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As filed with the Securities and Exchange Commission on February 7, 2000
Registration No.333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
________
US WATS, Inc.
(Exact name of registrant as specified in its charter)
________
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New York 22-3055962
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification Number)
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2 Greenwood Square
3331 Street Road, Suite 275
Bensalem, Pennsylvania 19020
(215) 633-9400
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
________
David B. Hurwitz
President and Chief Executive Officer
2 Greenwood Square
3331 Street Road, Suite 275
Bensalem, Pennsylvania 19020
(215) 244-3433
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Michael H. Friedman, Esquire
Pepper Hamilton LLP
3000 Two Logan Square
18th & Arch Streets
Philadelphia, PA 19103
(215) 981-4000
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the box. [_]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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CALCULATION OF REGISTRATION FEE
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Title of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered offering price per aggregate offering registration fee
registered share (1) price
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Common Stock 250,000 $2.0155 $503,875 $133.02
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(1) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
registration fee based on the average of the high and low prices of the Common
Stock as reported on the National Association of Securities Dealers, Inc.
Automated Quotation System on February 2, 2000.
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The information contained in this prospectus is not complete and may be changed.
The selling securityholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective or they
have an exemption from registration available. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
DATED February 7, 2000
PRELIMINARY PROSPECTUS
US WATS, Inc.
250,000 Shares of Common Stock
______________________
Using this prospectus, the selling securityholders listed on page 10 may sell
shares of common stock from time to time. The selling securityholders will
determine the terms of the sale at the time of the sale.
None of the shares of common stock offered by this prospectus are being offered
by us. We will not receive any proceeds from the shares of common stock sold by
the selling securityholders. We are registering the resale of the shares covered
by this prospectus to satisfy our obligations under agreements with the selling
securityholders.
Consider carefully the risk factors beginning on page 5 of this prospectus.
Our common stock is listed on the Nasdaq SmallCap Market under the ticker symbol
"USWI." The closing price of our common stock on the Nasdaq SmallCap Market on
February 4, 2000 was $2.4375 per share.
We urge you to carefully read this prospectus, which will describe the specific
terms of the offering, before you make your investment decision.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed on the
adequacy or accuracy of the disclosure in the prospectus. Any representation to
the contrary is a criminal offense.
_____________________________
February 7, 2000
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TABLE OF CONTENTS
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Page
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The Company...................................................... 4
Forward-Looking Statements....................................... 4
Risk Factors..................................................... 5
Indemnification of Officers and Directors........................ 9
Use of Proceeds.................................................. 10
Selling Securityholders.......................................... 10
Plan of Distribution............................................. 10
Where You Can Find More Information.............................. 12
Information Incorporated by Reference............................ 12
Legal Matters.................................................... 13
Experts.......................................................... 13
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THE COMPANY
We are a switch-based interexchange carrier providing long distance
telephone communication services primarily to small and medium-size business
customers. We also provide inbound-800 long distance services, as well as other
telecommunications services, such as travel cards (calling cards), cellular,
paging, internet services, dedicated access, data services, pre-paid calling
cards (debit cards), international callback and carrier termination services. We
use our own switches and facilities to originate, transport and terminate calls
for customers generally located between Boston, Massachusetts and Norfolk,
Virginia and California. During 1999, approximately 85% of the calls billed by
us were processed through our own switches. For calls originating or terminating
outside our own network, we utilize the services provided by other long distance
companies. Substantially all of our revenues are earned from our customers
located in the East Coast.
Our revenues are derived primarily from the transport of outgoing and
incoming calls which are billed by us to end-users at specified rates. Transport
costs of these calls are billed to us by other carriers at contractual rates.
These carriers supply us with call detail information which enables us to bill
our customers depending upon our individual rates. The combination of the
efficiency of our network and facilities, and the purchase of long distance
services in bulk from other carriers allow us to offer competitive rates to
small and medium-sized businesses.
Our outbound long distance services, inbound 800 services, cellular
services, as well as paging and Internet services are provided on one combined
bill that includes various management reports. We believe our consultative
approach to meeting our customers' needs distinguishes us from our larger
competitors.
We are a New York corporation with our principal executive offices at 2
Greenwood Square, 3331 Street Road, Suite 275, Bensalem, PA 19020. Our telephone
number at that location is (215) 633-9400. We have entered into an agreement to
merge into our wholly-owned subsidiary, Capsule Communications, Inc., a
corporation formed under the laws of the state of Delaware. Our shareholders
have approved this merger, and completion of the merger is pending regulatory
approvals from state public utility commissions.
FORWARD-LOOKING STATEMENTS
Some of the information included or incorporated by reference in this
prospectus contains forward-looking statements, including statements that are
not historical or factual. We intend these forward looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995 and we are including
this paragraph for purposes of complying with these safe harbor provisions. The
forward-looking statements include statements regarding our intent, belief or
expectations. You can identify these statements by the use of terminology such
as "may," "will," "expect," "believe," "intend," "plan," "estimate," "should"
and other comparable terms. In addition, we, through our senior management, from
time to time make forward-looking oral and written public statements concerning
our expected future operations and other developments.
Investors are cautioned that, while forward-looking statements reflect our
good faith beliefs and best judgment based upon current information, they are
not guarantees of future performance and are subject to known and unknown risks
and uncertainties. Actual results may differ materially from the expectations
contained in the forward looking statements as a result of various factors. Such
factors include, but are not limited to, the risks under the caption "Risk
Factors".
UNLESS OTHERWISE INDICATED OR UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL
REFERENCES IN THIS PROSPECTUS TO "WE," "US," "OUR" OR THE "COMPANY" MEANS US
WATS, INC.
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RISK FACTORS
We may not be able to continue as a going concern.
Our financial statements as of December 31, 1998 and for the year then ended
notes a substantial doubt as to our ability to continue as a going concern.
Among the reasons cited as raising concern are the following:
. our net loss;
. our negative working capital; and
. our negative cash flows.
These circumstances raise substantial doubt about our ability to continue as a
going concern.
We have historically incurred losses, and our future profitability is uncertain.
We reported net losses of approximately $3.7 million and $1.8 million for
the years ended December 31, 1997 and 1998, respectively, and a net loss of
approximately $2.2 million for the nine months ended September 30, 1999. We may
not achieve our revenue or profit goals, and our ability to do so depends on the
factors specified elsewhere in this "Risk Factors" section of this prospectus,
as well as on other factors outside of our control, including the extent to
which:
. our competitors announce and develop, or lower the prices of,
competing services; and
. prices for our services decrease as a result of reduced demand or
competitive pressures.
As a result, we may not be able to increase revenue or achieve
profitability.
We may not be able to obtain additional funds, which could prevent us from
implementing our business plan.
We need additional financing for future capital expenditures and other
purposes, including:
. construction of our network and our automated back office systems;
. building a direct sales force;
. acquisitions;
. paying scheduled principal and interest payments on our bank debt; and
. financing operating losses.
There can be no assurance that any additional financing we may need will be
available to us on favorable terms or at all.
Your stock ownership could be diluted if we need to sell additional shares of
our common stock to finance future acquisitions.
Part of our business strategy is to accelerate our market penetration,
cross-sell additional services, diversify our customer base, and improve our
operating profitability through the acquisition of other telecommunications
providers. In order to successfully complete targeted acquisitions, it may be
necessary for us to issue additional
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equity securities that could dilute your stock ownership.
Our directors and officers own enough of our outstanding stock to control us
without participation by the other shareholders.
A substantial portion (in excess of 69%) of our issued and outstanding
voting shares is presently held or controlled by the directors and officers.
There is no cumulative voting. Accordingly, as a group, our directors and
officers can exercise effective control over us and generally direct our affairs
without participation by our other shareholders.
We rely on independent sales agents and resellers to market our services.
Our independent sales representatives and resellers presently account for
approximately 55% of our revenues. Should the services of one or more of these
independent agents or resellers be interrupted or become unavailable to us, our
financial results could be adversely affected.
We are dependent on certain executive and technical personnel for the operation
of our network and systems.
The loss or unavailability of one or more of certain executive or technical
personnel could have an adverse effect on our operations. Our future success
will also depend on our ability to attract and retain additional key management
and technical personnel. The competition to hire qualified employees and
personnel in the telecommunications and Internet industries is intense and there
are a limited number of persons with knowledge of and experience in particular
sectors of the telecommunications industry. Although we have not experienced
difficulties employing or retaining personnel to date, we cannot guarantee that
we will be successful in attracting and retaining such executives and technical
personnel in the future.
If changes are made to existing government regulations or additional government
regulations are put into effect, our financial conditions may be adversely
affected.
We are subject to varying degrees of regulation in each of the
jurisdictions in which we provide our services. State regulatory requirements
vary from state to state. We have obtained certification in all of the
contiguous U.S. states that require certification in order to provide long
distance services, with the exception of Arizona and Colorado, in which
certifications are pending. Some states place statutory restrictions on the
operations of "telecommunications service resellers," as that term is defined
under the applicable laws of those states. Some states require
telecommunications service resellers to file and operate in accordance with
service and rate "tariffs." Changes in existing regulations or their
interpretation in any state could classify us as a "telecommunications service
reseller," which would subject us regulation. Such regulation could result in an
increase in customers' usage charges and, in some cases, could limit or
eliminate our ability to service customers in that jurisdiction. We would incur,
among other expenses, certain administrative costs and legal fees in contesting
or complying with such regulatory changes, which would increase our cost of
doing business.
Those companies who provide us local exchange telecommunications services
are also heavily regulated at the Federal level and in the states in which they
operate. Changes in existing regulations or their interpretation affecting these
companies could materially adversely affect their businesses or even prevent
them from offering telecommunications services to their customers, including us,
on favorable terms.
In addition, certain services offered by us which are not presently
regulated in all states may become regulated. Such regulation could delay the
deployment of products and/or services and would increase certain administrative
costs and legal fees in contesting or complying with such regulation.
The FCC has granted applications by companies seeking to provide
international callback (also known as "call reorigination" services) to those
countries where the practice is legal under local law. The FCC has taken the
view that call reorigination services create incentives to lower foreign
collection rates to the benefit of U.S. ratepayers
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and serve the FCC's general policies favoring resale and increased competition
in the international marketplace. The FCC, however, has stated that as a matter
of international comity, it will prohibit U.S. authorized carriers from
providing call reorigination in countries where it is expressly prohibited.
Despite the fact that the FCC has yet to take action to enforce another
country's ban, there can be no assurance that the FCC will not enforce such a
ban in the future.
We may not be able to compete effectively against other competitors that have
significantly greater resources than we do which could cause us to lose
customers.
In addition to direct competition from resellers, we must compete with
large telecommunications concerns, such as AT&T, MCI Worldcom and Sprint, any of
which at any particular time may offer more desirable services than those that
we offer. These large telecommunication concerns typically have:
. substantially greater financial, technical and marketing resources;
. larger networks;
. a broader portfolio of services;
. controlled transmission lines;
. stronger name recognition and customer loyalty; and
. long-standing relationships with our target customers.
If our billing system is unable to meet the needs of our customers, we may lose
potential revenue.
Our billing system is vital to our growth and our ability to achieve
operating efficiencies. We are dependent on Alternative Telephone Services, Inc.
for our billing system. We cannot assure you that their system will perform as
expected as we grow our customer base. The following could have a material
adverse effect on our operations:
. failure of third-party vendors to deliver call detail records in a
timely manner; and
. our failure to identify key information and processing needs.
We are subject to attempts by outsiders to gain access to our telecommunications
network.
Such attempts can take the form of the theft of calling cards and the
cloning of cellular phones. Breaches of security can also involve improper use
of 800 telephone numbers and customer PBX equipment. We monitor the use of our
network through certain fraud detection devices, which we believe provide
adequate protection. Due to the highly technical nature of our business,
however, complete assurance that sufficient controls are in place to prevent a
material loss is not possible.
A high level of customer attrition is inherent in the long distance telephone
industry, and our financial results are affected by this attrition.
The attrition of our customers is attributable to a variety of factors,
including our termination of customers for nonpayment and the initiatives of
existing and new competitors who, to attract new customers, may implement
national advertising campaigns, utilize telemarketing programs, and provide cash
payments and other forms of incentives. To retain our customer base, we
implement programs and enhancements, such as value-added services, agent and
association sales programs, improved customer service, competitive price
adjustments and an aggressive retention program. Some purchasers of our long
distance services are not obligated to purchase any minimum amount of our
services, and can stop using our service at any time and without penalty. Some
customers may not continue to buy their long distance telephone service through
us or through independent agents and resellers that
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purchase services from us. If a significant portion of our customers were to
decide to purchase long distance service from other long distance service
providers, we may not be able to replace them.
The telecommunications industry is undergoing rapid technological changes, and
our failure to keep up with such changes could cause us to lose customers.
The telecommunications industry is subject to rapid and significant changes
in technology, customer requirements and preferences. New technologies could
reduce the competitiveness of our network. We may be required to select one
technology over another, but at a time when it would be impossible to predict
with any certainty which technology will prove to be the most economic,
efficient or capable of attracting customer usage. Subsequent technological
developments may reduce the competitiveness of our network and require
unbudgeted upgrades or additional products that could be expensive and time
consuming. If we fail to adapt successfully to technological changes or
obsolescence or fail to obtain access to important technologies, our business
could be materially and adversely affected.
Many other companies are already engaged in the identical business as we are and
new competition is very likely.
The Telecommunications Act of 1996, or Telecommunications Act, provides for
significant deregulation of the telecommunications industry, including the local
telecommunications and long distance industries. This federal statute and the
related regulations remain subject to judicial review and additional rulemakings
of the Federal Communications Commission, or FCC, making it difficult to predict
what effect the legislation will have on us, our operations and our competitors.
Several regulatory and judicial proceedings have recently concluded, are
underway, or may soon be commenced, that address issues affecting our operations
and those of our competitors, which may cause significant changes to our
industry. We cannot predict the outcome of these developments, nor can we assure
you that these changes will not have a material adverse effect on us. The
following is a non-exhaustive list of proceedings and regulatory developments
that could have a material impact on our business operations:
REGIONAL BELL OPERATING COMPANY PROVISION OF TRADITIONAL LONG DISTANCE
SERVICES. On December 22, 1999, the FCC approved an application filed by Bell
Atlantic seeking authority to begin providing traditional long distance services
to customers located in the State of New York. The Telecommunications Act
provides relief from the current restriction on regional Bell operating company
provision of long distance service so long as certain procompetitive criteria
are met. This approval is likely to strengthen Bell Atlantic's competitive
position in New York substantially, which could have a materially adverse effect
on our continued ability to attract and retain customers. We anticipate that
Bell Atlantic will soon submit similar applications to obtain traditional long
distance service authority in other states in its 14-state operating region. In
addition, on January 10, 1999, Southwestern Bell filed an application with the
FCC seeking permission to begin providing traditional long distance services to
customers in Texas, and we expect other regional Bell operating companies to
file applications soon. Not only will the regional Bell operating companies
provide additional competition for us in the services that we provide, but the
Bell operating companies can be expected to bundle their long distance service
with local, cellular and video services. These package offerings may be more
attractive to consumers than offerings of stand-alone services.
DEREGULATION OF TRADITIONAL TELEPHONE COMPANY ADVANCED DATA SERVICES. A
proceeding has recently been initiated at the FCC to determine, among other
things, whether traditional telephone companies will be able to avoid some of
their obligations under the Telecommunications Act by providing long distance
data services through separate affiliates, as well as be relieved of certain
pricing restrictions. A decision adverse to competitive telecommunications
providers could provide the traditional telephone companies with a significant
competitive advantage in the provision of data services in these areas.
REGULATION OF ACCESS CHARGES. The FCC has asked for public comment on
whether it should begin to regulate the access charges imposed by competitive
telecommunications providers. A decision by the FCC
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to regulate access charges assessed by competitive telecommunications providers
like us could result in a significant reduction in the amount we can charge long
distance carriers that use our network to originate and terminate calls to and
from our customers.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Certain Provisions of New York Law and US WATS' Charter Documents
Our amended Certificate of Incorporation provides for the personal
liability of our directors to be eliminated to the fullest extent permitted by
applicable law. Under the New York Business Corporation Law, a corporation may
limit 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:
. his acts or omissions were in bad faith or involved intentional
misconduct or a knowing violation of law;
. he personally gained in fact a financial profit or other advantage to
which he was not legally entitled; or,
. his acts were in violation of certain provisions concerning dividends,
distributions or loans to directors.
As authorized under the New York Business Corporation Law, our By-Laws
require us to indemnify, and advance or promptly reimburse upon request the
expenses of, each person made or threatened to be made a party to any action or
proceeding, whether civil or criminal, by reason of the fact that such person or
such person's testator or intestate is or was a director against judgments,
fines (including excise taxes assessed on a person with respect to an employee
benefit plan), penalties, amounts paid in settlement and reasonable expenses,
including attorney's fees, actually and necessarily incurred in connection with
such action or proceeding, or any appeal therein, provided that no such
indemnification shall be made if a judgment or other final adjudication adverse
to such person establishes that his conduct did not meet the then applicable
standards, and provided further that no such indemnification shall be required
with respect to any settlement or other nonadjudicated disposition of any
threatened or pending action or proceeding unless we have given our prior
consent to such settlement or other disposition, which consent shall not be
unreasonably withheld. No repeal or amendment of the relevant By-Laws shall
apply or have any effect on the indemnification of, or advancement of expenses
to, any of our directors for or with respect to acts or omissions of such
director occurring prior to such repeal or amendment.
Certain Provisions of Delaware Law and Capsule Communications' Charter Documents
After we complete the merger into Capsule Communications, our wholly-owned
subsidiary, Delaware law and Capsule Communications' charter documents will
govern us. The General Corporation Law of Delaware permits a corporation to
provide in its certificate of incorporation a provision limiting the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director, except with respect to:
. any breach of the director's duty of loyalty;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. the payment of certain unlawful dividend or distributions; or
. any transaction from which the director derived an improper personal
benefit.
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Capsule Communications' Certificate of Incorporation contains such a provision.
Capsule Communications' Bylaws provide for indemnification of its directors
and officers to the maximum extent permitted by applicable law. The General
Corporation Law of Delaware allows for indemnification of directors and officers
in connection with derivative and non-derivative actions. However, the person to
be indemnified must have acted in good faith and in a manner that the person
reasonably believed to be consistent with the best interests of the corporation.
Also, with respect to derivative actions where the person is adjudged to be
liable to the corporation, indemnification is not permitted unless a court
determines that the person is fairly entitled to such indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock offered
in this prospectus nor will any such proceeds be available for our use or
otherwise for our benefit.
SELLING SECURITYHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the common stock by the selling securityholders as of the date of
this prospectus.
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Number of Beneficial Ownership
Shares After Offering
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Beneficially Number of
Owned Prior to Shares Number of Percent of Class (if
Name Registration Registered Shares Greater than 1%)
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Craig S. Shapiro 125,000(1) 125,000(1) -0- --
Whale Securities Co., L.P. 125,000(2) 125,000(2) -0- --
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(1) Consists of 125,000 shares of common stock issuable upon exercise of stock
options granted pursuant to a Stock Option Agreement dated July 19, 1995 between
Craig S. Shapiro and us. Assumes all options are fully exercised in accordance
with the terms of said stock option agreement.
(2) Consists of 125,000 shares of common stock issuable upon exercise of stock
options granted pursuant to a Stock Option Agreement dated July 19, 1995 between
Whale Securities Co., L.P. and us. Assumes all options are fully exercised in
accordance with the terms of said stock option agreement.
PLAN OF DISTRIBUTION
We are registering the common stock on behalf of the selling
securityholders. References in this section to the selling securityholders also
include any pledgees, donees or transferees who receive common stock from a
named selling securityholder after the date of this prospectus. To the extent
required, we will identify any additional selling securityholder in a supplement
to this prospectus.
Any and all of the common stock offered in this prospectus may be sold from
time to time to purchasers directly by the selling securityholders, at market
prices prevailing at the time of sale or at negotiated prices, in one or more of
the following types of transactions (which may include crosses and block
transactions) on the Nasdaq SmallCap
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Market, or on any exchange on which the common stock may then be listed:
. in the over-the-counter market;
. in negotiated transactions;
. by pledge to secure debts and other obligations;
. through put or call options transactions relating to the common stock
(whether non-traded or exchange-traded);
. through short sales of common stock; or
. a combination of such methods of sale.
Alternatively, the selling securityholders may from time to time offer the
common stock through brokers, underwriters, dealers or agents, who may receive
compensation in the form of underwriting discounts, concessions or commissions
from the selling securityholders and/or the purchasers of common stock for whom
they may act as agent.
The selling securityholders may also enter into hedging transactions with
broker-dealers or other financial institutions. In connection with these
transactions, broker-dealers or other financial institutions may engage in short
sales of the common stock in the course of hedging the positions they assume
with the selling securityholders. The selling securityholders may also enter
into options or other transactions with broker-dealers or other financial
institutions which require the delivery to that broker-dealer or other financial
institution of the common stock offered under this prospectus. The common stock
that broker-dealers or other financial institutions receives in those types of
transactions may be resold under this prospectus.
The selling securityholders and any broker-dealers that participate in the
distribution of the common stock may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 and any profit on the sale of common stock
by them and any discounts, commissions or concessions received by any such
underwriters might be deemed to be underwriting compensation under the
Securities Act. We have agreed to indemnify each selling securityholder against
certain liabilities arising under the Securities Act.
To comply with rules and regulations under the Securities Exchange Act of
1934 persons engaged in a distribution of the common stock may be limited in
their ability to engage in market activities with respect to such common stock.
In addition and without limiting the foregoing, each selling securityholder will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, which provisions may limit the timing of purchases and
sales of any of the common stock by the selling securityholders. All of these
things may affect the marketability of the common stock.
Selling securityholders also may resell all or a portion of the common
stock in open market transactions in reliance upon Rule 144 under the Securities
Act, provided they meet the criteria and conform to the requirements of such
Rule.
Upon a selling securityholder notifying us that he, she, or it has entered
into any material arrangement with a broker-dealer for the sale of common stock
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, we will file a supplement to
this prospectus, if required, pursuant to Rule 424(b) under the Securities Act,
disclosing, where applicable, the following:
. the name of each such selling securityholder and of the participating
broker-dealer(s);
. the amount of common stock involved;
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. the price at which such common stock was sold;
. the commissions paid or discounts or concession allowed to such
broker-dealer(s);
. that such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this
prospectus; and
. other facts material to the transaction.
In order to comply with certain states' securities laws, if applicable, the
common stock will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the common stock may
not be sold unless the common stock has been registered or qualified for sale in
such state or an exemption from registration or qualification is available and
such sale is made in compliance with the exemption.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at Regional Offices of the Commission located at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of our reports, proxy
statements and other information can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, our reports,
proxy statements and other information filed with the Commission through its
Electronic Data Gathering, Analysis and Retrieval system are publicly available
through the Commission's website on the Internet's World Wide Web, located at
http://www.sec.gov.
INFORMATION INCORPORATED BY REFERENCE
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be a part of this prospectus, and information that we file later
with the Commission will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
make with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act:
(a) Our Annual Report on Form 10-K for the year ended December 31, 1998;
(b) Our Quarterly Reports on Form 10-Q for the quarters ended March 31,
1999; June 30, 1999; and September 30, 1999;
(c) Our Current Reports on Form 8-K filed February 19, 1999; March 16,
1999; June 29, 1999; September 16, 1999; and December 8, 1999;
(d) The description of our common stock contained in our registration
statement on Form S-8 (File No. 33-97558) filed October 7, 1993, including
any amendments or reports filed for the purposes of updating such
description; and
(e) All documents filed by us pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this prospectus shall be deemed
to be incorporated by reference and to be a part of this prospectus from
the respective dates of filing of those documents.
This registration statement, including its exhibits, has been filed with the
Commission through EDGAR. We will provide, without charge, to each person to
whom a copy of this prospectus is delivered, upon the written or oral
-12-
<PAGE>
request of such person, a copy of any or all of the documents referred to above
which have been incorporated in this prospectus by reference, other than
exhibits to those documents (unless those exhibits are specifically incorporated
by reference into such documents). Written or telephone requests for such copies
should be directed to David B. Hurwitz, President and Chief Executive Officer,
US WATS, Inc., 2 Greenwood Square, Suite 275, 3331 Street Road, Bensalem, PA
19020; Mr. Hurwitz's telephone number is (215) 244-3433. We maintain a website
at http://www.uswats.com.
LEGAL MATTERS
The validity of the common stock being offered has been passed upon for us
by Pepper Hamilton LLP, Philadelphia, Pennsylvania.
EXPERTS
The financial statements and schedules incorporated by reference in this
prospectus and elsewhere in the registration statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
which are incorporated herein by reference (which reports express an
unqualified opinion and include an explanatory paragraph expressing substantial
doubt about our ability to continue as a going concern), and have been so
included in reliance upon the reports such firm has given upon its authority as
an expert in accounting and auditing.
-13-
<PAGE>
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in this prospectus in
connection with the offering covered by this prospectus. If given or made, such
information or representations must not be relied upon as having been authorized
by us or the selling securityholders. This prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, the common stock, in any
jurisdiction where, or to any person to whom, it is unlawful to make any such
offer or solicitation. Neither the delivery of this prospectus nor any offer or
sale made hereunder shall, under any circumstances, create an implication that
there has not been any change in the facts set forth in this prospectus or in
our affairs since the date hereof.
US WATS, INC.
250,000 Shares of Common Stock
___________
PROSPECTUS
___________
February 7, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
-------------------------------------------
The estimated expenses of the issuance and distribution, all of which are
payable by US WATS are as follows:
SEC Registration Fee $ 133.02
Legal Fees and Expenses 15,000
Accounting Fees and Expenses 8,500
Printing Expenses 0
Miscellaneous Expenses 7,000
Total $30,633.02
Item 15. Indemnification of Directors and Officers.
-----------------------------------------
The amended Certificate of Incorporation of US WATS, Inc. ("USW")
provides for the personal liability of its directors to be eliminated to the
fullest extent permitted by applicable law. Under the New York Business
Corporation Law ("NYBCL"), a corporation may limit 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 legally entitled; or (iii) his acts were in
violation of certain provisions concerning dividends, distributions or loans to
directors.
As authorized under the NYBCL, USW's By-Laws require USW to indemnify,
and advance or promptly reimburse upon request the expenses of, each person made
or threatened to be made a party to any action or proceeding, whether civil or
criminal, by reason of the fact that such person or such person's testator or
intestate is or was a director of USW against judgments, fines (including excise
taxes assessed on a person with respect to an employee benefit plan), penalties,
amounts paid in settlement and reasonable expenses, including attorney's fees,
actually and necessarily incurred in connection with such action or proceeding,
or any appeal therein, provided that no such indemnification shall be made if a
judgment or other final adjudication adverse to such person establishes that his
conduct did not meet the then applicable standards, and provided further that no
such indemnification shall be required with respect to any settlement or other
nonadjudicated disposition of any threatened or pending action or proceeding
unless USW has given its prior consent to such settlement or other disposition,
which consent shall not be unreasonably withheld. No repeal or amendment of the
relevant By-Laws shall apply or have any effect on the indemnification of, or
advancement of expenses to, any director of USW for or with respect to acts or
omissions of such director occurring prior to such repeal or amendment.
After USW merges into Capsule Communications, Inc. ("Capsule"), USW's
wholly-owned subsidiary, Delaware law and Capsule's charter documents will
govern Capsule. The General Corporation Law of Delaware ("DGCL") permits a
corporation to provide in its certificate of incorporation a provision limiting
the personal liability of a director to the corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director, except with respect
to (i) any breach of the director's duty of loyalty; (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) the payment of certain unlawful dividend or distributions; or (iv)
any transaction from which the director derived an improper personal benefit.
Capsule's Certificate of Incorporation contains such a provision.
Capsule's Bylaws provide for indemnification of Capsule's directors and
officers to the maximum extent permitted by applicable law. The DGCL allows for
indemnification of directors and officers in connection with
II-1
<PAGE>
derivative and non-derivative actions. However, the person to be indemnified
must have acted in good faith and in a manner that the person reasonably
believed to be consistent with the best interests of the corporation. Also, with
respect to derivative actions where the person is adjudged to be liable to the
corporation, indemnification is not permitted unless a court determines that the
person is fairly entitled to such indemnification.
II-2
<PAGE>
Item 16. Exhibits
--------
Exhibit No. Description
- ----------- -----------
4.1 Stock Option Agreement dated July 19, 1995 between Craig S.
Shapiro and US WATS, Inc.
4.2 Stock Option Agreement dated July 19, 1995 between Whale
Securities Co., LP and US WATS, Inc.
5 Opinion of Pepper Hamilton LLP.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Pepper Hamilton LLP (contained in Exhibit 5).
24 Power of Attorney (included on the signature page of this
registration statement).
____________________
Item 17. Undertakings
------------
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE>
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing this registration statement on Form S-3 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the township of Bensalem,
Commonwealth of Pennsylvania, on January 26, 2000.
US WATS, INC.
By:/s/ David Hurwitz
----------------------------------
David B. Hurwitz
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of David B. Hurwitz and James M. Rossi his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully as to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agent or either of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David B. Hurwitz President and Chief Executive Officer January 26, 2000
- --------------------------- (Principal Executive Officer)
David B. Hurwitz
___________________________ Director January __, 2000
Murray Goldberg
/s/ Artie Regan Director and Secretary January 26, 2000
- ---------------------------
Artie Regan
/s/ Walt Anderson Director January 26, 2000
- ---------------------------
Walt Anderson
___________________________ Director January __, 2000
James M. Rossi
/s/ Dominic J. Romano Director January 26, 2000
- ---------------------------
Dominic J. Romano
/s/ Michael McAnulty Chief Financial Officer January 26, 2000
- --------------------------- (Principal Financial and Accounting Officer)
Michael McAnulty
</TABLE>
II-5
<PAGE>
Index of Exhibits
Exhibit No. Description
- ----------- -----------
4.1 Stock Option Agreement dated July 19, 1995 between Craig S.
Shapiro and US WATS, Inc.
4.2 Stock Option Agreement dated July 19, 1995 between Whale
Securities Co., LP and US WATS, Inc.
5 Opinion of Pepper Hamilton LLP.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Pepper Hamilton LLP (contained in Exhibit 5).
24 Power of Attorney (included on the signature page
to the registration statement).
II-6
<PAGE>
EXHIBIT 4.1
US WATS, INC.
STOCK OPTION AGREEMENT
----------------------
Option granted as of July 19, 1995 (the "Date of Grant") by US WATS, INC.
(the "Corporation") to CRAIG S. SHAPIRO (hereinafter referred to as the
"Grantee"):
1. The Option. In further consideration of the services to be provided to
----------
the Corporation by the Grantee pursuant to that certain consulting agreement
between the Corporation and the Grantee dated July 19, 1995 (the "Consulting
Agreement"), the Corporation grants to the Grantee, a stock option (the
"Option") to purchase, on the terms and conditions herein set forth, up to
125,000 shares (the "Shares") of the Corporation's fully paid, nonassessable
shares of common stock ("Common Stock"), at the purchase price set forth in
Section 2 below.
2. The Purchase Price. The purchase price of 62,500 of the Shares shall
------------------
be $1.25 per share and the purchase price of the remaining 62,500 of the Shares
shall be $2.00 per share (together, the "Option Price"), as such Option Price
shall be adjusted from time to time pursuant to Section 9.
3. Exercise of Option.
------------------
(a) The Option is exercisable over a period ending five years from
the Date of Grant (the "Option Period"). The Option may be exercised from time
to time during the Option Period as to the total number of Shares subject to
this Option as determined under Section 1, or any lesser amount thereof, and the
Option shall continue as to any unexercised portion of the Option.
(b) In the event the Grantee elects to exercise all or any portion of
the Option, the Grantee shall deliver to the Corporation written notice (the
"Notice") of such election, which Notice shall specify the number of Shares in
respect of which the Option is to be exercised, along with payment of the Option
Price of the Shares in respect of which the Option is exercised. The Option
Price shall be paid in full in United States dollars at the time of exercise. If
the Option is exercised in accordance with the provisions of this Agreement, the
Corporation shall deliver as soon as practicable to the Grantee a certificate or
certificates representing the number of Shares in respect of which the Option is
being exercised, which Shares shall be registered in the Grantee's name.
4. Sale of Shares; Restrictions on Transferability. The Grantee
-----------------------------------------------
understands and acknowledges that:
(a) the Shares have not been registered under the Securities Act of
1933, as amended (the "Act") or any applicable state securities law and Grantee
shall not be entitled to
<PAGE>
sell, transfer, or distribute the Shares unless the Shares are subsequently so
registered or unless an exemption from such registration is available;
(b) prior to offering or selling the Shares upon claim of exemption,
the Grantee shall obtain a written opinion from counsel reasonably satisfactory
to the Corporation to the effect that such exemption is available or shall
deliver a "No action" letter from the Securities and Exchange Commission with
respect to the proposed sale, transfer or distribution of the Shares;
(c) the Shares are being acquired by Grantee solely for Grantee's own
account for investment purposes only and are not being purchased for the account
of others or with a view to distribution or resale by Grantee;
(d) each certificate representing the Shares will bear the following
legend, or one similar thereto, drawing attention to the restrictions on its
transferability:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY
APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE TRANSFERRED
EXCEPT UPON DELIVERY TO THE CORPORATION OF AN OPINION OF
COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO IT THAT SUCH
TRANSFER WILL NOT VIOLATE THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW;
(e) prior to the date of this Agreement, Grantee has had the
opportunity to review the Corporation's reports filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended, and
has had the opportunity to ask questions of and receive answers from the
Corporation concerning the Corporation, its business and its financial condition
and prospects.
(f) by reason of his business or financial experience, or the
business or financial experience of his professional advisors, who are
unaffiliated with and not compensated by the Corporation, Grantee has the
capacity to protect his own interests in connection with the offer and sale of
the Options or the Shares.
(g) Grantee is an "accredited investor" within the meaning of Rule
501 of the Act.
-2-
<PAGE>
5. Registration Rights.
-------------------
(a) Subject to the provisions of Section 5(d) below, at any time
hereafter whenever the Corporation proposes to file with the Securities and
Exchange Commission a registration statement registering its common stock for
sale in a public offering for cash (other than as to securities issued pursuant
to an employee benefit plan or as to a merger, acquisition or similar
transaction subject to Rule 145 promulgated under the Act), the Corporation
shall, at least 30 days prior to such filing, given written notice of such
proposed filing to the Grantee setting forth the facts with respect to such
proposed filing, and shall use its best efforts to include in any such filing
the Shares subject to the Option, provided, that the Corporation receives a
--------
request therefor at least 10 days prior to the proposed filing date and,
provided, further, that if the foregoing registration statement relates to an
- -----------------
underwritten public offering, the Corporation may require the holders of the
Shares not to sell such Shares pursuant to such registration statement for a
period of up to six (6) months after the consummation of such public offering,
if so requested by the underwriter of such public offering.
(b) If registration of the Shares is not effected under paragraph
5(a) hereof within eighteen (18) months of the date of the Consulting Agreement,
at the request of Grantee the Corporation shall prepare and file a registration
statement on the appropriate form with the SEC under the Act covering the
offering and sale of the Shares by the Grantee.
(c) All fees, disbursements and out-of-pocket expenses in connection
with the filing of any registration statement and in complying with applicable
securities and blue sky laws shall be borne by the Corporation.
(d) The Corporation shall register or qualify the Shares registered
pursuant to Section 5(a) or 5(b) hereof under the securities or "blue sky" laws
of such states as Grantee shall determine (but in any event in not more than 10
states); provided, however, that the Corporation shall not be required to
qualify to do business as a foreign corporation in any state where it is not
then so qualified, nor take any action which will subject it to general service
of process in any state where it is not then so subject.
(e) The Corporation shall not be obligated pursuant to Section 5(a)
to include in any filing any Shares subject to the Option where the Corporation
determines that inclusion of such Shares would conflict with or result in a
breach of agreements between the Corporation and third parties existing on the
date hereof pursuant to which such third parties have been granted the right to
have stock of the Corporation owned by them included in the registration
statement.
(f) In the event of the registration of any Shares subject to the
Option, the Corporation will indemnify and hold harmless the Grantee, each
person who controls the Grantee within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and each person who is deemed to be an underwriter with respect to such
Shares subject to the option, as defined in the Act (provided that if any such
-3-
<PAGE>
underwriter provided written information to the Corporation for use in the
registration statement, such underwriter shall indemnify the Corporation with
respect to such information in the same manner as the Grantee indemnifies the
Corporation as set forth in this last sentence of this subparagraph (f) and such
information shall constitute an exception to the Corporation's indemnity of such
underwriter in the same manner as set forth in the last proviso of this
sentence), from and against any and all losses, claims, damages, expenses and
liabilities, joint or several (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in any settlement
effected with the Corporation's consent (not to be unreasonably withheld) of any
action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Act, the Exchange Act or other federal or
state law or regulation, at common law or otherwise, insofar as such losses,
damages or liabilities arise out of or are based on (A) any untrue statement or
alleged untrue statement of a material fact contained in the registration
statement filed with respect to the Shares (including any related preliminary or
definitive prospectus, or any amendment or supplement to such registration
statement or prospectus), (B) any omission or alleged omission to state in such
document a material fact required to be stated in it or necessary to make the
statements in it not misleading, or (C) any violation by the Corporation of the
Act, the Exchange Act, any blue sky laws or any rule or regulation thereunder in
connection with such registration; provided, however, that the Corporation will
-------- -------
not be liable in any such case to the extent that such loss, claim, damage,
expense or liability arises from or is based on a material untrue statement or
omission or alleged material untrue statement or omission made in such
registration statement and in conformity with information furnished in writing
to the Corporation by the Grantee, or, with the knowledge of the Grantee, a
person who controls the Grantee, expressly for use in such registration
statement. With respect to the matters referred to in the last proviso of the
foregoing sentence, the Grantee will indemnify and hold harmless the
Corporation, and its directors, officers and control persons, from and against
any and all losses, claims, damages, expenses and liabilities, joint or several,
to which it may become subject under the Act, the Exchange Act or other federal
or state law or regulation, at common law or otherwise to the same extent
provided in the immediately preceding sentence.
(g) Promptly after receipt by an indemnified party of notice of the
commencement of any action involving matters referred to in the foregoing
paragraph, such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party, notify the indemnifying party in writing
thereof and the indemnifying party shall have the right to participate in and to
assume the defense thereof at its own expense with counsel reasonably
satisfactory to the indemnified party, and in such case, if the indemnified
party desires to retain its own counsel, the expense of such counsel shall be
borne by the indemnified party. In the event that, in the reasonable judgment
of the indemnified party, a bona fide conflict of interest arises between the
indemnified and indemnifying party with respect to any claim referenced above,
the indemnified party shall have the option of retaining counsel reasonably
satisfactory to the indemnifying party at the expense of the indemnifying party.
-4-
<PAGE>
(h) Nothing contained in this Option Agreement shall be construed as
requiring any holder to exercise his Option prior to the initial filing of any
registration statement or the effectiveness thereof.
6. Successors and Assigns. This Agreement shall be binding upon the
----------------------
parties and their respective successors and permitted assigns. This Option is
not assignable in whole or in part by the Grantee.
7. Expiration of Option. This Option shall expire on the date which is
--------------------
five years from the Date of Grant.
8. Rights.
------
(a) The granting of this Option shall not confer upon the Grantee or
on Whale Securities Co., L.P. any right to be, or to continue to be, retained by
the Corporation or any of its subsidiaries, subject, however, to the terms of
the Consulting Agreement between the Grantee and the Corporation.
(b) The Grantee shall not, by reason of the granting to it of the
Option, have or thereby acquire any rights of a stockholder of the Corporation
with respect to any Shares unless and until it has tendered full payment of the
Option Price for such Shares.
9. Adjustment of Number of Shares and Option Price. In the event that a
-----------------------------------------------
dividend shall be declared upon the Shares payable in shares of Common Stock,
the number of Shares then subject to the Option and the Option Price shall be
adjusted by adding to each of such Shares the number of shares of Common Stock
which would be distributable thereon if such Shares had been outstanding on the
date fixed for determining the stockholders entitled to receive such stock
dividend and reducing the Option Price proportionally. In the event that the
outstanding Shares shall be changed into or exchanged for a different number or
kind of shares of stock or other securities of the Corporation or of another
corporation, whether through reorganization, recapitalization, stock split-up,
combination of shares, merger or consolidation, then there shall be substituted
for each Share then subject to the Option the number and kind of shares of stock
or other securities into which each outstanding share of Common Stock shall be
so changed or for which each such share shall be exchanged; provided, however,
-------- -------
that in the event that such change or exchange results from a merger or
consolidation, and in the judgment of the Board of Directors of the Corporation
such substitution cannot be effected or would be inappropriate, or if the
Corporation shall sell all or substantially all of its assets, the Corporation
shall use reasonable efforts to effect some other adjustment of the Option which
the Board of Directors, acting in good faith, shall deem equitable. In the case
of any such substitution or adjustment as provided for in this Section 9, the
Option Price will be the option price for all shares of stock or other
securities which shall have been substituted for each Shares or to which such
Share shall have been adjusted pursuant to this Section 9. No adjustment or
substitution provided for in this
-5-
<PAGE>
Section 9 shall require the Corporation to sell a fractional Share, and the
total substitution or adjustment shall be limited accordingly.
10. Reserve of Shares. The Corporation will reserve and set about and have
-----------------
at all times, free from preemptive rights, that number of shares of authorized
but unissued Common Stock deliverable upon exercise of the Option, and it will
have at all times any other rights or privileges provided for therein sufficient
to enable it at any time to fulfill all of its obligations in this Agreement.
11. Governing Law. This Agreement shall be governed by, and construed and
-------------
enforced in accordance with, the laws and jurisdiction of the State of New York.
If the foregoing is in accordance with the Grantee's understanding and
agreed to an approved by it, it may so confirm by signing and returning the
duplicate of this Agreement delivered for that purpose.
US WATS, INC.
Dated: 9/19/95 By: /s/ Aaron Brown
------- ---------------
The foregoing is in accordance with the undersigned's understanding and is
hereby confirmed and agreed to as of the Date of Grant.
Dated:___________________ ________________________
CRAIG S. SHAPIRO
-6-
<PAGE>
EXHIBIT 4.2
US WATS, INC.
STOCK OPTION AGREEMENT
----------------------
Option granted as of July 19, 1995 (the "Date of Grant") by US WATS, INC.
(the "Corporation") to WHALE SECURITIES CO., L.P. (hereinafter referred to as
the "Grantee"):
1. The Option. In further consideration of the services to be provided to
----------
the Corporation by the Grantee pursuant to that certain consulting agreement
between the Corporation and the Grantee dated July 19, 1995 (the "Consulting
Agreement"), the Corporation grants to the Grantee, a stock option (the
"Option") to purchase, on the terms and conditions herein set forth, up to
125,000 shares (the "Shares") of the Corporation's fully paid, nonassessable
shares of common stock ("Common Stock"), at the purchase price set forth in
Section 2 below.
2. The Purchase Price. The purchase price of 62,500 of the Shares shall
------------------
be $1.25 per share and the purchase price of the remaining 62,500 of the Shares
shall be $2.00 per share (together, the "Option Price"), as such Option Price
shall be adjusted from time to time pursuant to Section 9.
3. Exercise of Option.
------------------
(a) The Option is exercisable over a period ending five years from
the Date of Grant (the "Option Period"). The Option may be exercised from time
to time during the Option Period as to the total number of Shares subject to
this Option as determined under Section 1, or any lesser amount thereof, and the
Option shall continue as to any unexercised portion of the Option.
(b) In the event the Grantee elects to exercise all or any portion of
the Option, the Grantee shall deliver to the Corporation written notice (the
"Notice") of such election, which Notice shall specify the number of Shares in
respect of which the Option is to be exercised, along with payment of the Option
Price of the Shares in respect of which the Option is exercised. The Option
Price shall be paid in full in United States dollars at the time of exercise. If
the Option is exercised in accordance with the provisions of this Agreement, the
Corporation shall deliver as soon as practicable to the Grantee a certificate or
certificates representing the number of Shares in respect of which the Option is
being exercised, which Shares shall be registered in the Grantee's name.
4. Sale of Shares; Restrictions on Transferability. The Grantee
-----------------------------------------------
understands and acknowledges that:
(a) the Shares have not been registered under the Securities Act of
1933, as amended (the "Act") or any applicable state securities law and Grantee
shall not be entitled to
<PAGE>
sell, transfer, or distribute the Shares unless the Shares are subsequently so
registered or unless an exemption from such registration is available;
(b) prior to offering or selling the Shares upon claim of exemption,
the Grantee shall obtain a written opinion from counsel reasonably satisfactory
to the Corporation to the effect that such exemption is available or shall
deliver a "No action" letter from the Securities and Exchange Commission with
respect to the proposed sale, transfer or distribution of the Shares;
(c) the Grantee is a registered broker-dealer;
(d) the Shares are not being acquired with a view to distribution by
Grantee;
(e) each certificate representing the Shares will bear the following
legend, or one similar thereto, drawing attention to the restrictions on its
transferability;
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY
APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE TRANSFERRED
EXCEPT UPON DELIVERY TO THE CORPORATION OF AN OPINION OF
COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO IT THAT SUCH
TRANSFER WILL NOT VIOLATE THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW;
(f) prior to the date of this Agreement, Grantee has had the
opportunity to review the Corporation's reports filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended, and
has had the opportunity to ask questions of and receive answers from the
Corporation concerning the Corporation, its business and its financial condition
and prospects.
5. Registration Rights.
-------------------
(a) Subject to the provisions of Section 5(d) below, at any time
hereafter whenever the Corporation proposes to file with the Securities and
Exchange Commission a registration statement registering its common stock for
sale in a public offering for cash (other than as to securities issued pursuant
to an employee benefit plan or as to a merger, acquisition or similar
transaction subject to Rule 145 promulgated under the Act), the Corporation
shall, at least 30 days prior to such filing, given written notice of such
proposed filing to the Grantee setting forth the facts with respect to such
proposed filing, and shall use its best efforts to include in any such filing
the Shares subject to the Option, provided, that the Corporation receives a
--------
request therefor at least 30 days prior to the proposed filing date and,
provided, further, that if the foregoing registration statement relates to an
- -----------------
underwritten public offering, the Corporation may
-2-
<PAGE>
require the holders of the Shares not to sell such Shares pursuant to such
registration statement for a period of up to six (6) months after the
consummation of such public offering, if so requested by the underwriter of such
public offering.
(b) If registration of the Shares is not effected under paragraph
5(a) hereof within eighteen (18) months of the date of the Consulting Agreement,
at the request of the Grantee the Corporation shall prepare and file a
registration statement on the appropriate form with the SEC under the Act
covering the offering and sale of the Shares by the Grantee.
(c) All fees, disbursements and out-of-pocket expenses in connection
with the filing of any registration statement and in complying with applicable
securities and blue sky laws shall be borne by the Corporation.
(d) The Corporation shall register or qualify the Shares registered
pursuant to Section 5(a) or 5(h)) hereof under the securities or "blue sky" laws
of such states as Grantee shall determine (but in any event in not more than 10
states); provided, however, that the Corporation shall not be required to
qualify to do business as a foreign corporation in any state where it is not
then so qualified, nor take any action which will subject it to general service
of process in any state where it is not then so subject.
(e) The Corporation shall not be obligated pursuant to Section 5(a)
to include in any filing any Shares subject to the Option where the Corporation
determines that inclusion of such Shares would conflict with or result in a
breach of agreements between the Corporation and third parties existing on the
date hereof pursuant to which such third parties have been granted the right to
have stock of the Corporation owned by them included in the registration
statement.
(f) In the event of the registration of any Shares subject to the
Option, the Corporation will indemnify and hold harmless the Grantee, each
person who controls the Grantee within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and each person who is deemed to be an underwriter with respect to such
Shares subject to the Option, as defined in the Act (provided that if any such
underwriter provided written information to the Corporation for use in the
registration statement, such underwriter shall indemnify the Corporation with
respect to such information in the same manner as the Grantee indemnify the
Corporation as set forth in this last sentence of this subparagraph (f) and such
information shall constitute an exception to the Corporation's indemnity of such
underwriter in the same manner as set forth in the last proviso of this
sentence), from and against any and all losses, claims, damages, expenses and
liabilities, joint or several (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in any settlement
effected with the Corporation's consent (not to be unreasonably withheld) of any
action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Act, the Exchange Act or other federal or
state law or regulation, at common law or otherwise, insofar as such losses,
damages or liabilities arise out of or are based on (A) any untrue-statement or
alleged untrue statement of a material fact contained
-3-
<PAGE>
in the registration statement filed with respect to the Shares (including any
related preliminary or definitive prospectus, or any amendment or supplement to
such registration statement or prospectus), (B) any omission or alleged omission
to state in such document a material fact required to be stated in it or
necessary to make the statements in it not misleading, or (C) any violation by
the Corporation of the Act, the Exchange Act, any blue sky laws or any rule or
regulation thereunder in connection with such registration; provided, however,
that the Corporation will not be liable in any such case to the extent that such
loss, claim, damage, expense or liability arises from or is based on a material
untrue statement or omission or alleged material untrue statement or omission
made in such registration statement and in conformity with information furnished
in writing to the Corporation by the Grantee, or, with the knowledge of the
Grantee, a person who controls the Grantee, expressly for use in such
registration statement. With respect to the matters referred to in the last
proviso of the foregoing sentence, the Grantee will indemnify and hold harmless
the Corporation, and its directors, officers and control persons, from and
against any and all losses, claims, damages, expenses and liabilities, joint or
several, to which it may become subject under the Act, the Exchange Act or other
federal or state law or regulation, at common law or otherwise to the same
extent provided in the immediately preceding sentence.
(g) Promptly after receipt by an indemnified party of notice of the
commencement of any action involving matters referred to in the foregoing
paragraph, such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party, notify the indemnifying party in writing
thereof and the indemnifying party shall have the right to participate in and to
assume the defense thereof at its own expense with counsel reasonably
satisfactory to the indemnified party, and in such case, if the indemnified
party desires to retain its own counsel, the expense of such counsel shall be
borne by the indemnified party. In the event that, in the reasonable judgment of
the indemnified party, a bona fide conflict of interest arises between the
indemnified and indemnifying party with respect to any claim referenced above,
the indemnified party shall have the option of retaining counsel reasonably
satisfactory to the indemnifying party at the expense of the indemnifying party.
(h) Nothing contained in this Option Agreement shall be construed as
requiring any holder to exercise his option prior to the initial filing of any
registration statement or the effectiveness thereof.
6. Successors and Assigns. This agreement shall be binding upon the
----------------------
parties and their respective successors and permitted assigns. This Option is
not assignable in whole or in part by the Grantee.
7. Expiration of Option. This Option shall expire on the date which is
--------------------
five years from the Date of Grant.
-4-
<PAGE>
8. Rights.
------
(a) The granting of this Option shall not confer upon the Grantee any
right to be, or to continue to be, retained by the Corporation or any of its
subsidiaries, subject, however, to the terms of the Consulting Agreement between
the Grantee and the Corporation.
(b) The Grantee shall not, by reason of the granting to it of the
Option, have or thereby acquire any rights of a stockholder of the Corporation
with respect to any Shares unless and until it has tendered full payment of the
Option Price for such Shares.
9. Adjustment of Number of Shares and Option Price. In the event that a
-----------------------------------------------
dividend shall be declared upon the Shares payable in shares of Common Stock,
the number of Shares then subject to the Option and the Option Price shall be
adjusted by adding to each of such Shares the number of shares of Common Stock
which would be distributable thereon if such Shares had been outstanding on the
date fixed for determining the stockholders entitled to receive such stock
dividend and reducing the Option Price proportionally. In the event that the
outstanding Shares shall be changed into or exchanged for a different number or
kind of shares of stock or other securities of the Corporation or of another
corporation, whether through reorganization, recapitalization, stock split-up,
combination of shares, merger or consolidation, then there shall be substituted
for each Share then subject to the Option the number and kind of shares of stock
or other securities into which each outstanding share of Common Stock shall be
so changed or for which each such share shall be exchanged; provided, however,
-------- -------
that in the event. that such change or exchange results from a merger or
consolidation, and in the judgment of the Board of Directors of the Corporation
such substitution cannot be effected or would be inappropriate, or if the
Corporation shall sell all or substantially all of its assets, the Corporation
shall use reasonable efforts to effect some other adjustment of the option which
the Board of Directors, acting in good faith, shall deem equitable. In the case
of any such substitution or adjustment as provided for in this Section 9, the
Option Price will be the option price for all shares of stock or other
securities which shall have been substituted for each Share or to which such
Share shall have been adjusted pursuant to this Section 9. No adjustment or
substitution provided for in this Section 9 shall require the Corporation to
sell a fractional Share, and the total substitution or adjustment shall be
limited accordingly.
10. Reserve of Shares. The Corporation will reserve and set about and have
-----------------
at all times, free from preemptive rights, that number of shares of authorized
but unissued Common Stock deliverable upon exercise of the Option, and it will
have at all times any other rights or privileges provided for therein sufficient
to enable it at any time to fulfill all of its obligations in this Agreement.
11. Governing Law. This Agreement shall be governed by, and construed and
-------------
enforced in accordance with, the laws and jurisdiction of the State of New
York.
-5-
<PAGE>
If the foregoing is in accordance with the Grantee's understanding and
agreed to an approved by it, it may so confirm by signing and returning the
duplicate of this Agreement delivered for that purpose.
US WATS, INC.
Dated: 9/19/95 By: /s/ Aaron Brown
------- ---------------
The foregoing is in accordance with the undersigned's understanding and is
hereby confirmed and agreed to as of the Date of Grant.
WHALE SECURITIES CO., L.P.
By: WHALE SECURITIES CORP.,
general partner
Dated:___________________ By:______________________________
-6-
<PAGE>
Exhibit 5
OPINION OF PEPPER HAMILTON LLP
[Pepper Hamilton LLP Letterhead]
US WATS, Inc.
2 Greenwood Square
3331 Street Road, Suite 275
Bensalem, Pennsylvania 19020
February 7, 2000
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
Reference is made to the Registration Statement on Form S-3 (the
"Registration Statement") of US WATS, Inc., a New York corporation (the
"Company"), to be filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"). The
Registration Statement relates to the offering for sale of 250,000 shares of
common stock, $0.001 par value per share (the "Shares"), issuable upon exercise
of options (the "Options") held by the selling securityholders named in the
Registration Statement pursuant to those certain stock option agreements between
Craig Shapiro and the Company and Whale Securities Co., LP and the Company, each
dated July 19, 1995 (the "Option Agreements").
In rendering this opinion, we have examined the Registration
Statement, including the exhibits thereto; the originals or copies, certified or
otherwise identified to our satisfaction, of the Certificate of Incorporation,
as amended to date, and the By-Laws of the Company, as amended to date; the
certificate executed by the President and Chief Executive Officer and the Chief
Financial Officer of the Company dated as of the date hereof; the Option
Agreements; and such other documents and corporate records relating to the
Company as we have deemed appropriate for the purpose of rendering the opinion
expressed herein. We have assumed the genuineness and authenticity of all
documents submitted to us as originals, the conformity to originals of all
documents submitted to us as copies thereof, and the due execution and delivery
of all documents where due execution and delivery are a prerequisite to the
effectiveness thereof. We have further assumed that the Shares to be issued to
the selling securityholders upon exercise of the Options plus other issued and
outstanding shares of the Company's common stock, $0.001 par value per share, do
not exceed the number of shares of the Company's common stock, $0.001 par value
per share, that is authorized under the Company's Certificate of Incorporation.
The opinion expressed herein is based exclusively on the applicable provisions
of the New York Business Corporation Law and federal securities laws as in
effect on the date hereof.
On the basis of the foregoing, we are of the opinion that the
Shares, upon exercise of the Options and payment of the exercise price provided
for in the Option Agreements, will be legally issued, fully paid and non-
assessable.
We assume no obligation to supplement this opinion if any applicable
law changes after the date hereof or if we become aware of any fact that might
change the opinion expressed herein after the date hereof.
We hereby consent to the reference to our firm under the section
"Legal Matters" in the Prospectus included in the Registration Statement and to
the filing of this opinion as an exhibit to the Registration Statement. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required under Section 7 of the Act.
Very truly yours,
/s/ PEPPER HAMILTON LLP
Pepper Hamilton LLP
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration
Statement of US WATS, Inc. on Form S-3 of our report dated March 30, 1999,
(which report expresses an unqualified opinion and includes an explanatory
paragraph expressing substantial doubt about the Company's ability to continue
as a going concern) appearing in the annual report on Form 10-K of US WATS, Inc.
for the year ended December 31, 1998, and to the reference to us under the
heading "Experts" in the prospectus, which is part of the Registration
Statement.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 4, 2000
