCL permits a corporation to
purchase insurance for its directors and officers against liabilities arising
from actions and omissions of the insured person, provided that such insurance
does not provide for any payment, other than cost of defense, where a final
adjudication adverse to the insured director or officer establishes that his
acts of active and deliberate dishonesty were material to the cause of action so
adjudicated, or that he personally gained a financial profit or other advantage
to which he was not legally entitled. The DGCL permits a corporation to purchase
insurance for its directors, officers, employees or agents against any liability
incurred in such capacity.
Limitation of Directors' Liability. The NYBCL permits a corporation to
provide in its certificate of incorporation a provision limiting the personal
liability of a director to the corporation or its shareholders for damages for
any breach of duty in such capacity, except for the liability of any director if
a judgment or other final adjudication adverse to him establishes that (i) his
acts or omissions were in bad faith or involved intentional misconduct or a
knowing violation of law; (ii) he personally gained in fact a financial profit
or other advantage to which he was not
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<PAGE>
legally entitled; or (iii) his acts were in violation of certain provisions
concerning dividends, distributions and loans to directors. The Company
Certificate contains such a provision.
The DGCL permits a corporation to provide in its certificate of
incorporation a provision limiting the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except with respect to (i) any breach of the director's duty
of loyalty; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) the payment of
certain unlawful dividends or distributions; or (iv) any transaction from which
the director derived an improper personal benefit. The Delaware Company
Certificate contains such a provision.
Number of Directors. The Company By-laws generally provide that the number
of directors constituting the board will be three, except where the board or the
shareholders fix a greater number. The NYBCL allows shareholders to increase or
decrease the size of the board. The Delaware Company By-laws provide that the
board shall consist of between one and 15 directors, as set by the board.
Removal of Directors. Under the NYBCL, generally, directors may be removed
by the shareholders for cause. Also, the certificate of incorporation or the
specific provisions of a by-law adopted by the shareholders may provide for such
removal by action of the board, except in the case of any director elected by
cumulative voting, or by the holders of the shares of any class or series, or
holders of bonds, voting as a class, when so entitled by the provisions of the
certificate of incorporation. Neither the Company Certificate nor Company Bylaws
have such a provision. If the certificate of incorporation or the by-laws so
provide, any or all of the directors may be removed without cause by vote of the
shareholders. The Company Bylaws provide that any director or the entire board
of directors may be removed, with or without cause, by a vote of shareholders.
Under the DGCL, generally, directors may be removed with or without cause
by a majority vote of the shareholders, unless the certificate of incorporation
provides otherwise. The Delaware Company Certificate does not provide otherwise.
Transactions with Interested Directors. The NYBCL provides several methods
for establishing the validity of transactions between a corporation and
interested directors. One method requires a vote of the board or a committee
that would be sufficient for such purpose without counting the vote of such
interested director, or, if the votes of the disinterested directors are
insufficient to constitute an act of the board or committee, by unanimous vote
of the disinterested directors. The comparable provision of the DGCL requires
only the affirmative vote of a majority of the disinterested directors, without
requiring that such vote would be sufficient alone to be the act of the board or
committee.
Loans and Guarantees of Obligations of Directors. Under the NYBCL (as
applicable to the Company), a corporation may not lend money to or guarantee the
obligation of a director of the corporation unless the loan or guarantee is
approved by the shareholders, with the holders of a majority of the votes of the
shares entitled to vote thereon constituting a quorum, but shares held by
directors who are benefitted by such loan or guarantee are not entitled to vote
or to be included in the determination of a quorum. Under the DGCL, a board of
directors may authorize loans or assistance to or guarantees of indebtedness of
employees and officers, including any employee or officer who is a director,
whenever, in the judgment of the board, such loan, assistance or guaranty may
reasonably be expected to benefit the corporation.
Business Combinations with Interested Shareholders. The NYBCL prohibits, in
the absence of an exemption, any "business combination" (as therein defined)
between a corporation and an "interested shareholder" for five years after the
date that the interested shareholder became an interested shareholder unless,
prior to that date, the board of directors of the corporation approved the
business combination or the transaction that resulted in the interested
shareholder becoming an interested shareholder. After five years, such a
business combination is permitted only if (i) it is approved by a majority of
the shares not owned by the interested shareholder or by an affiliate or
associate of the interested shareholder; or (ii) certain statutory fair price
requirements are met. An "interested shareholder" is, among others, any person
who beneficially owns, directly or indirectly, 20% or more of the outstanding
voting shares of the
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<PAGE>
corporation. In addition, the Company has identified certain ambiguities in the
NYBCL relating to whether the NYBCL, under certain circumstances, restricts a
corporation's ability to engage in business combinations with third parties. See
the discussion above under the heading "Rendering Section 912 Inapplicable." The
Company does not believe that it can effect a timely opt-out from these
provisions.
The DGCL has analogous restrictions which differ from their NYBCL
counterparts in certain respects; however, consistent with the DGCL, the
Delaware Company Certificate provides that these restrictions will not be
applicable to the Delaware Company. See the discussion above under the heading
"Possible Disadvantages."
Shareholder Action by Written Consent. The NYBCL permits shareholder action
without a meeting upon the written consent of all outstanding shares entitled to
vote on the matter, unless the certificate of incorporation permits majority
shareholder consent. The Company Certificate does not so permit. The DGCL
permits shareholder action without a meeting upon the written consent of holders
of outstanding stock having not less than the minimum number of votes that would
be necessary to authorize such action at a meeting at which all shares entitled
to vote thereon were present and voted, unless the certificate of incorporation
provides otherwise. The Delaware Company Certificate does not provide otherwise.
Dissenters' Rights. The NYBCL provides that a dissenting shareholder has
the right to receive the fair value of his shares if he complies with certain
procedures and objects to (i) certain mergers and consolidations, (ii) certain
dispositions of assets requiring shareholder approval, (iii) certain share
exchanges, or (iv) certain amendments to the certificate of incorporation which
adversely affect the rights of such shareholder. The DGCL provides such
appraisal rights only in the case of shareholders objecting to certain mergers
or consolidations (which class of mergers or consolidations is somewhat narrower
than the class giving rise to appraisal rights under the NYBCL), unless
additional appraisal rights are provided in the certificate of incorporation.
The Delaware Company Certificate does not provide any such additional appraisal
rights.
Holding Company Reorganization. The DGCL permits a corporation, unless
otherwise prohibited by its certificate of incorporation (the Delaware Company
Certificate has no such prohibition), to reorganize as a holding company without
shareholder approval. The reorganization contemplated by the statute is
accomplished by merging the subject corporation with or into a direct or
indirect wholly-owned subsidiary of the corporation and converting the stock of
the corporation into stock of another direct or indirect wholly-owned subsidiary
of the corporation, which would be the new holding company. The DGCL protects
certain rights of shareholders in connection with these transactions, but there
can be no assurance that such protection would be satisfactory in any specific
transaction. The NYBCL has no analogous provisions allowing holding company
reorganizations without shareholder approval.
Authorized Stock. The Company Certificate authorizes 31,000,000 shares of
capital stock, which consist of 30,000,000 shares of common stock, par value
$.001 per share, and 1,000,000 shares of preferred stock (none of which are
outstanding), par value $.01 per share. Of the preferred stock, 150,000 shares
are designated as a series entitled "The 9% Series of Convertible Preferred
Stock." The Delaware Company Certificate provides for 100,000,000 shares of
common stock, par value $.001 per share, and 2,000,000 shares of preferred
stock, par value $.01 per share.
All of the shares of preferred stock are to have such rights and
designations as are established by the respective boards of directors, except
that the Company's series of 9% Convertible Preferred, of which the Delaware
Company has no counterpart, has the rights and designations set forth in the
Company Certificate.
Special Meetings. The Company By-laws provide that special meetings of
shareholders may be called at the behest of the president, a majority of the
board of directors or the holders of one-third of the shares of the Company
entitled to vote at such meeting. The Delaware Company Certificate provides that
special meetings of shareholders may be called at the behest of the president or
a majority of the board of directors.
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<PAGE>
Proxies. Under the NYBCL and Company By-laws, a proxy shall not be voted or
acted upon after 11 months from its date unless such proxy provides for a longer
period. Under the DGCL and Delaware Company By-laws, a proxy shall not be voted
or acted upon after three years from its date unless such proxy provides for a
longer period.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE PROPOSAL TO CHANGE THE STATE OF INCORPORATION OF THE COMPANY FROM NEW YORK
TO DELAWARE BY MEANS OF A MERGER OF THE COMPANY WITH AND INTO A WHOLLY-OWNED
DELAWARE SUBSIDIARY.
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<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 attached proxy card grants the proxy holders discretionary authority to
vote on any matter raised at the Annual Meeting. 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, 1998, or written representations that no reports were required to
be filed, the Company believes that, except as indicated below, all Section
16(a) filing requirements applicable to its officers, directors and 10%
Shareholders were complied with. Mr. McAnulty became an executive officer of the
Company in May 1998 but did not file his initial Form 3 until October 1999. Mr.
Hurwitz did not file a Form 4 reporting his December 1997 exercise of options to
acquire 50,000 shares of Common Stock until October 1999. Each of Mr. Goldberg
and Mr. Regan did not file a Form 4 reporting his 1998 award of options to
acquire 25,000 shares of Common Stock until October 1999.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Shareholders are entitled to present proposals for action at a forthcoming
meeting if they comply with the requirements of the proxy rules promulgated by
the Securities and Exchange Commission. Proposals of shareholders of the Company
intended to be presented for consideration at the Company's 2000 Annual Meeting
of Shareholders must be received by the Company no later than June 27, 2000 in
order to be included in the proxy statement and form of proxy related to that
meeting.
If a shareholder intends to timely submit a proposal at the 2000 Annual
Meeting, which is not required to be included by the Company in the proxy
statement and form of proxy relating to that meeting, the shareholder must
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<PAGE>
provide the Company with notice of the proposal no later than September 10,
2000. If such shareholder fails to do so, or if such shareholder fails to give
timely notice of his intention to solicit proxies, the proxy holders will be
allowed to use their discretionary voting authority when the proposal is raised
at the 2000 Annual Meeting.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998 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 1998 FORM 10-K, EXCEPT FOR THE EXHIBITS TO SUCH DOCUMENTS, MAY RECEIVE
THEM WITHOUT CHARGE BY WRITING TO DAVID B. HURWITZ, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, US WATS, INC., 2 GREENWOOD SQUARE, SUITE 275, 3331 STREET
ROAD, BENSALEM, PA 19020.
By Order of the Board of Directors,
/s/ Artie Regan
Artie Regan
Secretary
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<PAGE>
EXHIBIT A
---------
AGREEMENT AND PLAN OF MERGER
----------------------------
This Agreement and Plan of Merger (the "Agreement"), is dated as of
October 23, 1999 by and between US Wats, Inc., a New York corporation (the
"Company") formed under the name "Second Lloyd Funding, Inc.", and Capsule
Communications, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Surviving Company").
WHEREAS, on the date hereof, the Company has authority to issue 30,000,000
shares of Common Stock, par value $.001 per share (the "Company Common Stock"),
of which 20,551,944 shares are issued and outstanding, and 1,000,000 shares of
Preferred Stock, par value $.01 per share, of which no shares are issued and
outstanding;
WHEREAS, on the date hereof, the Surviving Company has authority to issue
100,000,000 shares of Common Stock, par value $.001 per share (the "Surviving
Company Common Stock"), of which 100 shares are issued and outstanding and owned
by the Company and 2,000,000 shares of Preferred Stock, par value $.01 per
share, of which no shares are issued and outstanding;
WHEREAS, the respective boards of directors of the Company and the
Surviving Company have determined that it is advisable and in the best interests
of each of such corporations that the Company merge with and into the Surviving
Company upon the terms and subject to the conditions set forth herein;
WHEREAS, the respective boards of directors of the Company and the
Surviving Company have by resolutions duly adopted approved and adopted this
Agreement;
WHEREAS, the Company has approved and adopted this Agreement in its
capacity as the sole stockholder of the Surviving Company; and
WHEREAS, the board of directors of the Company has directed that this
Agreement be submitted to a vote of its shareholders as soon as practicable;
NOW, THEREFORE, in consideration of the mutual agreements and covenants
herein contained, the Company and the Surviving Company hereby agree as follows:
1. Merger. At the Effective Time (as defined below), the Company shall be
merged with and into the Surviving Company (the "Merger"), the separate
existence of the Company shall cease, and the Surviving Company shall be the
surviving corporation. The Merger shall become effective upon the date and time
of the later to occur of the filing of a certificate of merger, in form required
by law, with the Secretary of State of the State of New York and the filing of a
certificate of merger, in form required by law, with the Secretary of State of
the State of Delaware (the "Effective Time").
2. Certificate of Incorporation and Bylaws of Surviving Corporation;
-----------------------------------------------------------------
Directors; Officers. From and after the Effective Time, the Certificate of
- -------------------
Incorporation and Bylaws of the Surviving Company in effect immediately prior to
the Effective Time shall continue in full force and effect until further amended
in accordance with the provisions thereof and applicable law. The directors, the
members of the various committees of the board of directors, and the officers of
the Company in office immediately prior to the Effective Time shall be the
directors, committee members, and officers of the Surviving Company at the
Effective Time and thereafter until such time as their successors may be duly
elected and qualified.
3. Succession. At the Effective Time, the Surviving Company shall succeed
----------
to all of the assets and property (whether real, personal or mixed), rights,
privileges, franchises, immunities and powers of the Company, and the Surviving
Company shall assume and be subject to all of the duties, liabilities,
obligations and restrictions of
A-1
<PAGE>
every kind and description of the Company, including, without limitation, all
outstanding indebtedness of the Company, all in the manner and as more fully set
forth in Section 259 of the General Corporation Law of the State of Delaware and
other applicable law.
4. Further Assurances. From time to time, as and when required by the
------------------
Surviving Company or by its successors or assigns, there shall be executed and
delivered on behalf of the Company such deeds and other instruments, and there
shall be taken or caused to be taken by it all such further action, as shall be
appropriate, advisable or necessary in order to vest, perfect or conform, of
record or otherwise, in the Surviving Company, the title to and possession of
all property, interests, assets, rights, privileges, immunities, powers,
franchises and authority of the Company, and otherwise to carry out the purposes
of this Agreement, and the officers and directors of the Surviving Company are
fully authorized, in the name and on behalf of the Company or otherwise, to take
any and all such action and to execute and deliver any and all such deeds and
other instruments.
5. Conversion of Securities. At the Effective Time, by virtue of the Merger
------------------------
and without any action on the part of the holder thereof, (i) each share of the
Company Common Stock shall cease to exist and shall be changed and converted
into one fully paid and non-assessable share of the Surviving Company Common
Stock, and (ii) each share of the Surviving Company Common Stock issued and
outstanding in the name of the Company immediately prior to the Effective Time
shall be canceled and retired and resume the status of authorized and unissued
shares of the Surviving Company Common Stock, and no shares of the Surviving
Company Common Stock or other securities of the Surviving Company shall be
issued in respect thereof.
6. Warrants, Option and Purchase Rights. Each warrant, option or other
------------------------------------
right to purchase or otherwise acquire shares of the Company Common Stock which
is outstanding or effective immediately prior to the Effective Time shall, by
virtue of the Merger and without any action on the part of the holder thereof,
be changed and converted into a warrant, option or right to acquire (and the
Surviving Company hereby assumes the obligation to deliver) the same number of
shares of the Surviving Company Common Stock, at the same price per share, and
upon the same terms, and subject to the same conditions, as set forth in or
covered by the respective warrant, option or other purchase right as in effect
immediately prior to the Effective Time. The same number of shares of the
Surviving Company Common Stock shall be reserved for purposes of warrants,
options or other purchase rights as is equal to the number of shares of the
Company Common Stock so reserved immediately prior to the Effective Time for
warrants, options or other purchase rights. The Surviving Company hereby
assumes, as of the Effective Time, all obligations of the Company under the
warrants, options and other purchase rights of the Company outstanding or
effective immediately prior to the Effective Time.
7. Condition to the Merger. The consummation of the Merger and the other
-----------------------
transactions contemplated hereby is subject to receipt prior to the Effective
Time of the requisite approval of the Merger by the holders of the Company
Common Stock pursuant to the New York Business Corporation Law.
8. Certificates. At and after the Effective Time, all of the outstanding
------------
certificates which immediately prior thereto represented shares of Company
Common Stock shall be deemed for all purposes to evidence ownership of and to
represent the shares of Surviving Company Common Stock into which the shares of
Company Common Stock represented by such certificates have been converted as
herein provided and shall be so registered on the books and records of the
Surviving Company or its transfer agent. The registered owner of any such
outstanding certificate shall, until such certificate shall have been
surrendered for transfer or otherwise accounted for to the Surviving Company or
its transfer agent, have and be entitled to exercise any voting and other rights
with respect to, and to receive any dividends and other distributions upon, the
shares of Surviving Company Common Stock evidenced by such outstanding
certificate.
9. Amendment. The parties hereto, by mutual consent of their respective
---------
boards of directors, may amend or supplement this Agreement prior to the
Effective Time; provided, however, that no amendment or supplement may be made
after the approval and adoption of this Agreement by the shareholders of the
Company
A-2
<PAGE>
unless such amendment or supplement is approved by such shareholders if such
amendment or supplement would, under applicable law, require approval and
adoption by the shareholders.
10. Termination. This Agreement may be terminated, and the Merger and the
-----------
other transactions contemplated hereby may be abandoned, at any time prior to
the Effective Time, whether before or after approval and adoption of this
Agreement by the shareholders of the Company, by action of the board of
directors of the Company if: (i) the condition specified in Section 7 hereof
shall not have been satisfied or waived or (ii) the board of directors of the
Company determines for any reason, in its sole judgment and discretion, that the
consummation of the merger would be inadvisable or not in the best interests of
the Company and its shareholders.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
12. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company and the Surviving Company have caused this
Agreement to be executed and delivered as of the date first above written.
US WATS, INC.
/s/David B. Hurwitz
---------------------------
David B. Hurwitz
President
CAPSULE COMMUNICATIONS, INC.
/s/David B. Hurwitz
---------------------------
David B. Hurwitz
President
A-3
<PAGE>
EXHIBIT B
---------
CERTIFICATE OF INCORPORATION
OF
CAPSULE COMMUNICATIONS, INC.
ARTICLE I
NAME
----
The name of this corporation is Capsule Communications, Inc.
(the "Corporation").
ARTICLE II
REGISTERED OFFICE
-----------------
The registered office of the Corporation in the State of Delaware is
located at 1201 Market Street, Suite 1600, in the City of Wilmington, County of
New Castle 19801, and its registered agent at such address is PHS Corporate
Services, Inc.
ARTICLE III
PURPOSE
-------
The purpose or purposes of the Corporation shall be to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of Delaware.
ARTICLE IV
AUTHORIZED STOCK; DESIGNATIONS
------------------------------
The total number of shares of capital stock which the Corporation shall
have authority to issue is one hundred and two million (102,000,000) shares, of
which one hundred million (100,000,000) shares shall be common stock, par value
$.001 per share ("Common Stock"), and two million (2,000,000) shares shall be
preferred stock, par value $.01 per share ("Preferred Stock"). The Board of
Directors of the Corporation (the "Board of Directors") is hereby authorized,
subject to limitations prescribed by law, to provide for the issuance from time
to time of the shares of Preferred Stock in one or more series, and by filing a
certificate pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in a series, and
to fix the designations, powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, of each such series of Preferred Stock,
including the dividend rights, dividend rate, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), redemption
price or prices, and liquidation preferences of any wholly unissued series of
Preferred Stock.
ARTICLE V
DURATION
--------
The Corporation is to have perpetual existence.
ARTICLE VI
BOARD OF DIRECTORS
------------------
The number of directors which shall constitute the whole Board of Directors
shall be fixed by, or in the manner provided in, the bylaws. The election of
directors need not be by written ballot unless a stockholder
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demands election by written ballot at a meeting of stockholders and before
voting begins or unless the bylaws of the Corporation so provide.
ARTICLE VII
SPECIAL MEETINGS
----------------
A special meeting of stockholders may be called at any time by a majority
of the Board of Directors or President of the Corporation. At any time when a
special meeting of stockholders has been called pursuant hereto and upon receipt
of request from the persons calling the meeting, it shall be the duty of the
Secretary to fix the time and place of the meeting, which shall be held not more
than sixty (60) days after receipt of the request. If the Secretary neglects or
refuses to fix the time or place of the meeting, the person(s) calling the
meeting may do so.
ARTICLE VIII
VESTING OF POWER
----------------
All of the powers of the Corporation, insofar as the same may now or
hereafter be lawfully vested by this Certificate of Incorporation in the Board
of Directors, are hereby conferred upon the Board of Directors of the
Corporation. In furtherance and not in limitation of that power, the Board of
Directors shall have the power to make, adopt, alter, amend and repeal from time
to time bylaws of the Corporation, subject to the right of the stockholders
entitled to vote with respect thereto to adopt, amend and repeal bylaws.
ARTICLE IX
INDEMNIFICATION
---------------
The Corporation shall indemnify and advance expenses to the fullest extent
expressly or otherwise permitted by Section 145 (or any other provision) of the
General Corporation Law of Delaware ("DGCL"), as the same may be amended from
time to time, to each person who is or was a director or officer of the
Corporation and the heirs, executors and administrators of such a person. Any
expenses (including attorneys' fees) incurred by each person who is or was a
director or officer of the Corporation, and the heirs, executors and
administrators of such a person, in connection with defending any such
proceeding in advance of its final disposition shall be paid by the Corporation;
provided, however, that if the DGCL requires, an advancement of expenses
incurred by an indemnitee in his capacity as a director or officer (and not in
any other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking by or on behalf of
such indemnitee, to repay all amounts so advanced, if it shall ultimately be
determined that such indemnitee is not entitled to be indemnified for such
expenses under this Article or otherwise. Notwithstanding the aforementioned
indemnification provisions, the Corporation may enter into indemnification
agreements with directors or officers.
ARTICLE X
LOCATION OF MEETINGS
--------------------
Meetings of stockholders may be held within or without the State of
Delaware, as the bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the laws of the State of Delaware)
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the bylaws of the Corporation.
ARTICLE XI
PERSONAL LIABILITY
------------------
The personal liability of the directors of the Corporation is hereby
eliminated to the fullest extent expressly or otherwise permitted by Section
102(b)(7) (or any other provision) of the DGCL, as the same may be amended from
time to time.
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ARTICLE XII
SECTION 203 ELECTION
--------------------
The Corporation hereby elects not to be governed by Section 203 of the
DGCL.
ARTICLE XIII
INCORPORATOR
------------
The name and mailing address of the incorporator are as follows:
PHS Corporate Services, Inc.
1201 Market Street, Suite 1600
Wilmington, Delaware 19801
The undersigned incorporator hereby acknowledges that this Certificate of
Incorporation of Capsule Communications, Inc. is its act and deed and that the
facts stated herein are true.
Dated: October 21, 1999 __________________________________________
PHS Corporate Services, Inc., Incorporator
By: Benjamin Strauss, Vice President
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EXHIBIT C
---------
BYLAWS
OF
CAPSULE COMMUNICATIONS, INC.
ARTICLE I: MEETINGS OF STOCKHOLDERS
-----------------------------------
1.1 Annual Meeting: The annual meeting of the stockholders of the
--------------
corporation shall be held annually at such place within or without the State of
Delaware, at such time and on such date as may from time to time be designated
by the board of directors, for the election of directors and for the transaction
of any other proper business.
1.2 Special Meetings: Special meetings of the stockholders may be called as
----------------
and only as provided by the certificate of incorporation.
1.3 Notice of Meetings: Written notice of the each meeting stating the
------------------
place, date and hour of the meeting and, in the case of a special meeting, the
purpose or purposes for which it is called, shall be given to each stockholder
entitled to vote at such meeting not less than 10 nor more than 60 days before
the date of the meeting.
1.4 Stockholders List: 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 the 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 stockholders, 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 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 of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
1.5 Quorum: 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 30 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.
1.6 Vote Required: When a quorum is present at any meeting, 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 applicable law or the certificate of
incorporation, a different vote is required, in which case such law or provision
in the certificate of incorporation shall govern and control the decision of
such question.
1.7 Voting: Unless otherwise provided in the certificate of incorporation,
------
each stockholder shall at every meeting of the 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 proxy shall be voted on after three years
from its date, unless the proxy provides for a longer period.
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1.8 Action Without Meeting: Any action required or permitted to be taken at
----------------------
any annual or special meeting of stockholders may be taken without a meeting
thereof, without prior notice and without a vote, if a consent 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. Prompt notice of the taking of such
corporate action without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented in writing.
ARTICLE II: DIRECTORS
---------------------
2.1 Number of Directors; Term of Office: The board of directors shall
-----------------------------------
consist of one or more members. The number of directors shall be fixed by the
board of directors, but shall not be less than one or more than 15. Directors
need not be stockholders of the corporation. Each director shall hold office
until his or her successor is elected and qualified or until his or her earlier
death, resignation or removal. The initial number of directors constituting the
board of directors shall be five.
2.2 Powers of Directors: The business of the corporation shall be managed
-------------------
by or 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.
2.3 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.
2.4 First Meeting: The first meeting of each newly elected board of
-------------
directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
board of directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as 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 all of the directors.
2.5 Regular Meetings: Regular meetings of the board of directors may be
----------------
held without notice at such time and at such place as shall from time to time be
determined by the board.
2.6 Special Meetings: Special meetings of the board may be called by the
----------------
President upon not less than 10 nor more than 60 days' notice to each director;
special meetings shall be called by the President or Secretary in like manner
and on like notice on the written request of two directors unless the board
consists of only one director; in which case special meetings shall be called by
the President or Secretary in like manner and on like notice on the written
request of the sole director.
2.7 Quorum; Vote Necessary: At all meetings of the board, a majority of the
----------------------
directors shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which there is a quorum
shall be the act of the board of directors, 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 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.
2.8 Action Without 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.
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2.9 Telephonic Communications: Members of the board of directors, or any
-------------------------
committee designated by the board of directors, may participate in a meeting of
the board of directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
2.10 Committees of Directors: The board of directors may, by resolution
-----------------------
passed by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors, which, to the extent
provided in the resolutions, shall have and may exercise the powers of the board
in the management of the business and affairs of the corporation except as
otherwise restricted by statute or the certificate of incorporation; provided,
in the absence or disqualification of any member of such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or she or they constitute a quorum,
may by unanimous resolution appoint another member of the board to act at the
meeting in the place of any such absent or disqualified member. Each committee
shall keep regular minutes of its meetings and report the same to the board at
the next meeting of the board following such committee meeting; except that when
the board meeting is held within two days after the committee meeting, such
report shall, if not made at the first meeting, be made to the board at its
second meeting following such committee meeting.
2.11 Compensation of Directors: The board of directors may fix the
-------------------------
compensation of directors.
ARTICLE III: NOTICES
--------------------
3.1 Form: Whenever, under the provisions of applicable law or of the
----
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
3.2 Waiver: Whenever any notice is required to be given under the
------
provisions of applicable law or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE IV: OFFICERS
--------------------
4.1 Officers: The officers of the corporation shall be chosen by the board
--------
and shall be a President, a Secretary and a Treasurer. The board may choose one
or more Vice-Presidents, Assistant Secretaries and Assistant Treasurers. The
board may appoint such other officers as it shall deem necessary who shall
exercise such powers and perform such duties as shall be determined from time to
time by the board. Election or appointment of an officer shall not of itself
create contract rights. Any two or more offices may be held by the same person,
but no officer shall execute, acknowledge, or verify any instrument in more than
one capacity if such instrument is required by law to be executed, acknowledged,
or verified by two or more officers. The officers shall have the powers and
duties set forth below, and shall perform such other duties and have such other
powers as the board may from time to time prescribe.
4.2 Appointment at Organizational Meeting: The board, at its first meeting
-------------------------------------
after each annual meeting of stockholders, shall choose a President, a Secretary
and a Treasurer.
4.3 Salaries: The salaries of all officers of the corporation shall be
--------
fixed by the board, except Vice-Presidents, Assistant Secretaries and Assistant
Treasurers each of whose salary shall be set by the President and confirmed by
the board.
4.4 Term; Removal; Vacancies; Resignation: The officers of the corporation
-------------------------------------
shall hold office for a one-year term or until their successors are chosen and
qualified, subject to earlier termination through removal with or without cause
or through written resignation. Any officer elected or appointed by the board
may be removed
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<PAGE>
with or without cause at any time by the affirmative vote of a majority of the
board present at a meeting at which there is a quorum. Any vacancy occurring in
any office of the corporation shall be filled by the board.
An officer may resign by providing 30 days' prior written notice of such
resignation to the corporation. Such resignation shall be effective on the 30th
day after notice thereof is given to the corporation or on such later date as
may be stated in such resignation.
4.5 President: The President shall be the presiding officer at all meetings
---------
of the stockholders, and shall be the chief executive officer of the
corporation, and shall have general supervision of the affairs of the
corporation and general and active management of the business of the
corporation, subject to the policies and direction of the board, and shall
supervise and direct all of the employees of the corporation, and shall see that
all orders and resolutions of the board are carried into effect.
The President shall execute bonds, mortgages and other contracts requiring
a seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the board to some other
officer or agent of the corporation.
4.6 Vice-President(s): The Vice-President, or if there shall be more than
-----------------
one, the Vice-Presidents in the order determined by the President, shall, in the
absence or disability of the President, perform the duties and exercise the
powers of the President and shall perform such other duties and have such other
powers as the President may from time to time prescribe.
4.7 Secretary and Assistant Secretaries: The Secretary shall have charge of
-----------------------------------
such books, documents and papers as the board may determine and shall have
custody of the corporate seal. The Secretary shall attend all meetings of the
board and all meetings of the stockholders and record all the proceedings of the
meetings of the corporation and of the board in a book to be kept for that
purpose and shall perform like duties for the standing committees when required.
He or she shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the board. He or she 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 requiring it and when so
affixed, it may be attested by his or her signature or by the signature of such
Assistant Secretary.
The Assistant Secretary, or if there be more than one, the Assistant
Secretaries in the order determined by the President, shall, in the absence or
disability of the Secretary, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
President may from time to time prescribe.
4.8 Treasurer and Assistant Treasurers: The Treasurer shall see that an
----------------------------------
accounting system is maintained in such manner as to give a true and accurate
accounting of the financial transactions of the corporation. 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 moneys and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the board.
If required by resolution of the board, he or she shall give the
corporation a bond (which shall be renewed as the board may require) in such sum
and with such surety or sureties as shall be satisfactory to the board for the
faithful performance of the duties of his or her office and for the restoration
to the corporation, in case of his or her death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his or her possession or under his or her control belonging to
the corporation.
The Assistant Treasurer, or if there shall be more than one, the Assistant
Treasurers in the order determined by the President, shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
President may from time to time prescribe.
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4.9 Duties of Officers May Be Delegated. The board may delegate the powers
-----------------------------------
or duties of any of the officers of the corporation to any other officer or to
any director to the extent not prohibited by the certificate of incorporation or
by statute.
ARTICLE V: CERTIFICATES OF STOCK
--------------------------------
5.1 Certificate of Stock: Every holder of stock in the corporation shall be
--------------------
entitled to have a certificate, signed by, or in the name of the corporation by,
the President or a Vice-President, and by the Treasurer or an assistant
Treasurer, or the Secretary or an assistant Secretary of the corporation,
certifying the number of shares owned by him in the corporation.
Certificates may be issued for partly paid shares and in such case upon the
face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock, or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware
("DGCL"), in lieu of the foregoing requirements, there may be set forth on the
face or back of the certificate which the corporation shall issue to represent
such class or series of stock, a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional or other special rights or
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
5.2 Signatures: Any of or all the signatures on the certificate may be
----------
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 he were
such officer, transfer agent or registrar at the date of issue.
5.3 Transfer 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, assignation 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.
5.4 Fixing Record Date: In order that the corporation may determine the
------------------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than 60 nor less than 10 days before the date of such
meeting, nor more than 60 days prior to any 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; provided, however,
that the board of directors may fix a new record date for the adjourned meeting.
5.5 Registered Stockholders: The corporation shall be entitled to recognize
-----------------------
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner, and to hold liable for calls
and assessments a person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares 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 VI: GENERAL PROVISIONS
------------------------------
6.1 Dividends: Dividends upon the capital stock of the corporation, subject
---------
to the provisions of the certificate of incorporation, if any, may be declared
by the board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
6.2 Reserves: Before payment of any dividend, there may be set aside out of
--------
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
6.3 Annual Statement: The board of directors shall present at each annual
----------------
meeting a full and clear statement of the business and condition of the
corporation.
6.4 Checks: All checks or demands for money and notes of the corporation
------
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
6.5 Fiscal Year: The fiscal year of the corporation shall be determined by
-----------
the board of directors.
6.6 Seal: The corporate seal shall have inscribed thereon the name of the
----
corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
6.7 Amendments: The board of directors shall have the power to make, adopt,
----------
alter, amend and repeal from time to time any provision of these bylaws, subject
to the rights of stockholders entitled to vote with respect thereto to adopt,
amend and repeal any provision of these bylaws.
ARTICLE VII: INDEMNIFICATION
----------------------------
The corporation shall indemnify and advance expenses to the fullest extent
expressly or otherwise permitted by Section 145 (or any other provision) of the
DGCL, as the same may be amended from time to time, to each person who is or was
a director or officer of the corporation and the heirs, executors and
administrators of such a person. Any expenses (including attorneys' fees)
incurred by each person who is or was a director or officer of the corporation,
and the heirs, executors and administrators of such a person, in connection with
defending any such proceeding in advance of its final disposition shall be paid
by the corporation; provided, however, that if the DGCL requires, an advancement
of expenses incurred by an indemnitee in his capacity as a director or officer
(and not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit plan)
shall be made only upon delivery to the corporation of an undertaking by or on
behalf of such indemnitee, to repay all amounts so advanced, if it shall
ultimately be determined that such indemnitee is not entitled to be indemnified
for such expenses under this Article or otherwise. Notwithstanding the
aforementioned indemnification provisions, the corporation may enter into
indemnification agreements with directors or officers.
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EXHIBIT D
---------
US WATS, INC.
1999 STOCK OPTION PLAN
Section 1. Purposes.
--------
The purposes of the Plan are to: (a) assist the Company in recruiting and
retaining highly qualified employees, directors and consultants; (b) provide
Employees with an incentive for productivity; and (c) provide Employees an
opportunity to share in the growth and value of the Company. The Options granted
pursuant to the Plan are intended to constitute either Incentive Stock Options
within the meaning of Section 422 of the Code, or non-qualified stock options,
as determined by the Board or the Committee at the time the Option is granted.
Section 2. Definitions.
-----------
Capitalized terms used herein will have the meanings set forth in this
Section 2:
(a) "Board" shall mean the board of directors of the Company, as
constituted from time to time.
(b) "Cause" means: (i) conviction of a felony by a federal or state
court of competent jurisdiction; (ii) gross misconduct relating to the Company;
(iii) intentional misappropriation of funds; or (iv) deliberate and premeditated
acts against the interest of the Company.
(c) "Change in Control" means:
(i) The acquisition, after the effective date of the Plan, in
one or more transactions by any "Person" (as the term person
is used for purposes of Sections 13(d) or 14(d) of the
Exchange Act, but excluding from such definition any person
who, as of the effective date of the Plan is the beneficial
owner of Voting Securities) of "Beneficial ownership"
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of twenty-five (25%) or more of the combined
voting power of the Company's then outstanding voting
securities (the "Voting Securities"), provided that for
purposes of this clause (i) Voting Securities acquired
directly from the Company by any Person shall be excluded
from the determination of such Person's Beneficial ownership
of Voting Securities (but such Voting Securities shall be
included in the calculation of the total number of Voting
Securities then outstanding); or
(ii) approval by shareholders of the Company of:
(A) a merger, reorganization or consolidation involving the
Company if the shareholders of the Company immediately
before such merger, reorganization or consolidation do
not or will not own directly or indirectly immediately
following such merger, reorganization or consolidation,
more than fifty percent (50%) of the combined voting
power of the outstanding voting securities of the
company resulting from or surviving such merger,
reorganization or consolidation in substantially the
same proportion as their ownership of the Voting
D-1
<PAGE>
Securities outstanding immediately before such merger,
reorganization or consolidation; or
(B) a complete liquidation or dissolution of the Company;
(C) an agreement for the sale or other disposition of all
or substantially all of the assets of the Company; or
(iii) acceptance by shareholders of the Company of shares in a
share exchange if the shareholders of the Company
immediately before such share exchange do not or will not
own directly or indirectly immediately following such share
exchange more than fifty percent (50%) of the combined
voting power of the outstanding voting securities of the
entity resulting from or surviving such share exchange in
substantially the same proportion as their ownership of the
Voting Securities outstanding immediately before such share
exchange.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall mean the Committee appointed by the Board in
accordance with Section 3(a) of the Plan, if one is appointed.
(f) "Common Stock" shall mean the common stock of the Company, $.001
par value per share, or the common stock of any successor corporation.
(g) "Company" shall mean US WATS, INC., a New York corporation, or any
successor corporation, including a successor by merger.
(h) "Director" shall mean an individual who is a member of the Board.
(i) "Disability" shall mean a condition rendering an Optionee
Disabled.
(j) "Disabled" shall have the same meaning as set forth in Section
22(e)(3) of the Code.
(k) "Employee" shall mean any person employed by the Company or any of
its Subsidiaries. In addition, solely for the purpose of determining eligibility
for the grant of non-qualified stock options hereunder, and not for the purpose
of affecting the status of the relationship between such person and the Company,
the term "Employee" shall include consultants and advisors to the Company or any
of its Subsidiaries, as well as Directors and members of the board of directors
of any Subsidiary.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
(m) "Fair Market Value Per Share" shall mean the fair market value of
a share of Common Stock, as determined pursuant to Section 7 hereof.
(n) "Incentive Stock Option" shall mean an Option which is an
incentive stock option as described in Section 422 of the Code.
(o) "Non-Employee Director" shall have the meaning set forth in Rule
16b- 3(b)(3)(i) promulgated by the Securities and Exchange Commission under the
Exchange Act, or any successor definition adopted by the Securities and Exchange
Commission; provided, however, that the Board or the Committee may, to the
-------- -------
extent that it deems necessary to comply with Section 162(m) of the Code or
regulations thereunder, require that
D-2
<PAGE>
each "Non-Employee Director" also be an "outside director" as that term is
defined in regulations under Section 162(m).
(p) "Option(s)" shall mean an Incentive Stock Option or a
non-qualified stock option to purchase Shares that is granted pursuant to the
Plan.
(q) "Option Agreement" shall mean a written agreement substantially in
the form as the Board or Committee (subject to the terms and conditions of the
Plan) may from time to time approve evidencing and reflecting the terms of an
Option.
(r) "Optionee" shall mean an Employee to whom an Option is granted.
(s) "Parent Corporation" shall mean a parent corporation, whether now
or hereafter existing, as defined in Section 424(e) of the Code.
(t) "Participant" shall mean each Employee to whom an Option is
granted pursuant to the Plan.
(u) "Person" shall mean an individual, partnership, corporation,
limited liability company, trust, joint venture, unincorporated association, or
other entity or association.
(v) "Plan" shall mean this US WATS, Inc. 1999 Stock Option Plan.
(w) "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
(x) "Shares" shall mean shares of Common Stock subject to the Plan, as
described in Section 5 and adjusted in accordance with Section 8 of the Plan.
(y) "Subsidiary" shall mean a subsidiary corporation, whether now or
hereafter existing, as defined in sections 424(f) and (g) of the Code.
Section 3. Administration.
--------------
(a) Procedure. The Plan will be administered by the Board. The Board
---------
may at any time appoint a Committee consisting of not less than two Non-Employee
Directors to administer the Plan on behalf of the Board. If the Board appoints a
Committee pursuant to this Section 3(a), that Committee will possess all of the
power and authority of, and will be authorized to take any and all actions
required to be taken hereunder by, the Board, subject to such terms and
conditions as the Board may prescribe.
Members of any Committee established pursuant to this Section 3(a) will
serve for such period of time as the Board may determine. Members of the Board
or the Committee who are eligible for Options or have been granted Options may
vote on any matters affecting the administration of the Plan or the grant of any
Options pursuant to the Plan, except that no such member shall act upon the
grant of an Option to himself or herself, but any such member may be counted in
determining the existence of a quorum at any meeting of the Board or Committee
during which action is taken with respect to the grant of Options to himself or
herself.
From time to time the Board may increase the size of the Committee and
appoint additional members thereto, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies however caused, or
remove all members of the Committee and thereafter directly administer the Plan.
D-3
<PAGE>
(b) Powers of the Board and the Committee. Subject to the express
-------------------------------------
provisions of the Plan, the Board or the Committee shall have the authority, in
its sole and absolute discretion:
(i) to grant Options;
(ii) to determine the Employees to whom and the times at which
Options are granted;
(iii) to determine the terms and provisions of each Option under
the Plan and each Option Agreement and to modify or amend
any outstanding Option or Option Agreement;
(iv) to correct any defect, supply any omission and reconcile any
inconsistency in the Plan or any Option Agreement in the
manner and to the extent that it deems desirable;
(v) to prescribe, amend, modify and rescind rules and
regulations relating to the proper administration of the
Plan;
(vi) to accelerate the vesting or exercise date of any Option;
(vii) to interpret the Plan or any Option Agreement;
(viii) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of
an Option or to take such other actions as may be necessary
or appropriate with respect to the Company's rights pursuant
to Options or agreements relating to the grant or exercise
thereof; and
(ix) to make such other determinations and establish such other
procedures as it deems necessary or advisable for the proper
administration of the Plan.
(c) Effect of the Board's or Committee's Decision. All decisions,
---------------------------------------------
determinations and interpretations of the Board or the Committee pursuant to the
authority granted under this Section 3 will be final and binding upon all
parties.
(d) Limitation of Liability. No member of the Board or of the
-----------------------
Committee shall be liable for any good faith determination, act or failure to
act in connection with the Plan or any Option granted hereunder.
Section 4. Eligibility.
-----------
Options may be granted only to Employees. An Employee who has received an
Option, if he or she is otherwise eligible, may receive additional Options.
Section 5. Stock Subject to the Plan.
-------------------------
Subject to the provisions of this Section 5 and the provisions of Section 8
of the Plan, the maximum aggregate number of Shares which may be subject to
Options under the Plan is 3,000,000 Shares. The maximum number of Shares with
respect to which Options may be granted under the Plan to any Employee during
any calendar year is 1,000,000 Shares. If any Option issued hereunder should
expire or become unexercisable for any reason without having been exercised in
full, the unpurchased Shares which were subject to such option shall, unless the
Plan shall have been terminated, be returned to the Plan and become available
for future grants under the Plan.
D-4
<PAGE>
Section 6. Terms and Conditions of Options.
-------------------------------
Each Option granted pursuant to the Plan shall be authorized by the Board
or the Committee and shall be evidenced by an Option Agreement in such form as
the Board or the Committee may from time to time determine. Each Option
Agreement shall contain such provisions as the Board or the Committee may
require (including provisions which may specifically supersede the terms of the
Plan). Subject to the preceding sentence, each Option Agreement shall
incorporate by reference the terms and conditions of the Plan, including the
following terms and conditions:
(a) Number of Shares. The number of Shares subject to the Option will
----------------
be stated in the Option Agreement.
(b) Option Price. The price per Share payable on the exercise of any
------------
Option which is an Incentive Stock Option will be stated in the Option Agreement
and shall be no less than the Fair Market Value Per Share of the Common Stock on
the date such Option is granted, without regard to any restriction other than a
restriction which will never lapse. Notwithstanding the foregoing, if an Option
which is an Incentive Stock Option shall be granted under the Plan to any person
who, at the time of the grant of such Option, owns (including by attribution
under Section 424(d) of the Code) stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company, its Parent
Corporation or any Subsidiary, the price per Share payable upon exercise of such
Incentive Stock Option shall be no less than one hundred ten percent (110%) of
the Fair Market Value Per Share of the Common Stock on the date such Option is
granted. The price per Share payable on the exercise of an Option which is a
non-qualified stock option shall be no less than twenty-five percent (25%) of
the Fair Market Value Per Share of the Common Stock on the date such Option is
granted, determined without regard to any restriction other than a restriction
which will never lapse, and shall be stated in the Option Agreement.
(c) Consideration. The consideration to be paid for the Shares to be
-------------
issued upon the exercise of an Option, including the method of payment, shall be
determined by the Board or the Committee and, subject to subsections (i) and
(ii) below, may consist entirely of cash, check, promissory notes or Shares of
Common Stock having an aggregate Fair Market Value Per Share on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised, or any combination of such methods of payment, or
such other consideration and method of payment permitted under any laws to which
the Company is subject and which is approved by the Board or the Committee.
(i) If the consideration for the exercise of an Option is a
promissory note, such note will be full recourse and bear
interest at a per annum rate which is not less than the
applicable federal rate determined in accordance with
section 1274(d) of the Code as of the date of exercise. In
such an instance the Company may, in its sole and absolute
discretion, retain the Shares purchased upon exercise of the
Option in escrow as security for payment of the promissory
note.
(ii) If the consideration for the exercise of an Option is the
surrender of previously acquired and owned shares of Common
Stock, the Optionee will be required to make representations
and warranties satisfactory to the Company regarding his or
her title to the shares of Common Stock used to effect the
purchase (the "Payment Shares"), including without
limitation, representations and warranties that the Optionee
has good and marketable title to such Payment Shares free
and clear of any and all liens, encumbrances, charges,
equities, claims, security interests, options or
restrictions, and has full power to deliver such Payment
Shares without obtaining the consent or approval of any
person or governmental authority other than those which have
already given consent or approval in a manner satisfactory
to the Company. If such Payment Shares were acquired by
D-5
<PAGE>
the Optionee upon previous exercise of incentive stock
options granted within two years prior to the exercise of
the Option, or were acquired by the Optionee upon previous
exercise of incentive stock options within one year prior to
the exercise of the Option, such Optionee shall be required,
as a condition to using the Payment Shares in payment of the
exercise price of the Option, to acknowledge the tax
consequences of doing so, in that such previously exercised
incentive stock options may have, by such action, lost their
status as incentive stock options, and the Optionee may be
required to recognize ordinary income and be subject to tax
withholding as a result. The Board or the Committee may
impose such limitations and prohibitions on the use of
previously acquired and owned shares of Common Stock to
exercise an Option as it deems appropriate.
(d) Form of Option. The Option Agreement will state whether the Option
--------------
granted is an Incentive Stock Option or a non-qualified stock option.
(e) Exercise of Options. Any Option granted hereunder shall be
-------------------
exercisable at such times and under such conditions as shall be set forth in the
Option Agreement (as determined by the Board or the Committee), which may
include performance criteria with respect to the Company and/or the Optionee,
and as shall be permissible under the terms of the Plan.
An Option may be exercised in accordance with the provisions of the Plan as
to all or any portion of the Shares then exercisable under an Option from time
to time during the term of the Option.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company at its principal executive office in
accordance with the terms of the Option Agreement by the person entitled to
exercise the Option and full payment for the Shares with respect to which the
Option is exercised has been received by the Company, accompanied by any
agreements required by the terms of the Plan and/or Option Agreement. Full
payment may consist of such consideration and method of payment allowable under
this Section 6 of the Plan. No adjustment shall be made for a dividend or other
right for which the record date is prior to the date the Option is exercised,
except as provided in Section 8 of the Plan.
As soon as practicable after any exercise of an Option in accordance with
the provisions of the Plan, the Company shall, without transfer or issue tax to
the Optionee, deliver to the Optionee at the principal executive office of the
Company, or such other place as shall be mutually agreed upon between the
Company and the Optionee, a certificate or certificates representing the Shares
for which the Option shall have been exercised.
(f) Term and Vesting of Options.
---------------------------
(i) The Option Agreement shall specify any vesting conditions
applicable to the Options evidenced thereby (including
performance or target-based vesting, or time-based vesting);
provided, however, that to the extent that no vesting
-------- -------
conditions are stated in the Option Agreement, the Options
evidenced thereby shall be fully vested. Options may be
exercised in any order elected by the Optionee whether or
not the Optionee holds any other unexercised Options under
the Plan or any other plan of the Company.
(ii) Notwithstanding any other provision of the Plan, no Option
shall be (A) granted under the Plan after ten (10) years
from the date on which the Plan is approved by shareholders,
or (B) exercisable more than ten (10) years from the date
the Option is granted; provided, however, that if an Option
-------- -------
that is intended to be an Incentive Stock Option is granted
under the Plan to any person who, at the time
D-6
<PAGE>
of the grant of such Option, owns (including by attribution
under Section 424(d) of the Code) stock possessing more than
10% of the total combined voting power for all classes of
stock of the Company, its Parent Corporation or any
Subsidiary, the foregoing clause (B) shall be deemed
modified by substituting "five (5) years" for the term "ten
(10) years" that appears therein.
(iii) No Option granted to any Optionee shall be treated as an
Incentive Stock Option, to the extent such Option would
cause the aggregate Fair Market Value Per Share (determined
as of the date of grant of each such Option) of the Shares
with respect to which Incentive Stock Options are
exercisable by such Optionee for the first time during any
calendar year to exceed $100,000. For purposes of
determining whether an Incentive Stock Option would cause
such aggregate Fair Market Value Per Share to exceed the
$100,000 limitation, such Incentive Stock Options shall be
taken into account in the order granted. For purposes of
this subsection, the term Incentive Stock Options includes
all incentive stock options (as described in Section 422 of
the Code) issued under all plans of the Company, its Parent
Corporation or any Subsidiary.
(g) Termination of Options.
----------------------
(i) Unless sooner terminated as provided in the Plan, each
Option shall be exercisable for such period of time as shall
be determined by the Board or the Committee and set forth in
the Option Agreement, and shall be void and unexercisable
thereafter.
(ii) Except as otherwise provided herein or in the Option
Agreement, upon the termination of the Optionee's employment
with, or service as a director of or consultant or advisor
to, the Company or any Subsidiary for any reason, Options
exercisable on the date of termination of employment or such
other service shall be exercisable by the Optionee (or in
the case of the Optionee's death subsequent to termination
of employment or such other service, by the Optionee's
executor(s) or administrator(s)) for a period of three (3)
months from the date of the Optionee's termination of
employment or such other relationship.
(iii) Except as otherwise provided herein or by the terms of any
Option, if the Optionee dies or becomes Disabled while
employed by, or while serving as a director of or consultant
or advisor to, the Company or any Subsidiary, Options held
by such Optionee which are exercisable on the date the
Optionee dies or becomes Disabled shall be exercisable for a
period of twelve (12) months commencing on the date of the
Optionee dies or becomes Disabled, by the Optionee or his or
her legal guardian or representative or, in the case of
death, by his or her executor(s) or administrator(s).
(h) Forfeiture. Notwithstanding any other provision of the Plan, if
----------
the Optionee's employment by or service to the Company or any Subsidiary is
terminated for Cause, as determined by the Board or the Committee in its sole
and absolute discretion, all unexercised Options shall terminate upon the date
of such determination, or, if earlier, the effective time of such termination of
employment or engagement for Cause. In addition, if the Optionee's employment or
engagement is terminated for Cause, the Optionee shall forfeit all Shares for
which the Company has not yet delivered share certificates to the Optionee and
the Company shall refund to the Optionee any amount paid to it with respect to
such Shares, in the same form as it was paid (or in cash, at the Company's
discretion). Notwithstanding any other provision of the Plan, the Company may
withhold delivery of share certificates pending the resolution of any inquiry
that could lead to a finding resulting in forfeiture.
D-7
<PAGE>
Section 7. Determination of Fair Market Value Per Share of Common Stock.
------------------------------------------------------------
The Fair Market Value of a Share of Common Stock, as of any date, shall be
determined as follows:
(a) If the Shares of Common Stock are listed on a national or regional
securities exchange or traded through the Nasdaq Stock Market, then the Fair
Market Value of a share of Common Stock shall be the closing price on the
relevant date for a share of Common Stock on such exchange or on the Nasdaq
Stock Market, as reported in The Wall Street Journal or other source that the
-----------------------
Board or Committee deems reliable, or if there is no trading on that date, on
the next preceding date on which there were reported share prices.
(b) If the Shares of Common Stock are traded in the over-the-counter
market, then the Fair Market Value of a share of Common Stock shall be the mean
of the bid and asked prices on the relevant date for a share of Common Stock as
reported in The Wall Street Journal or other source that the Board or Committee
-----------------------
deems reliable (or, if not so reported, as otherwise reported by the National
Association of Securities Dealers Automated Quotations System or the NASD OTC
Bulletin Board), or if there is no trading on such date, on the next preceding
date on which there were reported share prices.
(c) In the absence of an established market for the Common Stock, the
Fair Market Value of a share of Common Stock shall be determined by the Board or
the Committee, in its sole and absolute discretion.
Section 8. Adjustments.
-----------
(a) Subject to required action by the stockholders, if any, the number
of Shares as to which Options may be granted under the Plan and the number of
Shares subject to outstanding Options and the Option prices thereof will be
adjusted proportionately for any increase or decrease in the number of
outstanding shares of Common Stock resulting from stock splits, reverse stock
splits, stock dividends, reclassifications and recapitalizations.
(b) No fractional Shares shall be issuable on account of any action
referenced in Section 8(a), and the aggregate number of Shares then subject to
an Option, when adjusted in accordance with that section, will be rounded down
to the next whole number, unless the Board, in its sole and absolute discretion,
shall determine to issue scrip certificates with respect to any fractional
Shares, which scrip certificates, in such event, shall be in a form and have
such terms and conditions as the Board, in its sole and absolute discretion,
shall prescribe.
Section 9. Rights as a Stockholder.
-----------------------
An Optionee shall have no rights as a stockholder of the Company with
respect to any Shares subject to an Option until such Option has been exercised
and a certificate with respect to the Shares purchased upon such exercise has
been issued to him or her.
Section 10. Time of Awarding Options.
------------------------
The date of grant of an Option shall, for all purposes, be the date that
the Board or the Committee specifies or, if none is specified, then the date of
the determination by the Board or the Committee that the Option is granted.
Notice of the determination shall be given to each Employee to whom an Option is
granted within a reasonable time after the date of such grant.
D-8
<PAGE>
Section 11. Modification, Extension and Renewal of Option.
---------------------------------------------
Subject to the terms and conditions of the Plan, the Board may modify,
extend or renew an Option, or accept the surrender of an Option (to the extent
not theretofore exercised). Notwithstanding the foregoing, (a) no modification
of an Option which adversely affects the Optionee shall be made without the
consent of the Optionee, and (b) no Incentive Stock Option may be modified,
extended or renewed if such action would cause it to cease to be an "Incentive
Stock Option" within the meaning of Section 422 of the Code, unless the Optionee
specifically acknowledges and consents to such action.
Section 12. Transferability.
---------------
Except as specifically approved by the Board or the Committee with respect
to a particular Option which is not intended to be an Incentive Stock Option, no
Option shall be assignable or transferable otherwise than by will or by the laws
of descent and distribution, and during the lifetime of the Optionee, such
Option shall be exercisable only by the Optionee, or, in the event of his or her
legal incapacity or Disability, by his or her legal guardian or representative.
Section 13. Change in Control.
-----------------
(a) Notwithstanding anything to the contrary set forth in the Plan
(other than Section 13(b), below), upon a Change in Control, the Board or the
Committee may, in its sole and absolute discretion and contingent upon the
occurrence of that Change in Control: (i) cause all unvested Options to vest,
(ii) cause any or all Options to be exchanged for options to purchase common
stock in the successor corporation, and/or (iii) cancel the Options and cause
the Company to distribute to each Optionee cash and/or other substitute
consideration with a value equal to the excess, if any, of the aggregate Fair
Market Value of the Shares subject to Options held by that Optionee over the
aggregate exercise price of such Options.
(b) Notwithstanding anything to the contrary set forth in the Plan, if
the Board determines that it is in the best interests of the Corporation to
engage in a transaction that will result in a Change in Control and which is
intended to be accounted for under the pooling-of-interests method of
accounting, then the Board or the Committee will not take any action under
Section 13(a) and, instead, upon the consummation of that transaction: (i) all
unvested Options will automatically vest, Options will automatically vest, (ii)
the type of shares subject to the Plan and each outstanding Option will be
revised such that the Plan and each outstanding Option apply to the same class
of common stock of the surviving corporation as the Common Stock has been
converted into in connection with such transactions, and (iii) the number of
shares subject to and the exercise price per share of each outstanding Option
will be adjusted in a manner consistent with Treas. Reg. (S) 1.425-1(a)(4)(i).
Section 14. Amendment of the Plan.
---------------------
Insofar as permitted by law, the Board may from time to time suspend,
terminate or discontinue the Plan or revise or amend it in any respect
whatsoever; provided, however, shareholder approval shall be required for any
amendment to the Plan that will increase the aggregate number of Shares for
which Options may be granted hereunder, or change the class of persons eligible
to receive Options.
Section 15. Application of Funds.
--------------------
The proceeds received by the Company from the sale of Shares pursuant to
the exercise of Options shall be used for general corporate purposes or such
other purpose as may be determined by the Board.
Section 16. Approval of Stockholders.
------------------------
The Plan shall become effective on the date that it is approved by a
majority of the votes cast at a duly held stockholder meeting at which a quorum
representing a majority of the Company's outstanding voting shares is present,
either in person or by proxy.
D-9
<PAGE>
Section 17. Conditions Upon Issuance of Shares.
----------------------------------
Shares shall not be issued pursuant to the exercise of an Option unless the
exercise of such Option and the issuance and delivery of such Shares pursuant
thereto shall comply with all relevant provisions of law, including, without
limitation, the Securities Act, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
Section 18. Regulatory Approvals.
--------------------
The Company, during the term of the Plan, shall use commercially reasonable
efforts to seek to obtain from appropriate regulatory agencies any requisite
authorization in order to issue and sell such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain from any such regulatory agency having jurisdiction the requisite
authorization(s) deemed by the Company's counsel to be necessary for the lawful
issuance and sale of any Shares hereunder, or the inability of the Company to
confirm to its satisfaction that any issuance and sale of any Shares hereunder
will meet applicable legal requirements, shall relieve the Company of any
liability in respect to the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
Section 19. Taxes, Fees, Expenses and Withholding of Taxes.
----------------------------------------------
(a) The Company shall pay all original issue and transfer taxes (but
not income taxes, if any) with respect to the grant of Options and/or the
issuance and transfer of Shares pursuant to the exercise thereof, and all other
fees and expenses necessarily incurred by the Company in connection therewith,
and will use commercially reasonable efforts to comply with all laws and
regulations which, in the opinion of counsel for the Company, are applicable
thereto.
(b) The grant of Options hereunder and the issuance of Shares pursuant
to the exercise of Options is conditioned upon the Company's reservation of the
right, in accordance with any applicable law, to withhold from any property,
compensation or other amounts payable to the Optionee, any taxes required to be
withheld under federal, state or other applicable law as a result of the grant
or exercise of such Option or the sale of the Shares issued upon exercise
thereof. To the extent that compensation or other amounts, if any, payable to
the Optionee are insufficient to pay any taxes required to be so withheld, the
Company may, in its sole and absolute discretion, require the Optionee (or such
other person entitled herein to exercise the Option), as a condition of the
exercise of an Option, to pay in cash to the Company an amount sufficient to
satisfy such tax liability or otherwise to make adequate provision for the
Company's compliance with its withholding obligations under federal, state and
other applicable law.
Section 20. Notices.
-------
Any notice to be given to the Company pursuant to the provisions of the
Plan shall be addressed to the Company in care of its Secretary (or such other
person as the Company may designate from time to time) at its principal
executive office, and any notice to be given to an Optionee shall be delivered
personally or addressed to him or her at the address given beneath his or her
signature on his or her Option Agreement, or at such other address as such
Optionee may hereafter designate in writing to the Company. Any such notice
shall be deemed duly given on the date and at the time delivered via personal,
courier or recognized overnight delivery service or, if sent via telecopier, on
the date and at the time telecopied with confirmation of delivery or, if mailed,
on the date five (5) days after the date of the mailing (which shall be by
regular, registered or certified mail). Delivery of a notice by telecopy (with
confirmation) shall be permitted and shall be considered delivery of a notice
notwithstanding that it is not an original that is received. It shall be the
obligation of each person holding Shares purchased upon exercise of an Option to
provide the Secretary of the Company, by letter mailed as provided herein, with
written notice of his or her direct mailing address.
D-10
<PAGE>
Section 21. No Enlargement of Rights.
------------------------
The establishment and maintenance of the Plan is purely voluntary on the
part of the Company, and nothing contained herein will be deemed to give any
Optionee the right to be retained in the employ or service of the Company or any
Subsidiary, or to interfere with the right of the Company or Subsidiary to
discharge or retire any Optionee at any time. No Optionee shall have any right
to or interest in Options authorized hereunder prior to the grant thereof to
such Optionee, and upon such grant, he or she shall have only such rights and
interests as are expressly provided herein, subject, however, to all applicable
provisions of the Company's certificate of incorporation, as the same may be
amended from time to time.
Section 22. Information to Optionees.
------------------------
(a) The Company, upon request, shall provide without charge to each
Optionee copies of such annual and periodic reports as are provided by the
Company to its stockholders generally.
(b) A copy of the Plan shall be delivered to the Secretary of the
Company and shall be shown by him to any Optionee making reasonable inquiry
concerning it.
Section 23. Invalid Provisions.
------------------
In the event that any provision of the Plan is found to be invalid or
otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein as invalid or unenforceable, and all such other provisions
shall be given full force and effect to the same extent as though the invalid or
unenforceable provision was not contained herein.
Section 24. Applicable Law.
--------------
Subject to Section 25, the Plan shall be governed by and construed in
accordance with the laws of the State of New York, without regard to the
application of the principles of conflicts of laws.
Section 25. Successor.
---------
In the event that the Company merges with another entity and such other
entity survives the merger, the Plan shall automatically be deemed to be the
Plan of the surviving entity and shall be governed by the laws of the state of
incorporation of the surviving entity, provided that the rights of individuals
with respect to Options, if any, outstanding at the time of such merger shall
continue to be governed by the laws of the State of New York.
D-11
<PAGE>
US WATS, INC.
Proxy Solicited on Behalf of the Board of Directors
The undersigned, revoking all previous proxies, hereby appoints James M.
Rossi and David B. Hurwitz, or either of them acting individually, as the proxy
agent of the undersigned, with full power of substitution, to vote, as
indicated below, and in their discretion upon such other matters as may
properly come before the meeting, all shares which the undersigned would be
entitled to vote at the Annual Meeting of US Wats, Inc. (the "Company") to be
held on Wednesday, November 24, 1999, at 11:00 a.m., local time, at the Holiday
Inn, 3499 Street Road, Bensalem, Pennsylvania 19020, and at any postponements
and adjournments thereof.
1. The election of the five nominees: Murray Goldberg, Artie Regan, Walt
Anderson, James M. Rossi and Dominic J. Romano.
[_] For All Nominees [_] Withhold From All Nominees
The board of directors recommends a vote FOR the nominees. If you do not wish
your shares voted FOR a particular nominee, draw a line through that person's
name above.
2.The amendment to the Company's certificate of incorporation to increase the
number of authorized shares of common stock of the Company from 30,000,000 to
100,000,000 and the number of authorized shares of preferred stock of the
Company from 1,000,000 to 2,000,000.
[_] For[_] Against[_] Abstain
3.The adoption of a new stock option plan by the Company that would permit the
grant of options with respect to 3,000,000 shares of common stock.
[_] For[_] Against[_] Abstain
4.The adoption of the plan of merger attached to the accompanying Proxy
Statement as Exhibit A, causing the reincorporation of the Company from New
York to Delaware.
[_] For[_] Against[_] Abstain
5.In accordance with their best judgement, the Proxies are authorized to
transact and vote upon such other business as may properly come before the
Annual Meeting and any postponement or adjournment thereof.
Please date and sign your Proxy on the reverse side and return it promptly.
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. UNLESS OTHERWISE
SPECIFIED, THE SHARES WILL BE VOTED "FOR" THE APPROVAL OF EVERY PROPOSAL
DESCRIBED ON THE REVERSE SIDE HEREOF. THIS PROXY ALSO DELEGATES DISCRETIONARY
AUTHORITY WITH RESPECT TO ANY OTHER BUSINESS WHICH MAY PROPERLY COME BEFORE THE
ANNUAL MEETING OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT.
Date: _____________________________
-----------------------------------
Signature of Shareholder
-----------------------------------
Signature If Held Jointly
NOTE: PLEASE SIGN THIS PROXY
EXACTLY AS NAME(S) APPEAR ON YOUR
STOCK CERTIFICATE. WHEN SIGNING AS
ATTORNEY-IN-FACT, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR
GUARDIAN, PLEASE ADD YOUR TITLE AS
SUCH, AND IF SIGNER IS A
CORPORATION, PLEASE SIGN WITH FULL
CORPORATE NAME BY A DULY
AUTHORIZED OFFICER OR OFFICERS AND
AFFIX THE CORPORATE SEAL. WHERE
STOCK IS ISSUED IN THE NAME OF TWO
(2) OR MORE PERSONS, ALL SUCH
PERSONS SHOULD SIGN.
