<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1996
REGISTRATION NO. 33-80191
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PACIFIC GATEWAY EXCHANGE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 94-3134065
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
533 AIRPORT BLVD., SUITE 505
BURLINGAME, CA 94010
(415) 375-6700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
HOWARD A. NECKOWITZ
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PACIFIC GATEWAY EXCHANGE, INC.
533 AIRPORT BLVD., SUITE 505
BURLINGAME, CA 94010
(415) 375-6700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
<TABLE>
<S> <C>
Copies to:
ERIC J. LAPP, ESQ. LEIGH P. RYAN, ESQ.
JOHN M. FOGG, ESQ. PAUL, HASTINGS, JANOFSKY & WALKER
GRAY CARY WARE & FREIDENRICH 399 PARK AVENUE
A PROFESSIONAL CORPORATION NEW YORK, NY 10022
400 HAMILTON AVENUE (212) 318-6000
PALO ALTO, CA 94301
(415) 328-6561
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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 following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE
TITLE OF EACH CLASS TO BE OFFERING PRICE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Common stock, $0.0001 par
value.......................... 4,257,050 shares $15.00 $63,855,750 $22,020
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Common stock, $0.0001 par
value.......................... 1,800,000 shares $13.95 $25,110,000 $ 8,659
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Total............................ 6,057,050 shares $88,965,750 $30,679
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Previously paid $20,623
Balance $10,056
</TABLE>
- ---------------
(1) Includes 790,050 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee.
------------------------
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 WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
PACIFIC GATEWAY EXCHANGE, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING
LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1.
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN
FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of this Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............. Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations
5. Determination of Offering Price............ Outside Front Cover Page; Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... Principal and Selling Stockholders
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered............................... Prospectus Summary; Capitalization;
Description of Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters
11. Information with Respect to the
Registrant............................... Outside Front and Inside Front Cover Pages;
Prospectus Summary; Sale of Shares to
KDD; Risk Factors; Dividend Policy;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Certain
Relationships and Related Transactions;
Principal and Selling Stockholders;
Description of Capital Stock; Shares
Eligible for Future Sale; Glossary;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
</TABLE>
<PAGE> 3
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 18, 1996
5,267,000 SHARES
[PACIFIC GATEWAY EXCHANGE LOGO]
COMMON STOCK
------------------------
Of the 5,267,000 shares of Common Stock offered hereby (the "Shares"),
4,900,000 shares are being offered by Pacific Gateway Exchange, Inc. ("Pacific
Gateway" or the "Company") and 367,000 shares are being offered by certain
stockholders of the Company (the "Selling Stockholders"). See "Principal and
Selling Stockholders." Of the 4,900,000 shares being offered by the Company,
1,800,000 shares will be sold to KDD America, Inc. ("KDD"). See "Underwriting."
The Company will not receive any proceeds from the sale of shares by the Selling
Stockholders. Prior to this offering (the "Offering"), there has been no public
market for the Common Stock of the Company. It is currently estimated that the
initial public offering price will be between $13.00 and $15.00 per Share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. Application has been made to have the Common
Stock approved for quotation on the Nasdaq National Market under the symbol
"PGEX."
------------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGES 6 TO
13 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
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Total(3)........................ $ $ $ $
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Total Assuming Full Exercise of
Over-Allotment Option(4)...... $ $ $ $
================================================================================================
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $662,000, which are payable by the
Company.
(3) Does not include 1,800,000 Shares being sold to KDD at a price equal to the
initial public offering price per Share, net of underwriting discounts and
commissions for a total net amount of $ .
(4) Assuming exercise in full of the 30-day option granted by the Company and
certain stockholders of the Company to the Underwriters to purchase up to
an additional 40,050 and 750,000 shares, respectively, on the same terms,
solely to cover over-allotments. See "Underwriting" and "Principal and
Selling Stockholders."
------------------------
The Shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York City on or about
, 1996.
------------------------
PAINEWEBBER INCORPORATED ALEX. BROWN & SONS
INCORPORATED
------------------------
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE> 4
[PACIFIC GATEWAY EXCHANGE LOGO]
INTERNATIONAL NETWORK
CURRENT AND PENDING FACILITIES
[MAP]
WORLD MAP NAMING AND LOCATING UNDERSEA FIBER OPTIC CABLES
AND GATEWAY SWITCHES DESCRIBED BELOW
PACIFIC GATEWAY HAS OWNERSHIP POSITIONS IN 14 DIGITAL UNDERSEA FIBER OPTIC
CABLES AND OPERATES TWO INTERNATIONAL GATEWAY SWITCHING FACILITIES IN LOS
ANGELES AND NEW YORK. THE COMPANY HAS ALSO MADE PLANS TO INVEST OR LEASE AN
INTEREST IN APPROXIMATELY SEVEN ADDITIONAL UNDERSEA FIBER OPTIC CABLES, AS WELL
AS AN ADDITIONAL SWITCHING SITE IN DALLAS. THE COMPANY'S OWNED INTERNATIONAL
NETWORK, TOGETHER WITH LEASED CAPACITY AND SATELLITE CIRCUITS, ENABLE IT TO
TERMINATE TELECOMMUNICATIONS TRAFFIC TO ANY COUNTRY IN THE WORLD THAT HAS DIRECT
DIAL SERVICE WITH THE UNITED STATES.
LEGEND:
<TABLE>
<C> <S>
- ------- Company-owned undersea fiber optic transmission facilities.
- ------- Fiber optic transmission facilities currently in service,
under construction or in the planning stages in which the
Company has plans to purchase or lease an interest.
o Company-owned international gateway switching sites.
o Company-owned switching facilities planned for 1996
installation.
</TABLE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined by its independent accountants
and quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and related Notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus (i) gives effect to a 940 to 1 split of the Company's Common
Stock effected on October 20, 1995, (ii) assumes no exercise of the
Underwriters' over-allotment option and (iii) gives effect to the sale of
1,800,000 shares of the Company's Common Stock to KDD.
THE COMPANY
Pacific Gateway is a facilities-based international telecommunications
carrier which provides international telecommunications services primarily to
its target customer base of long distance service providers worldwide, including
five of the seven largest U.S.-based long distance carriers. The Company
operates an international network consisting of international and domestic
switching facilities in Los Angeles and New York, partial ownership interests in
14 digital undersea fiber optic cable systems in the Atlantic, Pacific and
Caribbean regions and operating agreements that provide for the exchange of
telecommunications traffic with foreign carriers.
As of March 31, 1996, Pacific Gateway had operating agreements with 25
foreign carriers in 19 countries around the world, which countries collectively
represent approximately 43.3% of U.S.-originated international traffic. The
Company is currently negotiating operating agreements with more than 20
prospective foreign partners. The Company's foreign partners include both
telecommunications carriers that have been dominant in their home markets which
may be wholly or partially government-owned (often referred to as Post Telephone
and Telegraphs or "PTTs") and nondominant carriers that may have been recently
established as a result of the deregulation of foreign telecommunications
markets ("Competitive Carriers").
Industry sources estimate that the international telecommunications
services market was approximately $50.6 billion in aggregate carrier revenues in
1994, with approximately $12.4 billion of this traffic originating in the United
States, and that aggregate international telecommunications traffic grew at a
compound annual rate of 13% during the period from 1990 to 1994, with some
sectors in developing countries growing at faster rates. This historical growth
rate is approximately twice the growth rate of aggregate U.S. domestic long
distance traffic over the same period. The Company believes that the
international telecommunications market will continue to experience strong
growth for the foreseeable future.
The Company's senior management team founded Pacific Gateway in 1991 to
capitalize on the significant growth opportunities it believes are being created
by the following major trends in the international telecommunications services
market: (i) global deregulation and privatization; (ii) increased availability
of digital undersea fiber optic cable capacity; (iii) reductions in service
costs driven by technological advancements and increased competition; and (iv)
economic development and an increasing number of telephones and access lines in
service worldwide. Despite the growth and general deregulatory trends in the
global telecommunications market, however, the pace of change and emergence of
competition in many countries remains slow, with domestic and international
traffic still dominated by government-controlled monopoly carriers. The Company
believes that U.S.-based international carriers, such as Pacific Gateway, which
have already established, or are in negotiations to establish, operating
agreements with government-controlled monopoly carriers in many such countries
will be well-positioned to capture the benefits of increasing traffic flows as
the telecommunications infrastructure in these countries is expanded.
The Company's strategy to capitalize on the growing demand for
international telecommunications services consists of the following key
elements: (i) secure additional operating agreements with foreign carriers,
particularly in fast-growing markets in Asia, the Pacific Rim, Latin America and
Eastern Europe; (ii) expand and enhance its global network facilities; (iii)
pursue strategic alliances, joint ventures and acquisitions to increase both
overseas-originated and U.S.-originated traffic; (iv) broaden its offering of
higher margin value-added products and services; (v) leverage its existing
network facilities through targeted direct marketing of international services
to corporate customers located near the Company's switching facilities; and (vi)
maintain efficient, low-cost operations.
3
<PAGE> 6
International long distance traffic is traditionally exchanged pursuant to
bilateral operating agreements entered into between international long distance
carriers in two countries. The Company believes that it is currently the only
U.S.-based international carrier other than AT&T Communications, Inc., MCI
Telecommunications Corporation, Sprint Corporation and WorldCom, Inc. to have
secured a significant number of traditional switched voice bilateral operating
agreements with foreign carriers. Unless a U.S.-based international carrier is
able to offer a new business opportunity or a new source of traffic, generally
there is little incentive for a foreign carrier to take on the administrative
burdens of negotiating a new operating agreement with a U.S.-based carrier, to
incur additional capital investment, and to maintain the relationship on an
ongoing basis. The Company believes that the combination of the large traffic
volume, proven operating performance and personal relationships that
traditionally has been required both to establish operating agreements and to
secure positions in digital undersea fiber optic cable systems creates a
significant barrier to entry in the international telecommunications services
market.
The Company's target customer base includes the more than 200 U.S.-based
long distance carriers with annual revenues of between $50 million and $2
billion and the foreign carriers with which the Company has, or proposes to
have, operating agreements. As of March 31, 1996, Pacific Gateway provided its
services to approximately 57 U.S.-based long distance carriers and 25 foreign
carriers. The Company has been able to increase its revenues by providing
service to new U.S.-based customers, by providing its existing customers with
direct service to additional countries as it obtains new operating agreements
and by terminating increasing volumes of traffic from its foreign carrier
partners. The Company believes that the principal reasons its customers select
Pacific Gateway to carry their international traffic are (i) the Company's
reputation for operating a state-of-the-art network at rates that are comparable
to or lower than its competitors; (ii) that the Company's size enables its
experienced sales and operating personnel to tailor cost-effective
telecommunications services to meet customers' needs and to provide highly
responsive, flexible customer service; and (iii) that Pacific Gateway is the
only significant U.S. facilities-based international carrier that does not also
compete primarily for end-user customers in the domestic long distance market.
The Company was incorporated in Delaware on August 8, 1991. The Company's
principal executive offices are located at 533 Airport Boulevard, Suite 505,
Burlingame, California 94010. Its telephone number is (415) 375-6700.
THE OFFERING
Common Stock offered by the
Company............................. 4,900,000 shares
Common Stock offered by the Selling
Stockholders...................... 367,000 shares
Common Stock to be outstanding after
this Offering(1).................... 18,856,440 shares
Use of proceeds..................... The net proceeds of this Offering will
be used (i) to expand the Company's
international network facilities on
new and existing routes, (ii) to
repay the Company's existing
indebtedness to one of its
stockholders and to a commercial
lender, and (iii) to invest in
potential joint ventures, strategic
alliances or acquisitions and for
working capital and other general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol.............................. PGEX
- ---------------
(1) Gives effect to the purchase by the Company of 143,560 shares of Common
Stock from a former employee in April 1996 and excludes 1,200,000 shares
reserved for issuance under the Company's 1995 Stock Option Plan, of which
539,170 shares of Common Stock were issuable upon exercise of outstanding
options at March 31, 1996, and 400,000 shares of Common Stock were reserved
at March 31, 1996 for issuance under the Company's 1995 Stock Purchase Plan.
See "Capitalization" and "Management -- Stock Plans."
4
<PAGE> 7
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION(1) THREE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
------------ ------ ------ ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND REVENUES PER MINUTE OF USE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 124 $ 800 $5,048 $20,913 $ 76,416 $12,125 $32,240
Cost of long distance services..... 37 587 4,036 17,196 66,346 10,042 29,130
------- ------ ------ ------- -------- ------- -------
Gross profit..................... 87 213 1,012 3,717 10,070 2,083 3,110
Selling, general and administrative
expenses......................... 113 531 1,008 2,273 5,467 992 1,956
Depreciation....................... 1 17 104 410 1,124 189 385
------- ------ ------ ------- -------- ------- -------
Operating income (loss).......... (27) (335) (100) 1,034 3,479 902 769
Interest expense................... -- -- 12 193 538 111 152
------- ------ ------ ------- -------- ------- -------
Income (loss) before income
taxes.......................... (27) (335) (112) 841 2,941 791 617
Provision for income taxes......... -- -- -- 205 1,155 311 250
------- ------ ------ ------- -------- ------- -------
Net income (loss)................ $ (27) $ (335) $ (112) $ 636 $ 1,786 $ 480 367
======= ====== ====== ======= ======== ======= =======
Net income (loss) per share........ $ -- $(0.03) $(0.01) $ 0.04 $ 0.12 $ 0.03 $ 0.03
======= ====== ====== ======= ======== ======= =======
Weighted average shares
outstanding...................... 10,070 11,128 14,300 14,300 14,300 14,300 14,300
OTHER OPERATING DATA:
EBITDA(2).......................... $ (26) $ (318) $ 4 $ 1,444 $ 4,603 $ 1,091 $ 1,154
Capital expenditures............... $ 80 $ 66 $1,542 $ 3,745 $ 7,233 $ 242 $ 4,121
Minutes of use..................... N/A N/A 13,580 61,690 252,925 38,667 108,888
Revenues per minute of use......... N/A N/A $ 0.37 $ 0.34 $ 0.30 $ 0.31 $ 0.30
Estimated return traffic revenue
backlog(3)....................... -- -- $ 158 $ 986 $ 6,142 $ 2,052 $ 8,400
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------
AS
ACTUAL ADJUSTED(4)
------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................... $ 3,691 $ 58,407
Working capital (deficit)............................................................... (6,973) 50,743
Total assets............................................................................ 41,123 95,839
Revolving line of credit................................................................ 3,000 --
Revolving line of credit, related party................................................. 5,420 --
Stockholders' equity.................................................................... 3,257 66,393
</TABLE>
- ---------------
(1) The Company was incorporated in Delaware and commenced operations on August
8, 1991.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization expense. EBITDA does not represent cash flows
as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all the
Company's cash needs. EBITDA is a financial measure commonly used in the
Company's industry and should not be considered in isolation or as a
substitute for net income, cash flows from operating activities or other
measures of liquidity determined in accordance with generally accepted
accounting principles.
(3) Represents revenue from delayed proportional return traffic actually
received during the six months following the end of the years ended December
31, 1993 and 1994 and the three months ended March 31, 1995. For the year
ended December 31, 1995, the amount represents the actual return revenue of
$3,042 during the three months ended March 31, 1996 and management's
estimate of revenue to be received from delayed proportional return traffic
during the three month period ending June 30, 1996. For the three months
ended March 31, 1996, this amount represents management's estimate of
revenue to be received from delayed proportional return traffic during the
six months ending September 30, 1996. Management's estimates of the revenue
to be received from delayed proportional return traffic are based on the
anticipated ratios between outgoing and incoming traffic and the anticipated
settlement rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
(4) Adjusted to reflect the sale of 3,100,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $14.00 per
share and 1,800,000 shares of Common Stock offered by the Company hereby to
KDD at a price equal to the initial public offering price per share, net of
underwriting discounts and commissions, and the application of the estimated
net proceeds therefrom. See "Use of Proceeds."
5
<PAGE> 8
SALE OF SHARES TO KDD
As part of the Offering the Company will sell directly to KDD 1,800,000
Shares of Common Stock at a price equal to the initial public offering price per
Share, net of underwriting discounts and commissions. KDD is a subsidiary of
Kokusai Denshin Denwa, the leading international telecommunications carrier
based in Japan according to industry sources ("KDD Japan"). The Company will
sell 1,000,000 Shares to KDD simultaneously with the Closing of the sale of the
Shares offered hereby and will sell the remaining 800,000 Shares to KDD within
five business days following the date of termination of the applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended. KDD will own approximately 9.5% of the outstanding Common Stock
following the purchase of the 1,800,000 Shares. KDD will enter into an agreement
not to sell any of the Shares to be purchased hereunder during the 180-day
lock-up period commencing from the date of this Prospectus and will restrict its
sales during the 180-day period thereafter to the volume limits that would be
applicable if the Shares held by KDD were restricted shares eligible for sale
pursuant to Rule 144 under the Securities Act. Any future sale of the Company's
Common Stock by KDD could adversely affect the market price of the Company's
Common Stock. See "Shares Eligible for Future Sale." Such agreement will also
provide that KDD may not increase its holdings of Common Stock of Pacific
Gateway above 20% without the prior written consent of Pacific Gateway. In
connection with the sale of the Shares to KDD, Pacific Gateway and KDD Japan
will enter into a seven-year cooperation agreement that contemplates joint
projects in the communication field, including joint product development in new
services, such as video teleconferencing, imaging and Internet services together
with related technical support and assistance; joint marketing arrangements to
promote small and medium-size business and retail and ethnic marketing programs;
continuing exchange of traffic; assistance by KDD Japan to the Company with
respect to the Company's business in Asia; and sharing of information by Pacific
Gateway and KDD Japan regarding the telecommunications market and industry in
the United States and Japan, respectively.
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the shares
of Common Stock offered hereby. This Prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including statements
regarding expected future revenue from delayed proportional return traffic from
foreign partners pursuant to certain operating agreements. Actual results could
differ materially from those projected in the forward-looking statements as a
result of numerous factors, including changes in international settlement rates,
changes in the ratios between outgoing and incoming traffic, foreign currency
fluctuations, termination of certain operating agreements, and other factors set
forth below and elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company commenced its operations in August 1991 and has a limited
operating history. The Company was not profitable until 1994 and had accumulated
losses of $473,445 through December 31, 1993. There can be no assurance that the
Company's future operations will continue to generate operating or net income.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON OPERATING AGREEMENTS WITH FOREIGN PARTNERS
Pacific Gateway's strategy is based on its ability to enter into operating
agreements with foreign carriers, which the Company refers to as foreign
partners, in each of the foreign countries it has targeted so it can terminate
traffic in, and receive return traffic from, that country. The Company believes
that it would not be able to serve its customers at competitive prices without
such operating agreements. The operating agreements are generally for an
unspecified term in accordance with industry practice, although many of the
Company's foreign partners have mutual investments with the Company in digital
undersea fiber optic cable to assure long-term telecommunications access between
their respective countries and the United States. While the
6
<PAGE> 9
Company has been successful in negotiating and maintaining operating agreements,
none of which has been terminated to date, the trend toward deregulation of
telephone communications in many countries and a significant reduction in
outgoing traffic carried by Pacific Gateway, among other things, could cause
foreign partners to terminate their operating agreements, or could cause such
operating agreements to have substantially less value to the Company. Such
termination by certain of the Company's foreign partners could have a material
adverse effect on the Company's business. Moreover, there can be no assurance
that the Company will be able to enter into additional operating agreements in
the future. The failure to enter into additional operating agreements could
limit the Company's ability to increase its revenues on a profitable basis. See
"Business -- Industry Background -- Operating Agreements" and
"Business -- Operating Agreements."
MANAGING RAPID GROWTH
The Company is experiencing a period of rapid growth which is expected to
continue to place a significant strain on the Company's management, operational
and financial resources. In order to manage its growth effectively, the Company
must continue to implement and improve its operational and financial systems and
controls, to purchase and utilize more digital undersea fiber optic cable and
other transmission facilities and to expand, train and manage its employee base.
Inaccuracies in the Company's forecasts of traffic could result in insufficient
or excessive transmission facilities and disproportionate fixed expenses. The
Company's overflow traffic is handled by other international carriers to which
the Company pays per minute usage fees. The Company is not able to assure that
the quality of these services is commensurate with the transmission quality
provided by the Company. If the Company is not able to manage its growth
effectively or maintain the quality of its service, the Company's business may
be adversely affected.
RISKS OF INTERNATIONAL TELECOMMUNICATIONS BUSINESS
The Company generates substantially all its revenues by providing
international telecommunications services to its customers. The Company's
operations are subject to certain risks, such as changes in foreign government
regulations and telecommunications standards, licensing requirements, tariffs,
taxes and other trade barriers, as well as political and economic instability.
In addition, the Company's revenues and cost of long distance services are
sensitive to changes in international settlement rates, changes in the ratios
between outgoing and incoming traffic and foreign currency fluctuations.
International rates charged to customers are likely to decrease in the future
for a variety of reasons, including increased competition between existing
carriers, new entrants into niche markets and the consummation of joint ventures
among large international carriers that facilitate targeted pricing and cost
reductions. In addition, the Company's business could be adversely affected by a
reversal in the current trend toward deregulation of government-owned
telecommunications carriers. There can be no assurance that the Company will be
able to increase its traffic volume or reduce its operating costs sufficiently
to offset any resulting rate decreases.
DEPENDENCE ON AVAILABILITY OF TRANSMISSION FACILITIES
The future profitability of the Company will depend in part on its ability
to obtain transmission facilities on a cost-effective basis. Because digital
undersea fiber optic cables typically take several years to plan and construct,
carriers generally make investments based on a forecast of anticipated traffic.
The Company does not control the planning or construction of digital undersea
fiber optic transmission facilities and must seek access to such facilities
through partial ownership positions. If ownership positions are not available,
the Company must seek access to such facilities through lease arrangements on
negotiated terms that may vary with industry and market conditions. The Company
currently has partial ownership interests in 14 digital undersea fiber optic
cable systems, and leases capacity in one such cable system. In addition, unlike
AT&T Communications, Inc. ("AT&T"), MCI Telecommunications Corporation ("MCI"),
Sprint Corporation ("Sprint") and WorldCom, Inc., ("WorldCom"), the Company does
not have direct access from its gateway switches to the digital undersea fiber
optic cable heads, and is required to lease these facilities from these
competitors of the Company. The cost of leasing access from the gateway switches
to the digital undersea fiber optic cable heads is currently approximately 0.5%
of the Company's revenue. There can be no assurance of
7
<PAGE> 10
continued availability of transmission facilities or access to digital undersea
fiber optic cable heads on economically viable terms. See
"Business -- International Network."
COMPETITION
The international telecommunications industry is highly competitive and
subject to the introduction of new services facilitated by advances in
technology. International telecommunications providers compete on the basis of
price, customer service, transmission quality, breadth of service offerings and
value-added services. The U.S.-based international telecommunications services
market is dominated by AT&T, MCI and Sprint. The Company also competes with
WorldCom and other carriers in certain markets. As the Company's network expands
to serve a broader range of customers, Pacific Gateway expects to encounter
increasing competition from these and other major domestic and international
communications companies, many of which may have significantly greater resources
and more extensive domestic and international communications networks than the
Company. Moreover, the Company is likely to be subject to additional competition
as a result of the formation of global alliances among the largest
telecommunications carriers. Recent examples of such alliances include AT&T's
alliance with Unisource, known as "Uniworld," MCI's alliance with British
Telecom, known as "Concert," and Sprint's alliance with Deutsche Telekom and
France Telecom, known as "Global One." The Company also faces competition from
companies offering resold international telecommunications services. The Company
expects that competition from such resellers will increase in the future in
tandem with increasing deregulation of telecommunications markets worldwide.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite transmission capacity for services similar to those
provided by the Company. Such technologies include satellite-based systems, such
as the proposed Iridium and GlobalStar systems, utilization of the Internet for
international voice and data communications and digital wireless communication
systems such as personal communications services ("PCS"). The Company is unable
to predict which of many possible future product and service offerings will be
important to maintain its competitive position or what expenditures will be
required to develop and provide such products and services. There can be no
assurance that the Company will be able to maintain its competitive position in
the future.
With the recent grants by the Federal Communications Commission (the "FCC")
of AT&T's petitions to be classified as a non-dominant carrier in the domestic
interstate and international markets, only certain domestic local exchange
carriers continue to be classified as dominant carriers. As a consequence of its
new classification, AT&T has obtained relaxed pricing restrictions and relief
from other regulatory constraints, including reduced tariff notice requirements,
which should make it easier for AT&T to compete with alternative carriers such
as the Company in the interstate, domestic interexchange market as well as the
international market. AT&T's reclassification as a non-dominant carrier for
international services could have an adverse effect on the Company because
certain regulations, such as the price cap regulation and extended tariff notice
periods, applicable to AT&T as a dominant carrier will no longer apply. These
reduced regulatory requirements could make it easier for AT&T to compete with
the Company. Nonetheless, the Commission placed certain conditions on AT&T's
reclassification to promote the development of vigorous competition in the
international services marketplace. Significantly, AT&T must (1) not raise its
international residential switched voice service rates for three years, (2)
assist competing U.S. carriers in obtaining nondiscriminatory accounting rates,
(3) assist the FCC's efforts to monitor the competitive impact of AT&T's global
alliances, and improve the maintenance, restoration, provisioning, and access to
international submarine cable facilities.
Because the Company's business is focused primarily in the international
market, AT&T's domestic non-dominant status should not have an adverse impact on
the Company's business. The FCC has also initiated a new proceeding to consider,
among other issues, whether regulation of domestic interexchange services should
be modified in light of AT&T's reclassification. In addition, the recently
enacted Telecommunications Act of 1996 (the "Telecommunications Act"), which
substantially revises the Communications Act of 1934 (the "Communications Act"),
permits and is designed to promote additional competition in the intrastate,
interstate and international telecommunications markets by both U.S.-based and
foreign companies, including the Regional Bell Operating Companies ("RBOCs").
RBOCs, among other existing or potential competitors
8
<PAGE> 11
of the Company, have significantly more resources than the Company. See
"Business -- Competition" and "Business -- Government Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of Howard A. Neckowitz, Chairman of
the Board, President and Chief Executive Officer, Gail E. Granton, Chief
Financial Officer, Executive Vice President, International Business Development
and Secretary, Ronald D. Anderson, Vice President, Operations and Engineering,
and Robert F. Craver, Senior Vice President, International Relations, as well as
a group of employees with long-standing industry relationships and technical
knowledge of the Company's operations. The loss of the services of one or more
of these individuals could materially and adversely affect the business of the
Company and its future prospects. The Company has entered into employment
agreements with Messrs. Neckowitz, Anderson and Craver, and Ms. Granton. These
agreements generally provide, with certain limited exceptions, that the officer
cannot render services to another person or entity without the prior written
consent of the Board of Directors of the Company or engage in any activity which
conflicts or interferes in any material way with the performance of his or her
duties with the Company during the term of the agreement (which terms range from
two to four years) and during the separation period following the officer's
termination of employment prior to the end of the term of the agreement so long
as the officer is receiving a severance payment from the Company. Each agreement
provides that the officer may terminate the agreement during the separation
period following termination of employment, thus terminating the officer's
obligation not to compete as well as the Company's obligation to pay severance.
The Company does not maintain key person life insurance on any of its officers
or employees. The Company's future success will also depend on its ability to
attract and retain additional management, technical and sales personnel required
in connection with the growth and development of its business. See "Management."
CAPITAL EXPENDITURES; POTENTIAL NEED FOR ADDITIONAL FINANCING
The facilities-based telecommunications industry requires substantial
capital investment in switching and peripheral equipment and digital undersea
fiber optic cables. Growth in the number of minutes transmitted, international
locations and customers served by the Company will require additional investment
in equipment and facilities. While the Company believes that the proceeds of
this Offering, combined with other existing and anticipated sources of
liquidity, should be sufficient to fund its capital requirements for the
foreseeable future, certain events may occur that would require the Company to
obtain additional financing. Such events could include faster than expected
growth or lower than anticipated funds generated from operations. There can be
no assurance that the Company will be able to raise additional financing, or, if
raised, that the terms of such financing will be favorable to the Company.
GOVERNMENT REGULATION
The Company's business is subject to various federal laws, regulations,
regulatory actions and court decisions which may have negative effects on the
Company. The Company's interstate and international facilities-based and resale
services are subject to regulation by the FCC, and regulations promulgated by
the FCC are subject to change in the future. The Company may also be subject to
regulation in foreign countries in connection with certain of its business
activities. For example, the Company's use of transit agreements or
arrangements, if any, may be affected by laws or regulations in either the
transited or terminating foreign jurisdiction. There can be no assurance that
foreign countries will not adopt laws or regulatory requirements that could
adversely affect the Company. There can be no assurance that future regulatory,
judicial and legislative changes will not have a material adverse effect on the
Company or that regulators or third parties will not raise material issues with
regard to the Company's compliance with applicable regulations.
The FCC recently further streamlined its regulation of non-dominant
international carriers to provide that their tariffs and any revisions thereto
are effective upon one day's notice in lieu of the previous 14-day notice
period. The Company has filed international tariffs (for switched and private
line services) with the FCC. The Company has also filed a domestic tariff with
the FCC. With respect to international services, the Company has obtained
facilities-based Section 214 authorizations to operate its channels of
communication
9
<PAGE> 12
via satellites and undersea fiber optic cables. The FCC recently reduced the
filing requirements for facilities-based authorizations. Section 214 resale
authority is also required to resell international services. The Company has
obtained all required authorizations from the FCC to use its various
transmission media for the provision of international switched services and
international private line services. In addition, the FCC is presently
considering certain international policy issues in several rulemaking
proceedings and in response to specific applications and petitions filed by
other telecommunications carriers. The resolution of these proceedings could
have an adverse effect on the Company's business.
The Company is also required to conduct its international business in
compliance with the FCC's international settlements policy (the "ISP"). The ISP
establishes the permissible boundaries for U.S.-based carriers and their foreign
counterparts to settle the cost of terminating each other's traffic over their
respective networks. There can be no assurance that the FCC will not change the
ISP or that any such change will not have a material adverse effect on the
Company's business.
FOREIGN OWNERSHIP
The Communications Act limits the ownership of an entity holding a common
carrier radio license by non-U.S. citizens, foreign corporations and foreign
governments. The Company does not currently hold any radio licenses. These
ownership restrictions currently do not apply to non-radio facilities, such as
fiber optic cable. There can be no assurance, however, that foreign ownership
restrictions will not be imposed on the operation of non-radio facilities used
for the provision of international services. The FCC recently adopted new rules
relating to the entry and participation of foreign-affiliated entities in the
U.S. telecommunications market. These rules also reduce international tariff
notice requirements for dominant, foreign-affiliated carriers from 45 days'
notice to 14 days' notice. Such reduced tariff notice requirements may make it
easier for dominant, foreign-affiliated carriers to compete with the Company.
The recently enacted Telecommunications Act partially amends existing
restrictions on the foreign ownership of radio licenses. In particular, the
Telecommunications Act allows corporations with non-U.S. citizen officers or
directors to hold radio licenses. Other non-U.S. ownership restrictions,
however, remain unchanged. See "Business -- Government Regulation -- Foreign
Ownership." The Company cannot predict the effect on the Company of the
Telecommunications Act or other new legislation or regulations which may become
applicable to the Company.
FEDERAL LEGISLATION
The Telecommunications Act, which substantially revises the Communications
Act, was recently enacted by Congress and signed into law by the President of
the United States. The legislation is designed to promote competition in all
telecommunications markets by, among other things, permitting the FCC to relax
regulations for local exchange carriers and other telecommunications carriers
where the public interest and competition warrant. To the extent such
flexibility is provided, the Company's ability to compete for certain services
may be adversely affected. The legislation also provides specific guidelines
under which the RBOCs can provide in-region long distance services. Under the
Telecommunications Act, RBOCs are authorized to provide out-of-region services,
which permit the RBOCs and other carriers to provide domestic and international
long distance services. The FCC has proposed rules to govern the entry of RBOCs
into the out-of-region interstate, interexchange market. Among other things, the
FCC has proposed to allow affiliates of RBOCs that provide out-of-region
interstate, interexchange service to be regulated as non-dominant carriers,
under certain circumstances. The Company's business could be adversely affected
by competition from the RBOCs, which typically have greater resources than the
Company, and from other carriers that have expanded opportunities to provide
domestic and international services.
The Telecommunications Act also imposes certain requirements on all
telecommunications carriers to facilitate the entry of new telecommunications
providers. All carriers must permit interconnection of their networks with other
carriers and may not deploy network features and functions that interfere with
interoperability. In addition, the Telecommunications Act requires all
telecommunications providers to contribute equitably to a Universal Service
Fund, although the FCC may exempt an interstate carrier or class of carriers if
their contribution would be minimal. There can be no assurance that the Company
would be exempt from contributing to a Universal Service Fund.
10
<PAGE> 13
Certain provisions of the Telecommunications Act could materially affect
the growth and operation of the telecommunications industry and the services
provided by the Company. There are numerous rulemakings to be undertaken by the
FCC which will interpret and implement the Telecommunications Act's provisions.
Further, certain of the Telecommunications Act's provisions have been, and
likely will continue to be, judicially challenged. The Company is unable to
predict the outcome of such rulemakings or litigation or the substantive effect
(financial or otherwise) of the new legislation and the rulemakings on the
Company.
There can be no assurance that current laws and FCC and other regulations
will not be amended or modified. Any such amendment or modification could have
an adverse effect on the Company's business.
RELATIONSHIP WITH MATRIX
Matrix Telecom, Inc. ("Matrix") is currently Pacific Gateway's largest
customer, accounting for approximately 44% and 22% of the Company's revenues in
1994 and 1995, respectively and approximately 15% during the three months ended
March 31, 1996. The loss of Matrix as a customer would have an immediate and
material adverse effect on the Company's business. Mr. Neckowitz, the Chairman
of the Board, President and Chief Executive Officer of the Company, is the
Chairman of the Board of Matrix, and Ronald L. Jensen, a member of the Board of
Directors of the Company, is a director of Matrix. The largest shareholders of
Matrix, Mr. Jensen, members of his family, Mr. Neckowitz and Ms. Granton, Chief
Financial Officer, Executive Vice President, International Business Development
and Secretary of the Company, are also the majority shareholders of Pacific
Gateway. Due to their ownership interests in Matrix and the close connection
between the business of the Company and the operations of Matrix, the interests
of Mr. Jensen, Mr. Neckowitz and Ms. Granton may conflict with the Company's
interest in certain circumstances. Pursuant to an agreement dated as of May 1,
1995, Matrix agreed to send substantially all its international
telecommunications traffic and its domestic telecommunications traffic in the
Northeast and California through the Company's network until November 1996,
subject to earlier termination if the Company does not match a bona fide
competitive pricing offer Matrix may receive from a third party. The term of the
agreement is automatically extended on a month-to-month basis unless either
party gives the other 30 days' notice of termination. There can be no assurance
whether or on what terms such agreement will be continued. See "Certain
Relationships and Related Transactions" and "Business -- Customers."
CONCENTRATION OF CREDIT RISK
Seven of the Company's customers accounted for approximately 49% of gross
accounts receivable as of March 31, 1996. The Company performs ongoing credit
evaluations of its customers but generally does not require collateral to
support accounts receivable from its customers. The Company's allowance for
doubtful accounts is based on current market conditions. Losses on uncollectible
accounts have consistently been insignificant and within management's
expectation.
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of preferred stock (the "Preferred Stock") and to determine the price,
rights, preferences and privileges of those shares without any further vote or
actions by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of shares of
Preferred Stock, while potentially providing desirable flexibility in connection
with possible acquisitions and serving other corporate purposes, could have the
effect of making it more difficult for a third party to acquire, or may
discourage a third party from attempting to acquire, a majority of the
outstanding voting stock of the Company. The Company has no present intention to
issue shares of Preferred Stock. In addition, the Company is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law
(the "Delaware Law"), which will prohibit the Company from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company. Furthermore, certain provisions
of the Company's bylaws, including
11
<PAGE> 14
provisions that provide that the exact number of directors shall be determined
by a majority of the Board of Directors and that the vacancies on the Board of
Directors may be filled by a majority vote of the directors then in office,
though less than a quorum, may have the effect of delaying or preventing changes
in control or management of the Company, which could adversely affect the market
price of the Company's Common Stock. See "Management" and "Description of
Capital Stock."
CONTROL OF COMPANY BY EXISTING STOCKHOLDERS
The Company currently has only one non-executive director. Upon the
consummation of this Offering, the existing stockholders of the Company in the
aggregate will own and control approximately 72.3% of the outstanding shares of
Common Stock. As a result of their ownership of shares of Common Stock, the
existing stockholders of the Company, acting together, will be able to control
the management and policies of the Company. Mr. Neckowitz, the Chairman of the
Board, President and Chief Executive Officer of the Company, has proxies to vote
a total of 8,900,860 shares of Common Stock held by certain members of the
Jensen family. These proxies, combined with the shares owned by Mr. Neckowitz,
give him the right to vote approximately 58.66% of the outstanding shares of
Common Stock of the Company after this Offering. See "Principal and Selling
Stockholders."
The Company has a revolving credit facility with Ronald L. Jensen, a
principal stockholder. The Company intends to use a portion of the proceeds of
this Offering to repay all existing indebtedness under this facility. At March
31, 1996, there was $5.4 million outstanding under the facility. See "Use of
Proceeds" and "Certain Relationships and Related Transactions -- Agreements with
Directors and Executive Officers."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock in the public market following this Offering
by the current stockholders of the Company could adversely affect the market
price for the Common Stock. Upon expiration of the lock-up agreements with the
Underwriters 180 days after the date of this Prospectus (or earlier upon the
written consent of PaineWebber Incorporated, one of the Representatives of the
Underwriters), 5,568,000 shares of Common Stock outstanding prior to this
Offering may be sold in the public market, subject to limitations contained in
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act").
The volume limitations of Rule 144 will apply to the sale of these shares as
long as the shares are held by affiliates of the Company. Following this
Offering, sales of substantial amounts of shares of Common Stock in the public
market, or even the potential for such sales, could adversely affect the
prevailing market price of the Common Stock and impair the Company's ability to
raise capital through the sale of equity securities. See "Principal and Selling
Stockholders" and "Shares Eligible for Future Sale."
DILUTION
KDD and the other purchasers of Common Stock in this Offering will
experience immediate and substantial dilution in net tangible book value of
$9.53 per share and $10.51 per share, respectively (assuming an initial public
offering price of $14.00 per share). See "Dilution."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There is currently no public market for the Common Stock. There can be no
assurance that an active public market for the Common Stock will develop or
that, if a public market develops, the market price for the Common Stock will
equal or exceed the initial public offering price set forth on the cover page of
this Prospectus. For a discussion of the factors to be considered in determining
the initial public offering price, see "Underwriting."
Historically, the market prices for securities of emerging companies in the
telecommunications industry have been highly volatile. Future announcements
concerning the Company or its competitors, including results of operations,
technological innovations, government regulations, proprietary rights or
significant litigation, may have a significant impact on the market price of the
Company's Common Stock.
12
<PAGE> 15
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and has no
plans to do so in the foreseeable future. The Company intends to retain
earnings, if any, to develop and expand its business. See "Dividend Policy."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
to be sold by the Company in this Offering (assuming an initial public offering
price of $14.00 per share) are estimated to be $63.1 million ($63.6 million if
the Underwriters' over-allotment option is exercised in full), after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company. The Company will not receive any of the proceeds from
the sale of shares of Common Stock by the Selling Stockholders.
The Company intends to use (i) approximately $35 million of the net
proceeds to finance the expansion of its international network facilities on new
and existing routes, including investments in digital undersea fiber optic
cables, switches and related equipment, (ii) approximately $5.4 million to repay
existing indebtedness to Ronald L. Jensen, a principal stockholder of the
Company and $3.0 million to repay existing indebtedness to a commercial lender
and (iii) the remaining proceeds to invest in potential joint ventures,
strategic alliances or acquisitions and for working capital and general
corporate purposes. Although the Company is currently evaluating several
potential investment opportunities, including joint ventures or strategic
alliances with foreign carriers in Pacific Rim, Europe and Latin America, and
the acquisition of one or more marketing organizations with a corporate customer
base, the Company is not currently negotiating any acquisition transaction.
Pending the use of the net proceeds for the purposes described above, the
Company will invest such proceeds in short-term, interest-bearing, investment
grade securities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Company Strategy" and
"Certain Relationships and Related Transactions."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to do so in the foreseeable future. The Company
anticipates that all future earnings, if any, generated from operations will be
retained by the Company to develop and expand its business. Any future
determination with respect to the payment of dividends will be at the
discretion of the Board of Directors and will depend upon, among other things,
the Company's operating results, financial condition and capital requirements,
the terms of then-existing indebtedness, general business conditions and such
other factors as the Board of Directors deems relevant. In addition, the terms
of the Company's revolving credit facility with a commercial lender, which is
collateralized by its accounts receivable, prohibits the payment of cash
dividends without the lender's consent.
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<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996 and as adjusted to reflect the sale of 4,900,000 shares of Common
Stock offered by the Company hereby (assuming an initial public offering price
of $14.00 per share), after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company, and the
application of the estimated net proceeds therefrom as described under "Use of
Proceeds." This table should be read in conjunction with the Financial
Statements and related Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................... $ 3,691 $58,407
======= =======
Revolving line of credit(1)............................................. $ 3,000 --
Revolving line of credit, related party(1).............................. 5,420 --
Stockholders' equity:
Preferred Stock, $.0001 par value, 1,000,000 shares authorized; no
shares issued and outstanding; and no shares issued and outstanding
as adjusted........................................................ -- --
Common Stock, $.0001 par value, 25,000,000 shares authorized;
14,100,000 shares issued and outstanding; and 19,000,000 shares
issued and outstanding as adjusted(2).............................. 1 2
Additional paid in capital............................................ 940 64,075
Retained earnings..................................................... 2,316 2,316
------- -------
Stockholders' equity............................................. 3,257 66,393
------- -------
Total capitalization.......................................... $11,677 $66,393
======= =======
</TABLE>
- ---------------
(1) Reflects the repayment of indebtedness to a commercial lender and to a
principal stockholder of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Certain Relationships and Related Transactions."
(2) Excludes the purchase by the Company of 143,560 shares from a former
employee in April 1996 and 1,200,000 shares reserved for issuance under the
Company's 1995 Stock Option Plan, of which 539,170 shares of Common Stock
were issuable upon exercise of outstanding options at March 31, 1996, and
400,000 shares reserved at March 31, 1996 for issuance under the Company's
1995 Stock Purchase Plan. See "Management -- Stock Plans."
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<PAGE> 17
DILUTION
The net tangible book value of the Company at March 31, 1996 was $3,257,000
or $0.23 per share of Common Stock. "Net tangible book value" per share
represents the amount of total tangible assets of the Company reduced by the
amount of its total liabilities and divided by the total number of shares of
Common Stock outstanding. Without taking into account any other change in such
pro forma net tangible book value after March 31, 1996, other than to give
effect to the sale by the Company of 3,100,000 shares offered hereby at an
assumed initial public offering price of $14.00 per share and 1,800,000 shares
of Common Stock offered by the Company hereby to KDD at a price equal to the
initial public offering price per share, net of underwriting discounts and
commissions, and receipt of the estimated net proceeds therefrom, the pro forma
net tangible book value of the Company at March 31, 1996 would have been
approximately $66,393,000, or $3.49 per share. This represents an immediate
increase in such net tangible book value of $3.26 per share to existing
stockholders and an immediate dilution of $9.53 per share to KDD and $10.51 per
share to the other investors in the Offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $14.00
Net tangible book value per share before this Offering............ $0.23
Increase in net tangible book value per share attributable to new
investors...................................................... 3.26
-----
Pro forma net tangible book value per share after this Offering..... 3.49
------
Dilution in net tangible book value per share to new investors...... $10.51
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the differences between the existing stockholders, KDD and the other investors
in the Offering with respect to the number of shares of Common Stock purchased
from the Company, the total consideration paid to the Company and the average
price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)...... 14,100,000 74.2% $ 941,734 1.4% $ 0.07
KDD........................... 1,800,000 9.5 23,436,000 34.6 $ 13.02
Other investors in the
Offering(1)................. 3,100,000 16.3 43,400,000 64.0 $ 14.00
---------- ------ ----------- -----
Total............... 19,000,000 100.0% $67,777,734 100.0%
========== ====== =========== =====
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in this Offering will reduce the number of
shares held by existing stockholders to 13,733,000 shares or approximately
72.3% of the total number of shares of Common Stock to be outstanding after
this Offering, and will increase the number of shares to be purchased by
investors in the Offering and KDD to 5,267,000 shares or approximately 27.7%
of the total number of shares of Common Stock to be outstanding after this
Offering. These amounts and percentages exclude the purchase by the Company
of 143,560 shares from a former employee in April 1996.
The Average Price Per Share for KDD is less than the Average Price Per
Share for other investors in this Offering because no underwriting discounts and
commissions will be paid on account of shares of Common Stock sold to KDD. The
net proceeds per share to the Company, however, will be identical for all shares
sold in the Offering.
The above computations assume no exercise of the Underwriters'
over-allotment option and no exercise of any outstanding options. At March 31,
1996, there were outstanding options to purchase 539,170 shares of Common Stock
at a weighted average exercise price of $8.67 per share. To the extent
outstanding options are exercised, there will be further dilution to new
investors. See "Management -- Stock Plans," "Management -- Compensation of
Directors" and Note 7 of Notes to Financial Statements.
15
<PAGE> 18
SELECTED FINANCIAL DATA
The following selected financial data for the fiscal years ended December
31, 1992, 1993, 1994 and 1995 have been derived from financial statements of the
Company which have been audited by Coopers & Lybrand L.L.P., independent
accountants, and which for the years ended December 31, 1993, 1994 and 1995 are
included elsewhere in this Prospectus. The selected financial data for the
period from the Company's inception on August 8, 1991 through December 31, 1991
and the three-month periods ended March 31, 1995 and 1996 have been derived from
unaudited financial statements which, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the financial position and results of operations of the
Company for such unaudited period. The financial statements for the three-month
periods ended March 31, 1995 and 1996 are also included elsewhere in the
Prospectus. The results of operations for the three-month periods ended March
31, 1995 and 1996 are not necessarily indicative of results that may be expected
for the full year.
The data set forth below are qualified by reference to, and should be read
in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and related
Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION(1) THREE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------------ ------- ------- ------- -------- ------- --------
(IN THOUSANDS EXCEPT PER SHARE AND REVENUES PER MINUTE OF USE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 124 $ 800 $ 5,048 $20,913 $ 76,416 $12,125 $ 32,240
Cost of long distance services................ 37 587 4,036 17,196 66,346 10,042 29,130
-------- ------- ------- ------- -------- ------- --------
Gross profit................................ 87 213 1,012 3,717 10,070 2,083 3,110
Selling, general and administrative
expenses.................................... 113 531 1,008 2,273 5,467 992 1,956
Depreciation.................................. 1 17 104 410 1,124 189 385
-------- ------- ------- ------- -------- ------- --------
Operating income (loss)..................... (27) (335) (100) 1,034 3,479 902 769
Interest expense.............................. -- -- 12 193 538 111 152
-------- ------- ------- ------- -------- ------- --------
Income (loss) before income taxes........... (27) (335) (112) 841 2,941 791 617
Provision for income taxes.................... -- -- -- 205 1,155 311 250
-------- ------- ------- ------- -------- ------- --------
Net income (loss)........................... $ (27) $ (335) $ (112) $ 636 $ 1,786 $ 480 $ 367
======== ======= ======= ======= ======== ======= ========
Net income (loss) per share................... $ -- $ (0.03) $ (0.01) $ 0.04 $ 0.12 $ 0.03 $ 0.03
======== ======= ======= ======= ======== ======= ========
Pro forma net income per share(2)............. $ 0.15 $ 0.04 $ 0.03
======== ======= ========
Weighted average shares outstanding........... 10,070 11,128 14,300 14,300 14,300 14,300 14,300
OTHER OPERATING DATA:
EBITDA(3)..................................... $ (26) $ (318) $ 4 $ 1,444 $ 4,603 $ 1,091 $ 1,154
Capital expenditures.......................... $ 80 $ 66 $ 1,542 $ 3,745 $ 7,233 $ 242 $ 4,121
Minutes of use................................ N/A N/A 13,580 61,690 252,925 38,667 108,888
Revenues per minute of use.................... N/A N/A $ 0.37 $ 0.34 $ 0.30 $ 0.31 $ 0.30
Estimated return traffic revenue backlog(4)... -- -- $ 158 $ 986 $ 6,142 $ 2,052 $ 8,400
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
---- ------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 1 $ 129 $ 63 $ 9 $ 1,792 $ 3,691
Working capital (deficit)............................. 195 37 (865) 242 (6,412) (6,973)
Total assets.......................................... 374 1,007 4,130 12,301 29,756 41,123
Revolving line of credit.............................. -- -- -- -- 3,000 3,000
Revolving line of credit, related party............... -- -- 718 4,488 2,420 5,420
Stockholders' equity.................................. 101 580 468 1,104 2,891 3,257
</TABLE>
- ---------------
(1) The Company was incorporated in Delaware and commenced operations on August
8, 1991.
(2) Assumes that a portion of the proceeds are used to repay the amounts
outstanding under the Company's two revolving lines of credit and that the
interest expense, net of taxes, is eliminated.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization expense. EBITDA does not represent cash flows
as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all of the
Company's cash needs. EBITDA is a financial measure commonly used in the
Company's industry and should not be considered in isolation or as a
substitute for net income, cash from operating activities or other measures
of liquidity determined in accordance with generally accepted accounting
principles.
(4) Represents revenue from delayed proportional return traffic actually
received during the six months following the end of the years ended December
31, 1993 and 1994 and the three months ended March 31, 1995. For the year
ended December 31, 1995, the amount represents the actual return revenue of
$3,042 during the three months ended March 31, 1996 and management's
estimate of revenue to be received from delayed proportional return traffic
during the three month period ending June 30, 1996. For the three months
ended March 31, 1996, this amount represents management's estimate of
revenue to be received from delayed proportional return traffic during the
six months ending September 30, 1996. Management's estimate of the revenue
to be received from delayed proportional return traffic are based on the
anticipated ratios between outgoing and incoming traffic and the anticipated
settlement rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 including statements regarding expected future revenue from
delayed proportional return traffic from foreign partners pursuant to certain
operating agreements. The Company's revenues and results of operations are
difficult to forecast and could differ materially from those projected in the
forward-looking statements as a result of numerous factors, including, without
limitation, changes in international settlement rates, changes in the ratios
between outgoing and incoming traffic, foreign currency fluctuations,
termination of certain operating agreements, and other factors discussed under
"Risk Factors" above.
OVERVIEW
Pacific Gateway was founded in August 1991 to capitalize on the significant
growth opportunities in the international telecommunications services market.
The Company operates an international network consisting of international and
domestic switching facilities in Los Angeles and New York, partial ownership
interests in 14 digital undersea fiber optic cable systems in the Atlantic,
Pacific and Caribbean regions and operating agreements with foreign carriers
that provide for the exchange of telecommunications traffic. As of March 31,
1996, the Company had operating agreements with 25 foreign carriers in 19
countries around the world, which provide for the exchange of telecommunications
traffic with these carriers. The Company's revenues are derived primarily from
the sale of international telecommunications services to U.S.-based carriers on
a wholesale basis and from the traffic received by the Company under operating
agreements with its foreign partners. Substantially all the Company's remaining
revenues are derived from the sale of domestic switched services to Matrix. As
of March 31, 1996, the Company provided its services to approximately 57
U.S.-based long distance carriers.
The majority of the Company's costs are variable and consist of payments to
foreign partners for the termination of traffic, payments to other providers of
long distance services for transmission services to countries where the Company
does not have operating agreements, payments to domestic carriers for the
termination of overseas-originated traffic in the United States where the
Company does not have its own domestic network and payments to local exchange
companies for access charges for originating and terminating international and
domestic traffic where the Company has its own domestic network. The Company
generally enters new markets by establishing operating agreements with foreign
partners and by investing in or leasing digital undersea fiber optic cable in
order to cost-effectively carry and terminate traffic. The Company seeks to have
partial ownership positions in cable systems where it believes its customers'
demand will justify the investment in those fixed assets. Although the Company
is generally able to earn a higher gross margin on traffic routed through its
owned circuits relative to leased routes, Pacific Gateway will continue to buy
usage-sensitive transmission capacity on a per minute basis from other U.S.
facilities-based international carriers on routes where traffic volumes are
relatively low or inconsistent, as well as to manage overflow traffic on busy
routes.
Under its operating agreements, the Company typically agrees to send
U.S.-originated traffic to its foreign partners and its foreign partners agree
to send a proportionate amount of return traffic via the Company's network at
negotiated rates. These agreements contractually obligate the foreign partners
to adhere to the policy of the FCC, whereby traffic from the foreign country is
routed to U.S.-based international carriers, such as the Company, in the same
proportion as traffic carried into the foreign country. The Company and its
foreign partners typically settle the amounts owed to each other in cash on a
net basis, subsequent to the receipt of return traffic. The Company records the
amount due to the foreign partner as an expense in the period the Company's
traffic is delivered.
Of the Company's 25 operating agreements, 10 provide that the Company
generally must wait up to six months before it actually receives the
proportional return traffic. The delay period between the Company's delivery of
U.S.-originated traffic and the receipt of the proportional return traffic
enables the carriers to determine the appropriate traffic exchange ratio based
on the Company's relative market share on a particular
17
<PAGE> 20
route. As a result, the Company delivers outbound traffic and generally
recognizes a loss in the period in which it sells to its customers because
amounts due to foreign partners generally exceed revenues from customers on
outbound traffic. The Company then recognizes revenues with minimal associated
cost on the associated return traffic on a six month delayed basis. The rates
that the Company charges its customers are established at a level such that the
Company expects to recognize a gross profit on the combined transactions.
For the 10 agreements which provide for delayed return traffic, the Company
had previously deferred a portion of the costs associated with outbound traffic
until the receipt of the proportional return traffic. The Company has restated
its financial statements so that the costs associated with the outbound call are
recorded as an expense in the period the Company's traffic is delivered. The
impact of this restatement was to reduce income before income taxes, net income
and income per share by $5.7 million, $3.5 million, and $0.25 in 1995 and
$348,762, $211,282, and $0.02 in 1994, respectively.
The costs associated with operating agreements that provide for delayed
proportional return traffic have increased rapidly over time as the Company has
added new operating agreements and generally increased its volumes of outbound
traffic. Revenues from delayed proportional return traffic have grown on a six
month delayed basis consistent with the delayed settlement process described
above. Based on U.S.-originated traffic which the Company delivered during the
six months ended March 31, 1996, for which the Company recorded costs of $6.8
million in the fourth quarter of 1995 and $11.0 million in the first quarter of
1996, the Company estimates that the proportional return traffic it will receive
will result in revenues of approximately $8.4 million during the six months
ending September 30, 1996.
The Company's selling, general and administrative expenses consist
primarily of personnel costs and selling commissions related to its U.S.
wholesale business. Certain of the Company's data processing services are
provided by Matrix, the Company's largest customer, and are included in selling,
general and administrative expenses based on a charge which approximates the
cost of these services. See "Certain Relationships and Related Transactions."
The Company has developed and is currently in the process of testing its own
customized billing and management information system. See "Business -- Billing
and Management Information Systems."
18
<PAGE> 21
RESULTS OF OPERATIONS
The following table provides a breakdown of the Company's statement of
operations on an actual and percentage of revenues basis for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------- -----------------------------------
1993 1994 1995 1995 1996
-------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $5,048 100.0% $20,913 100.0% $76,416 100.0% $12,125 100.0% $32,240 100.0%
Cost of long distance
services.................... 4,036 79.9 17,196 82.2 66,346 86.8 10,042 82.8 29,130 90.3
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit................ 1,012 20.1 3,717 17.8 10,070 13.2 2,083 17.2 3,110 9.7
Selling, general and
administrative expenses..... 1,008 20.0 2,273 10.9 5,467 7.2 992 8.2 1,956 6.1
Depreciation.................. 104 2.1 410 2.0 1,124 1.5 189 1.6 385 1.2
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating income (loss)..... (100) (2.0) 1,034 4.9 3,479 4.5 902 7.4 769 2.4
Interest expense.............. 12 0.2 193 0.9 538 0.7 111 0.9 152 0.5
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Income (loss) before income
taxes..................... (112) (2.2) 841 4.0 2,941 3.8 791 6.5 617 1.9
Provision for income taxes.... -- -- 205 1.0 1,155 1.5 311 2.6 250 0.8
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Net income (loss)........... $ (112) (2.2)% $ 636 3.0% $ 1,786 2.3% $ 480 3.9% $ 367 1.1%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
Other Operating Data:
Revenues from delayed return
traffic(1)................ $ 97 $ 412 $ 4,462 $ 194 $ 3,042
====== ======= ======= ======= =======
Estimated return traffic
revenue backlog(2)........ $ 158 $ 986 $ 6,142 $ 2,052 $ 8,400
====== ======= ======= ======= =======
</TABLE>
- ---------------
(1) Represents revenue from proportional return traffic under certain of the
Company's operating agreements which require the Company to wait up to six
months to receive the return traffic. The substantial majority of the direct
costs associated with such revenue is recognized up to six months in advance
of the receipt of the revenue.
(2) Represents revenue from delayed proportional return traffic actually
received during the six months following the end of the years ended December
31, 1993 and 1994 and the three months ended March 31, 1995. For the year
ended December 31, 1995, the amount represents the actual return revenue of
$3,042 during the three months ended March 31, 1996 and management's
estimate of revenue to be received from delayed proportional return traffic
during the three month period ending June 30, 1996. For the three months
ended March 31, 1996, this amount represents management's estimate of
revenue to be received from delayed proportional return traffic during the
six months ending September 30, 1996. Management's estimates of the revenue
to be received from delayed proportional return traffic are based on the
anticipated ratios between outgoing and incoming traffic and the anticipated
settlement rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Revenues: Total revenues in the three months ended March 31, 1996 increased
166% to $32.2 million from $12.1 million in the three months ended March 31,
1995. The increase was primarily the result of both increased sales to existing
customers, due to an increase in the number of operating agreements to 25 at
March 31, 1996 from 12 at March 31, 1995 and a 128% increase in the number of
wholesale carrier customers to 57 at March 31, 1996 from 25 at March 31, 1995.
The Company also received more return traffic from its foreign partners during
the three months ended March 31, 1996 with return traffic increasing to $3.0
million in the three months ended March 31, 1996 from $194,000 in the three
months ended March 31, 1995.
Gross Profit: Gross profit increased 48% to $3.1 million from $2.1 million
primarily due to increased revenues. As a percentage of revenues, gross profit
decreased from 17.2% in the prior period to 9.7% in the current period. This
percentage decrease was primarily the result of increased traffic on direct
routes where the Company must generally wait up to six months for the return
traffic. The amount of costs associated with operating agreements that provide
for delayed proportional return traffic increased to $11.0 million during the
three months ended March 31, 1996 from $1.6 million in the three months ended
March 31, 1995. This increase in costs represents growth in outbound traffic on
new and existing routes in advance of proportional return traffic, and is
expected to result in increased delayed proportional return traffic in the
following six months.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 100% to $2.0 million from $1.0 million. This
increase was due primarily to increased personnel and sales commission expenses.
The increase in personnel expenses was directly related to the increase in
employees to
19
<PAGE> 22
30 at March 31, 1996 from 18 at March 31, 1995. The increase in sales commission
expenses was primarily due to increased revenues. As a percentage of revenues,
selling, general and administrative expenses decreased from 8.2% in the prior
period to 6.1% in the current period.
Depreciation: Depreciation increased 104% to $385,000 from $189,000. As a
percentage of revenues, depreciation decreased from 1.6% in the prior period to
1.2% in the current period. The increase in dollar amount was primarily due to
depreciation of additional transmission facilities acquired during the last
three quarters of 1995.
Interest Expense: Interest expense increased 37% to $152,000 from $111,000.
This increase was a result of increased borrowing under the Company's revolving
credit facilities. See "Certain Relationships and Related Transactions."
Income Taxes: Income taxes decreased to $250,000 from $311,000, primarily
due to decreased operating income. The effective tax rate was 39.3% in 1995 and
40.5% in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues: Total revenues in 1995 increased 266% to $76.4 million from $20.9
million in 1994. The increase was primarily the result of both increased sales
to existing customers, due to an increase in the number of operating agreements
to 21 at December 31, 1995 from 12 at December 31, 1994 and a 193% increase in
the number of wholesale carrier customers to 44 at December 31, 1995 from 15 at
December 31, 1994. In addition to an increase in the revenue from Matrix to
$17.2 million in 1995 from $9.2 million in 1994, the Company also received more
return traffic from its foreign partners during 1995 with return traffic revenue
increasing to $4.5 million in 1995 from $412,000 in 1994. See "Certain
Relationships and Related Transactions."
Gross Profit: Gross profit increased 173% to $10.1 million from $3.7
million primarily due to increased revenues. As a percentage of revenues, gross
profit decreased from 17.8% in 1994 to 13.2% in 1995. This percentage decrease
was primarily the result of increased traffic on direct routes where the Company
must generally wait up to six months for the return traffic. The amount of costs
associated with operating agreements that provide for delayed proportional
return traffic during the year increased to $17.7 million in 1995 from $1.2
million in 1994. This increase in costs represents growth in outbound traffic on
new and existing routes in advance of proportional return traffic, and is
expected to result in increased delayed proportional return traffic in the
following six months.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 139% to $5.5 million from $2.3 million. This
increase was due primarily to increased personnel and sales commission expenses.
The increase in personnel expenses was directly related to the increase in
employees to 28 as of December 31, 1995 from 15 as of December 31, 1994. The
increase in sales commission expenses was primarily due to increased revenues.
Matrix provided certain data processing services to the Company for which the
Company incurred expenses of $166,000 and $35,000 in 1995 and 1994,
respectively. As a percentage of revenues, selling, general and administrative
expenses decreased from 10.9% in the prior period to 7.2% in the current period.
Depreciation: Depreciation increased 168% to $1.1 million from $410,115. As
a percentage of revenues, depreciation decreased to 1.5% in the current period
from 2.0% in the prior period. The increase in dollar amount was primarily due
to depreciation of additional transmission facilities and switching equipment
acquired in 1995.
Interest Expense: Interest expense increased 179% to $537,982 from
$192,979. This increase was a result of increased borrowings under the Company's
revolving credit facility with a principal stockholder of the Company, which
borrowings were used to finance the acquisition of long distance communications
equipment and ownership interests in digital undersea fiber optic cables. See
"Certain Relationships and Related Transactions."
20
<PAGE> 23
Income Taxes: Income taxes increased to $1.2 million from $205,000,
primarily due to increased operating income and a change in the effective tax
rate. The effective tax rate was 39.3% in 1995 and 24.4% in
1994. The lower 1994 rate reflects utilization of certain net operating loss
carryforwards.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues: Total revenues in 1994 increased 318% to $20.9 million from $5.0
million in 1993. This increase was primarily the result of a larger number of
minutes sold to new U.S. wholesale carrier customers that were added in 1994.
The Company tripled its base of U.S. wholesale customers during 1994 to 15 at
December 31, 1994 from 5 at December 31, 1993. The revenue from Matrix accounted
for $6.0 million of the increase in 1994, as revenue from Matrix increased to
$9.2 million in 1994 from $3.2 million in 1993.
Gross Profit: Gross profit increased 270% to $3.7 million from $1.0 million
primarily due to increased revenues. As a percentage of revenues, gross profit
decreased from 20.1% in 1993 to 17.8% in 1994. This percentage decrease was
primarily the result of increased traffic on direct routes where the Company
must generally wait up to six months for its proportional share of return
traffic. The amount of costs associated with the operating agreements that
provide for delayed proportional return traffic during the year increased to
$1.2 million in 1994 from $144,000 in 1993. This increase in costs represents
growth in outbound traffic on new and existing routes in advance of proportional
return traffic, and resulted in increased delayed proportional return traffic in
the first six months of 1995.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 130% to $2.3 million from $1.0 million. This
increase was primarily due to increased personnel and sales commission expenses.
The increase in personnel expenses was directly related to the increase in
personnel to 15 at December 31, 1994 from six at December 31, 1993. The increase
in sales commission expense was due to increased revenues. Beginning in 1994,
Matrix provided certain data processing services to the Company for which the
Company incurred expenses of $35,000 in 1994. As a percentage of revenues,
selling, general and administrative expenses decreased from 20.0% in 1993 to
10.9% in 1994.
Depreciation: Depreciation increased 293% to $410,115 from $104,241. As a
percentage of revenues, depreciation decreased to 2.0% in 1994 from 2.1% in
1993. The increase in the dollar amount was primarily due to depreciation of
additional transmission facilities and switching equipment acquired in 1994.
Interest Expense: Interest expense increased to $192,979 from $11,891. As a
percentage of revenues, interest expense increased from 0.2% in 1993 to 0.9% in
1994. This increase was a result of the interest on additional borrowings under
the Company's revolving credit facility which were used to finance additional
digital undersea fiber optic cable acquisitions during 1994.
Income Taxes: Income taxes were $205,000 in 1994. There was no income tax
expense in 1993 because the Company had an operating loss. The Company's
effective tax rate in 1994 was 24.4%, which reflected a combined federal and
state income tax rate of 39.5% less the utilization of net operating loss
carryforwards from prior years.
21
<PAGE> 24
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth statement of operations data for each of the
Company's last nine fiscal quarters and the percentage of the Company's revenues
represented by each line item reflected therein. This information is unaudited
and has been prepared on the same basis as the audited financial statements
contained herein and, in management's opinion, reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the periods presented. The operating results
for any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED:
-------------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
--------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............ $ 3,305 $3,947 $ 4,688 $8,973 $12,125 $17,560 $21,392 $25,339 $32,240
------- ------ ------- ------ ------- ------- ------- ------- -------
Cost of long
distance
service........... 2,815 3,268 3,637 7,476 10,041 15,154 18,904 22,247 29,130
------- ------ ------- ------ ------- ------- ------- ------- -------
Gross profit...... 490 679 1,051 1,497 2,084 2,406 2,488 3,092 3,110
Selling, general and
administrative
expenses.......... 303 411 591 968 993 1,295 1,536 1,643 1,956
Depreciation........ 39 65 145 161 189 221 300 414 385
------- ------ ------- ------ ------- ------- ------- ------- -------
Operating
income.......... 148 203 315 368 902 890 652 1,035 769
Interest expense.... 14 29 54 96 111 117 153 157 152
------- ------ ------- ------ ------- ------- ------- ------- -------
Income
before
income
taxes..... 134 174 261 272 791 773 499 878 617
Provision for income
taxes............. 32 43 64 66 311 303 196 345 250
------- ------ ------- ------ ------- ------- ------- ------- -------
Net
income.... 102 $ 131 $ 197 $ 206 $ 480 $ 470 $ 303 $ 533 $ 367
======= ====== ======= ====== ======= ======= ======= ======= =======
Net income
per
share..... $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.03 $ 0.03 $ 0.02 $ 0.04 $ 0.03
======= ====== ======= ====== ======= ======= ======= ======= =======
Other Operating
Data:
Revenues from
delayed return
traffic(1)...... $ 59 $ 97 $ 107 $ 149 $ 194 $ 792 $ 1,260 $ 2,216 $ 3,042
======= ====== ======= ====== ======= ======= ======= ======= =======
Estimated return
traffic revenue
backlog(2)...... $ 204 $ 256 $ 343 $ 986 $ 2,052 $ 3,476 $ 5,258 $ 6,142 $ 8,400
======= ====== ======= ====== ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES FOR THE QUARTER ENDED:
------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
--------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of long
distance
services.......... 85.2 82.8 77.6 83.3 82.8 86.3 88.4 87.8 90.3
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit...... 14.8 17.2 22.4 16.7 17.2 13.7 11.6 12.2 9.7
Selling, general and
administrative
expenses.......... 9.1 10.4 12.6 10.8 8.2 7.4 7.2 6.5 6.1
Depreciation........ 1.2 1.6 3.1 1.8 1.6 1.3 1.4 1.6 1.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating
income.......... 4.5 5.2 6.7 4.1 7.4 5.0 3.0 4.1 2.4
Interest expense.... .4 0.7 1.2 1.1 0.9 0.7 0.7 0.6 0.5
----- ----- ----- ----- ----- ----- ----- ----- -----
Income
before
income
taxes..... 4.1 4.5 5.5 3.0 6.5 4.3 2.3 3.5 1.9
Provision for income
taxes............. 1.0 1.1 1.4 0.7 2.6 1.7 0.9 1.4 0.9
----- ----- ----- ----- ----- ----- ----- ----- -----
Net
income.... 3.1% 3.4% 4.1% 2.3% 3.9% 2.6% 1.4% 2.1% 1.1%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Represents revenue from proportional return traffic under certain of the
Company's operating agreements which require the Company to wait up to six
months to receive the return traffic. The substantial majority of the direct
costs associated with such revenue is recognized up to six months in advance
of the receipt of the revenue.
(2) Represents revenue from delayed proportional return traffic actually
received during the six months following the end of the years ended December
31, 1993 and 1994 and the three months ended March 31, 1995. For the year
ended December 31, 1995, the amount represents the actual return revenue of
$3,042 during the three months ended March 31, 1996 and three months ended
March 31, 1996, the amounts represent management's estimate of revenue to be
received from delayed proportional return traffic during the three month
period ending June 30, 1996. For the three months ended March 31, 1996, this
amount represents management's estimate of revenue to be received from
delayed proportional return traffic during the six months ending September
30, 1996. Management's estimates of the revenue to be received from delayed
proportional return traffic are based on the anticipated ratios between
outgoing and incoming traffic and the anticipated settlement rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its rapid growth, including its capital
expenditures, through funds provided by operations, a revolving credit facility
with a principal stockholder, a revolving credit facility with a commercial
lender and the sale of shares of common stock. The Company's net working capital
requirements have been insignificant as the Company has funded accounts
receivable growth through corresponding growth in its accounts payable. The
Company's accounts receivable turnover was 54 days in 1995 compared to an
accounts payable turnover of 71 days in 1995. The Company's longer accounts
payable turnover is partially due to its accounts payable with foreign partners
which generally have 180-day terms as a result of the six-month lag inherent in
the international telecommunications services settlement process.
Net cash provided by (used in) operating activities was $758,290, ($77,963)
and $7.4 million in 1993, 1994 and 1995, respectively and $863,043 and $3.0
million for the three months ended March 31, 1995 and 1996, respectively. In
1995, the net cash provided by operations was the result of an increase in net
income and accounts payable which exceeded the increases in accounts receivable
and deferred settlement costs. The net cash provided by operations in 1993 was
the result of an increase in accounts payable and accrued liabilities
representing the net settlements due to foreign partners, which increase was
greater than the increase in accounts receivable from customers.
Net cash used in investing activities was $1.5 million, $3.7 million and
$6.5 million in 1993, 1994 and 1995, respectively, and $241,603 and $4.1 million
for the three months ended March 31, 1995 and 1996, respectively. Substantially
all of these expenditures were for the acquisition of partial ownership
interests in international fiber optic cable transmission systems and related
equipment.
Net cash provided by financing activities was $717,919, $3.8 million and
$932,615 in 1993, 1994 and 1995, respectively, and $3.0 million for the three
month period ended March 31, 1996. In connection with the 1992 investment by a
principal stockholder, the Company received loan commitments aggregating
$750,000 from a principal stockholder. In 1994 this principal stockholder
replaced the loan commitments with a revolving credit facility (the "Note") to
the Company. Available funds under the Note were initially $5.0 million in 1994,
and were increased to $9.0 million in 1995 based on the Company having achieved
certain performance-based milestones. The Note is secured by a pledge of
substantially all the assets of the Company that are not pledged to the
commercial lender, and bears interest payable monthly at the prime rate plus 2%.
As of March 31, 1996, $5.4 million was outstanding under the Note. The Company
intends to repay the balance outstanding under the Note with a portion of the
net proceeds of this Offering. The entire $9.0 million of available credit under
the Note will expire on the closing of this Offering. See "Use of Proceeds" and
"Certain Relationships and Related Transactions." The Company has an additional
revolving credit facility with a commercial lender under which it may borrow the
lesser of $3.0 million or 70% of certain of the Company's accounts receivable.
Interest is payable monthly at the lender's prime rate plus 0.875%. The
revolving credit facility is collateralized by all the Company's accounts
receivable and contains covenants with respect to, among other things, the
profitability and current ratio of the Company and restrictions on the payment
of dividends. On December 28, 1995, the Company borrowed $3.0 million under the
facility and used the proceeds to repay $3.0 million of the amount outstanding
under the Note. The facility expires on September 30, 1996.
The Company believes that the net proceeds of this Offering, together with
cash provided by operating activities and other existing sources of liquidity,
will be sufficient to meet its expected capital expenditures and working capital
needs through the end of 1997. At March 31, 1996, the Company had outstanding
commitments of $860,000 for the acquisition of additional ownership interests in
digital undersea fiber optic cables. The Company anticipates making capital
expenditures of approximately $15 million during the remainder of 1996 and $20
million in 1997 to expand the Company's international network facilities on new
and existing routes, and expects to use a portion of the net proceeds of this
Offering for such purposes. See "Use of Proceeds."
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NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which is
effective for fiscal years beginning after December 15, 1995. The Company
adopted SFAS No. 121 on January 1, 1996 and does not expect the impact on its
financial statements, if any, to be material.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" which is effective for fiscal years beginning after December 31,
1995. SFAS 123 encourages entities to adopt a fair value based method of
accounting for employee stock compensation plans; however, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting. Under the intrinsic value based
method, companies do not recognize compensation cost for many of their stock
compensation plans. Under the fair value based method, companies would recognize
compensation costs for those same plans. The Company elects to continue to use
the intrinsic value based method, and therefore does not expect the impact on
its financial statements, if any, to be material.
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BUSINESS
OVERVIEW
Pacific Gateway is a facilities-based international telecommunications
carrier which provides international telecommunications services primarily to
its target customer base of long distance service providers worldwide, including
five of the seven largest U.S.-based long distance carriers. As a
"facilities-based" carrier, the Company primarily owns or leases its
international network facilities rather than reselling time provided by another
facilities-based carrier. The Company operates an international network
consisting of international and domestic switching facilities in Los Angeles and
New York, partial ownership interest in 14 digital undersea fiber optic cable
systems in the Atlantic, Pacific and Caribbean regions and operating agreements
that provide for the exchange of traffic with foreign carriers. The Company
currently has the capacity to send or receive approximately 240 million
international minutes annually over its owned digital undersea fiber optic cable
facilities.
As of March 31, 1996, Pacific Gateway had operating agreements with 25
foreign carriers in 19 countries around the world, which countries collectively
represent approximately 43.3% of U.S.-originated international traffic. The
Company is currently negotiating operating agreements with more than 20
prospective foreign partners. The Company's foreign partners include both
telecommunications carriers that have been dominant in their home markets which
may be wholly or partially government-owned (often referred to as Post Telephone
and Telegraph or "PTTs") and nondominant carriers that may have been recently
established as a result of the deregulation of foreign telecommunications
markets ("Competitive Carriers").
INDUSTRY BACKGROUND
The international telecommunications market consists of all calls that
originate in one country and terminate in another. Industry sources estimate
that this market was approximately $50.6 billion in aggregate carrier revenues
in 1994. This market can be divided into two major segments: the U.S.-originated
international market (the "U.S.-Originated Market"), consisting of all
international calls which either originate or terminate in the United States,
and the overseas-originated international market (the "Overseas-Originated
Market"), consisting of calls between countries other than the United States.
Services offered by international long distance carriers fall into three primary
categories: international switched services, switch-based value-added services
and international private line services.
Bilateral operating agreements between international long distance carriers
in different countries are key components of the international long distance
telecommunications market. Under an operating agreement, each carrier agrees to
terminate traffic in its country and provide proportional return traffic to its
partner carrier. The implementation of a high quality international network,
including the acquisition and utilization of digital undersea fiber optic cable
and adherence to the technical recommendations of the International Telegraph
and Telephone Consultative Committee (the "CCITT") of the International
Telephone Union (the "ITU") for signalling, protocol and transmission, is an
important element in enabling a carrier to compete effectively in the
international long distance telecommunications market.
The international long distance telecommunications market has experienced
rapid growth in recent years. During the period from 1990 to 1994, according to
the FCC, the U.S.-Originated Market grew at an annual compound rate of 13% from
$7.6 billion to $12.4 billion, while the U.S. domestic long distance market grew
at a compound annual rate of 7%. The Company believes that the international
telecommunications market will continue to experience strong growth for the
foreseeable future as a result of the following trends:
- the opening of overseas telecommunications markets due to deregulation
and the privatization of government-owned monopoly carriers, permitting
the emergence of new carriers;
- the reduction of international outbound long distance rates, driven by
competition and technological advancements, which is making international
calling available to a much larger customer base and stimulating
increasing traffic volumes;
- the increased availability and quality of digital undersea fiber optic
cable in the place of satellite- and analog coaxial cable-based
transmission networks, which have enabled long distance carriers to
improve the quality of their services and reduce their cost structures;
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- the dramatic increases in the availability of telephones and the number
of access lines in service around the world, stimulated by economic
growth, government mandates and technological advancements;
- the worldwide proliferation of new communications devices such as
cellular telephones, facsimile machines and other forms of data
communications equipment;
- the rapidly increasing globalization of commerce, trade and travel; and
- the rapidly increasing demand for bandwidth-intensive data transmission
services, including the Internet.
Many of the world's developing countries are committing significant
resources to build telecommunications infrastructures in order to increase the
number and quality of telephone lines in their countries. The ITU forecasts that
the number of telephone lines in developing countries will grow at a compound
annual growth rate of 17% per year through the year 2000, compared to 5% per
year in the same period for developed nations. The Company believes that
increasing investment in telecommunications infrastructure will stimulate
increasing demand for international telecommunications services.
The Wall Street Journal estimated in September 1995 that more than 19
telecommunications companies worldwide had announced intentions to raise a total
of more than $36 billion from investors by the end of 1996 in what are generally
referred to as privatizations. In conjunction with these privatizations, certain
countries have opened their telecommunications markets to competition in order
to increase the level of private investment and the rate of infrastructure
development. Deregulation of telecommunications services in the United States
began in 1984 with the AT&T divestiture. The Company believes that, since that
date, more than 40 new facilities-based Competitive Carriers have emerged in
international markets outside of the United States as this trend toward
deregulation has expanded internationally. The Company believes that this trend
creates numerous opportunities for U.S.-based carriers, such as Pacific Gateway,
to increase their access to developing telecommunications markets and to
increase their market share in both the U.S.-Originated Market and the
Overseas-Originated Market. The Company believes that many of the emerging
carriers in developing countries, as well as certain recently privatized PTTs,
are likely to seek alliances, partnerships or joint ventures with other
international carriers to expand their global networks. Recent examples of such
alliances include AT&T's alliance with Unisource, known as "Uniworld," MCI's
alliance with British Telecom, known as "Concert," and Sprint's alliance with
Deutsche Telekom and France Telecom, known as "Global One."
Despite the growth and general deregulatory trends in the global
telecommunications market, the pace of change and emergence of competition in
many countries remains slow, with domestic and international traffic still
dominated by government-controlled monopoly carriers. The Company believes that
U.S.-based international carriers, such as Pacific Gateway, which have already
established, or are in negotiations to establish, operating agreements with
government-controlled monopoly carriers in many such countries will be well-
positioned to capture the benefits of increasing traffic flows as the
telecommunications infrastructure in these countries is expanded.
Markets
U.S.-Originated Market. In 1994, the U.S.-Originated Market was $12.4
billion in aggregate revenues from international switched services traffic,
according to statistics published by the FCC. Based on 1994 FCC statistics, the
U.S.-Originated Market is dominated by AT&T with a 64% market share, followed by
MCI with a 24% market share, and Sprint with a 10% market share. The balance of
this market currently is divided among WorldCom, Pacific Gateway and a number of
specialized carriers. U.S.-based carriers that originate international traffic
but do not have operating agreements with foreign carriers must utilize the
services of a carrier which has the appropriate facilities and operating
agreements to terminate this traffic. In addition, international carriers with
operating agreements may use the services of other international carriers for
overflow traffic or on routes with smaller traffic volumes. Approximately $1.1
billion of the 1994 U.S.-Originated Market traffic, which aggregated $12.4
billion in revenues, was terminated under an operating agreement held by a
carrier other than the originating carrier. The Company's marketing efforts to
U.S.-based carriers are primarily directed at this segment of the
U.S.-Originated Market.
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Overseas-Originated Market. Based on statistics compiled by industry
sources, the Company estimates that the Overseas-Originated Market was $37.4
billion in aggregate revenues generated by international carriers in 1994.
According to the ITU, the Overseas-Originated Market for international long
distance service grew from 12.1 billion minutes per year in 1984 to 53.6 billion
minutes per year in 1994, representing a 16% compound annual growth rate.
Although the Company's extensive international network enables it to compete in
the entire Overseas-Originated Market, Pacific Gateway is focusing its strategy
on developing a significant presence in a defined set of geographical routes
where it believes it has either competitive advantages through strong
relationships with foreign partners or the opportunity to gain market share and
increase its volume of higher-margin, value-added services.
Services
International Switched Services. International switched services represent
the largest component of international telecommunications traffic. These
services are provided through transmission facilities employing switches that
automatically route calls to available circuits. As shown in the diagram below,
a typical international telephone call which originates in a U.S. business or
residence first travels through the local carrier's switched network to the
caller's domestic long distance carrier. The domestic long distance carrier then
carries the call to an international gateway switch. An international carrier
picks up the call at its gateway switch and sends it through a digital undersea
fiber optic cable or satellite circuit to the corresponding international
gateway switch operated by an international carrier in the country of
destination. The long distance carrier in that country then routes the call to
its customer through the domestic telephone network. Foreign-originated traffic
is routed back to the United States in a similar manner.
[CHART]
Switch-Based Value-Added Services. Switch-based value-added services
include 800 service, international directory assistance with the option of call
completion, travel card services, enhanced facsimile services and
videoconferencing, among others. The provision of such value-added services
offers carriers attractive opportunities to increase operating margins and offer
a more competitive service to their customers.
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International Private Line Services. International private line services
provide a dedicated point-to-point connection between two locations without
using a public switched network. A typical private line connection would be
between the New York and London branches of an international bank. Customers of
this service are typically multinational corporations or government agencies
which have substantial communications volume between two or more international
locations.
Operating Agreements
International long distance traffic is traditionally exchanged under
switched voice bilateral operating agreements between long distance carriers in
two countries. In order to terminate a U.S.-originated call in another country,
a U.S.-based international carrier must have an operating agreement with a
carrier in that country or must pay for transmission service from another
carrier that has such an agreement. Operating agreements provide for the
termination of traffic in, and return traffic to, the partners' respective
countries for mutual compensation through negotiated settlement rates. Operating
agreements typically provide that a foreign carrier will return the same
percentage of total U.S. terminating traffic as it receives from the U.S.-based
carrier and also provide for network coordination and accounting and settlement
procedures. The execution of an operating agreement between two carriers is
typically accompanied by an equal investment by both carriers in digital
undersea fiber optic cable between the two countries. While operating agreements
generally are for an unspecified term, the Company believes that the common
ownership of transmission facilities, which are expected to have 20-year useful
lives, establishes a solid foundation for long-term relationships among
international carriers.
Before the deregulation of telecommunications services in the United States
in 1984, AT&T was the only carrier that had operating agreements with foreign
carriers. Until recently, in many foreign countries there was only one operating
agreement in place between the government-controlled monopoly carrier and a
foreign-based international carrier. In the United States, however, after
deregulation of the long distance telecommunications services industry, MCI and
Sprint each negotiated its own operating agreements with foreign carriers. In
addition, WorldCom, as a result of the international relationships developed by
certain of its recently-acquired subsidiaries, also has numerous operating
agreements. See "-- Government Regulation."
Other than these four carriers and Pacific Gateway, the Company believes
that no new U.S. entrant in the international telecommunications market has been
able to secure a significant number of traditional switched voice bilateral
operating agreements with foreign carriers. Unless a U.S.-based international
carrier is able to offer a new business opportunity or a new source of traffic,
generally there is little incentive for a government-controlled monopoly carrier
to take on the administrative burdens of negotiating a new operating agreement
with a U.S.-based carrier, to incur additional capital investment, and to
maintain the relationship on an ongoing basis. The Company believes that the
combination of the large traffic volume, proven operating performance and
personal relationships that traditionally has been required both to establish
operating agreements and to secure positions in digital undersea fiber optic
cable systems, creates a significant barrier to entry in the international
telecommunications market.
COMPANY STRATEGY
The Company's objective is to strengthen its position as a facilities-based
international telecommunications services provider by increasing its customer
base in the United States and abroad and positioning itself for continued growth
in revenues and profitability. The Company's strategy for achieving this
objective consists of the following key elements:
Secure Additional Operating Agreements
Pacific Gateway actively seeks to enter into additional operating
agreements to expand the geographical scope of its international network and to
attract new domestic and foreign customers. Pacific Gateway is able to increase
the revenues generated by its existing customer base by providing direct service
for these customers to additional countries.
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Pacific Gateway targets prospective partners for new operating agreements
by evaluating customer demand, the relative long-term economic attractiveness of
offering direct service to a particular country and the availability of fiber
optic or satellite transmission capacity to that country. Currently, the Company
is focusing its resources on establishing additional routes primarily to Asia,
the Pacific Rim, Eastern Europe and Latin America. The Company believes that
these markets, and, in the near future, the Middle East and Africa, offer
opportunities for the Company to attain significant market share, improve gross
margins, and gain other strategic advantages. In addition, the Company is
seeking increased access to more competitive high traffic routes, such as to
Western Europe, through strategic relationships with well-established
international carriers that offer opportunities to achieve significant revenue
growth at relatively low cost. Pacific Gateway believes that the experience,
relationships and knowledge of its management team have played, and will
continue to play, a key role in enabling the Company to negotiate additional
operating agreements in selected markets. The Company also believes that as
specific telecommunications markets become less regulated, its management team
will be able to use its experience and knowledge to augment existing operating
agreements, including by the deployment of telecommunications equipment in
foreign countries, resulting in a more efficient world-wide network.
Expand and Enhance Network Facilities
To support additional operating agreements and the growth of traffic on its
existing direct routes, the Company intends to continue to acquire partial
ownership positions in new and existing digital undersea fiber optic cables. The
Company is generally able to increase its gross profit margin and provide
greater assurance of the quality and reliability of transmission by routing
traffic over its owned international facilities. The Company also intends to
expand its switching and international gateway facilities in the United States
and to invest in network operations in certain foreign locations in order to
originate and terminate customer traffic more cost effectively and support the
development of a targeted commercial sales development program. The Company
expects to begin operating a new domestic switching facility in Dallas by the
end of the third quarter of 1996. The Company has committed to invest in seven
new digital undersea fiber optic cable projects which are currently in the
planning stages. The Company utilizes state-of-the-art equipment and
technologies that conform to relevant operating standards to ensure high
quality, cost-effective transmission service.
Increase Overseas-Originated Traffic Through International Alliances, Joint
Ventures and Acquisitions
The Company believes that alliances and direct investments with foreign
partners have the potential to increase the Company's opportunities to increase
traffic in the most rapidly growing segments of the international
telecommunications market. The Company is currently evaluating several potential
alliances, investment opportunities and acquisitions, including equity positions
and operating roles with both established and emerging international
telecommunications carriers with operations in Asia, the Pacific Rim, Eastern
Europe, Western Europe and Latin America. The Company currently is discussing
with potential U.S. and foreign partners the terms of possible business
relationships and other strategic alliances which could provide that the partner
would acquire a minority ownership interest in the Company. There can be no
assurance that any of these discussions will result in the formation of an
alliance or that any such alliance, if formed, would be successful. The Company
is pursuing these opportunities to stimulate traffic from foreign markets, to
leverage its foreign partners' knowledge of their local markets and to expand
into new emerging markets. In many of the regions targeted by the Company, the
provision of telecommunications services is being deregulated, providing
numerous opportunities either to provide wholesale services to other competitive
carriers operating in the region or to service the end-user market directly.
Additionally, many of the switch-based value-added services currently offered by
the Company in the United States (discussed below) can be provided abroad
through such alliances, creating opportunities to generate additional revenues
through available technology.
Expand Product Line
The Company intends to expand the range of products and services that it
offers to its customers to include international 800 service, prepaid services
such as debit and travel cards, international directory assistance with the
option of call completion service, enhanced facsimile service and virtual
private network
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services. The Company believes that leveraging its existing network by offering
additional value-added services will increase the loyalty of its existing
customer base and help attract new customers. These services will enable Pacific
Gateway's carrier customers to provide a broader range of international services
to their end-user customers, which the Company expects will stimulate additional
higher margin international traffic over its network.
Expand Customer Segments
Pacific Gateway intends to leverage its existing network and low-cost
structure by marketing international long distance services directly to selected
corporate customers that are generally spending more than $10,000 per month on
international telecommunications services and are located within geographic
proximity to the Company's switching facilities. The Company also intends to
market its services to targeted businesses which have large volumes of
international telecommunications traffic to specific countries where the Company
believes that it can offer the combined advantages of competitive prices, high
transmission quality and service diversity. The Company expects that traffic
generated by corporate customers will result in higher gross margins than the
Company's wholesale traffic. To develop this aspect of its business more
rapidly, the Company may seek to acquire a marketing organization with an
existing corporate customer base located within geographic proximity to the
Company's switching facilities. The Company is not currently negotiating any
such acquisition.
Maintain Efficient Low-Cost Operations
The Company believes it is important to maintain efficient, low-cost
operations in order to be competitive in the international telecommunications
services market. Through continuous monitoring of its network, the Company
optimizes the routing of calls to decrease transmission costs and obtain the
highest possible transmission quality and reliability. The Company pursues a
disciplined, incremental approach to the costs of expansion. When Pacific
Gateway initially expands sales and services into a region, the Company usually
arranges to provide services for that area on a usage-sensitive (variable cost)
basis. As volume grows, the Company typically reprovisions its network by
acquiring fixed-cost facilities with greater capacity. In addition, the Company
closely controls selling, general and administrative costs at levels that it
believes are among the lowest in the industry. The Company intends to maintain a
small corporate staff and to continue investing in network technology and
information systems that will preserve and enhance its position as a low-cost
international telecommunications service provider.
SERVICES
The Company provides four categories of services: international switched
services, domestic switched services, switch-based value-added services and
international private line services. Substantially all the Company's current
revenues are generated by the sale of international switched services and
domestic switched services.
International Switched Services. The Company's international switched
services revenues are generated from outgoing and incoming international traffic
carried through its international network. Revenues from international switched
services are derived from country-specific, usage-sensitive rates charged to its
customers and return traffic from Pacific Gateway's foreign partners.
As of March 31, 1996, the Company had 25 operating agreements with foreign
carriers in 19 countries under which it carries traffic through its network of
switching facilities and digital undersea fiber optic cables, as well as through
leased satellite circuits. Through its network and its arrangements with U.S.
and foreign carriers, the Company is able to deliver traffic to or between all
countries in the world that have direct dial service with the United States.
International switched services represented approximately 85.6% and 88.1% of the
Company's revenues in 1994 and 1995, respectively, and 89.5% in the three months
ended March 31, 1996.
Domestic Switched Services. The Company provides both originating and
terminating switched long distance services within the United States. The
Company's originating network, which provides access and
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egress to local network providers, extends to geographical areas around its
switching facilities in Los Angeles (serving most major metropolitan areas in
California, Arizona, and Nevada) and New York (serving selected metropolitan
locations in New York, Washington, D.C., Massachusetts, Pennsylvania,
Connecticut, New Jersey and Virginia). As the Company expands its switching
network to include Dallas and other strategic locations, its originating network
will be expanded to the major metropolitan areas in those regions. The Company
provides domestic switched services as a cost-effective means to terminate its
return traffic in the U.S. and to offer services to U.S.-based long distance
resellers that do not own or lease switching facilities ("switchless
resellers"). Currently the Company provides domestic switched services only to
Matrix. Domestic switched services accounted for approximately 12.4% and 11.7%
of the Company's total revenues in 1994 and 1995, respectively, and 8.6% in the
three months ended March 31, 1996.
Switch-Based Value-Added Services. The Company regards the 25 foreign
carriers with which it has operating agreements both as existing customers
through their use of the Company's network to terminate traffic and as potential
customers for the Company's anticipated switch-based value-added service
offerings. The Company currently offers directory assistance, international 800
service and prepaid services such as debit and travel cards on a limited basis
to its U.S.-based wholesale carrier customers that do not provide such services
directly to their customers. Pacific Gateway intends to expand the range of its
value-added services to include international directory assistance with the
option of call completion services. In the aggregate, these services accounted
for less than 1% of the Company's revenues in each of 1994 and 1995 and
approximately 1.8% in the three months ended March 31, 1996.
International Private Line Services. Pacific Gateway provides dedicated
international point-to-point connections on a selective basis to customers
requiring special dedicated services for high-traffic voice and data routes
between two locations. International private line services represented less than
1% of the Company's revenues in each of 1994 and 1995 and in the three months
ended March 31, 1996.
INTERNATIONAL NETWORK
Since its inception in 1991, the Company has successfully implemented an
extensive international facilities-based network comprised of its international
gateway switches and related peripheral equipment and digital undersea fiber
optic cable systems, as well as leased cable and satellite capacity. The map on
the inside front cover of this Prospectus illustrates the Company's
international network, including cable projects that are currently in the
planning stages. The Company is able to provide service to any point in the
world using a combination of its owned digital undersea fiber optic network and
leased cable and satellite capacity. The Company's network employs
state-of-the-art digital switching and fiber optic technologies and is supported
by comprehensive monitoring and technical services. The Company believes that
this network is fundamental to its ability to compete successfully in the
international telecommunications market. The Company regards its extensive
international network as a significant competitive advantage which would be
expensive and time-consuming for a new entrant to replicate.
International Gateway and Domestic Switches
The Company operates international gateway switches in Los Angeles and New
York that were manufactured by Northern Telecom and conform to international
signalling and transmission standards provided for in CCITT recommendations.
Traffic to Asia and the Pacific Rim is generally routed via the Company's Los
Angeles gateway, and traffic to Europe and Latin America is routed via the
Company's New York gateway. In addition, the Company operates domestic switches
in Los Angeles and New York to support origination and termination of its
customer traffic and to provide domestic switched service to Matrix. The Company
expects to implement a domestic switch in Dallas by the end of the third quarter
of 1996 to serve the Mexico market, and, in the future, may implement other
international gateway and domestic switches in other strategic locations. The
Company expects to expand its originating network to Europe, the Pacific Rim,
Asia and Latin America through alliances or direct investments.
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Digital Undersea Fiber Optic Cable Systems
The Company currently has investments in 14 digital undersea fiber optic
cable systems with an ownership interest in each of generally less than 1%.
Digital undersea fiber optic cables are owned and operated by consortia of
international service providers which jointly commit to fund the construction
and operating costs of the cables in proportion to their equity positions in the
cables. Typically, participation in a consortium is limited to those carriers
which have the operating authority to provide direct international service and
have obtained operating agreements with the countries served by the cables.
Capacity is usually owned by two carriers in two countries with ownership to the
theoretical "midpoint" of the cable. Because digital undersea fiber optic cables
typically take several years to plan and construct, carriers generally make
investments based on a forecast of anticipated traffic.
The Company seeks to have ownership positions in digital undersea fiber
optic cable systems where it believes its customers' demand will justify the
investment in those fixed assets. Although the Company is generally able to earn
a higher gross margin on traffic routed through its owned fiber optic cable
routes relative to leased routes, Pacific Gateway will continue to buy
usage-sensitive transmission capacity on a per minute basis from other U.S.
facilities-based international carriers on routes where traffic volumes are
relatively low or inconsistent, as well as to manage overflow traffic on busy
routes.
The Company does not have direct access from its gateway switches to the
digital undersea fiber optic cable heads and currently leases these facilities
from certain of its competitors.
Satellite Facilities
The Company utilizes leased satellite facilities for traffic to and from
countries where digital undersea fiber optic cables are not available or
cost-effective. Leased satellite facilities are also used for redundancy when
digital undersea cable service is temporarily interrupted. The Company is
currently evaluating the construction of earth station facilities based on
increasing traffic that may result in such investments being cost-effective for
the Company.
Network Monitoring and Technical Support
The Company provides customer service and support, 24-hour network
monitoring, trouble reporting and response procedures, service implementation
coordination, billing assistance and problem resolution. The Company provides a
single point of contact for each customer and accepts end-to-end responsibility
for installation, maintenance and problem resolution.
Pacific Gateway generally utilizes redundant, highly automated
state-of-the-art telecommunications equipment in its network and has diverse
alternate routes available in cases of component or facility failure. Back-up
power systems and automatic traffic re-routing enable the Company to provide a
high level of reliability for its customers. Computerized automatic network
monitoring equipment allows fast and accurate analysis and resolution of network
problems.
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<PAGE> 35
OPERATING AGREEMENTS
As of March 31, 1996, the Company had 25 operating agreements with foreign
carriers in 19 countries as reflected in the table below.
<TABLE>
<CAPTION>
CUMULATIVE % OF
NUMBER OF COUNTRY OR COUNTRIES OF U.S.-ORIGINATED
YEAR NEW AGREEMENTS FOREIGN CARRIER(S) MINUTES(1)
----- -------------- ------------------------------------ ---------------
<S> <C> <C> <C>
1991 1 Guam 0.2%
1992 2 Japan(2), Philippines 2.2%
1993 4 Australia, Canada, New Zealand, 24.5%
Russia
1994 5 Netherlands, Sweden, Switzerland 26.8%
1995 9 Chile, Dominican Republic, Japan, 34.6%
Spain, United Kingdom(2), Venezuela
1996 4(3) Germany, Israel, South Korea, 43.3%
Malaysia
</TABLE>
- ---------------
(1)Percentage of total U.S.-originated international minutes going to countries
in which the Company has entered into operating agreements, excluding private
lines, based on 1994 FCC statistics.
(2)Private line only.
(3)As of March 31, 1996.
These agreements enable the Company to terminate traffic in a foreign
country directly to its foreign carrier's network and entitle the Company to
receive a proportionate amount of return traffic from the foreign partner.
Although the Company's operating agreements generally are for an unspecified
term, the Company believes that the common ownership of transmission facilities,
which are expected to have 20-year useful lives, establishes a solid foundation
for long-term relationships among international carriers. Currently, Pacific
Gateway is engaged in various stages of negotiation with respect to operating
agreements with 20 carriers in approximately 15 countries in addition to those
reflected in the table above.
CUSTOMERS
As of March 31, 1996, the Company provided its services to approximately 57
U.S.-based long distance carriers, up sharply from 44 carriers as of December
31, 1995 and 15 carriers as of December 31, 1994. In the United States, the
Company has identified the more than 200 long distance carriers with annual
revenues of between $50 million and $2 billion as its target customer base. The
Company also regards the 25 foreign carriers with which it has operating
agreements as existing customers and as potential customers for the Company's
anticipated switch-based value-added services. In 1994, Matrix, Wiltel, Inc.
(now WorldCom) and Optus Communications Pty Limited accounted for 44%, 12% and
11% of the Company's revenues, respectively. In 1995 and the three months ended
March 31, 1996, only Matrix, with 22% and 15%, respectively, accounted for more
than 10% of the Company's revenues.
Matrix is a U.S.-based switchless long distance carrier which provides
domestic and, through Pacific Gateway, international long distance services to
its domestic retail customers. It targets principally the small business market,
utilizing telemarketing services, direct mail and direct sales. Pursuant to an
agreement dated as of May 1, 1995, Matrix has agreed to send substantially all
its international telecommunications traffic and its domestic telecommunications
traffic in the Northeast and California through Pacific Gateway's network until
November 1996, subject to earlier termination if the Company does not match a
bona fide competitive pricing offer Matrix may receive from a third party. The
term of the agreement is automatically extended on a month-to-month basis unless
either party gives the other 30 days' notice of termination. The Company expects
that the relative portion of its revenues derived through its relationship with
Matrix will continue to decline if the Company continues to be successful in
obtaining additional U.S. and foreign customers and increasing traffic from its
existing customers. See "Risk Factors -- Relationship with Matrix" and "Certain
Relationships and Related Transactions."
33
<PAGE> 36
SALES AND MARKETING
The Company believes that the principal reasons its customers select
Pacific Gateway to carry their international traffic are (i) the Company's
reputation for operating a state-of-the-art network at rates that are comparable
to or lower than its competitors, (ii) that the Company's size enables its
experienced sales and operating personnel to tailor cost-effective
telecommunications services to meet customers' needs and to provide highly
responsive, flexible customer service and (iii) that Pacific Gateway is the only
significant U.S. facilities-based international carrier that does not also
compete primarily for end-user customers in the domestic long distance market.
Wholesale Carrier Services
The Company's wholesale carrier services are generally priced at or below
the market price of the other four leading U.S. international facilities-based
carriers. The Company does not, however, offer a standard discount relative to
AT&T or any other carrier's rates, and believes that its ability to obtain
traffic from its customers is not dependent upon its pricing alone.
Pacific Gateway has five sales professionals dedicated to marketing and
maintaining the Company's relationships with its U.S.-based carrier customers.
Marketing is typically conducted on a personalized basis. Participation at
industry conferences, referrals from other carriers and long-term relationships
are key factors in establishing the visibility, reputation and personal trust
necessary to obtain and maintain this business. The Company believes that it has
been able to compete effectively by offering more personalized service than its
competitors and the assurance of ongoing senior-level attention to each account.
The Company initiates and maintains its relationships with its foreign
partners in the Company's targeted markets through the combined efforts of its
senior management team. The Company believes that its success in entering into
operating agreements with its foreign partners is due largely to the
long-standing personal relationships which the Company's senior management team
have developed with the appropriate officials at PTTs and Competitive Carriers
as a result of their previous positions and experience with other large U.S-
based international carriers.
Commercial Services
Pacific Gateway is developing a commercial program targeted at selected
businesses with substantial international calling volume located in geographic
proximity to the Company's international gateway switches in New York and Los
Angeles. The primary service offerings will be switched services, as well as
international private line services. The Company believes it can reach this
customer base at low marginal cost through a focused sales force. To develop
this aspect of its business more rapidly, the Company may seek to acquire a
marketing organization with an existing corporate customer base located within
geographic proximity to the Company's switching facilities. The Company is not
currently negotiating any such acquisition.
BILLING AND MANAGEMENT INFORMATION SYSTEMS
Accurate operation of a management information system is vital to the
Company's operations, given the high volume of transactions and the need to bill
customers accurately. To date, the Company has not experienced any system
problem which has led to significant delays in billing customers or in disputes
with its customers over billing.
The Company maintains its own staff of programming and management
information reporting personnel, as well as contract programmers dedicated to
the maintenance of the Company's management information system. This system
includes reporting on revenues, cost of long distance services, margin analysis,
foreign settlement systems and network performance reporting. The Company
provides common data access for system users to support its customer service,
accounting and network monitoring functions.
The Company currently has a contract pursuant to which Matrix has agreed to
provide call processing, rating and bill rendering services to the Company
through June 1, 1996 and on a monthly basis thereafter, on terms that the
Company believes are competitive with similar services offered in the industry.
The Company
34
<PAGE> 37
has purchased an IBM AS400 computer system sized to meet the Company's projected
growth through mid-1997, and has developed and is currently testing its own
customized billing and management information system software to meet the needs
of its customers and vendors and enhance the Company's ability to monitor its
operations. The Company intends to phase in its new management information
systems during the second quarter of 1996 and discontinue its Matrix contract
soon thereafter.
COMPETITION
The international telecommunications industry is highly competitive and
subject to the introduction of new services facilitated by advances in
technology. International telecommunications providers compete on the basis of
price, customer service, transmission quality, breadth of service offerings and
value-added services. The U.S.-based international telecommunications services
market is dominated by AT&T, MCI and Sprint. The Company also competes with
WorldCom and other carriers in certain markets. As the Company's network expands
to serve a broader range of customers, Pacific Gateway expects to encounter
increasing competition from these and other major domestic and international
communications companies, many of which may have significantly greater resources
and more extensive domestic and international communications networks than the
Company. Moreover, the Company is likely to be subject to additional competition
as a result of the formation of global alliances among the largest
telecommunications carriers. Recent examples of such alliances include AT&T's
alliance with Unisource, known as "Uniworld," MCI's alliance with British
Telecom, known as "Concert," and Sprint's alliance with Deutsche Telekom and
France Telecom, known as "Global One." The Company also faces competition from
companies offering resold international telecommunications services. The Company
expects that competition from such resellers will increase in the future in
tandem with increasing deregulation of telecommunications markets worldwide.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite transmission capacity for services similar to those
provided by the Company. Such technologies include satellite-based systems, such
as the proposed Iridium and GlobalStar systems, utilization of the Internet for
international voice and data communications, and digital wireless communication
systems such as PCS. The Company is unable to predict which of many possible
future product and service offerings will be important to maintain its
competitive position or what expenditures will be required to develop and
provide such products and services. See "Risk Factors -- Competition."
With the recent grant by the FCC of AT&T's petition to be classified as a
non-dominant carrier in the domestic interstate market, only certain domestic
local exchange carriers continue to be classified as dominant carriers. AT&T has
also been classified as a non-dominant carrier in the international market. As a
consequence of its new classifications, AT&T has obtained relaxed pricing
restrictions and relief from other regulatory constraints, including reduced
tariff notice requirements, which should make it easier for AT&T to compete with
alternative carriers such as the Company in the interstate, domestic
interexchange and international markets. With regard to AT&T's long pending
petition to be reclassified as a non-dominant international carrier, the FCC
concluded that AT&T does not possess market power in the U.S.-international
market for residential IMTS or multi-purpose earth station services. As a
consequence of its new non-dominant status, AT&T will be permitted to file
tariffs for its international services on one day's notice instead of 45 days,
without economic or cost support data, and will no longer be required to comply
with price cap regulation for its residential IMTS. In addition, AT&T will be
relieved from Section 214 licensing requirements imposed on dominant carriers,
such as obtaining FCC approval prior to terminating service to a particular
point. AT&T remains subject to the Section 214 requirements of non-dominant U.S.
international carriers, and the generally applicable common carrier
requirements, including to provide international services at reasonable and
nondiscriminatory rates, terms, and conditions. However, the removal of dominant
carrier regulation could make it easier for AT&T to compete with the Company. To
support the continuing development of competition in this market, the FCC
conditioned its reclassification of AT&T in the international marketplace on a
number of "voluntary" commitments by AT&T. Broadly, AT&T has committed to
improve the maintenance, restoration, provisioning, and access to international
cable facilities, assist the Commission's efforts to monitor the competitive
impact of AT&T's global alliances with foreign
35
<PAGE> 38
telecommunications entities, and help ensure that all U.S. carriers have access
to nondiscriminatory accounting rate arrangements. Significantly, AT&T has also
committed to maintaining its annual average rate per minute for international
residential calls at or below the 1995 level for approximately three years.
The FCC has also initiated a new proceeding to consider, among other
issues, whether regulation of domestic interexchange services should be modified
in light of AT&T's reclassification. In addition, the recently-enacted
Telecommunications Act substantially revises the Communications Act, and permits
and is designed to promote additional competition in the intrastate, interstate
and international telecommunications markets by both U.S.-based and foreign
companies, including the RBOCs. RBOCs, among other existing or potential
competitors of the Company, have significantly more resources than the Company.
See "-- Government Regulation."
GOVERNMENT REGULATION
Overview
The Company's services are subject to varying degrees of federal
regulation. The FCC exercises authority over all interstate and international
facilities-based and resale services offered by the Company. Services that
originate and terminate within the same state, also known as intrastate
services, are regulated by state regulatory commissions. The Company also may be
subject to regulation in foreign countries in connection with certain business
activities. For example, the Company's use of transit agreements or
arrangements, if any, may be affected by regulations in either the transited or
terminating foreign jurisdiction. There can be no assurance that foreign
countries will not adopt regulatory requirements that could adversely affect the
Company.
Federal Regulation
General Requirements. The Company must comply with the requirements of
common carriage under the Communications Act, including the offering of service
on a non-discriminatory basis at just and reasonable rates, and obtaining FCC
approval prior to any assignment of authorizations or any transfer of de jure or
de facto control of the Company.
The FCC has established different levels of regulation for dominant and
non-dominant carriers. The Company is classified as a non-dominant carrier for
both domestic and international service. Under the Communications Act and the
FCC's rules, all international carriers, including the Company, are required to
obtain authority under Section 214 of the Communications Act prior to initiating
their international telecommunications services, and must file and maintain
tariffs containing the rates, terms, and conditions applicable to their
services. The FCC recently further streamlined its regulation of non-dominant
international carriers, to provide that these tariffs and any revisions thereto
are effective upon one day's notice in lieu of the previous 14-day notice
period. The Company has filed international tariffs (for switched and private
line services) with the FCC. Nevertheless, an otherwise non-dominant U.S.-based
carrier may be subject to dominant carrier regulation on a specific
international route if it is affiliated with a foreign carrier operating at the
foreign point. The Company has no affiliations that would subject it to dominant
carrier treatment on any route.
Domestic interstate common carriers such as the Company are not required to
obtain Section 214 or other authority from the FCC for the provision of domestic
interstate telecommunications services. Domestic interstate carriers must,
however, file and maintain tariffs with the FCC containing the specific rates,
terms and conditions applicable to their services. These tariffs are effective
upon one day's notice. The Company has filed a domestic tariff with the FCC. The
FCC's policy of permitting domestic carriers to file streamlined "range of
rates" tariffs was overturned by the U.S. Court of Appeals for the District of
Columbia Circuit on January 20, 1995. The Telecommunications Act, however,
provides that the FCC must forbear from applying most provisions of the
Communications Act or FCC regulations (including tariff filing requirements) to
a telecommunications carrier, a class of carriers or a telecommunications
service, if the FCC determines that enforcement of the Communications Act (or
FCC regulations) is not necessary to meet certain public interest standards and
that forbearance is consistent with the public interest. Carriers may petition
the FCC for
36
<PAGE> 39
forbearance. As of the date of this Prospectus, at least one carrier has
petitioned the FCC to forbear from applying tariff filing requirements to
non-dominant carriers. The Telecommunications Act's forbearance provision and
subsequent FCC actions may lessen certain of the regulatory requirements
applicable to the Company. In addition, in a separate proceeding, the FCC has
proposed to forbear from requiring non-dominant domestic carriers to file
tariffs pursuant to authority under the Telecommunications Act.
International Services. With respect to international services, the Company
must obtain facilities-based Section 214 authorization to operate its channels
of communication via satellites and undersea fiber optic cables, although the
FCC recently reduced the filing requirements for facilities-based
authorizations. Section 214 resale authority is required to resell international
services. The Company has obtained all required authorizations from the FCC to
use its various transmission media for the provision of international switched
services and international private line services.
While the FCC permits the resale of international switched services, the
resale of international private lines for the provision of services
interconnected to the public switched network, generally referred to as "private
line resale," is permitted only on those routes where the FCC has found that
equivalent resale opportunities are provided to U.S.-based carriers (for
example, on routes to countries such as Canada, the United Kingdom and Sweden).
The FCC is considering these and other international service issues in the
context of several policy rulemaking proceedings and in response to specific
petitions and applications filed by other international carriers. In one recent
proceeding, the FCC reduced regulatory requirements of international
telecommunications service providers such as the Company. In addition to
reducing the filing period for non-dominant carriers' international tariffed
rates from 14 days to one day, the FCC streamlined other international service
rules. In particular, the FCC now permits resellers to resell services of any
authorized facilities-based carrier except U.S. facilities-based affiliates that
are regulated as dominant carriers on routes the reseller seeks to serve. The
FCC's resolution of some of these issues in other proceedings either may
facilitate the Company's international business (by, for example, streamlining
the regulatory requirement to acquire additional international facilities
capacity), or adversely affect the Company's international business (by, for
example, permitting larger carriers to take advantage of accounting rate
discounts for high traffic volumes). The Company is unable to predict how the
FCC will resolve the pending international policy issues or how such resolution
will affect its international business.
The Company must also conduct its international business in compliance with
the FCC's international settlements policy ("ISP"). The ISP establishes the
permissible boundaries for U.S.-based carriers and their foreign correspondents
to settle the cost of terminating each other's traffic over their respective
networks. The precise terms of settlement are established in a correspondent
agreement, also referred to as an operating agreement. Among other terms, the
operating agreement establishes the types of service covered by the agreement,
the division of revenues between the carrier that bills for the call and the
carrier that terminates the call at the other end, the frequency of settlements
(i.e., monthly or quarterly), the currency in which payments will be made, the
formula for calculating traffic flows between countries, technical standards,
procedures for the settlement of disputes, the effective date of the agreement
and the term of the agreement.
The amount of payments (the "settlement rate") is determined by the
negotiated accounting rate specified in the operating agreement. Under the ISP,
unless prior approval is obtained, the settlement rate generally must be
one-half of the accounting rate. Carriers must obtain waivers of the FCC's rules
if they wish to use an accounting rate that differs from the prevailing rate or
vary the settlement rate from one-half of the accounting rate. As a result of
the FCC's pro-competition policies, the recent trend has been to reduce
accounting rates.
As a U.S.-based international carrier, the Company is also subject to the
FCC's "uniform settlements policy" designed to eliminate foreign carriers'
incentives and opportunities to discriminate in their operating agreements among
different U.S.-based carriers through "whipsawing." Whipsawing refers to the
practice of a foreign carrier to vary the accounting and/or settlement rate
offered to different U.S.-based carriers for the benefit of the foreign carrier,
which could secure various incentives by favoring one U.S.-based carrier over
another. Under the uniform settlements policy, U.S.-based carriers can only
enter into operating agreements that contain the same accounting rate offered to
all U.S.-based carriers. When a U.S.-based carrier negotiates
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<PAGE> 40
an accounting rate with a foreign correspondent that is lower than the
accounting rate offered to another U.S.-based carrier for the same service, the
U.S.-based carrier with the lower rate must file a notification letter with the
FCC. If a U.S.-based carrier varies the terms and conditions of its operating
agreement in addition to lowering the accounting rate, then the U.S.-based
carrier must request a waiver of the FCC's rules. Both the notification and the
waiver requests are designed to ensure that all U.S.-based carriers have an
opportunity to compete for foreign correspondent return traffic.
Among other efforts to counter the practice of whipsawing and inequitable
treatment of similarly situated U.S.-based carriers, the FCC adopted the
principle of proportionate return to assure that competing U.S.-based carriers
have roughly equitable opportunities to receive the return traffic that reduces
the marginal cost of providing international service. Consistent with its
pro-competition policies, the FCC prohibits U.S.-based carriers from bargaining
for any special concessions from foreign partners.
Additionally, international telecommunications service providers are
required to file copies of their contracts with other carriers, including
operating agreements, with the FCC within 30 days of execution. The Company has
filed each of its operating agreements with the FCC. The FCC's rules also
require the Company to file periodically a variety of reports regarding its
international traffic flows and use of international facilities. The FCC is
engaged in a rulemaking proceeding in which it has proposed to reduce certain
reporting requirements of common carriers. The Company is unable to predict the
outcome of this proceeding or its effect on the Company.
Foreign Ownership. The Communications Act limits the ownership of an entity
holding a common carrier radio license by non-U.S. citizens, foreign
corporations and foreign governments. The Company does not currently hold any
radio licenses. These ownership restrictions currently do not apply to non-radio
facilities, such as fiber optic cable. There can be no assurance, however, that
foreign ownership restrictions will not be imposed on the operation of non-radio
facilities used for the provision of international services. The FCC recently
adopted new rules relating to the entry and participation of foreign-affiliated
entities in the U.S. telecommunications market. These rules also reduce
international tariff notice requirements for dominant, foreign-affiliated
carriers from 45 days' notice to 14 days' notice. Such reduced tariff notice
requirements may make it easier for dominant, foreign-affiliated carriers to
compete with the Company. The Telecommunications Act partially amends existing
restrictions on the foreign ownership of radio licenses by allowing corporations
with non-U.S. citizen officers or directors to hold radio licenses. Other
non-U.S. ownership restrictions, however, remain unchanged. The effect on the
Company of the Telecommunications Act or other new legislation or regulations
which may become applicable to the Company cannot be determined.
Federal Legislation. The recently-enacted Telecommunications Act, among
other things, is intended to establish competition with local exchange carriers
("LECs") as a national policy by preempting state and local laws that prohibit
competition in the local exchange market and by the establishment of certain
requirements, including interconnection requirements, the offering of local
network elements on an unbundled basis and other LEC requirements with respect
to resale, number portability, dialing parity, access to rights-of-way and
mutual compensation. The Telecommunications Act authorizes the FCC to provide
regulatory flexibility for LECs and other telecommunications companies for which
regulation is no longer necessary, The Telecommunications Act also provides
specific guidelines under which RBOCs can provide in-region long distance
services. Upon enactment, and, subject to obtaining necessary certifications
from state and federal authorities to provide intrastate or interstate services,
RBOCs are authorized to provide out-of-region long distance services which will
permit RBOCs to compete with the Company in the provision of domestic and
international long distance services. The FCC has proposed rules to govern the
entry of RBOCs into the out-of-region interstate, interexchange market. Among
other things, the FCC has proposed to allow affiliates of RBOCs that provide
out-of-region interstate, interexchange service to be regulated as non-dominant
carriers, under certain circumstances. The Telecommunications Act also contains
provisions that will permit the FCC to forbear from applying certain provisions
of the Telecommunications Act and common carrier regulations to non-dominant
carriers. Such FCC action could reduce some of the Company's regulatory
requirements, such as filing specific rates for its domestic interstate
services. The Telecommunications Act also imposes certain requirements on all
telecommunications carriers to facilitate the entry of new telecommunications
providers. All carriers must permit interconnection of their networks with other
carriers and may not deploy network
38
<PAGE> 41
features and functions that interfere with interoperability. In addition, the
Telecommunications Act requires all telecommunications providers to contribute
equitably to a Universal Service Fund, although the FCC may exempt an interstate
carrier or class of carriers if their contribution would be minimal.
Certain provisions of the Telecommunications Act could materially affect
the growth and operation of the telecommunications industry and the services
provided by the Company. There are numerous rulemakings to be undertaken by the
FCC which will interpret and implement the Telecommunications Act's provisions.
Further, certain of the Telecommunications Act's provisions have been, and
likely will continue to be, judicially challenged. The Company is unable to
predict the outcome of such rulemakings or litigation or the substantive effect
(financial or otherwise) of the new legislation and the rulemakings on the
Company.
EMPLOYEES
As of March 31, 1996, Pacific Gateway had 30 full-time employees, of which
seven were engaged in international relations, 12 in operations and engineering,
and 11 in sales, customer support and business development.
PROPERTIES
The principal offices of the Company are located in approximately 5,000
square feet of space in Burlingame, California. The Company leases this space
under an agreement which expires in November 1996. The Company also leases a
total of approximately 3,000 square feet in New York and Los Angeles as sites
for its switching facilities. The lease in New York expires in June 1997, at
which time the Company anticipates that it will relocate to New Jersey. The
Company anticipates that it will incur additional expenses of approximately
$250,000 over a six month period in relocating its New York switching
facilities. The lease in Los Angeles expires in April 1998. The Company believes
that its facilities are adequate to support its current needs and that suitable
additional facilities will be available, when needed, at commercially reasonable
terms.
LITIGATION
The Company is not currently subject to any material legal proceedings.
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<PAGE> 42
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY MEMBERS OF MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------------- --- ---------------------------------------------
<S> <C> <C>
Howard A. Neckowitz............. 42 President, Chief Executive Officer and
Chairman of the Board
Gail E. Granton................. 40 Chief Financial Officer, Executive Vice
President, International Business
Development, Secretary and Director
Ronald L. Jensen................ 65 Director
</TABLE>
Other key members of management of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------------- --- ---------------------------------------------
<S> <C> <C>
Ronald D. Anderson.............. 39 Senior Vice President, Operations and
Engineering
Paul G. Black................... 39 Vice President, International Development
Programs
Katherine A. Chapman............ 29 Director, Customer Programs
Robert F. Craver................ 53 Senior Vice President, International
Relations
William R. Haner................ 42 Vice President, International Sales
Karen D. Martin................. 44 Controller
Joyce M. Raymond................ 32 Vice President, Carrier Marketing
Fred A. Weismiller.............. 54 Executive Vice President, International
Marketing
Vernon R. Woelke................ 47 Vice President, Finance
</TABLE>
MR. HOWARD A. NECKOWITZ has served as President, Chief Executive Officer
and Chairman of the Board of the Company since its inception in August 1991. Mr.
Neckowitz previously served as a consultant to major U.S. and overseas
telecommunications companies with respect to valuation and due diligence
processes for the acquisition of ongoing foreign telecommunications operations
and the start-up of competitive carrier operations for international, long
distance, local and cellular operations in various countries. Prior to his
consulting experience, Mr. Neckowitz served from 1982 to 1986 as Director,
International Services, at GTE Sprint, where he founded and developed GTE
Sprint's international services operation. In this position he was responsible
for feasibility analyses supporting GTE Sprint's entrance into the international
switched service market. From 1977 to 1982, Mr. Neckowitz worked at AT&T in its
Overseas Department. Mr. Neckowitz serves as Chairman of the Board of Matrix and
as a director of Cam-Net Telecommunications, Inc., a provider of domestic
telecommunication services in Canada, both of which are customers of the
Company.
MS. GAIL E. GRANTON has served as Chief Financial Officer, Executive Vice
President, International Business Development, Secretary and a member of the
Board of Directors of the Company since its inception in August 1991. From 1986
to August 1991, Ms. Granton served as a consultant to major U.S. and overseas
telecommunications companies, focusing on the valuation and due diligence
process for the acquisition of ongoing foreign telecommunication operations and
the start-up of competitive carrier operations for international, long distance,
local and cellular operations in various countries. From 1982 to 1986, Ms.
Granton worked in the International Department of GTE Sprint, as a Manager,
International Business Development, reporting to Mr. Neckowitz.
MR. RONALD L. JENSEN has served as a member of the Board of Directors since
1992. He has been the sole owner of United Group Association ("UGA"), a health
insurance agency, since 1985 and has held various executive offices since such
date. Mr. Jensen is the Chairman of the Board and served as President from 1988
to 1994 of United Insurance Companies, Inc. ("UICI"), a publicly-traded
insurance holding company, and is a member of the board of directors of Matrix.
See "Certain Relationships and Related Transactions."
40
<PAGE> 43
MR. RONALD D. ANDERSON has served as Senior Vice President, Operations and
Engineering of the Company since December 1992. From 1986 to 1992, Mr. Anderson
served in a similar position with TRT International, Inc., an international
telecommunications carrier that has since been acquired by WorldCom. Mr.
Anderson has more than 15 years of experience in domestic and international
telecommunications engineering and operations, with significant experience in
international signaling and transmission for cable and satellite, PTT technical
interface and bilateral technical negotiations.
MR. PAUL G. BLACK joined the Company in October 1995 as Vice President,
International Development Programs. From 1993 through 1995, Mr. Black was
President of SERSA/GEOCOM, a provider of dedicated international communications
services. From 1990 to 1993, Mr. Black was Manager, Western Region for GTE
Spacenet (now known as GTE Telecom). From 1987 to 1990, Mr. Black organized and
launched a national sales and customer service organization for Transpoint
Communications which marketed voice and data transmission services to Fortune
500 companies and regional long distance companies.
MS. KATHERINE A. CHAPMAN has served as Director, Customer Programs for the
Company since April 1995. From 1989 to April 1995, Ms. Chapman served in various
positions with Cable & Wireless of North America. While at Cable & Wireless, Ms.
Chapman had various responsibilities including sales, marketing, and customer
support for commercial customers, managing and maintaining a wholesale customer
base, and developing the marketing strategy for dedicated access customers. Ms.
Chapman has seven years of experience in the telecommunications industry.
MR. ROBERT F. CRAVER has served as Senior Vice President, International
Relations of the Company since February 1994. Prior to joining the Company, Mr.
Craver worked at GTE Hawaiian Telephone Co., Inc. from 1987 to 1994. While at
GTE Hawaiian Telephone, Mr. Craver directed that company's international program
as Director of International Services. Mr. Craver has also held international
positions at Sprint and AT&T, for a total of more than 20 years of experience in
the international telecommunications industry. Mr. Craver has extensive
experience in international negotiations with foreign partners and has served as
an officer of the Pacific Telecommunications Council.
MR. WILLIAM R. HANER has served as Vice President, International Sales, of
the Company since January 1995. From 1993 to 1994, Mr. Haner served in a similar
position with IDB Communications Group, Inc., an international
telecommunications company which has since been acquired by WorldCom. From 1985
to 1993, Mr. Haner was a Director of Sales for TRT International, Inc., where he
was responsible for international data services and implementing enhanced
facsimile services. Mr. Haner has more than 14 years of sales experience with
long distance carriers and commercial customers.
MS. KAREN D. MARTIN has served as Controller of the Company since October
1995. From 1982 to 1995, Ms. Martin served as Tax Manager with Tab Products Co.,
an office products company. Ms. Martin is a member of the California Society of
CPAs and the American Institute of Certified Public Accountants.
MS. JOYCE M. RAYMOND joined the Company in December 1993 as Vice President,
Carrier Marketing, to develop a U.S. carrier marketing program for the Company.
Prior to joining the Company, Ms. Raymond was Director, Carrier Services, at
West Coast Communications, where she was responsible for carrier marketing from
1992 to 1993. Ms. Raymond was also Director, Carrier Services at Com System,
Inc., a domestic long distance telecommunications company, where she was
responsible for developing the carrier marketing program from 1984 to 1992. Ms.
Raymond has more than 11 years of experience in the telecommunications industry.
MR. FRED A. WEISMILLER joined the Company in November 1994 as Executive
Vice President, International Marketing. Mr. Weismiller's responsibilities
include developing the valued-added long distance services which can be sold to
U.S. carriers and to carriers in developing overseas markets. From 1991 to 1994,
Mr. Weismiller served as Managing Director and Executive Director, Sales and
Marketing at Telecom New Zealand. Mr. Weismiller has 25 years of experience in
international and domestic telecommunications management, including 20 years
with AT&T, where his final assignment was in Hong Kong as the Managing Director
of the AT&T Regional Technical Center from 1989 to 1990.
41
<PAGE> 44
MR. VERNON R. WOELKE has served as Vice President, Finance of the Company
since October 1995. Mr. Woelke also serves as the Chief Financial Officer of
UICI, a position he has held since 1986. He has also served as a director of
UICI since 1990 and as a Director and President or Executive Officer of various
of the insurance subsidiaries of UICI since 1986. Mr. Woelke will continue to
serve as Vice President, Finance of the Company as required on an interim basis
until June 30, 1996.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Board of Directors. There are no
family relationships among the directors or officers of the Company.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
cash and non-cash compensation paid by the Company during the fiscal year ended
December 31, 1995 to the Company's Chief Executive Officer and each of the
Company's other executive officers whose total compensation for services in all
capacities to the Company exceeded $100,000 during such year.
SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1995
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
NAME AND ---------------------- OPTIONS/SARS
PRINCIPAL POSITION SALARY BONUS #
- ------------------------------------------------------ -------- ------- ------------
<S> <C> <C> <C>
Howard A. Neckowitz................................... $240,000 $17,528 141,175
President and Chief Executive Officer
Gail E. Granton....................................... $144,167 $10,711 65,882
Chief Financial Officer, Executive Vice President,
International Business Development and Secretary
</TABLE>
The Company's Board of Directors and stockholders adopted the Company's
1995 Stock Option Plan (the "Option Plan") on September 30, 1995. As of March
31, 1996, options to purchase 539,170 shares of Common Stock had been granted by
the Company under the Option Plan. No compensation intended to serve as
incentive for performance to occur over a period longer than one fiscal year was
paid pursuant to a long-term incentive plan during the last fiscal year to any
of the persons named in the Summary Compensation Table. The Company does not
have any defined benefit or actuarial plan under which benefits are determined
primarily by final compensation or average final compensation and years of
service with any of the persons named in the Summary Compensation Table.
42
<PAGE> 45
STOCK OPTIONS GRANTED IN FISCAL 1995
The following table provides information concerning grants of options to
purchase the Company's Common Stock made during the fiscal year ended December
31, 1995 to the persons named in the Summary Compensation Table:
OPTION GRANTS IN FISCAL YEAR 1995
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION
SECURITIES GRANTED EXERCISE FOR OPTION TERM(3)
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION -------------------
OPTIONS GRANTED FISCAL 1995 SHARE(2) DATE 5% 10%
--------------- ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Howard A. Neckowitz............ 141,175(1) 27.7% $8.50 09/30/00 $331,536 $732,610
Gail E. Granton................ 65,882(1) 12.9 8.50 09/30/00 154,717 341,884
</TABLE>
- ---------------
(1) Options vest and become exercisable 25% on September 30, 1996 and 6.25% per
quarter thereafter, provided optionee is continuously employed by the
Company.
(2) All options were granted at an exercise price equal to the fair market value
of Pacific Gateway's Common Stock as determined by the Board of Directors of
the Company on the date of grant. Pacific Gateway's Common Stock was not
publicly traded at the time of the option grants to the officers.
(3) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of the future Common
Stock price. Actual gains, if any, on stock option exercises are dependent
on the future performance of the Common Stock, overall market conditions and
the option holders' continued employment through the vesting period. This
table does not take into account any appreciation in the price of the Common
Stock from the date of grant to date. If the fair market value of the Common
Stock at the date of grant is the assumed initial public offering price of
$14.00, the potential realizable value of these options (a) at a 5% assumed
annual rate of stock price appreciation would be $546,060, and $254,828,
respectively, and (b) at a 10% assumed annual rate of stock price
appreciation would be $1,206,651 and $563,103, respectively.
OPTION EXERCISES AND FISCAL 1995 YEAR-END VALUES
The following table provides the specified information concerning
unexercised options held as of December 31, 1995 by the persons named in the
Summary Compensation Table:
AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT 12/31/95 12/31/95(1)
------------------- -------------------
NAME VESTED UNVESTED VESTED UNVESTED
- ------------------------------------------------------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
Howard A. Neckowitz.................................... -- 141,175 -- $352,937
Gail E. Granton........................................ -- 65,882 -- $164,705
</TABLE>
- ---------------
(1) Calculated by subtracting the exercise price from the estimated fair market
value of the underlying securities as of December 31, 1995 of $11.00 per
share.
No options were exercised by the individuals named in the table in fiscal
year 1995. No compensation intended to serve as incentive for performance to
occur over a period longer than one fiscal year was paid pursuant to a long-term
incentive plan during the last fiscal year to any of the persons named in the
Summary Compensation Table.
STOCK PLANS
1995 Stock Option Plan
The Company has reserved a total of 1,200,000 shares of Common Stock for
issuance under the Option Plan, 120,000 shares of which have been reserved for
issuance to Outside Directors (as defined herein). As of March 31, 1996, options
to purchase 539,170 shares had been granted under the Option Plan. Under the
Option Plan, options may be granted to employees (including officers),
consultants, advisors and directors of
43
<PAGE> 46
the Company, although only employees and directors and officers who are also
employees may receive "incentive stock options" intended to qualify for certain
tax treatment. The exercise price of nonqualified stock options must be no less
than the fair market value of the Common Stock on the date of grant. The
exercise price of incentive stock options must be no less than the fair market
value of the Common Stock on the date of grant and, in the case of incentive
stock options granted to employees owning 10% or more of the Company's
outstanding stock ("10% Holders"), the exercise price must be no less than 110%
of the fair market value of the Common Stock on the date of grant. Options
granted under the Option Plan generally vest over a four-year period but vest in
full upon a change of control of the Company. The Option Plan also provides for
the automatic granting of nonqualified stock options to directors of the Company
who hold less than 3% of the shares outstanding and who are not employees of the
Company ("Outside Directors"). Currently there are no Outside Directors of the
Company. Each Outside Director is eligible on the effective date of this
Offering, and each new Outside Director who is elected after the effective date
of this Offering will be granted an initial option to purchase 20,000 shares of
Common Stock on the effective date of this Offering or upon his or her initial
appointment or election to the Board of Directors, respectively. Subsequently,
each Outside Director will automatically be granted an option to purchase 10,000
shares of Common Stock on each successive anniversary date of either (i) in the
case of an Outside Director eligible on the effective date of this Offering, the
effective date of this Offering, or (ii) in the case of other Outside Directors,
the date of his or her initial election or appointment as an Outside Director.
The exercise price of the options granted to Outside Directors will be equal to
the fair market value of the Common Stock on the date of grant. Options granted
under the Option Plan generally vest over four years and must be exercised
within five years.
1995 Employee Stock Purchase Plan
A total of 400,000 shares of the Company's Common Stock have been reserved
for issuance under the Company's 1995 Employee Stock Purchase Plan (the
"Purchase Plan"), none of which have yet been issued. The Purchase Plan permits
eligible employees of the Company to purchase Common Stock at a discount, but
only through payroll deductions, during concurrent 24-month offering periods.
Each offering period will be divided into four consecutive six-month purchase
periods. The price at which Common Stock is purchased under the Purchase Plan is
set by the Board of Directors, but shall not be less than 85% of the fair market
value of the Common Stock on the first day of the offering period or the last
day of the purchase period, whichever is lower. The initial offering period will
commence on the effective date of this Offering.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, dated October 1, 1995,
with each of Howard A. Neckowitz, President, Chief Executive Officer and
Chairman of the Board, Gail E. Granton, Chief Financial Officer, Executive Vice
President, International Business Development and Secretary, Ronald D. Anderson,
Senior Vice President, Operations and Engineering and Robert F. Craver, Senior
Vice President, International Relations. These agreements generally provide,
with certain limited exceptions, that the officer cannot render services to
another person or entity without the prior written consent of the Board of
Directors of the Company or engage in any activity which conflicts or interferes
in any material way with the performance of his or her duties with the Company
during the term of the agreement (which range from two to four years) and during
the separation period following the officer's termination of employment prior to
the end of the term of the agreement so long as the officer is receiving a
severance payment from the Company. The agreements provide that the officer may
terminate the agreement during the separation period following termination of
employment, thus terminating the officer's obligation not to compete as well as
the Company's obligation to pay severance. The agreement with Mr. Neckowitz is
for a term of four years, the agreements with Ms. Granton and Mr. Anderson are
for a term of three years and the agreement with Mr. Craver is for a term of two
years. Under their respective employment agreements, Mr. Neckowitz's annual base
salary is $300,000, Ms. Granton's annual base salary is $160,000, Mr. Anderson's
annual base salary is $125,000 and Mr. Craver's annual base salary is $135,000.
Under each of the agreements, the officer's salary may be reviewed by the
Company on an annual basis and is subject to upward adjustment in the reasonable
and good faith discretion of the Board of Directors. Each officer is eligible
for bonuses as determined by the Board in its discretion, based on the
performance of the officer and the Company. The agreements provide for severance
payments in
44
<PAGE> 47
an amount equal to base salary to the end of the term or, if greater, two years
of base salary for Mr. Neckowitz and one year of base salary for Ms. Granton,
Mr. Anderson, and Mr. Craver in the event of termination without cause or
termination following a change of control of the Company. The severance payments
are expressly conditioned on the officer not competing with the Company during
the separation period and are payable on or around the Company's normal paydays
in accordance with the Company's then-existing normal payroll practices. In the
event of a change of control, each of such employees would be entitled to the
same severance following his or her resignation from the Company resulting from
diminution of his or her duties. Upon any such payment of severance or upon any
termination by mutual agreement of the parties, the officer would also receive
full vesting of any outstanding stock options. The agreements with Messrs.
Neckowitz, Anderson and Craver and Ms. Granton require them to sign such
confidentiality and nondisclosure agreements as may be requested by the Company
from time to time, which will be deemed effective as of the date of such
officer's initial employment with the Company.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for services
provided as a director. Under the Option Plan, Outside Directors will receive an
initial option to purchase 20,000 shares of Common Stock on the effective date
of this Offering or upon his or her initial appointment or election to the Board
of Directors and yearly grants of options to purchase 10,000 shares of Common
Stock. See "Stock Plans -- 1995 Stock Option Plan." The Company does not pay
additional amounts for committee participation or special assignments of the
Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During the fiscal year ended December 31, 1995, the entire Board of
Directors, of which Howard A. Neckowitz, President, Chief Executive Officer and
Chairman of the Board of the Company, and Gail E. Granton, Chief Financial
Officer, Executive Vice President, International Business Development and
Secretary of the Company, were and are members, fulfilled all functions of the
Compensation Committee with regard to compensation of executive officers of the
Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware Law, the Company has adopted
provisions in its Certificate of Incorporation which provide that directors of
the Company shall not be personally liable for monetary damages to the Company
or its stockholders for a breach of fiduciary duty as a director, except for
liability as a result of (i) a breach of the director's duty of loyalty to the
Company or its stockholders; (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) an act
related to the unlawful stock repurchase or payment of a dividend under Section
174 of the Delaware Law; and (iv) transactions from which the director derived
an improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the fullest extent permitted under Delaware Law. The Company has
entered into separate indemnification agreements with its directors and officers
which are, in some cases, broader than the specific indemnification provisions
contained in the Delaware Law. The indemnification agreements require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct of
a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
45
<PAGE> 48
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS
In November 1992, Pacific Gateway received loan commitments aggregating
$750,000 from Ronald L. Jensen, currently a director and 16.53% stockholder of
Pacific Gateway, in connection with Mr. Jensen's purchase of a majority interest
in Pacific Gateway. In 1992, Pacific Gateway entered into a $5.0 million
revolving credit facility (the "Note") with Mr. Jensen. Since that time, Pacific
Gateway has achieved certain performance-based milestones which have resulted in
an increase in the amount available to Pacific Gateway under the Note to $9.0
million, the maximum amount provided for under the Note. The Note bears interest
at the prime rate plus 2%, payable monthly. Payments of principal and interest
under the Note are secured, under a Security and Pledge Agreement dated February
1, 1993, by all the tangible and intangible assets of Pacific Gateway other than
those pledged as security of the credit facility with a commercial lender. As of
March 31, 1996, the outstanding principal balance under the Note was $5.4
million. The Company intends to repay the balance outstanding under the Note
with a portion of net proceeds of this Offering. The revolving credit facility
will expire on the closing of this Offering. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
The Company has entered into indemnification agreements with its directors
and officers. Such agreements require the Company to indemnify such individuals
and are, in some cases, broader than the specific indemnification provisions
contained in the Delaware Law. See "Management -- Limitation of Liability and
Indemnification."
AGREEMENTS WITH AFFILIATES
Mr. Neckowitz has been granted proxies to vote an aggregate of 8,900,860
shares of Common Stock held by Ronald L. Jensen, Julie J. Jensen, Jeffrey J.
Jensen, Janet J. Krieger, James J. Jensen, and Jami J. Jensen. In addition, Gail
E. Granton has granted Mr. Neckowitz a proxy to vote 1,043,081 shares only in
the event the over-allotment option is exercised by the underwriters. Such
proxies expire on January 1, 1998 or, if earlier, the date on which Mr.
Neckowitz is unable to perform his duties as an officer of the Company due to
his voluntary resignation, termination for cause, illness, disability, physical
or mental incapacity or death. Mr. Jensen has entered into an Irrevocable Proxy
and Voting Agreement with Mr. Neckowitz providing that if Mr. Jensen acquires
any of such shares owned by his adult children, Mr. Neckowitz shall continue to
have the right to vote such shares in accordance with the terms of the proxies
described above.
Mr. Jensen, a director and 16.53% stockholder of Pacific Gateway, is a
director of Matrix and owns approximately 10.8% of the outstanding shares of
common stock of Matrix. Howard A. Neckowitz, President, Chief Executive Officer,
Chairman of the Board and 17.09% stockholder of Pacific Gateway, is the Chairman
of the Board of Matrix and owns approximately 3.3% of the outstanding shares of
common stock of Matrix. Gail E. Granton, Chief Financial Officer, Executive Vice
President, International Business Development, Secretary and a director of
Pacific Gateway owns approximately 1.2% of the outstanding shares of common
stock of Matrix. Ronald D. Anderson, Senior Vice President, Operations and
Engineering of Pacific Gateway, owns approximately 0.8% of the outstanding
shares of common stock of Matrix. Matrix is currently Pacific Gateway's largest
customer, with Pacific Gateway recording revenues from sales to Matrix of
approximately $9.2 million and $17.2 million for the fiscal years ended December
31, 1994 and 1995, respectively, and approximately $4.8 million for the three
months ended March 31, 1996. These revenues accounted for approximately 44% and
22% of Pacific Gateway's revenues for 1994 and 1995, respectively, and
approximately 15% for the three months ended March 31, 1996. Matrix also
provides the Company with certain data processing services for which the Company
pays Matrix a service fee on a per call processed basis which approximates the
cost of the services provided. In addition, Matrix has committed to send
substantially all of its international telecommunications traffic and its
domestic telecommunications traffic in the Northeast and California through
Pacific Gateway's network until November 1996, subject to earlier termination if
the Company does not match a bona fide competitive pricing offer Matrix may
receive from a third party. See
46
<PAGE> 49
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Overview" and "Business -- Customers."
In February 1995, the Company accepted certain shares of common stock of a
customer as payment for accounts receivable totaling $702,000. The Company then
sold this stock to Ronald L. Jensen for $702,000. Mr. Jensen subsequently sold
the stock for $730,000.
In December 1995, the Company made an advance in the amount of $100,000 to
Howard A. Neckowitz. Such advance was due on demand and was repaid during the
first quarter of 1996.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 30, 1996, and as adjusted to
reflect the sale of the Shares offered hereby, (i) by each person who is known
by the Company to own beneficially more than 5% of the Company's Common Stock,
(ii) by each of the executive officers named in the table under "Executive
Compensation" and by each of the Company's directors, (iii) by all officers and
directors of the Company as a group, and (iv) by each Selling Stockholder.
Except pursuant to applicable community property laws or as indicated in the
footnotes to this table, each stockholder identified in the table possesses sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by such stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE SHARES BEING OWNED AFTER THE
OFFERING OFFERED OFFERING
--------------------- ------------ -----------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER NUMBER PERCENT
- ------------------------------------- ---------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
Howard A. Neckowitz(1)............... 11,285,640 80.86% 223,954 11,061,686(3) 58.66%
533 Airport Blvd.
Burlingame, California 94010
Ronald L. Jensen(2).................. 2,306,760 16.53% -- 2,306,760 12.23%
5215 North O'Connor
Irving, Texas 75039
Gail E. Granton...................... 1,192,860 8.55% 112,446 1,080,414 5.73%
533 Airport Blvd.
Burlingame, California 94010
Julie J. Jensen...................... 1,318,820 9.45% -- 1,318,820(3) 6.99%
1023 15th Street N.W.
Washington, D.C. 20005
Jeffrey J. Jensen.................... 1,318,820 9.45% -- 1,318,820(3) 6.99%
2121 Precinct Line Road
Hurst, Texas 76054
Janet Jensen Krieger................. 1,318,820 9.45% -- 1,318,820 6.99%
9003 Airport Freeway
Fort Worth, Texas 76180
James J. Jensen...................... 1,318,820 9.45% -- 1,318,820(3) 6.99%
6304 Alexandria Circle
Atlanta, Georgia 30326
Jami J. Jensen....................... 1,318,820 9.45% -- 1,318,820(3) 6.99%
1933 Swede Gulch
Golden, Colorado 80120
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED BEFORE THE BEING OWNED AFTER THE
OFFERING OFFERED OFFERING
---------------------- ------- ----------------------
OFFICERS AND DIRECTORS NUMBER PERCENT NUMBER NUMBER PERCENT
- --------------------------------------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Howard A. Neckowitz(1)................. 11,285,640 80.86% 223,954 11,061,686(3) 58.66%
Ronald L. Jensen(2).................... 2,306,760 16.53% -- 2,306,760 12.23%
Gail E. Granton........................ 1,192,860 8.55% 112,446 1,080,414 5.73%
Ronald D. Anderson..................... 294,220 2.11% 30,600 263,620 1.40%
Katherine A. Chapman................... 9,400 * -- 9,400 *
Robert F. Craver....................... 135,360 * -- 135,360 *
William R. Haner....................... 78,960 * -- 78,960 *
Joyce M. Raymond....................... 78,960 * -- 78,960 *
Fred A. Weismiller..................... 135,360 * -- 135,360 *
Vernon R. Woelke....................... 17,860 * -- 17,860 *
All officers and directors as a group
(12 persons)(1)...................... 13,228,620 94.79% 367,000 12,861,620(3) 68.21%
</TABLE>
- ---------------
* Represents less than 1%.
(1) Includes 2,306,760 shares held by Ronald L. Jensen, 1,318,820 shares held by
Julie J. Jensen, 1,318,820 shares held by Jeffrey J. Jensen, 1,318,820
shares held by Janet J. Krieger, 1,318,820 shares held by James J. Jensen
and 1,318,820 shares held by Jami J. Jensen for which Mr. Neckowitz has been
given an irrevocable proxy to vote such shares. Excludes 1,020,414 shares
held by Gail Granton for which Mr. Neckowitz has been given an irrevocable
proxy to vote such shares only in the event the over-allotment option is
exercised. Such proxies held by Mr. Neckowitz expire on January 1, 1998, or,
if earlier, the date on which Mr. Neckowitz becomes unable to perform his
duties as an officer of the Company due to his voluntary resignation,
termination for cause, illness, disability, physical or mental incapacity or
death. As a proxy holder, Mr. Neckowitz may be deemed to be the beneficial
owner of such shares, but Mr. Neckowitz disclaims beneficial ownership of
all such shares. See "Certain Relationships and Related Transactions."
(2) Excludes shares held by Mr. Jensen's adult children Julie J. Jensen, Jeffrey
J. Jensen, Janet J. Krieger, James J. Jensen and Jami J. Jensen and certain
employees of companies associated with Mr. Jensen. Mr. Jensen has the right
to purchase, and each of such persons has the right to cause Mr. Jensen to
purchase, up to 40% of the shares held by each of such persons if they cease
to be employed by a Jensen related company. Mr. Jensen has entered into an
Irrevocable Proxy and Voting Agreement with Mr. Neckowitz providing that if
Mr. Jensen acquires any of such shares, Mr. Neckowitz shall continue to have
the right to vote such shares in accordance with the term of the proxies
described in footnote 1.
(3) Assumes no exercise of the over-allotment option by the Underwriters. If the
over-allotment option is exercised in full, the number of shares owned after
this Offering by Gail E. Granton will be reduced by 60,000 and the
percentage of shares beneficially owned by her after this Offering will be
5.40%, the number of shares owned by Ronald D. Anderson will be reduced by
30,000 and the percentage of shares beneficially owned by him after this
Offering will be 1.24%, the number of shares owned after this Offering by
Julie J. Jensen and Jami J. Jensen will each be reduced by 155,000 and the
percentage of shares beneficially owned by each of them after this Offering
will be 6.16%, the number of shares owned after this Offering by Jeffrey J.
Jensen and James J. Jensen will each be reduced by 115,000 and the
percentage of shares beneficially owned by each of them after this Offering
will be 6.37% and the number of shares beneficially owned after this
Offering by Howard A. Neckowitz will be reduced by 660,000 and the
percentage of shares beneficially owned by him after this Offering will be
60.45% after giving effect to the sale by him of 120,000 shares and the sale
of 540,000 shares subject to the proxies described in footnote 1 and the
effectiveness of the proxy granted by Gail Granton as described in footnote
1. If the over-allotment option is exercised in full, the remaining 40,050
shares to be sold to the Underwriters will be sold by the Company.
48
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, par value $.0001 per share, and 1,000,000 shares of Preferred
Stock, par value $.0001 per share. As of March 31, 1996, there were 14,100,000
shares of Common Stock issued and outstanding held of record by 27 stockholders
and no shares of Preferred Stock issued and outstanding. The following
description of the Company's capital stock does not purport to be complete and
is subject to, and qualified in its entirety by, the Certificate of
Incorporation and Bylaws of the Company that are included as exhibits to the
Registration Statement of which this Prospectus is a part and by the provisions
of applicable law.
COMMON STOCK
The holders of Common Stock are entitled to all of the rights and
privileges of holders of shares of common stock under the Delaware Law. The
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of legally
available funds. In the event of the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities. Holders of Common Stock do not
have preemptive rights or other rights to subscribe for additional shares. There
are no redemption or sinking fund provisions applicable to the Common Stock. All
of the outstanding shares of Common Stock are, and the shares of Common Stock
sold in this Offering will be, when issued, duly authorized, validly issued,
fully paid and nonassessable.
Each holder of Common Stock is entitled to one vote for each share of
Common Stock on all matters submitted to the vote of stockholders, including the
election of directors. Cumulative voting for the election of directors is
prohibited by the Company's Certificate of Incorporation and Bylaws.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue Preferred Stock in one or more series and
to designate the dividend rate, voting rights and other rights, preferences and
restrictions of each series, any or all of which may be greater than the rights
of the Common Stock. It is not possible to state the actual effect of the
issuance of any shares of Preferred Stock upon the rights of holders of the
Common Stock until the Board of Directors determines the specific rights of the
holders of such Preferred Stock. However, the effects might include, among other
things, restricting dividends on the Common Stock, diluting the voting power of
the Common Stock, impairing the liquidation rights of the Common Stock and
delaying or preventing a change in control of the Company without further action
by the stockholders. The Company has no present plans to issue any shares of
Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is a Delaware corporation and subject to Section 203 of the
Delaware Law, an anti-takeover law. In general, Section 203 of the Delaware Law
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (defined broadly to include mergers, consolidations,
sales or disposition of other assets having an aggregate value of in excess of
10% of the consolidated assets of the corporation, and certain other assets that
would increase the interested stockholder's proportionate share of ownership in
the corporation) with a Delaware corporation for three years following the date
such person became an interested stockholder, subject to certain exceptions such
as the approval of the board of directors and of the holders of at least two
thirds of the outstanding shares of voting stock not owned by the interested
stockholder. The existence of this provision would be expected to have an
anti-takeover effect, including attempts that might result in a premium over the
market price for the shares of Common Stock held by stockholders.
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that may reduce the likelihood of a change in management or voting
control of the Company without the consent of the Board of Directors. The Bylaws
provide that the Board of Directors will consist of not less than five directors
and that the number of directors shall be determined by a majority of the Board
of Directors. Further, vacancies in the
49
<PAGE> 52
Board of Directors may be filled by a majority vote of the directors then in
office, though less than a quorum. Accordingly, the Board of Directors could
delay any stockholder from obtaining majority representation on the Board of
Directors by enlarging the Board of Directors and filling the new vacancies with
its own nominees until the next stockholder election. The Company's Certificate
of Incorporation also does not provide for cumulative voting in the election of
directors. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock will be Chemical
Mellon Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock.
Upon completion of this Offering, the Company will have outstanding an
aggregate of 18,856,440 shares of Common Stock (an aggregate of 18,896,490
shares if the Underwriters' over-allotment option is exercised in full). Of
these shares, the 5,267,000 shares sold in this Offering (6,057,050 shares if
the Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), except for any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act (whose sales would be subject to certain limitations and
restrictions described below) and except for the 1,800,000 shares being
purchased by KDD. See "Sale of Shares to KDD."
The remaining 13,589,440 shares of Common Stock held by existing
stockholders were issued and sold by the Company in reliance on exemptions from
the registration requirements of the Securities Act. All such outstanding shares
will be subject to the "lock-up" agreements described below. Upon expiration of
such lock-up agreements 180 days after the date of this Prospectus, 5,568,000
shares will become eligible for sale, subject in most cases to the limitations
of Rule 144. The remaining 8,021,440 shares held by existing stockholders will
become eligible for sale at various times over a period of less than two years.
KDD will enter into an agreement not to sell any of the shares of Common
Stock being purchased by KDD during the 180-day period commencing from the date
of this Prospectus and to restrict its sales during a 180-day period thereafter
to the volume limits that would be applicable if the shares were restricted
shares eligible for sale pursuant to Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) 1% of the number of
shares of Common Stock then outstanding (approximately 189,000 shares
immediately after this Offering) or (ii) generally, the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the required
filing of a Form 144 with respect to such sale. Sales under Rule 144 are
generally subject to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least three years, is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice filing provisions of Rule 144.
Under Rule 701 under the Securities Act, persons who purchase shares upon
exercise of options granted prior to the effective date of this Offering are
entitled to sell such shares 90 days after the effective date of this Offering
in reliance on Rule 144, without having to comply with the holding period and
notice filing requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the public information, volume limitation or
notice filing provisions of
50
<PAGE> 53
Rule 144. The Securities and Exchange Commission has proposed certain amendments
to Rule 144 which would reduce the requisite holding period from two years to
one year.
The Company and each of its directors, executive officers and existing
stockholders have agreed not to offer, sell, contract to sell, or grant any
option to purchase or otherwise dispose of any shares of Common Stock owned by
any of them prior to the expiration of 180 days from the date of this
Prospectus, except (i) for shares of Common Stock offered hereby, (ii) with the
prior written consent of PaineWebber Incorporated, (iii) in the case of
directors, executive officers and stockholders of the Company, transfers to
members of their families or trusts for the benefit of any of them who agree to
the terms of such "lock-up" agreement and (iv) in the case of the Company, for
the issuance of shares of Common Stock upon the exercise of options, or the
grant of options to purchase shares of Common Stock, under the Company's Option
Plan and the issuance of shares of Common Shares under the Company's Purchase
Plan.
UNDERWRITING
The underwriters named below, acting through PaineWebber Incorporated and
Alex. Brown & Sons Incorporated (the "Representatives"), have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement by
and among the Company, the Selling Stockholders and the Representatives (the
"Underwriting Agreement"), to purchase from the Company and the Selling
Stockholders, and the Company and the Selling Stockholders have severally agreed
to sell to the Underwriters, respectively, 3,100,000 shares and 367,000 shares
of the Company's Common Stock, which in the aggregate equals the number of
shares of Common Stock set forth opposite the name of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
PaineWebber Incorporated..................................................
Alex. Brown & Sons Incorporated...........................................
---------
Total........................................................... 3,467,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares of Common Stock listed above are subject to
certain conditions. The Underwriting Agreement also provides that the
Underwriters are committed to purchase, and the Company and the Selling
Stockholders are obligated to sell, 3,467,000 of the shares of Common Stock
offered by this Prospectus, if any of the shares of Common Stock being sold
pursuant to the Underwriting Agreement are purchased (without consideration of
any shares that may be purchased through the exercise of the Underwriters'
overallotment option).
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover of this Prospectus
and to certain dealers at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such dealers may reallow,
a concession to other dealers not in excess of $ per share. After the
initial public offering of the Common Stock, the public offering price, the
concessions to selected dealers and reallowance to other dealers may be changed
by the Representatives.
The Company and certain stockholders of the Company have granted to the
Underwriters an option, exercisable during the 30-day period after the date of
this Prospectus, to purchase up to an additional 40,050 and 750,000 shares,
respectively, of Common Stock at the initial public offering price set forth on
the cover page of this Prospectus, less the underwriting discounts and
commissions. To the extent the Underwriters exercise such option, each of the
Underwriters will become obligated, subject to certain conditions, to
51
<PAGE> 54
purchase such percentage of such additional shares of Common Stock as is
approximately equal to the percentage of shares of Common Stock that it is
obligated to purchase as shown in the table set forth above. The Underwriters
may exercise such option only to cover over-allotments, if any, incurred in the
sales of shares of Common Stock.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company and each of its directors, executive officers and existing
stockholders have agreed not to offer, sell, contract to sell, or grant any
option to purchase or otherwise dispose of any shares of Common Stock owned by
any of them prior to the expiration of 180 days from the date of this
Prospectus, except (i) for shares of Common Stock offered hereby, (ii) with the
prior written consent of PaineWebber Incorporated, (iii) in the case of
directors, executive officers and stockholders of the Company, transfers to
members of their families or trusts for the benefit of any of them who agree to
the terms of such "lock-up" agreement and (iv) in the case of the Company, for
the issuance of shares of Common Stock upon the exercise of options, or the
grant of options to purchase shares of Common Stock, under the Company's Option
Plan and the issuance of shares under the Company's Purchase Plan.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. The initial public offering price will be determined
through negotiations among the Company, the Selling Stockholders, the
Underwriters and the Representatives. Among the factors to be considered in
determining the initial public offering price, in addition to prevailing market
conditions, will be certain financial information of the Company, the history
of, and the prospects for, the Company and the industry in which it competes, an
assessment of the Company's management, its past and present operations, the
prospects for, and timing of, future revenues of the Company, the present state
of the Company's development, and the above factors in relation to market values
and various valuation measures of other companies engaged in activities similar
to the Company. The initial public offering price set forth on the cover page of
this Prospectus should not, however, be considered an indication of the actual
value of the Common Stock. Such price is subject to change as a result of market
conditions and other factors. There can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade in
the public market subsequent to this Offering at or above the initial public
offering price.
As part of this Offering, the Company will sell directly to KDD 1,800,000
Shares of Common Stock at a price equal to the initial public offering price,
net of underwriting discounts and commissions. The Shares being sold to KDD are
not subject to the Underwriting Agreement and the Underwriters will not receive
any fees or commissions in connection with the sale of such Shares to KDD.
LEGAL MATTERS
The validity of the Shares offered hereby and general corporate legal
matters will be passed upon for the Company by Gray Cary Ware & Freidenrich, A
Professional Corporation, Palo Alto, California. Certain legal matters relating
to the sale of the shares of Common Stock in this Offering will be passed upon
for the Underwriters by Paul, Hastings, Janofsky & Walker, New York, New York.
EXPERTS
The balance sheets as of December 31, 1994 and 1995 and the statements of
operations, cash flows, and changes in stockholders' equity for the years ended
December 31, 1993, 1994 and 1995 included in this Prospectus have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
52
<PAGE> 55
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form S-1 under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the Financial Statements and related Notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved.
As a result of this Offering, the Company will become subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended. As long as the Company is subject to such
periodic reporting and informational requirements, it will file with the
Commission all reports, proxy statements and other information required thereby.
The Registration Statement, as well as such reports and other information filed
by the Company with the Commission, may be inspected at the public reference
facilities maintained by the Commission at its principal office located at 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor New York, New York 10048. Copies of such material may
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
53
<PAGE> 56
GLOSSARY
Access Charges -- The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
Estimated return traffic revenue backlog -- Under the terms of certain
operating agreements, the Company is contractually entitled to receive
proportional return traffic and must wait up to six months to receive this
return traffic from its foreign partner. The Company records revenue with
minimal associated direct cost when it receives the return traffic. The backlog
at the end of a period represents the amount of revenue the Company expects to
receive during the six months following the end of that period based on the
amount of traffic it has already delivered to its foreign partner.
FCC -- Federal Communications Commission.
Facilities based international carrier -- A company that owns or leases its
international network facilities including undersea fiber optic cables and
switching facilities rather than reselling time provided by another facilities
based carrier.
LECs (Local Exchange Carrier) -- A company providing Local Exchange
Services.
Local Exchange Services -- Local Exchange Services generally refers to all
services provided by a LEC including local dial tone and long distance access
services.
Long distance carriers -- Long distance carriers provide services between
local exchanges on an interstate or intrastate basis. A long distance carrier
may offer services over its own or another carriers facilities.
Operating agreement -- International long distance traffic is traditionally
exchanged pursuant to switched voice operating agreements between two long
distance carriers in two countries. The agreements provide for the termination
of traffic in, and return of traffic to, the partners' respective countries for
mutual compensation through negotiated settlement rates. The agreements
typically provide that a foreign carrier will return the same percentage of
total U.S. terminating traffic as it receives from the U.S.-based carrier, and
also provide for network coordination and accounting and settlement procedures.
PTT -- Telecommunication carrier that has been dominant in their home
market and which may be wholly or partially government-owned. They are often
referred to as Post Telephone and Telegraph or "PTT".
Private Line -- A private, dedicated telecommunications line connecting
different end user locations.
Proportional return traffic -- Under the terms of the operating agreements,
the foreign partners are required to deliver to the U.S. carriers the traffic
flowing to the U.S. in the same proportion as the U.S. carriers delivered U.S.
originated traffic to the foreign carriers.
RBOC (Regional Bell Operating Company) -- The seven local telephone
companies established by the 1982 agreement between AT&T and the Department of
Justice.
Switch -- A sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow telecommunications service providers to connect
calls directly to their destination, while providing advanced features and
recording connection information for future billing.
Undersea fiber optic cable -- Fiber optic cable is the medium of choice for
the telecommunications industry. Fiber is immune to electrical interference and
environmental factors that affect copper wiring and satellite transmission.
Fiber optic technology involves sending laser light pulses across glass strands
in order to transmit digital information. A strand of fiber optic cable is as
thick as a human hair yet is said to have more bandwidth capacity than a copper
wire the size of a telephone pole. For international service, the fiber optic
cable is placed at the bottom of the oceans in order to connect the various
continents.
54
<PAGE> 57
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited with
respect to March 31, 1996).......................................................... F-3
Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and the
Three Months Ended March 31, 1995 and 1996 (unaudited with respect to the periods
ended March 31, 1995 and 1996)...................................................... F-4
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the
Three Months Ended March 31, 1995 and 1996 (unaudited with respect to the periods
ended March 31, 1995 and 1996)...................................................... F-5
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1993,
1994 and 1995 and the Three Months Ended March 31, 1996 (unaudited with respect to
the period ended March 31, 1996).................................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pacific Gateway Exchange, Inc.:
We have audited the accompanying balance sheets of Pacific Gateway
Exchange, Inc., as of December 31, 1994 and 1995, and the related statements of
operations, cash flows, and changes in stockholders' equity for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pacific Gateway Exchange,
Inc., as of December 31, 1994 and 1995, and the results of their operations and
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
May 13, 1996
F-2
<PAGE> 59
PACIFIC GATEWAY EXCHANGE, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 9,485 $ 1,792,202 $ 3,690,607
Accounts receivable, net of allowance for doubtful
accounts of $137,038 in 1994, $824,337 in 1995 and
$959,337 in 1996.................................... 4,683,257 12,804,008 18,992,096
Accounts receivable, related party.................... 2,203,000 3,261,849 2,788,956
Advances receivable, related party.................... -- 175,000 --
Income tax recoverable................................ 54,868 -- --
----------- ----------- -----------
Total current assets........................ 6,950,610 18,033,059 25,471,659
PROPERTY AND EQUIPMENT:
Undersea fiber optic cables........................... 2,698,050 5,825,684 8,616,120
Long distance communications equipment................ 2,398,467 6,092,410 7,355,075
Office furniture and equipment........................ 337,195 748,530 816,517
----------- ----------- -----------
5,433,712 12,666,624 16,787,712
Less accumulated depreciation......................... 532,180 1,656,170 2,040,957
----------- ----------- -----------
Total property and equipment, net........... 4,901,532 11,010,454 14,746,755
Notes receivable...................................... 223,834 149,669 148,865
Deferred income tax................................... 53,309 148,247 177,743
Deposits and other assets............................. 171,334 414,317 577,493
----------- ----------- -----------
Total assets................................ $12,300,619 $29,755,746 $41,122,515
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 6,636,730 $19,418,595 $27,837,134
Accrued liabilities................................... 71,875 772,256 718,980
Income taxes payable.................................. -- 735,218 254,714
Revolving line of credit.............................. -- 3,000,000 3,000,000
Other liabilities..................................... -- 518,758 633,864
----------- ----------- -----------
Total current liabilities................... 6,708,605 24,444,827 32,444,692
Revolving line of credit, related party............... 4,487,724 2,420,339 5,420,339
----------- ----------- -----------
Total liabilities........................... 11,196,329 26,865,166 37,865,031
Commitments and Contingencies (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, authorized
1,000,000 shares.................................... -- -- --
Common stock, $.0001 par value, authorized 25,000,000
shares, issued and outstanding 14,100,000 shares.... 1,410 1,410 1,410
Additional paid-in capital............................ 940,324 940,324 940,324
Retained earnings..................................... 162,556 1,948,846 2,315,750
----------- ----------- -----------
Total stockholders' equity.................. 1,104,290 2,890,580 3,257,484
----------- ----------- -----------
Total liabilities and stockholders'
equity.................................... $12,300,619 $29,755,746 $41,122,515
=========== =========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
F-3
<PAGE> 60
PACIFIC GATEWAY EXCHANGE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $1,817,484 $11,702,041 $59,250,454 $8,364,265 $27,480,056
Revenues -- related party................ 3,231,000 9,211,000 17,165,995 3,760,598 4,759,701
---------- ----------- ----------- ---------- -----------
Total revenues................. 5,048,484 20,913,041 76,416,449 12,124,863 32,239,757
Cost of long distance services........... 4,035,847 17,195,516 66,346,356 10,041,528 29,130,061
---------- ----------- ----------- ---------- -----------
Gross margin................... 1,012,637 3,717,525 10,070,093 2,083,335 3,109,696
Selling, general and administrative
expenses............................... 1,007,832 2,273,430 5,466,831 992,338 1,955,996
Depreciation............................. 104,241 410,115 1,123,990 188,812 384,787
---------- ----------- ----------- ---------- -----------
Total operating expenses....... 1,112,073 2,683,545 6,590,821 1,181,150 2,340,783
---------- ----------- ----------- ---------- -----------
Operating income (loss)........ (99,436) 1,033,980 3,479,272 902,185 768,913
Interest expense......................... 11,891 192,979 537,982 110,773 152,009
---------- ----------- ----------- ---------- -----------
Income (loss) before income taxes...... (111,327) 841,001 2,941,290 791,412 616,904
Provision for income taxes............... -- 205,000 1,155,000 311,000 250,000
---------- ----------- ----------- ---------- -----------
Net income (loss).............. $ (111,327) $ 636,001 $ 1,786,290 $ 480,412 $ 366,904
========== =========== =========== ========== ===========
Net income (loss) per share.... $ (0.01) $ 0.04 $ 0.12 $ 0.03 $ 0.03
========== =========== =========== ========== ===========
Weighted average number of common shares
outstanding............................ 14,300,000 14,300,000 14,300,000 14,300,000 14,300,000
========== =========== =========== ========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
F-4
<PAGE> 61
PACIFIC GATEWAY EXCHANGE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31, ----------------------------
----------------------------------------- 1995 1996
1993 1994 1995 ----------- -----------
----------- ----------- ----------- (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................ $ (111,327) $ 636,001 $ 1,786,290 $ 480,412 $ 366,904
Adjustments to net income (loss):
Depreciation........................... 104,241 410,115 1,123,990 188,812 384,787
Change in provision for losses on bad
debts............................... 20,000 117,038 687,299 141,910 135,000
Provision for deferred income taxes.... -- (53,309) (94,938) -- (29,496)
Change in accounts receivable.......... (505,588) (3,978,408) (9,510,050) (5,317,295) (6,323,088)
Change in accounts receivable, related
party............................... (1,195,000) (1,008,000) (1,058,849) (485,999) 472,893
Change in notes and advances
receivable.......................... (14,333) 195,172 (100,835) -- 175,804
Change in deposits and other assets.... (55,907) (106,407) (242,983) (4,099) (163,176)
Change in accounts payable............. 2,516,204 3,692,828 12,781,865 5,712,915 8,418,539
Change in accrued liabilities.......... -- 71,875 700,381 (8,375) (53,276)
Change in other liabilities............ -- -- 518,758 34,761 115,106
Change in federal income taxes
(recoverable) payable............... -- (54,868) 790,086 120,001 (480,504)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities................ 758,290 (77,963) 7,381,014 863,043 3,019,493
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment....... (1,542,493) (3,744,965) (7,232,912) (241,603) (4,121,088)
Sale of stock (accepted as payment for
accounts receivable) to related
party.................................. -- -- 702,000 -- --
----------- ----------- ----------- ----------- -----------
Net cash (used in) investing
activities............................. (1,542,493) (3,744,965) (6,530,912) (241,603) (4,121,088)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Borrowings on revolving lines of
credit................................. 717,919 3,929,308 4,000,000 -- 3,000,000
Repayments on revolving lines of
credit................................. -- (159,503) (3,067,385) -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities............................. 717,919 3,769,805 932,615 -- 3,000,000
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash.......... (66,284) (53,123) 1,782,717 621,440 1,898,405
Cash at the beginning of the period...... 128,892 62,608 9,485 9,485 1,792,202
----------- ----------- ----------- ----------- -----------
Cash at the end of the period............ $ 62,608 $ 9,485 $ 1,792,202 $ 630,925 $ 3,690,607
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow
information:
Interest paid during the period........ $ -- $ 102,810 $ 576,250 $ 76,012 $ 137,527
=========== =========== =========== =========== ===========
Income taxes paid during the period.... $ -- $ 313,376 $ 682,999 $ -- $ 760,000
=========== =========== =========== =========== ===========
Non-Cash Activities:
Stocks accepted as payment for accounts
receivable.......................... $ -- $ -- $ 702,000 $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
F-5
<PAGE> 62
PACIFIC GATEWAY EXCHANGE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCK COMMON STOCK ADDITIONAL RETAINED
COMMITTED -------------------- PAID-IN EARNINGS
TO BE ISSUED SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------------ ---------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1993........ $ 850,000 3,980 $ 40 $ 91,694 $ (362,118) $ 579,616
Net loss..................... -- -- -- -- (111,327) (111,327)
---------- ---------- ------ --------- ---------- ----------
Balance December 31, 1993...... 850,000 3,980 40 91,694 (473,445) 468,289
Issuance of Common Stock..... (850,000) 11,020 110 849,890 -- --
Net income................... -- -- -- -- 636,001 636,001
---------- ---------- ------ --------- ---------- ----------
Balance December 31, 1994...... -- 15,000 150 941,584 162,556 1,104,290
940 to 1 stock split......... -- 14,085,000 1,260 (1,260) -- --
Net income................... -- -- -- -- 1,786,290 1,786,290
---------- ---------- ------ --------- ---------- ----------
Balance December 31, 1995...... -- 14,100,000 1,410 940,324 1,948,846 2,890,580
Net income (unaudited)....... -- -- -- -- 366,904 366,904
---------- ---------- ------ --------- ---------- ----------
Balance March 31, 1996
(unaudited).................. $ -- 14,100,000 $1,410 $ 940,324 $2,315,750 $3,257,484
========== ========== ====== ========= ========== ==========
</TABLE>
See Accompanying Notes to Financial Statements
F-6
<PAGE> 63
PACIFIC GATEWAY EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Organization:
Pacific Gateway Exchange, Inc. ("Pacific Gateway" or the "Company"), a
Delaware corporation, owns and operates an international switched and domestic
switched telecommunications network. The operations of Pacific Gateway have
grown significantly as the result of entering into additional operating
agreements with foreign partners and marketing to certain long distance
companies in the United States which do not have their own international
network.
For the periods ended March 31, 1995 and 1996, the Company believes that
the financial statements include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position and
results of operations.
Cash and Cash Equivalents:
Cash equivalents consist primarily of money market accounts which are
available on demand. The carrying amount reported in the accompanying balance
sheet approximates fair value.
Fair Value of Financial Instruments:
The carrying amounts for accounts receivable and accounts payable
approximate their fair value. The revolving lines of credit have an interest
rate which varies with the prime rate and approximates the current interest rate
for similar financial instruments. Therefore, the recorded amount of the
revolving lines of credit approximates fair value.
Property and Equipment:
Property and equipment are stated at cost. Depreciation is provided for
financial reporting purposes using the straight line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Undersea fiber optic cables............................................... 20 years
Long distance communications equipment.................................... 5-7 years
Office furniture and equipment............................................ 4-7 years
</TABLE>
Maintenance and repairs are expensed as incurred. Replacements and
betterments are capitalized. The cost and related accumulated depreciation of
assets sold or retired are removed from the account balance, and any resulting
gain or loss is reflected in results of operations.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentration
of credit risk are accounts receivable. Seven of the Company's customers account
for approximately 55% and 49% of gross accounts receivable as of December 31,
1995 and March 31, 1996, respectively. The Company performs ongoing credit
evaluations of its customers but generally does not require collateral to
support customer receivables. The Company's allowance for doubtful accounts is
based on current market conditions. Losses on uncollectible accounts have
consistently been within management's expectations.
Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS 109 has as its basic objective the
F-7
<PAGE> 64
PACIFIC GATEWAY EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)
recognition of current and deferred income tax assets and liabilities based upon
all events that have been recognized in the financial statements as measured by
the provisions of the enacted tax laws.
Valuation allowances are established when necessary to reduce deferred tax
assets to the estimated amount to be realized. Income tax expense represents the
tax payable for the current period and the change during the period in the
deferred tax assets and liabilities.
Revenue Recognition:
Revenues for telecommunication services provided to customers are
recognized as services are rendered. Revenues for return traffic received
according to the terms of the Company's operating agreements with its foreign
partners are recognized as revenue as the return traffic is received.
Earnings Per Share:
Earnings per share are calculated based on the weighted average number of
shares outstanding during the period plus the dilutive effect of stock committed
to be issued and stock options determined using the treasury stock method. The
earnings per share calculation has been adjusted for all periods presented to
reflect the 940 to 1 stock split effected October 20, 1995. Additionally, this
calculation treats stock options granted on September 30, 1995 as if they were
common stock equivalents for all periods presented. See Notes 7 and 10.
Estimates in Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(2) ACCOUNTING FOR INTERNATIONAL LONG DISTANCE TRAFFIC
The Company has entered into operating agreements with 25
telecommunications carriers in 19 foreign countries under which international
long distance traffic is both delivered and received. Under these agreements,
the foreign carriers are contractually obligated to adhere to the policy of the
Federal Communications Commission (the "FCC"), whereby traffic from the foreign
country is routed to international carriers, such as the Company, in the same
proportion as traffic carried into the country. Mutually exchanged traffic
between the Company and foreign carriers is settled through a formal settlement
policy that generally extends over a six-month period at an agreed upon rate.
The Company records the amount due to the foreign partner as an expense in the
period the traffic is delivered. Of the 25 operating agreements the Company had
at March 31, 1996, 10 agreements provided that the Company generally must wait
up to six months before it actually receives the proportional return traffic.
For these agreements, the Company recognizes a loss in the period in which it
sells to a customer because the amount due to the foreign partner generally
exceeds the amount the Company charges its customers. However, when the return
traffic is received in the future period, the Company generally realizes a gross
margin on the return traffic that, when combined with the prior period loss on
the outbound traffic, results in a gross profit on the total transaction.
Although the Company can reasonably estimate the revenue it will receive under
the FCC's proportional share policy, there is no guarantee that there will be
traffic delivered back to the United States or what impact changes in future
settlement rates will have on net payments made and revenue received.
For the 10 agreements which provide for delayed return traffic, the Company
had previously deferred a portion of the costs associated with the outbound call
until the receipt of the proportional return traffic. The Company has restated
its financial statements to adopt the accounting method described above. The
impact of
F-8
<PAGE> 65
PACIFIC GATEWAY EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)
this restatement was to reduce income before income taxes, net income and income
per share by $5,697,130, $3,473,431 and $0.25 in 1995 and $348,762, $211,282,
and $0.02 in 1994, respectively.
(3) INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------------ ---------------------------
1993 1994 1995 1995 1996
-------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Current................. -- $258,309 $1,249,938 $ 328,770 $ 279,496
Deferred................ -- (53,309) (94,938) (17,770) (29,496)
-------- -------- ---------- --------- ---------
-- $205,000 $1,155,000 $ 311,000 $ 250,000
======== ======== ========== ========= =========
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------ ---------------------------
1993 1994 1995 1995 1996
----- ----- ---- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Expected statutory amount.......... -- 34.0% 34.0% 34.0% 34.0%
Release of valuation allowance..... -- (15.1%) -- -- --
State income taxes, net of federal
benefit.......................... -- 5.5% 5.3% 5.3% 5.3%
Other.............................. -- -- -- -- 1.2%
----- ----- ---- ---- ----
--% 24.4% 39.3% 39.3% 40.5%
===== ===== ==== ==== ====
</TABLE>
As a result of operating losses in 1992 and 1993 and the fact that the
Company had a limited operating history, a valuation allowance equal to the
deferred tax asset was recorded at December 31, 1993 which resulted in no tax
benefit being realized for the period. The Company was profitable for the first
time in 1994 which allowed it to release the previously recorded deferred tax
asset valuation allowance.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes and the impact of available
net operating loss carryforwards.
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1994 1995 1996
-------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................... $ 54,040 $ 325,613 $ 378,938
Net operating loss carry forwards................. 61,412 42,185 35,805
-------- --------- ---------
Total gross deferred tax assets........... 115,452 367,798 414,743
Deferred tax liabilities:
Depreciation...................................... 62,143 219,551 237,000
-------- --------- ---------
Net deferred tax (assets)................. $(53,309) $(148,247) $(177,743)
======== ========= =========
</TABLE>
F-9
<PAGE> 66
PACIFIC GATEWAY EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)
At March 31, 1996, the Company has net operating loss carryforwards of
approximately $80,000 which may be applied against future taxable income and
which expire in 2008.
(4) REVOLVING LINES OF CREDIT
At March 31, 1996, the Company had a $9,000,000 revolving line of credit
with Ronald L. Jensen, a principal stockholder of the Company, having a maturity
date that is the earlier of December 31, 1998, the closing of a public offering,
or the date of a change in ownership of 50% of the outstanding common stock of
the Company. Interest is payable monthly at prime (8.5% at March 31, 1996, 8.75%
at December 31, 1995 and 9.0% at December 31, 1994) plus 2%. There was
$3,579,661 available to be borrowed against the line of credit at March 31,
1996. The line of credit is collateralized by all the tangible and intangible
assets of the Company other than accounts receivable and the terms prohibit the
Company from disposing of any of such assets other than in the ordinary course
of business. The amount outstanding under this line, which is subordinated to
the amount due the commercial lender, was $4,487,724, $2,420,339 and $5,420,339
at December 31, 1994, December 31, 1995 and March 31, 1996, respectively.
In 1995, the Company entered into an additional revolving line of credit
with a commercial lender under which it may borrow the lesser of $3,000,000 or
70% of certain of the Company's accounts receivable. The revolving credit
facility is collateralized by all of the Company's accounts receivable and
contains covenants with respect to, among other things, the profitability and
current ratio of the Company and restrictions on the payment of dividends.
Interest is payable monthly at the lender's prime rate plus .875%. The amount
outstanding under this line was $3,000,000 at March 31, 1996. The line expires
on September 30, 1996.
(5) RELATED PARTY TRANSACTIONS
The Company provides certain domestic and international switched
telecommunication services to Matrix Telecom, Inc. ("Matrix"), which is a
switchless reseller. Ronald L. Jensen and his five adult children, as a group,
own a controlling interest in Matrix and also own a significant, but not
controlling interest in the Company. Revenues recorded from providing these
services were $3,231,000, $9,211,000, and $17,165,995 for the years ended
December 31, 1993, 1994, and 1995, respectively and $3,760,598 and $4,759,701
for the three months ended March 31, 1995 and 1996, respectively. Matrix also
provided certain data processing services to the Company for which the Company
incurred expenses of $35,000 and $166,000 in 1994 and 1995, respectively and
$15,000 and $66,000 for the three months ended March 31, 1995 and 1996,
respectively. The amount receivable from Matrix was $2,203,000, and $3,261,849
at December 31, 1994 and 1995, respectively and $2,788,956 at March 31, 1996.
In February 1995, the Company accepted certain shares of common stock, with
a fair market value of approximately $702,000, of a customer as payment for
accounts receivable totaling $702,000. The Company then sold this stock to
Ronald L. Jensen for $702,000. Mr. Jensen subsequently sold the stock over a
period of several months for a total of $730,000.
At December 31, 1995, the Company had advances receivable from the officers
of the Company totaling $175,000. These advances were due on demand and were
repaid in the first quarter of 1996.
F-10
<PAGE> 67
PACIFIC GATEWAY EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)
(6) SEGMENT DATA
The Company classifies its operations into one industry segment,
telecommunications services. Export sales were $694,000, $4,572,000, and
$17,619,000 for the years ended December 31, 1993, 1994, and 1995, respectively
and $2,815,000 and $8,836,000 for the three months ended March 31, 1995 and
1996, respectively. Export sales by geographic area were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------- ----------------------------
1993 1994 1995 1995 1996
--------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Pacific Rim............... $ 664,000 $2,908,000 $10,066,000 $1,666,000 $4,054,000
Europe.................... -- 812,000 4,798,000 578,000 3,132,000
Canada.................... 30,000 852,000 2,418,000 571,000 1,245,000
Other..................... -- -- 337,000 -- 405,000
--------- ---------- ----------- ---------- ----------
$ 694,000 $4,572,000 $17,619,000 $2,815,000 $8,836,000
========= ========== =========== ========== ==========
</TABLE>
To date, the Company's international operating agreements have been with
entities operating in countries where management does not expect political or
economic forces to cause disruption in telecommunications traffic to or from
these countries.
The Company sells to the long distance companies in the United States which
do not have their own international network and to its foreign partners. At
March 31, 1996, the Company had 25 operating agreements and approximately 57
United States customers. Because it has a small number of large customers, 10%
or more of the Company's revenues have been derived from the following
customers.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------- ----------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Matrix Telecom, Inc. (see
Note 5)................... $3,231,000 $9,211,000 $17,165,995 $ 3,760,598 $ 4,759,701
Lightcom International,
Inc....................... 600,000 (A) (A) (A) (A)
Wiltel, Inc................. (A) 2,599,000 (A) (A) (A)
Optus Communications Pty
Limited................... (A) 2,209,000 (A) (A) (A)
</TABLE>
- ---------------
(A) Sales were less than 10% of total revenues.
(7) STOCK OPTION PLAN
On September 30, 1995, the Company adopted a stock option plan. The plan
provides for the granting of nonqualified and incentive stock options to
purchase up to 1,200,000 shares of common stock. Options granted become
exercisable over vesting periods of generally four years at exercise prices not
less than the fair market value of the stock at the date of grant and generally
must be exercised within five years. On September 30, 1995, options to purchase
509,170 shares were granted at an exercise price of $8.50 per share which the
Board of Directors determined to be the fair market value of the stock at that
time. The earnings per share calculation treats these options as if they were
common stock equivalents for the periods presented, using the treasury stock
method. In 1996, options to purchase 30,000 shares were granted at an exercise
price of $11.50 per share.
(8) EMPLOYEE BENEFIT PLANS
In September 1995, the Company established an Employee Stock Purchase Plan
(the "Purchase Plan") which is meant to qualify under section 423 of the
Internal Revenue Code. The Purchase Plan will become
F-11
<PAGE> 68
PACIFIC GATEWAY EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)
effective immediately upon the successful completion of a public offering of the
Company's common stock. Under the Purchase Plan, the Company reserved up to
400,000 shares of common stock for purchase by employees who meet certain
eligibility requirements. Eligible employees may contribute up to 10% of their
compensation to the Purchase Plan to purchase shares at 85% of the fair market
value of the stock on the first or the last day of each six-month offering
period as defined in the Purchase Plan.
(9) COMMITMENTS AND CONTINGENCIES
Litigation
The Company is not currently subject to any legal proceedings that will
have a material impact on the Company's financial position or results of
operations.
Leases
The Company leases office space and equipment under noncancelable operating
leases. Rental expenses for 1993, 1994, and 1995 was $52,000, $92,000, and
$142,000, respectively and $38,000 and $30,000 for the three months ended March
31, 1995 and 1996, respectively. Future minimum lease payments under these
leases as of March 31, 1996 are as follows:
<TABLE>
<S> <C>
1996.............................................. $126,000
1997.............................................. 92,000
1998.............................................. 15,000
--------
Total minimum lease payments............ $233,000
========
</TABLE>
Employment Agreements
The Company has entered into employment agreements with each of Howard
Neckowitz, President, Chief Executive Officer and Chairman of the Board, Gail
Granton, Chief Financial Officer, Executive Vice President, International
Business Development and Secretary, Ronald Anderson, Vice President, Operations
and Engineering and Robert Craver, Senior Vice President, International
Relations. The agreement with Mr. Neckowitz is for a term of four years, the
agreements with Ms. Granton and Mr. Anderson are for a term of three years and
the agreement with Mr. Craver is for a term of two years. The agreements provide
for severance payments in an amount equal to base salary to the end of the term
or, if greater, two years of base salary for Mr. Neckowitz and one year of base
salary for Ms. Granton, Mr. Anderson and Mr. Craver in the event of termination
without cause or termination following a change of control of the Company. In
the event of a change of control, each of such employees would be entitled to
severance following his or her resignation from the Company resulting from
diminution of his or her duties. Should such an event occur, the Company's
obligation for severance could range from $1,020,000 to $2,145,000. Upon any
such payment of severance, the officer would also receive full vesting of any
outstanding stock options.
Commitments
At March 31, 1996 the Company had outstanding commitments of $860,000 for
the acquisition of additional ownership interests in digital undersea fiber
optic cables.
(10) CAPITAL STOCK
In 1992, the Company entered into an agreement whereby it received $850,000
in cash and agreed to issue stock of the Company representing approximately 73%
of the Company. In 1994, the Company issued 11,020 (pre-split) shares of its
common stock to fulfill its commitment under this agreement. The earnings per
F-12
<PAGE> 69
PACIFIC GATEWAY EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)
share calculation treats these shares as common stock equivalents prior to the
issuance of the shares for all periods presented.
On September 30, 1995, the Company's Board of Directors authorized
management to file a registration statement with the Securities and Exchange
Commission to permit the Company to sell shares of its common stock to the
public. On September 30, 1995, the Company's Board of Directors authorized an
amendment to the Certificate of Incorporation which was approved by the
shareholders on the same date. The amendment effected a 940 to 1 split of the
Company's Common Stock and adjusted the authorized shares to 25,000,000 shares
of common stock, $.0001 par value per share, and 1,000,000 shares of Preferred
Stock, $.0001 par value per share. The 940 to 1 split was effective October 20,
1995. The rights, preferences and limitations of the Preferred Stock may be
designated by the Company's Board of Directors at any time.
(11) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which is
effective for fiscal years beginning after December 15, 1995. The Company
adopted the standard on January 1, 1996 which did not have a material impact on
its financial statements.
In October, 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective for fiscal years beginning after December 31,
1995. SFAS 123 encourages entities to adopt a fair value based method of
accounting for employee stock compensation plans; however, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting. Under the intrinsic value based
method, companies do not recognize compensation cost for many of their stock
compensation plans. Under the fair value based method, companies would recognize
compensation costs for those same plans. The Company elects to continue to use
the intrinsic value based method, and therefore does not expect the impact on
its financial statements, if any, to be material.
F-13
<PAGE> 70
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Sale of Shares to KDD...................... 6
Risk Factors............................... 6
Use of Proceeds............................ 13
Dividend Policy............................ 13
Capitalization............................. 14
Dilution................................... 15
Selected Financial Data.................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 17
Business................................... 25
Management................................. 40
Certain Relationships and Related
Transactions............................. 46
Principal and Selling Stockholders......... 47
Description of Capital Stock............... 49
Shares Eligible for Future Sale............ 50
Underwriting............................... 51
Legal Matters.............................. 52
Experts.................................... 52
Additional Information..................... 53
Glossary................................... 54
Index to Financial Statements.............. F-1
</TABLE>
------------------------
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
5,267,000 SHARES
[PACIFIC GATEWAY EXCHANGE LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
PAINEWEBBER INCORPORATED
ALEX. BROWN & SONS
INCORPORATED
------------------------
, 1996
================================================================================
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. The Company is paying all of the expenses
incurred on behalf of the Selling Stockholders (other than underwriting
discounts and commissions). All amounts shown are estimates except for the
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee.......................................................... $ 30,679
NASD filing fee........................................................... 9,397
Nasdaq National Market fee................................................ 50,000
Blue sky qualification fees and expenses.................................. 5,000
Printing and engraving expenses........................................... 100,000
Legal fees and expenses................................................... 200,000
Accounting fees and expenses.............................................. 200,000
Transfer agent and registrar fees......................................... 5,000
Fee for Custodian for Selling Stockholders................................ 2,000
Miscellaneous............................................................. 59,924
--------
Total........................................................... $662,000
========
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors, and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Certificate of
Incorporation and By-Laws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant intends to enter into separate indemnification agreements with its
directors, officers and certain employees which would require the Registrant,
among other things, to indemnify them against certain liabilities which may
arise by reason of their status or service (other than liabilities arising from
willful misconduct of a culpable nature) and to maintain directors' and
officers' liability insurance, if available on reasonable terms.
These indemnification provisions and the indemnification agreement to be
entered into between the Registrant and its officers and directors may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since October 31, 1992, the Registrant has not sold or issued any
unregistered securities.
II-1
<PAGE> 72
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------------ -------------------------------------------------------------------------
<C> <S>
1.1 -- Form of Underwriting Agreement.
3.1 -- Amended and Restated Certificate of Incorporation.
3.2 -- Amended and Restated Bylaws.
4.1 -- Specimen Certificate for Common Stock
5.1* -- Opinion of Gray Cary Ware & Freidenrich, A Professional Corporation.
10.1 -- Form of Indemnification Agreement for directors and officers.
10.2 -- Stock Option Plan and forms of agreements thereunder.
10.3 -- Employee Stock Purchase Plan.
10.4.1 -- Proxy dated December 10, 1994 by Julie J. Jensen.
10.4.2 -- Proxy dated December 10, 1994 by Jeffrey J. Jensen.
10.4.3 -- Proxy dated December 10, 1994 by Janet Jensen Kreiger.
10.4.4 -- Proxy dated December 10, 1994 by James J. Jensen.
10.4.5 -- Proxy dated December 10, 1994 by Jami J. Jensen.
10.4.6 -- Proxy dated May 10, 1996 by Gail E. Granton.
10.4.7* -- Proxy dated June 10, 1996 by Ronald L. Jensen.
10.5.1 -- Employment Agreement dated October 1, 1995 between Howard A.
Neckowitz and Pacific Gateway Exchange, Inc.
10.5.2 -- Employment Agreement dated October 1, 1995 between Gail E. Granton
and Pacific Gateway Exchange, Inc.
10.5.3 -- Employment Agreement dated October 1, 1995 between Ronald D. Anderson
and Pacific Gateway Exchange, Inc.
10.5.4 -- Employment Agreement dated October 1, 1995 between Robert F. Craver
and Pacific Gateway Exchange, Inc.
10.6 -- Telephone Service Agreement dated May 1, 1995 between Matrix Telecom,
Inc. and Pacific Gateway Exchange, Inc.
10.7 -- Agreement for Billing Services dated November 24, 1995 between Matrix
Telecom, Inc. and Pacific Gateway Exchange, Inc.
10.8 -- Business Loan Agreement (Receivables) and Security Agreement
(Receivables) dated December 19, 1995 between Bank of America, NT&SA
and Pacific Gateway Exchange, Inc.
10.9* -- Form of Stock Purchase Agreement with KDD.
11.1 -- Statement regarding computation of per share income (loss).
23.1* -- Consent of Independent Accountants (see page II-5).
23.2 -- Consent of Counsel (included in Exhibit 5.1).
24.1 -- Power of Attorney (see page II-4).
</TABLE>
- ---------------
* Being filed with this Amendment No. 4.
All other exhibits have been previously filed.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-2
<PAGE> 73
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised 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. 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 hereunder, 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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Palo
Alto, County of Santa Clara, State of California, on the 18th day of June, 1996.
PACIFIC GATEWAY EXCHANGE, INC.
By: /s/ HOWARD A. NECKOWITZ
------------------------------------
Howard A. Neckowitz
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -----------------
<C> <S> <C>
/s/ HOWARD A. NECKOWITZ President, Chief Executive June 18, 1996
- --------------------------------------------- Officer and Chairman of
Howard A. Neckowitz the Board (Principal
Executive Officer and
Principal Accounting
Officer)
/s/ GAIL E. GRANTON Chief Financial Officer, June 18, 1996
- --------------------------------------------- Executive Vice President,
Gail E. Granton International Business
Development, Secretary and
Director (Principal
Financial Officer)
RONALD L. JENSEN* Director June 18, 1996
- ---------------------------------------------
Ronald L. Jensen
*By: /s/ HOWARD A. NECKOWITZ
- ---------------------------------------------
Howard A. Neckowitz, Attorney-in-Fact
</TABLE>
II-4
<PAGE> 75
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 4 to the Registration
Statement on Form S-1 of our report dated May 13, 1996, on our audit of the
financial statements as of and for the years ended December 31, 1995, 1994, and
1993 of Pacific Gateway Exchange, Inc. We also consent to the reference to our
firm under the caption "Experts."
/s/ COOPERS & LYBRAND, L.L.P.
San Francisco, California
June 18, 1996
II-5
<PAGE> 76
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- -------- ---------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement.
3.1 -- Amended and Restated Certificate of Incorporation.
3.2 -- Amended and Restated Bylaws.
4.1 -- Specimen Certificate for Common Stock
5.1* -- Opinion of Gray Cary Ware & Freidenrich, A Professional Corporation.
10.1 -- Form of Indemnification Agreement for directors and officers.
10.2 -- Stock Option Plan and forms of agreements thereunder.
10.3 -- Employee Stock Purchase Plan.
10.4.1 -- Proxy dated December 10, 1994 by Julie J. Jensen.
10.4.2 -- Proxy dated December 10, 1994 by Jeffrey J. Jensen.
10.4.3 -- Proxy dated December 10, 1994 by Janet Jensen Kreiger.
10.4.4 -- Proxy dated December 10, 1994 by James J. Jensen.
10.4.5 -- Proxy dated December 10, 1994 by Jami J. Jensen.
10.4.6 -- Proxy dated May 10, 1996 by Gail E. Granton.
10.4.7* --Proxy dated June 10, 1996 by Ronald L. Jensen.
10.5.1 -- Employment Agreement dated October 1, 1995 between Howard A.
Neckowitz and Pacific Gateway Exchange, Inc.
10.5.2 -- Employment Agreement dated October 1, 1995 between Gail E. Granton
and Pacific Gateway Exchange, Inc.
10.5.3 -- Employment Agreement dated October 1, 1995 between Ronald D. Anderson
and Pacific Gateway Exchange, Inc.
10.5.4 -- Employment Agreement dated October 1, 1995 between Robert F. Craver
and Pacific Gateway Exchange, Inc.
10.6 -- Telephone Service Agreement dated May 1, 1995 between Matrix Telecom,
Inc. and Pacific Gateway Exchange, Inc
10.7 -- Agreement for Billing Services dated November 24, 1995 between Matrix
Telecom, Inc. and Pacific Gateway Exchange, Inc.
10.8 -- Business Loan Agreement (Receivables) and Security Agreement
(Receivables) dated December 19, 1995 between Bank of America, NT&SA
and Pacific Gateway Exchange, Inc.
10.9* -- Form of Stock Purchase Agreement with KDD.
11.1 -- Statement regarding computation of per share income (loss).
23.1* -- Consent of Independent Accountants (see page II-5).
23.2 -- Consent of Counsel (included in Exhibit 5.1).
24.1 -- Power of Attorney (see page II-4).
</TABLE>
- ---------------
* Being filed with this Amendment No. 4.
All other exhibits have been previously filed.
<PAGE> 1
EXHIBIT 5.1
[GRAY CARY WARE FREIDENRICH LETTERHEAD]
June 17, 1996
Securities and Exchange Commission
Judiciary Plaza
Room 1006, Mail Stop 1-4
450 Fifth Street
Washington, D.C. 20549
RE: PACIFIC GATEWAY EXCHANGE, INC. REGISTRATION STATEMENT NO. 33-80191
ON FORM S-1 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
DECEMBER 8, 1995
Ladies and Gentlemen:
As counsel to Pacific Gateway Exchange, Inc., a Delaware corporation
(the "Company"), we are rendering this opinion in connection with a proposed
sale of 5,267,000 shares of the Company's common stock (the "Common Stock") of
which 4,900,000 shares will be issued and sold by the Company and 367,000
shares will be sold by certain of the Company's stockholders (the "Selling
Stockholders"), plus an option to purchase up to 790,050 additional shares from
the Company and certain Selling Stockholders to cover over-allotments, if any
(the "Option Shares"). We have examined all instruments, documents and records
which we deemed relevant and necessary for the basis of our opinion hereinafter
expressed. In such examination, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals
and the conformity to the originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion that the 4,900,000
shares of Common Stock to be issued and sold by the Company are validly
authorized shares of Common Stock and, when issued against payment of the
purchase price therefor, will be legally issued, fully paid and non-assessable.
We are also of the opinion that the 367,000 shares of Common Stock to be sold
by the Selling Stockholders identified in the above referenced Registration
Statement will be validly authorized, legally issued, fully paid, and
nonassessable. Finally, with respect to the Option Shares, we
<PAGE> 2
GRAY CARY WARE & FREIDENRICH
Securities and Exchange Commission
June 17, 1996
Page 2
are of the opinion that up to 40,050 additional shares of Common Stock to be
issued and sold by the Company are validly authorized shares of Common Stock
and, when issued against payment of the purchase price therefor, will be
legally issued, fully paid and non-assessable and that up to 750,000 additional
shares of Common Stock to be sold by the Selling Stockholders are validly
authorized, legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name wherever it
appears in said Registration Statement, including the Prospectus constituting a
part thereof, as originally filed or as subsequently amended.
Respectfully submitted,
GRAY CARY WARE & FREIDENRICH
A Professional Corporation
/s/ GRAY CARY WARE & FREIDENRICH
<PAGE> 1
EXHIBIT 10.4.7
IRREVOCABLE PROXY AND VOTING AGREEMENT
I, Ronald L. Jensen, a shareholder of Pacific Gateway Exchange, Inc., a
Delaware corporation (the "Corporation"), hereby appoint Howard A. Neckowitz to
be my proxy agent and to vote all of my shares in the Corporation (the
"Shares") with respect to all matters submitted to the stockholders at all
meetings of the stockholders, or any adjournments thereof, and in all consents
to any actions taken without a meeting. This appointment shall continue from
June 10, 1996 until January 1, 1998 and during said period, Howard A. Neckowitz
shall have all of the power that I would possess with respect to the voting of
my shares and granting my consent. I hereby ratify and confirm all acts that my
Irrevocable Proxy and Voting Agreement (the "Proxy") shall do or cause to be
done by virtue of and within the limitations set forth in this Proxy.
If, during the term of this Proxy, Howard A. Neckowitz becomes unable
to perform his duties as an officer of Pacific Gateway Exchange, Inc. due to
his voluntary resignation, termination for cause, long-term disability,
physical or mental incapacity, or death, then this Proxy shall be null and
void. Except as set forth in this paragraph, this Proxy shall be irrevocable.
I agree that any transfer of the Shares by me prior to January 1, 1998
other than pursuant to a registered underwritten offering under the Securities
Act of 1933, as amended, (the "Act") or pursuant in Rule 144 under the Act
shall be subject to this Proxy. It shall be a condition of such transfer that
the transferee appoint Howard A. Neckowitz as such stockholder's proxy on terms
identical to this Proxy for the term ending upon termination of this Proxy.
I agree that the Shares shall bear the following legend until this Proxy
terminates as set forth above:
The shares represented by this certificate are subject to a
Irrevocable Proxy and Voting Agreement dated as of June 10,
1996, a copy of which is on file with the Secretary of the
Corporation. Any purchaser of such shares prior to January 1,
1998, other than pursuant to a registered underwritten offering
under the Securities Act of 1933, as amended, (the "Act") or
pursuant to Rule 144 under the Act shall be bound by such
agreement.
IN WITNESS THEREOF, I have executed this Proxy effective as of the 10th
day of June 1996.
/s/ RONALD L. JENSEN
--------------------------
Ronald L. Jensen
<PAGE> 1
EXHIBIT 10.9
DRAFT - JUNE 7, 1996
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered
into as of June __, 1996, by and between PACIFIC GATEWAY EXCHANGE, INC., a
Delaware corporation (the "Company"),and KDD AMERICA, INC., a New York
corporation ("Purchaser").
R E C I T A L S
WHEREAS, the Company proposes to sell an aggregate of
4,900,000 shares of the Company's Common Stock, $.0001 par value per share (the
"Common Stock") in an initial public offering registered under the Securities
Act of 1933, as amended;
WHEREAS, the Company proposes to sell 1,800,000 shares of the
foregoing 4,900,000 shares to Purchaser pursuant to this Agreement (the "KDD
Shares") and the remaining 3,100,000 shares pursuant to the Underwriting
Agreement (as hereinafter defined);
WHEREAS, concurrently therewith, certain stockholders of PGE
propose to sell 367,000 shares of Common Stock pursuant to the same registered
initial public offering;
WHEREAS, the shares to be sold by the Company and such
stockholders (other than the KDD Shares) are to be sold pursuant to a certain
Underwriting Agreement, (the "Underwriting Agreement"), by and among the
Company, the such stockholders and PaineWebber Incorporated and Alex. Brown &
Sons Incorporated, as Representatives (the "Representatives") of the several
underwriters named in Schedule II thereto (the "Underwriters"); and
WHEREAS, the price and other terms of the sale of the KDD
Shares are intended to be substantially similar to and in no event less
favorable to Purchaser than the corresponding terms of the Underwriting
Agreement are to the Underwriters, and the closing of the Underwriting
Agreement is a condition precedent to the obligations of Purchaser hereunder;
NOW, THEREFORE, in consideration of the above recitals, the
mutual covenants set forth below and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the Company and Purchaser hereby
agree as follows:
<PAGE> 2
A G R E E M E N T
1. Definitions. Capitalized terms used herein without
definition shall have the meanings assigned thereto in the Underwriting
Agreement.
2. Agreement to Sell and Purchase. On the basis of the
representations, warranties and agreements of the Company herein contained, and
subject to all of the terms and conditions of this Agreement, the Company
agrees to sell to Purchaser, and Purchaser agrees to purchase the KDD Shares
from the Company, at a purchase price per share equal to the net purchase price
per share to be paid by the Underwriters (after giving effect to applicable
underwriting commissions and discounts) for the Firm Shares (and Option Shares,
if any) under the Underwriting Agreement.
3. Delivery and Payment.
(a) Delivery of 1,000,000 shares (the "First Shares")
shall be made to Purchaser against payment of the purchase price therefor by
certified or official bank check payable in immediately available funds to the
order of the Company at the office of PaineWebber Incorporated, 1285 Avenue of
the Americas, New York, New York 10019. Such payment shall be made on the
Closing Date under the Underwriting Agreement or at such time on such other
date as may be agreed upon by the Company and Purchaser (such date is
hereinafter referred to as the "First Closing Date"). Notwithstanding the
foregoing, in the event that the purchase price is $15 or more per share, the
number of First Shares shall be appropriately reduced so that the aggregate
purchase price is less than $15 million and the number of Second Shares (as
defined below) shall be correspondingly increased.
(b) Delivery of the remaining 800,000 shares (the "Second
Shares") shall be made to Purchaser against payment of the purchase price
therefor in the manner and at the office specified above in Section 3(a) on the
fifth business day following the date of termination (including early
termination) of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), or at such time
on such other date, not later than five business days after the date of
termination (including early termination) of the applicable waiting period
under the HSR Act, as may be agreed upon by the Company and Purchaser (such
date is hereinafter referred to as the "Second Closing Date" and together with
the First Closing Date is sometimes referred to herein separately as a "Closing
Date").
(c) Certificates evidencing the Shares shall be in
definitive form and shall be registered in such names and in such denominations
as Purchaser shall request at least two business days prior to the First
Closing Date or the Second Closing Date,
-2-
Stock Purchase Agreement
<PAGE> 3
as the case may be, by written notice to the Company. For the purpose of
expediting the checking and packaging of certificates for the Shares, the
Company agrees to make such certificates available for inspection at least 24
hours prior to the First Closing Date or the Second Closing Date, as the case
may be.
(d) The cost of original issue U.S. tax stamps, if any,
in connection with the issuance and delivery of the Shares by the Company to
Purchaser shall be borne by the Company. The Company will pay and save
Purchaser harmless from any and all liabilities with respect to or resulting
from any failure or delay in paying Federal and state stamp and other transfer
taxes, if any, which may be payable or determined to be payable in connection
with the original issuance or sale to Purchaser of the Shares.
4-A. Representations and Warranties of the Company. The
Company represents, warrants and covenants to Purchaser that:
(a) A registration statement (Registration No. 33-80191)
on Form S-1 relating to the Shares, including a preliminary prospectus and such
amendments to such registration statement as may have been required to the date
of the Underwriting Agreement, has been prepared by the Company under the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations (collectively referred to as the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The term "preliminary prospectus" as used
herein means a preliminary prospectus as contemplated by Rule 430 or Rule 430A
("Rule 430A") of the Rules and Regulations included at any time as part of the
registration statement. Copies of such registration statement and amendments
and of each related preliminary prospectus have been delivered to Purchaser.
If such registration statement has not become effective, a further amendment to
such registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective will be filed promptly
by the Company with the Commission. If such registration statement has become
effective, a final prospectus containing information permitted to be omitted
at the time of effectiveness by Rule 430A will be filed by the Company with the
Commission in accordance with Rule 424(b) of the Rules and Regulations promptly
after execution and delivery of the Price Determination Agreement. The term
"Registration Statement" means the registration statement as amended at the
time it becomes or became effective (the "Effective Date"), including financial
statements and all exhibits and any information deemed to be included by Rule
430A. The term "Prospectus" means a prospectus relating to the Shares in the
form it is first filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations or, if no such filing is required, the form of final prospectus
included in the Registration Statement at the Effective Date.
-3-
Stock Purchase Agreement
<PAGE> 4
(b) On the Effective Date, the date the Prospectus is
first filed with the Commission pursuant to Rule 424(b) (if required), at all
times subsequent to and including each Closing Date and when any post-effective
amendment to the Registration Statement becomes effective or any amendment or
supplement to the Prospectus is filed with the Commission, the Registration
Statement and the Prospectus (as amended or as supplemented if the Company
shall have filed with the Commission any amendment or supplement thereto),
including the financial statements included in the Prospectus, did or will
comply with all applicable provisions of the Act and the Rules and Regulations
and will contain all statements required to be stated therein in accordance
with the Act and the Rules and Regulations. On the Effective Date and when any
post-effective amendment to the Registration Statement becomes effective, no
part of the Registration Statement or any such amendment did or will contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading. At the Effective Date, the date the Prospectus or any
amendment or supplement to the Prospectus is filed with the Commission and at
each Closing Date, the Prospectus did not or will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Company has not distributed any offering material in
connection with the offering or sale of the Shares or the Firm Shares other
than the Registration Statement, the preliminary prospectus, the Prospectus or
any other materials, if any, permitted by the Act.
(c) The Company currently has no subsidiaries (as defined
in the Rules and Regulations) and has had, in the past five years, no
subsidiaries (as defined in the Rules and Regulations). The Company is, and at
each Closing Date will be, a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation. The
Company has, and at each Closing Date will have, full power and authority to
conduct all the activities conducted by it, to own or lease all the assets
owned or leased by it and to conduct its business as described in the
Registration Statement and the Prospectus. The Company is, and at each Closing
Date will be, duly licensed or qualified to do business and in good standing as
a foreign corporation in all jurisdictions in which the nature of the
activities conducted by it or the character of the assets owned or leased by it
makes such licensing or qualification necessary or in which the failure so to
qualify would not have a material adverse effect in the Company. The Company
does not own, and at each Closing Date will not own, directly or indirectly,
any shares of stock or any other equity or long-term debt securities of any
corporation or have any equity interest in any firm, partnership, joint
venture, association or other entity. Complete and correct copies of the
Certificate of
-4-
Stock Purchase Agreement
<PAGE> 5
Incorporation and of the By-laws of the Company and all amendments thereto have
been delivered to Purchaser, and no changes therein will be made subsequent to
the date hereof and prior to the Second Closing Date.
(d) The outstanding shares of Common Stock have been, and
the Firm Shares (and Option Shares, if any) to be issued and sold by the
Company pursuant to the Underwriting Agreement and the Shares to be issued and
sold by the Company pursuant to this Agreement upon such issuance will be, duly
authorized, validly issued, fully paid and nonassessable and will not be
subject to any preemptive or similar right. The description of the Common
Stock in the Registration Statement and the Prospectus is, and at each Closing
Date will be, complete and accurate in all material respects. Except as set
forth in the Prospectus, the Company does not have outstanding, and at each
Closing Date will not have outstanding, any options to purchase, or any rights
or warrants to subscribe for, or any securities or obligations convertible
into, or any contracts or commitments to issue or sell, any shares of Common
Stock or any such warrants, convertible securities or obligations other than
employee options that may have been granted in the ordinary course of business
subsequent to the dates set forth in the Prospectus.
(e) The financial statements and schedules included in
the Registration Statement or the Prospectus present fairly the financial
condition of the Company as of the respective dates thereof and the results of
operations and cash flows of the Company for the respective periods covered
thereby, all in conformity with generally accepted accounting principles
applied on a consistent basis throughout the entire period involved, except as
otherwise disclosed in the Prospectus. No other financial statements or
schedules of the Company are required by the Act or the Rules and Regulations
to be included in the Registration Statement or the Prospectus. Coopers &
Lybrand L.L.P. (the "Accountants"), who have reported on such financial
statements and schedules, are independent accountants with respect to the
Company as required by the Act and the Rules and Regulations. The statements
included in the Registration Statement with respect to the Accountants pursuant
to Rule 509 of Regulation S-K of the Rules and Regulations are true and correct
in all material respects.
(f) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurance that: (i)
material transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access
to assets in an amount material to the Company is permitted only in accordance
with management's general or specific authorization; and (iv) the recorded
accountability for
-5-
Stock Purchase Agreement
<PAGE> 6
assets is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(g) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and prior
to each Closing Date, except as set forth in or contemplated by the
Registration Statement and the Prospectus: (i) there has not been and will not
have been any material change in the capitalization of the Company; (ii) there
has not been and will not have been any material change in the business,
properties, business prospects, condition (financial or otherwise) or results
of operations of the Company arising for any reason whatsoever; (iii) the
Company has not incurred nor will it incur any material liabilities or
obligations, direct or contingent, nor has it entered into nor will it enter
into any material transactions other than pursuant to this Agreement and the
Underwriting Agreement and the transactions referred to herein and therein; and
(iv) the Company has not and will not have paid or declared any dividends or
other distributions of any kind on any class of its capital stock.
(h) The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act
of 1940, as amended.
(i) Except as set forth in the Registration Statement and
the Prospectus, there are no actions, suits or proceedings pending or
threatened against or affecting the Company or any of its officers in their
capacity as such, before or by any Federal or state court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, wherein an unfavorable ruling, decision or finding might materially
and adversely affect the Company or its business, properties, business
prospects, condition (financial or otherwise) or results of operations.
(j) The Company has, and at each Closing Date will have:
(i) all governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to carry on its business as contemplated in the
Prospectus; (ii) complied in all material respects with all laws, regulations
and orders applicable to it or its business; and (iii) performed all its
material obligations required to be performed by it, and is not, and at each
Closing Date will not be, in default, under any indenture, mortgage, deed of
trust, voting trust agreement, stockholder agreement, loan agreement, security
agreement, pledge agreement, bond, debenture, note agreement, lease,
registration agreement, contract or other agreement or instrument
(collectively, a "contract or other agreement") to which it is a party or by
which its property is bound or affected. To the best knowledge of the Company,
no other party under any contract or other agreement to which it is a party is
in default in any material respect
-6-
Stock Purchase Agreement
<PAGE> 7
thereunder. The Company is not and at each Closing Date will not be, in
violation of any provision of its Certificate of Incorporation or By-laws.
(k) No consent, approval, authorization or order of, or
any filing or declaration with, any court or governmental agency or body is
required for the consummation by the Company of the transactions on its part
contemplated herein or in the Underwriting Agreement, except such as have been
obtained under the Act or the Rules and Regulations and such as may be required
under state securities or Blue Sky laws, the by-laws and rules of the National
Association of Securities Dealers, Inc. (the "NASD") in connection with the
purchase and distribution by the Underwriters of the Firm Shares (and Option
Shares, if any) to be sold by the Company pursuant to the Underwriting
Agreement or the HSR Act in connection with the purchase by Purchaser of the
Shares to be sold by the Company pursuant to this Agreement at the Second
Closing.
(l) The Company has full corporate power and authority to
enter into this Agreement and the Underwriting Agreement. This Agreement and
the Underwriting Agreement have been duly authorized, executed and delivered by
the Company and constitute valid and binding agreements of the Company and are
enforceable against the Company in accordance with the terms hereof and thereof
except to the extent that such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws of general
application relating to the rights of creditors. The performance of this
Agreement and the Underwriting Agreement and the consummation of the
transactions contemplated hereby and thereby will not result in the creation or
imposition of any lien, charge or encumbrance upon any of the assets of the
Company pursuant to the terms or provisions of, or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or give any other party a right to terminate any of its obligations under, or
result in the acceleration of any obligation under, the Certificate of
Incorporation or By-laws of the Company or any contract or other agreement to
which the Company is a party or by which the Company or any of its properties
is bound or affected, or violate or conflict with any judgment, ruling, decree,
order, statute, rule or regulation of any court or other governmental agency or
body applicable to the business or properties of the Company.
(m) The Company has good and marketable title to all
properties and assets described in the Prospectus as owned by it, free and
clear of all liens, charges, encumbrances or restrictions, except such as are
described in the Prospectus or are not material to the business of the Company.
The Company has valid, subsisting and enforceable leases for the properties
described in the Prospectus as leased by it, with such exceptions as are not
material and do not materially interfere with the use
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Stock Purchase Agreement
<PAGE> 8
made and proposed to be made of such properties by the Company.
(n) There is no document or contract of a character
required to be described in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement which is not described or
filed as required. All such contracts to which the Company is a party have
been duly authorized, executed and delivered by the Company, constitute valid
and binding agreements of the Company, and are enforceable against the Company
in accordance with the terms thereof.
(o) No statement, representation, warranty or covenant
made by the Company in this Agreement or the Underwriting Agreement or made in
any certificate or document required by this Agreement or the Underwriting
Agreement to be delivered to Purchaser was or will be, when made, inaccurate,
untrue or incorrect in any material respect.
(p) Neither the Company nor any of its directors,
officers or controlling persons has taken, directly or indirectly, any action
intended, or which might reasonably be expected, to cause or result, under the
Act or otherwise, in, or which has constituted, stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares or the Firm Shares.
(q) No holder of securities of the Company has rights to
the registration of any securities of the Company because of the filing of the
Registration Statement.
(r) Prior to the First Closing Date, the Shares shall
have been qualified for quotation on the NASDAQ National Market subject to
official notice of issuance.
(s) The Company is not involved in any material labor
dispute, work stoppage, strike or other job action nor, to the knowledge of the
Company, is any such dispute, work stoppage, strike or other job action
threatened.
(t) The Company owns, or is licensed or otherwise has the
full exclusive right to use, all material trademarks and trade names which are
used in or necessary for the conduct of its business as described in the
Prospectus. No claims have been asserted by any person to the use of any such
trademark or trade name. The use, in connection with the business and
operations of the Company, of such trademarks and trade names does not, to the
Company's knowledge, infringe on the rights of any person.
(u) Neither the Company nor, to the Company's knowledge,
any employee or agent of the Company has made any payment of funds of the
Company or received or retained any funds which constitutes a violation by the
Company of any law, rule or regulation or of a character required to be
disclosed in the Prospectus.
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Stock Purchase Agreement
<PAGE> 9
(v) No relationship, direct or indirect, exists between
or among the Company and any of its directors, officers, stockholders,
customers or suppliers which is required to be disclosed in the Prospectus and
which is not so disclosed. Without limitation, there have been no transactions
between or involving the Company and any of its directors, officers,
stockholders or customers relating to the borrowing of money, the guaranty of
any obligations or liabilities or the purchase, sale or lease of property which
are required to be disclosed in the Prospectus and which are not so disclosed.
(w) All Federal, state and local tax returns of the
Company required by law to be filed prior to the date hereof have been filed,
and all taxes, assessments, fees, penalties, interest and other governmental
charges that are shown to be due and payable with respect to the Company have
been paid or properly accrued on the Company's financial statements in
accordance with generally accepted accounting principles consistently applied.
There is no tax deficiency that has been, nor does the Company have any
knowledge of any tax deficiency which is likely to be, asserted against the
Company that has not been properly accrued for on the Company's financial
statements in accordance with generally accepted accounting principles
consistently applied.
(x) Except as described in the Prospectus, the Company
has not incurred any liability for a fee, commission or other compensation on
account of the employment of a broker or finder in connection with the
transactions contemplated by this Agreement.
(y) The Company has obtained from each of its
stockholders and from each of the Company's directors and officers an
enforceable written agreement, in a form approved by Representatives, that for
a period of 180 days from the date of the Prospectus, he, she or it will not,
without the prior written consent of PaineWebber Incorporated, offer, sell,
contract to sell or grant any option to purchase or otherwise dispose of any
shares of capital stock of the Company now owned or hereafter acquired by such
person.
(z) Neither the Company nor any other person associated
with or acting on behalf of the Company including, without limitation, any
director, officer, agent, or employee of the Company has, directly or
indirectly, while acting on behalf of the Company: (i) used any corporate funds
for unlawful contributions, gifts, entertainment, or other unlawful expenses
relating to political activity; (ii) made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic political
parties or campaigns from corporate funds; (iii) violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any other
unlawful payment.
-9-
Stock Purchase Agreement
<PAGE> 10
(aa) The Company has filed with the applicable foreign and
domestic regulatory authorities each and every statement, report, information
or form required by any applicable law, regulation or order, except where the
failure to so file would not have a material adverse effect on the Company or
its business, properties, business prospects, condition (financial or
otherwise) or results of operations, and all such filings or submissions were
in compliance with applicable laws when filed, and no deficiencies have been
asserted by any regulatory commission, agency or authority with respect to such
filings or submissions, except where the failure to so file or cure any such
deficiency would not have a material adverse effect on the Company or its
business, properties, business prospects, condition (financial or otherwise) or
results of operations. The Company has maintained in full force and effect all
licenses and permits necessary or proper for the conduct of its business,
except where the failure to do so would not have a material adverse effect on
the Company or its business, properties, business prospects, condition
(financial or otherwise) or results of operations, and the Company has not
received any notification that any revocation or limitation thereof is
threatened or pending that would have such an effect. Except as disclosed in
the Registration Statement and the Prospectus, there is not pending any change
under any law, regulation, license or permit that would have a material adverse
effect on the Company or its business, properties, business prospects,
condition (financial or otherwise) or results of operations. The Company has
not received any notice of, or, to the knowledge of the Company, been
threatened with or is under investigation with respect to, a violation or a
possible violation of any provision of any law, regulation or order, except
such violation or violations as would not have a material adverse effect on the
Company or its business, properties, business prospects, condition (financial
or otherwise) or results of operations.
(bb) With respect to state certificates of public
convenience and necessity and other operating authorizations issued by state
public utility commissions or similar state governmental agencies
(collectively, "PUCs" and, individually, a "PUC") (such PUC certificates and
authorizations are hereinafter referred to collectively as the "State
Authorizations") held by the Company, such State Authorizations are in full
force and effect and are unimpaired by any act or omission of the Company or
any of its employees or agents, in each case except where such authorization is
not required or where the failure to so hold any such State Authorization would
not have a material adverse effect on the Company or its business, properties,
business prospects, condition (financial or otherwise) or results of
operations. The State Authorizations are all of the licenses, authorizations,
consents and approvals necessary from the PUCs in order to allow the Company to
own its assets and carry on its business as currently being conducted, except
where the failure to so hold any State Authorization would not have a material
adverse effect
-10-
Stock Purchase Agreement
<PAGE> 11
on the Company or its business, properties, business prospects, condition
(financial or otherwise) or results of operations. To the Company's knowledge,
there are no proceedings of any kind, including (but not limited to) rulemaking
proceedings of general applicability in the industry or industries in which the
Company operates, by or before any PUC, now pending or threatened, which, if
adversely determined, would have a material adverse effect on the Company or
its business, properties, business prospects, condition (financial or
otherwise) or results of operations. Neither the execution and delivery of
this Agreement, the Underwriting Agreement and the Price Determination
Agreement nor the consummation of the transactions contemplated herein and
therein and in the Registration Statement will conflict with or result in a
breach of, or require any authorization, approval or consent under, the
Communications Act of 1934, as amended, or the policies or rules of the Federal
Communications Commission (the "FCC") or the communications statutes of any
state or the policies or rules of any PUC. All applications, reports and other
filings required by the FCC or any PUC to be filed as of the date hereof with
respect to an FCC license or the State Authorizations, as the case may be, have
been duly and currently filed as of the date hereof, except where the failure
to so file would not have a material adverse effect on the Company or its
business, properties, business prospects, condition (financial or otherwise) or
results of operations.
(cc) Neither the Company nor any affiliate (as defined in
Section 517.021(1) of the Florida Statutes) does any business with the
government of Cuba or with any person or affiliate located in Cuba.
4-B. Representations and Warranties of Purchaser. Purchaser
is organized, validly existing and in good standing under the laws of New York
and has full corporate power and authority to enter into this Agreement. This
Agreement has been duly authorized, executed and delivered by Purchaser and
constitute valid and binding agreements of Purchaser and is enforceable against
Purchaser in accordance with the terms hereof except to the extent that such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws of general application relating to
the rights of creditors.
5. Further Agreements. The Company and Purchaser further
agree with one another as follows:
(a) The Company will apply the net proceeds from the
offering and sale of the Shares and the Firm Shares (and Option Shares, if any)
to be sold by the Company in the manner set forth in the Prospectus under "Use
of Proceeds" and shall file such reports with the Commission with respect to
the sale of the Shares and the Firm Shares (and Option Shares, if any) and the
application of the proceeds therefrom as may be required in accordance with
Rule 463 under the Act.
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Stock Purchase Agreement
<PAGE> 12
(b) The Company will not, and will cause each of its
executive officers, directors and each beneficial owner of outstanding shares
of Common Stock to enter into agreements with the Representatives in the form
set forth as an exhibit to the Underwriting Agreement to the effect that they
will not, for a period of 180 days after the commencement of the public
offering of the Firm Shares, without the prior written consent of PaineWebber
Incorporated, offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of any shares of Common Stock or rights to acquire such
shares (except that the Company may grant options pursuant to employee and
director stock option plans described in the Prospectus).
(c) The Company and Purchaser will promptly file the
Notification and Reports Forms under the HSR Act with the Federal Trade
Commission and the Antitrust Division of the Department of Justice and will use
commercially reasonable efforts to respond as promptly as practicable to all
inquiries received for additional information or documentation. The Company
and Purchaser shall coordinate the preparation, timing and filing of
notification under the HSR Act so as to timely present such notices and avoid
inconsistencies between such notices. Notwithstanding anything contained
herein to the contrary, in no event shall the Company or Purchaser be required
to divest itself or dispose of any properties or assets or grant any special
concessions in order to obtain any governmental approval of the transaction
contemplated by this Agreement.
(d) The Company will use its best efforts to cause the
Registration Statement to become effective and will maintain the effectiveness
of the Registration Statement (including the filing of any necessary amendments
to the Registration Statement or supplements to the Prospectus required by the
Act or to ensure that the disclosure in the Registration Statement or the
Prospectus does not contain any untrue statement of a material fact or any
statement, which, in light of the circumstances in which it is made, is
misleading) until such time as the Second Closing has occurred or the parties
otherwise agree.
(e) In the event that the Underwriting Agreement is
amended following the date of this Agreement, the Company agrees to amend this
Agreement as necessary and appropriate to give the Purchaser substantially
equal benefits and rights as accorded to the Underwriters.
6. Conditions of the Obligations of Purchaser. The
obligations of Purchaser hereunder are subject to the following conditions:
(a) Each of the covenants required to be performed by the
Company or the selling stockholders in the Underwriting Agreement on or prior
to the "Closing Date" (as defined therein) shall have been duly, timely and
fully performed and each
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Stock Purchase Agreement
<PAGE> 13
condition required to be complied with by the Company or such selling
stockholders in the Underwriting Agreement on or prior to such Closing Date
shall have been duly, timely and fully complied with in all material respects.
(b) The transactions contemplated by the Underwriting
Agreement shall have been consummated contemporaneously with the First Closing.
(c) Purchaser and the Company shall have entered into a Rights
Agreement substantially in the form of Exhibit A hereto and Kokusai Denshin
Denwa and the Company shall have entered into a Cooperation Agreement
substantially in the form of Exhibit B hereto.
(d) With respect to the Second Closing Date, any
applicable waiting period under the HSR Act with respect to the transactions
contemplated by this Agreement shall have expired or early termination shall
have been granted.
(e) Each of the representations and warranties of the
Company contained herein shall be true and correct in all material respects at
each Closing Date, as if made at such Closing Date, and each of the covenants
required to be performed by the Company or the Stockholders herein on or prior
to each Closing Date shall have been duly, timely and fully complied with in
all material respects.
(f) Purchaser shall have received an opinion, dated the
First Closing Date, and with respect to the Second Shares, the Second Closing
Date, and satisfactory in form and substance to counsel for Purchaser, from
Gray Cary Ware & Freidenrich, counsel to the Company, substantially in the form
delivered to the Underwriters pursuant to the Underwriting Agreement.
(g) Concurrently with the execution and delivery of the
Underwriting Agreement or, if the Company elects to rely on Rule 430A, the date
of the Prospectus, and at each Closing Date, the Accountants shall have
furnished to Purchaser copies of any letters delivered to the Representatives
pursuant to Section 6(h) of the Underwriting Agreement.
(h) Concurrently with the execution and delivery of this
Agreement or, if the Company elects to rely on Rule 430A, on the date of the
Prospectus, and at each Closing Date, there shall be furnished to Purchaser a
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Company, in form and
substance satisfactory to Purchaser, to the effect that:
(i) Each of the covenants required to be performed by the
Company in the Underwriting Agreement on or prior to the date of such
certificate has been duly, timely
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Stock Purchase Agreement
<PAGE> 14
and fully performed and each condition required to be complied with
by the Company in the Underwriting Agreement on or prior to the
delivery of such certificate has been duly, timely and fully complied
with in all material respects.
(ii) Each of the representations and warranties of
the Company contained in this Agreement was, when originally made, and
is, at the time such certificate is delivered, true and correct in all
material respects; and
(iii) Each of the covenants required to be performed
by the Company herein on or prior to the date of such certificate has
been duly, timely and fully performed and each condition required to
be complied with by the Company herein on or prior to the delivery of
such certificate has been duly, timely and fully complied with in all
material respects.
(i) Each stockholder of the Company owning more than 10%
of the outstanding common stock of the Company shall have delivered a written
understanding to Purchaser to be bound by Section 4(d) of the Rights Agreement
to the same extent as the Company.
(j) The Company shall have furnished to Purchaser such
certificates, in addition to those specifically mentioned herein, as Purchaser
may have reasonably requested.
7. Termination. This Agreement may be terminated at any
time prior to the First Closing Date (or, with respect to the Second Shares, on
or prior to the Second Closing Date):
(a) By mutual written consent of the Company, and
Purchaser.
(b) By the Company or Purchaser if there is a lawsuit,
action or proceeding brought or threatened by a third party or governmental
agency or body with respect to the transactions contemplated by this Agreement.
(c) By the Company or Purchaser if the other party
breaches in any material respect any of its representations, warranties,
covenants or obligations under this Agreement.
(d) By the Company or Purchaser if the First Closing Date
has not occurred by July 31, 1996.
(e) By the Company or Purchaser if the parties do not
receive required approvals and clearances pursuant to the HSR Act by August 31,
1996.
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Stock Purchase Agreement
<PAGE> 15
In the event of termination of this Agreement by any or all of the parties
pursuant to this Section 7, written notice thereof shall forthwith be given to
each other party specifying the provision hereof pursuant to which such
termination is made, this Agreement shall forthwith become void and there shall
be no liability on the part of any party to the other parties hereto.
8. Miscellaneous.
(a) Each of the parties hereto shall bear its own
expenses (including without limitation attorneys' fees) in connection with the
negotiation and consummation of the transactions contemplated hereby.
(b) Notice given pursuant to any of the provisions of
this Agreement shall be in writing and, unless otherwise specified, shall be
mailed or delivered: (a) if to the Company or any Stockholder, at the office
of the Company, 533 Airport Boulevard, Suite 505, Burlingame, California 94010,
Attention: Howard A. Neckowitz, President, with a copy to Gray, Cary, Ware &
Freidenrich, 400 Hamilton Avenue, Palo Alto, California 94301, Attention: Eric
J. Lapp, Esq.; or (b) if to Purchaser, to the office of Purchaser at KDD
America, 750 Lexington Avenue, 28th Floor, New York, NY 10022 U.S.A.,
Attention: Hideo Yamamoto, President, with a copy to Nishimura & Sanada, Ark
Mori Building, 29th Floor, 12-32, Akasaka 1-Chome, Minato-Ku, Tokyo 107, Japan,
Attention: Stephen B. Givens. Any such notice shall be effective only upon
receipt. Any notice may be made by telex or telephone, but if so made shall be
subsequently confirmed in writing.
(c) This Agreement, together with the Exhibits hereto,
constitute the entire agreement and understanding between the parties and there
are no agreements or commitments with respect to the transactions contemplated
herein except as set forth in this Agreement. This Agreement supersedes any
prior offer, agreement or understanding between the parties with respect to the
transactions contemplated hereby.
(d) Any term or provision of this Agreement may be
amended by a writing signed by the Company and Purchaser. The observance of
any term or provision of this Agreement may be waived only by a writing signed
by the party to be bound by such waiver. No waiver by a party of any breach of
this Agreement will be deemed to constitute a waiver of any other breach or
succeeding breach.
(e) This Agreement has been and is made solely for the
benefit of the Company and Purchaser and their respective successors and
permitted assigns, and no other person shall acquire or have any right under or
by virtue of this Agreement.
(f) This Agreement may be signed in two or more
counterparts with the same effect as if the signatures thereto
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Stock Purchase Agreement
<PAGE> 16
and hereto were upon the same instrument.
(g) This Agreement may not be assigned by any party
directly or by operation of law without the prior written consent of each other
party hereto. This Agreement shall be binding upon, and shall inure to the
benefit of, the respective successors and permitted assigns of the parties
hereto.
(h) This Agreement shall be governed by and construed in
accordance with the laws of the State of California without regard to its
principles of conflicts of laws.
(i) In case any provision in this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
(j) Should any proceeding be brought to enforce or
interpret any provision of this Agreement, the prevailing party shall be
entitled to recover reasonable attorneys' fees and costs to be fixed in amount
by the court or arbitrator.
IN WITNESS WHEREOF, each of the undersigned has executed and
delivered this Agreement by as of the date first written above.
PACIFIC GATEWAY EXCHANGE,
a Delaware corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
KDD AMERICA, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
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Stock Purchase Agreement
<PAGE> 17
EXHIBIT A
TO STOCK PURCHASE AGREEMENT
RIGHTS AGREEMENT
THIS RIGHTS AGREEMENT (this "Agreement") is entered into as of
June __, 1996, by and between PACIFIC GATEWAY EXCHANGE, INC., a Delaware
corporation (the "Company") and KDD AMERICA, INC., a New York corporation
("Purchaser").
R E C I T A L S
WHEREAS, the Company proposes to sell an aggregate of 4,900,000 shares
of the Company's Common Stock, $.0001 par value per share (the "Common Stock");
WHEREAS, the Company proposes to sell 1,800,000 shares of the
foregoing 4,900,000 shares to Purchaser (the "KDD Shares") pursuant to a
certain Stock Purchase Agreement of even date herewith (the "Stock Purchase
Agreement") by and between the Company and Purchaser and the remaining
3,100,000 shares pursuant to a certain Underwriting Agreement(the "Underwriting
Agreement") by and among the Company, the stockholders named therein and
PaineWebber Incorporated and Alex. Brown & Sons Incorporated, as
Representatives of the several underwriters named in Schedule II thereto;
WHEREAS, concurrently therewith, certain stockholders of the Company
propose to sell 367,000 shares of Common Stock pursuant to the same
Underwriting Agreement;
WHEREAS, the price and other terms of the sale of the KDD Shares are
intended to be substantially similar to and in no event less favorable to
Purchaser than the corresponding terms of the Underwriting Agreement are to the
Underwriters, and the closing of the Underwriting Agreement is a condition
precedent to the obligations of Purchaser under the Stock Purchase Agreement;
and
WHEREAS, it is a condition precedent to the obligations of Purchaser
under the Stock Purchase Agreement that the Company and Purchaser enter into
this Agreement.
NOW, THEREFORE, in consideration of the above recitals, the mutual
covenants set forth below and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the Company and Purchaser hereby
agree as follows:
<PAGE> 18
A G R E E M E N T
1. Certain Definitions. As used in this Agreement, the following
terms shall have the following respective meanings:
"Affiliate" shall mean, with respect to any person or entity, another
person or entity that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control with
such person or entity.
"Change of Control Transaction" shall mean a transaction, approved or
agreed to by Purchaser, in which the business, stock or assets of the Company
are sold or otherwise transferred to a party which is not an Affiliate of
Purchaser or part of a "group" (as defined in Rule 13d-3 promulgated under the
Exchange Act) including Purchaser in an arm's-length transaction in which the
form and amount of consideration per share, if any, payable to holders of the
Common Stock is distributed pro rata based on ownership of the Common Stock and
in which the other significant terms of the transaction (including, but not
limited to, indemnification or escrow arrangements) apply, in all material
respects, equally to Purchaser and the other stockholders of the Company. The
assumption by Purchaser of potential liability in such change in control
transaction greater than the other stockholders of the Company shall be deemed
to constitute equal treatment. If any holders of the Common Stock are given an
option as to the form and amount of consideration to be received, all holders
of the Common Stock must be given the same option. A change in control
transaction may take the form of a sale of a majority of the outstanding voting
stock of the Company, a merger or consolidation in which the holders of the
outstanding voting stock of the Company before the transaction do not own a
majority of the outstanding voting stock of the combined entity, a sale of all
or substantially all the assets of the Company or a reorganization in which a
third party acquires a majority of the voting power of the Company.
Notwithstanding the foregoing, the expiration of proxies held by Mr. Neckowitz
shall not constitute a change in control transaction.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
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Rights Agreement
<PAGE> 19
"Fair Market Value" shall mean the closing sale price per share of the
Common Stock, for securities listed on a national securities exchange, or the
closing bid price per share of the Common Stock, for securities quoted on the
NASDAQ National Market, on the day in question (or, if such day is not a
trading day or if no sales of shares of Common Stock were made on such day, on
the nearest preceding trading day on which sales of shares of Common Stock were
made), as reported in The Wall Street Journal, or, if trading in the Common
Stock is not then reported in The Wall Street Journal, at such closing sale or
bid price as may then appear in what the Board of Directors of the Company in
its judgment then deems to be the most nearly comparable listing or reporting
service.
The terms "register", "registered", and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registrable Securities" shall mean shares of Common Stock, (i) issued
or issuable to Purchaser from the Company (ii) purchased by Purchaser from
third parties or (iii) issued as a dividend or other distribution with respect
to, or in exchange or in replacement of, any shares of Common Stock owned by
Purchaser, excluding in all cases, however (including exclusion from the
calculation of the number of outstanding Registrable Securities), any
Registrable Securities sold by Purchaser in a transaction, including a
transaction pursuant to a registration statement under this Agreement or a
transaction pursuant to Rule 144, in which rights under this Agreement are not
transferred in accordance with Subsection 9(h).
"Registration Expenses" shall mean all expenses incurred by the
Company in complying with Section 9 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements of counsel, blue sky
fees and expenses, and accounting and auditing expenses including the expense
of any special audits incident to or required by any such registration (but
excluding the compensation of regular employees of the Company which shall be
paid in any event by the Company and excluding Selling Expenses).
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting
-3-
Rights Agreement
<PAGE> 20
discounts and selling commissions applicable to the sale.
"U.S.-Based Telecommunications Carrier" means AT&T, MCI, Sprint, and
WorldCom and any other similar U.S.-based companies that may hereafter be
engaged as a wholesale telecommunication carrier in the U.S. in a manner that
is directly and significantly competitive with the primary wholesale
telecommunications business of PGE.
2. Representative at Board Meetings. Purchaser shall have the right
to have one representative present at all meetings of the Board of Directors of
the Company and any committees thereof; provided, however, that such
representative shall not be entitled to vote at such meetings. The Company
shall send the representative all notices, information, minutes of meetings and
other materials distributed to directors of the Company at the same time they
are distributed to other directors and shall provide such representative with
notice and an agenda of any meeting at the same time they are distributed to
other directors. Purchaser shall provide written notice to the Company of the
identity and address of, or any change with respect to the identity or address
of, the representative. The Company may request the Purchaser's observer to
temporarily leave meetings at which strategic transactions with competitors of
Purchaser are discussed or other confidential information of competitors of
Purchaser subject to confidentiality agreements with the Company is discussed.
3. Limitations on Purchases of Additional Shares. (a)(i) Purchaser
shall have the right to purchase additional shares of Common Stock from time to
time in the open market; provided, however, that such purchases may not during
the two-year period following the First Closing Date without the Company's
written consent reduce the number of shares of Common Stock listed on a
securities exchange or traded over the counter (excluding shares held of record
by Purchaser) to less than 16% of the shares of Common Stock then outstanding
(excluding options, warrants or other securities convertible into shares of
Common Stock). Purchaser shall give the Company prior written notice of any
proposed purchase of additional shares of Common Stock in the open market.
(ii) Purchaser's right to purchase such additional shares of Common
Stock shall be subject to receipt by the Company of any regulatory approvals
which may be required (in the reasonable judgment of the Company) in connection
therewith. The Company shall use its best efforts to obtain, and shall pay,
and save Purchaser harmless from, the expenses of, all such regulatory
approvals.
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(b) In the event that Purchaser is unable purchase additional shares
of Common Stock in the open market without violating the provisions of Section
3(a)(i) above and such provision has not been waived by the Company in writing,
then, at any time after the nine-month period following after the First Closing
Date, Purchaser may require the Company to issue and sell such additional
shares of Common Stock to Purchaser at Fair Market Value.
(c) Purchaser may not purchase more than 20% of the shares of Common
Stock then outstanding (excluding options, warrants or other securities
convertible into shares of Common Stock) pursuant to the provisions of Sections
3(a) or (b) above without the prior written consent of the Company. In the
event that Purchaser purchases more than 20% of the shares of Common Stock then
outstanding (excluding options, warrants or other securities convertible into
shares of Common Stock) without such consent, then Purchaser agrees to grant to
the Board of Directors of the Company an irrevocable proxy to vote such excess
shares and to sell such excess shares to the Company or any third party
designated by the Company at Fair Market Value.
(d) In the event the Company issues additional shares, Purchaser may
(without limiting the generality of Section 3(a)) acquire in the public market
such number of shares as may be necessary to maintain Purchaser's percentage
share interest in the Company. In the event a purchase of such shares by
Purchaser would exceed the limitation set forth in Section 3(a)(i) and such
limitation is not waived by PGE, then at any time after the 15th month
following the First Closing Date Purchaser may require the Company to issue and
sell such shares to Purchaser (regardless when the additional shares were
issued by the Company) at the Fair Market Value of such shares as of the date
of issuance by the Company.
4. Limitation on Sale of Shares. (a) Purchaser agrees that, for a
period of 180 days after the First Closing Date, it will not, without the prior
written consent of PaineWebber Incorporated, sell any shares of Common Stock
acquired pursuant to the Stock Purchase Agreement or hereafter acquired by it.
For the 180-day period immediately following the expiration of such 180-day
period, Purchaser may freely dispose of shares of Common Stock owned by it, up
to the maximum amount permissable under Rule 144(e) notwithstanding the fact
that Purchaser is not now required to comply with Rule 144. In the event that
Purchaser desires to dispose of shares of Common Stock owned by it in excess of
such limit during such 180-day period, Purchaser shall provide the Company with
written notice to such effect and the Company and Purchaser shall seek in good
faith to market and distribute such excess shares on the most favorable terms
to Purchaser that will not, in the
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<PAGE> 22
reasonable judgment of the Company, materially adversely affect the market in
the Common Stock.
(b) Notwithstanding the provisions of Section 4(a) above, in the
event that Purchaser purchases more than 15% of the shares of Common Stock then
outstanding (excluding options, warrants or other securities convertible into
shares of Common Stock) during the two year period following the First Closing
Date, for a period of 360 days after the date of such purchase (or until the
expiration of such two-year period if earlier), it will not sell such excess
shares. In the event that Purchaser owns in excess of 15% of the shares of
Common Stock then outstanding (excluding options, warrants or other securities
convertible into shares of Common Stock), Purchaser shall vote such excess
shares in favor of a Change in Control Transaction, if recommended by the Board
of Directors of the Company, and shall not exercise dissenters rights with
respect to any shares of Common Stock owned by it, to the extent necessary to
preserve pooling of interests accounting treatment of such transaction for the
Company.
(c) Anything herein to the contrary notwithstanding, Purchaser shall
be released from the limitations set forth in Section 4(a) and shall be
entitled to dispose of shares in excess of such limitations on a pro rata basis
to the extent of the issuance of additional shares of capital stock by the
Company or the sale of shares of capital stock of the Company by Affiliates of
the Company.
(d) Purchaser shall not sell any shares of Common Stock of the
Company owned by it in a private sale to a U.S.-Based Telecommunications
Carrier without the prior written consent of the Company. Subject to Section
7(b), the Company shall not sell any shares of Common Stock in a private sale
to a Japan-based telecommunications company without the prior written consent
of Purchaser.
5. Participation in Tender Offers, etc. For a period of two years
after the First Closing Date, unless Purchaser shall have been specifically
invited in writing by the Company, Purchaser shall not: (a) effect, seek, offer
or propose, participate in or assist any other person to effect, seek, offer or
propose or participate in (i) any tender, exchange offer or merger of the
Company or (ii) any Solicitation of Proxies (as defined in the proxy rules of
the Commission) or consents to vote any voting securities of the Company; or
(b) form, join or in any way participate in a Group (as defined in Rule 13d-3
promulgated under the Exchange Act); provided, however, that nothing in this
Section 5 shall prohibit Purchaser from contacting any executive officer or
director of the Company for the purpose
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of seeking the Company's written invitation to submit a proposal with respect
to any of the foregoing transactions.
6. Changes in Control. (a) The Company shall have the option to
repurchase from Purchaser shares of Common Stock held by Purchaser at Fair
Market Value in the event of a Change in Control of Purchaser.
(b) Purchaser shall have the right to sell to the Company shares of
Common Stock held by Purchaser at Fair Market Value in the event of a Change
in Control of the Company.
7. Investments in Competing Carriers. (a) During any period when
Purchaser owns more than 10% the shares of Common Stock of the Company then
outstanding (excluding options, warrants or other securities convertible into
shares of Common Stock) Purchaser shall not invest in a U.S.-Based
Telecommunication Carrier, other than investments of up to 3% of the
outstanding voting securities of any such carriers whose voting securities are
traded on a national securities exchange or quoted on NASDAQ National Market
("Excluded Investments").
(b) In the event that Purchaser invests in a U.S.-Based
Telecommunications Carrier other than Excluded Investments, then, regardless of
the percentage of the outstanding shares of Common Stock then owned by
Purchaser, the restriction against transfer set forth in the second sentence of
Section 4(d) above shall cease to apply to the Company.
8. Right of First Offer. (a) In the event that Purchaser desires to
dispose of any shares of Common Stock owned by it in a private transaction
(other than transfers to Affiliates of Purchaser), it shall first deliver
written notice (hereinafter referred to as the "Notice of Offer") to the
Company, which Notice of Offer shall specify: (i) the number shares of Common
Stock owned by Purchaser which Purchaser wishes to sell (the "Offered Shares");
(ii) the proposed cash purchase price per share for the Offered Shares (the
"Offer Price"); and (iii) all other terms and conditions of the offer. The
Notice of Offer shall constitute an irrevocable offer by Purchaser to sell to
the Company all, but not less than all, of the Offered Shares at the Offer
Price under the terms and conditions contained in the Notice of Offer.
(b) Within 20 days following its receipt of the Notice of Offer, the
Company shall deliver written notice to Purchaser as to its election to
purchase (such notification
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shall be referred to hereinafter as the "Company Acceptance") the Offered
Shares. The election to purchase the Offered Shares shall be made on behalf of
the Company and approved by the Board of Directors of the Company. The Company
Acceptance shall be deemed to be an irrevocable commitment to purchase from
Purchaser the Offered Shares under the terms and conditions contained in the
Notice of Offer.
(c) If the Company does not deliver to Purchaser a Company Acceptance
within the time frame set forth in Section 8(b) above, providing for the
purchase by the Company of all of the Offered Shares, Purchaser: (A) shall be
under no obligation to sell the Offered Shares to the Company; and (B) may,
within a period of 180 days from the date of the Notice of Offer and subject to
the restriction set forth in Section 4(d), sell some or all of the Offered
Shares to one or more third parties (each a "Third Party Transferee"), at no
less than 90% of the Offer Price. If the Purchaser does not complete the sale
of the Offered Shares within such 180-day period, the provisions of this
Section 7 shall again apply, and no sale of shares of Common Stock held by
Purchaser in a private transaction shall be made otherwise than in accordance
with the terms of this Agreement.
(d) The closing of a purchase of the Offered Shares by the Company
pursuant to this Section 7 shall take place within 90 days after the date of
the Notice of Offer at 10:00 a.m. local time at the principal offices of the
Company, or at such other date, time or place as the Company and Purchaser may
agree. At such closing, Purchaser shall sell, transfer and deliver to the
Company, full right, title and interest in and to the Offered Shares free and
clear of all liens, security interests or adverse claims of any kind and nature
(except as otherwise set forth in the Certificate of Incorporation of the
Company, this Agreement and applicable securities laws), and shall deliver to
the Company a certificate or certificates representing the Offered Shares sold,
in each case duly endorsed for transfer or accompanied by appropriate stock
transfer powers duly endorsed with signatures guaranteed by a commercial bank,
trust company or registered broker dealer. Simultaneously with delivery of
such certificates, the Company shall deliver to Purchaser, by wire transfer of
immediately available funds to such bank and account as Purchaser shall
designate, a cash amount equal to the product of the Offer Price and the number
of Offered Shares, in full payment of the purchase price of the Offered Shares.
9. Piggy-Back Registration Rights, etc.
(a) If at any time or from time to time, the Company shall
determine to register shares of Common Stock,
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<PAGE> 25
for its own account or for the account of others (other than a registration
relating solely to employee benefit plans or a registration relating solely to
a Commission Rule 145 transaction or registration on any registration form
which does not include substantially the same information as would be required
to be included in a registration statement covering the sale of the Registrable
Securities), the Company will:
(i) promptly give to Purchaser written notice thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all of the Registrable Securities specified in a written
request by Purchaser, provided that such written request is received by the
Company within 30 days following receipt by Purchaser of such notice from the
Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving a firm commitment underwriting, the
Company shall so advise Purchaser as a part of the written notice given
pursuant to Subsection 9(a)(i). In such event, Purchaser shall have the right
to sell the shares of Common Stock held by it in the same transaction(s) as
those covered by the registration statement at the highest price per share of
Common Stock received by the Company or the other stockholders and the most
favorable terms and conditions received by either of them, provided however,
that in the event of an underwriter cutback of the number of shares to be sold
in such offering, Purchaser shall be treated on a pro rata basis with the other
selling stockholders after the Company has been allowed to sell all shares it
has elected to sell. The Purchaser, together with the Company and the other
stockholders distributing their securities through such underwriting, shall
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by the Company.
(c) All Registration Expenses incurred in connection with a
registration pursuant to this Section 9 (including the reasonable fees and
expenses of one counsel for Purchaser and the other holders participating in
such registration) shall be borne by the Company, and all Selling Expenses
shall be borne by Purchaser and the other holders participating in such
registration pro-rata on the basis of the number of shares so registered.
(d) Registration Procedures. In the case of each registration,
qualification, or compliance effected by the Company pursuant to this Section
9, the Company will keep
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<PAGE> 26
Purchaser advised in writing as to the initiation of each registration,
qualification, and compliance and as to the completion thereof. At its expense
the Company will:
(i) Keep such registration, qualification, or compliance
effective for a period of 180 days or until Purchaser has completed the
distribution described in the registration statement relating thereto,
whichever first occurs;
(ii) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(iii) Furnish to Purchaser a number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirement of the Securities Act, and such other documents as Purchaser may
reasonably request (including a conformed copy of the registration statement
filed with the Commission and any amendments thereto and an original executed
underwriting agreement entered into in connection with such registration) in
order to facilitate the disposition of the Registrable Securities;
(iv) Use its best efforts to register and qualify the
Registrable Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as shall be reasonably
requested by Purchaser, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
make a general consent to service of process in any such states or
jurisdictions;
(v) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement;
(vi) Notify Purchaser at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the happening
of any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing, and at the request of Purchaser
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<PAGE> 27
promptly prepare and furnish to Purchaser a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that,
as thereafter delivered to the purchasers or prospective purchasers of such
securities, such prospectus shall not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which they were made;
(vii) Furnish, at the request of Purchaser, on the date that
Registrable Securities are delivered to the underwriters for sale in connection
with registration pursuant to this Section 9, if such securities are being sold
through underwriters, or on the date that the registration statement with
respect to such securities becomes effective, if such securities are not being
sold through underwriters, (A) a copy of any opinion, dated such date, of the
counsel representing the Company for the purposes of such registration,
addressed to the underwriters or the Company, and (B) a copy of any letter,
dated such date, from the independent accountants of the Company, addressed to
the underwriter or the Company;
(viii) Use its reasonable efforts to obtain the withdrawal of
any order suspending the effectiveness of the registration statement at the
earliest possible time;
(ix) Otherwise comply with all applicable rules and
regulations of the Commission, and make available to its security holders, as
soon as reasonably practicable, an earnings statement covering the period of at
least 12 months, but not more than 18 months, beginning with the first full
calendar month after the effective date of such registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act, and furnish to each seller at least 10 business days prior to
the filing thereof a copy of any amendment or supplement to such registration
statement or prospectus;
(x) Notify Purchaser of any "stop transfer" order with
respect to the Company's securities; and
(xi) Use its best efforts to qualify the Registrable
Securities covered by such registration statement on any securities exchange on
which the Company's securities are then listed or registered.
(e) (i) The Company will indemnify Purchaser, each of its
officers, directors and partners, and each person controlling Purchaser, with
respect to Registrable Securities held by Purchaser, each person controlling
the Company who is not participating in such registration,
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<PAGE> 28
qualification or compliance and each underwriter, if any, and each person who
controls any underwriter, against all claims, losses, damages, and liabilities
(or actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, to which they may become
subject under the Securities Act, the Exchange Act, or other federal or state
law, arising out of or based on (A) any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering circular or
other similar document (including any related registration statement,
notification, or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were
made, or (B) any violation by the Company of any federal, state, or common law
rule or regulation applicable to the Company in connection with any such
registration, qualification, or compliance, and will reimburse Purchaser, each
of its officers, directors and partners, and each person controlling Purchaser,
each such person controlling the Company, each such underwriter, and each
person who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability, or action, as incurred, provided that the
Company will not be liable to Purchaser in any such case to the extent that any
such claim, loss, damage, liability or expense arises out of or is based on any
untrue statement or omission, made in reliance on and in conformity with
written information furnished to the Company expressly for use in the
Registration Statement by Purchaser.
(ii) Purchaser will, if Registrable Securities held by
Purchaser are included in the securities as to which such registration,
qualification, or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of the Securities Act, each
other stockholder participating in such registration, and each of its officers,
directors, and partners and each person controlling such other stockholder,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on (A) any untrue statement by Purchaser (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular, or other similar document, or any
omission by Purchaser (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in
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<PAGE> 29
the light of the circumstances under which they were made, and will reimburse
the Company, such other stockholders, such directors, officers, persons,
underwriters, or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action, as incurred, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular, or other document in reliance upon and in
conformity with written information furnished to the Company expressly for use
in the Registration Statement by Purchaser, or (B) any violation by Purchaser,
in connection with a non-underwritten offering, of any federal, state, or
common law rule or regulation applicable to Purchaser in connection with the
distribution of securities pursuant to a registration statement, and will
reimburse the Company, such other stockholders, such directors, officers,
persons, or control persons for any legal and any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action, as incurred; provided, however, that the
obligations of Purchaser hereunder shall be limited to an amount equal to the
aggregate proceeds received by Purchaser in such offering.
(iii) Each party entitled to indemnification under this
Subsection 9(e) (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly after
such Indemnified Party has received written notice of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom, provided that
counsel for the Indemnifying Party, who shall conduct the defense of such claim
or litigation, shall be approved by the Indemnified Party (whose approval shall
not unreasonably be withheld). The Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying Party
shall bear the expense of such defense of one counsel representing the
Indemnified Party if representation of both parties by the same counsel would
be inappropriate due to actual or potential conflicts of interest. The failure
of any Indemnified Party or Parties to give notice as provided herein would
relieve the Indemnifying Party of its obligations under this Subsection 9(e)
only to the extent that such failure to give notice shall materially adversely
prejudice the Indemnifying Party in the defense of any such claim or any such
litigation. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement that does not include as
an
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<PAGE> 30
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
(iv) If the indemnification provided for in this Subsection
9(e) is unavailable or insufficient to hold harmless an Indemnified Party under
Subsections 9(e)(i) or (ii) above, then each Indemnifying Party shall
contribute to the amount paid or payable by such indemnified party as a result
of the losses, claims, damages or liabilities referred to in Subsections
9(e)(i) or (ii) above (A) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and Purchaser on the
other from the offering and the relative fault of the Company on the one hand
and Purchaser on the other in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. Relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or Purchaser and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The Company and
Purchaser agree that it would not be just and equitable if contributions
pursuant to this Subsection 9(e)(iv) were to be determined by pro rata
allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in the first sentence of this
Subsection 9(e)(iv). The amount paid or payable by an Indemnified Party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this Subsection 9(e)(iv) shall be deemed to include any legal or
other expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending against any action or claim which is the subject of
this Subsection 9(e)(iv). Notwithstanding the provisions of this Subsection
9(e)(iv), Purchaser shall not be required to contribute any amount in excess of
the proceeds received by Purchaser in the registration. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Purchaser's obligation in this
Subsection 9(e)(iv) to contribute is several in proportion to the number of
shares sold by all holders participating in a registration and not joint. Each
party entitled to contribution agrees that upon the service of a summons or
other initial legal process upon it in any action instituted against it in
respect of which contribution may be sought, it shall promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or
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<PAGE> 31
parties of any such service shall not relieve the party from whom contribution
may be sought from any obligation it may have hereunder or otherwise (except as
specifically provided in Subsection 9(e)(iii) above).
(f) Purchaser shall furnish to the Company such information
regarding Purchaser and the distribution proposed by Purchaser as the Company
may reasonably request in writing and as shall be required in connection with
any registration, qualification or compliance referred to in this Section 9.
(g) With a view to making available the benefits of certain rules
and regulations of the Commission that may at any time permit the sale of
shares of Common Stock to the public without registration, the Company agrees
to:
(i) Use its best efforts to facilitate the sale of shares of
Common Stock to the public, without registration under the Securities Act,
pursuant to Rule 144 under the Securities Act;
(ii) Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act at all
times after ninety (90) days after the effective date of the first registration
under the Securities Act filed by the Company for an offering of its securities
to the general public;
(iii) File with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements);
(iv) During any period in which the Company is not subject to
Section 13 or 15(d) of the Exchange Act, make available the information
required to be provided by Rule 144A(d)(4);
(v) So long as Purchaser owns any shares of Common Stock
which constitute restricted securities under Rule 144 to furnish to Purchaser
forthwith upon request a written statement by the Company as to its compliance
with the reporting requirements of said Rule 144 (at any time after 90 days
after the effective date of the first registration statement filed by the
Company for an offering of its securities to the general public), and of the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements), a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents so filed by the
Company as Purchaser may reasonably request in availing
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itself of any rule or regulation of the Commission allowing Purchaser to sell
any such securities without registration.
(h) The rights granted under this Section 9 may be assigned or
otherwise conveyed in whole or in part by Purchaser to any transferee;
provided, however, that in each case the Company is given written notice of the
transfer, stating the name and address of said transferee and said transferee's
agreement to be bound by the provisions of this Agreement; and provided
further, that Purchaser may transfer to any parent, subsidiary or other person
or entity which is an Affiliate of Purchaser, the rights granted under this
Section 9, so long as the Company is given written notice of such transferee's
agreement to be bound by the provisions of this Agreement, without meeting the
other conditions set forth in this Section 9.
(i) (i) In the event any Registrable Securities are offered or
sold by Purchaser in a registration, Purchaser will: (A) advise the Company in
writing of any offer, sale or other disposition by it of any Registrable
Securities in any manner other than as set forth in the registration statement
or any prospectus included therein on or before the respective dates thereof;
(B) not effect any stabilization activity in connection with the Company's
Common Stock; (C) not, until it has sold all of such Registrable Securities,
bid for or purchase, for any account in which it has a beneficial interest, any
Common Stock other than in transactions permitted pursuant to Rule 10b-6 under
the Exchange Act (if applicable); (D) not, until it has sold all of such
Registrable Securities, attempt to induce any person to purchase any Common
Stock other than in transactions permitted pursuant to Rule 10b-6; and (E) not,
until it has sold all of such Registrable Securities, pay any compensation for
soliciting another to purchase any security of the Company other than in
connection with the registration.
(ii) Purchaser shall, if requested by the Company or the
managing underwriter(s) in connection with any proposed registration and
distribution pursuant to this Agreement, (A) agree to sell the Registrable
Securities on the basis provided in any underwriting arrangements entered into
in connection therewith and (B) complete and execute all questionnaires, powers
of attorney, indemnities, underwriting agreements and other documents customary
in similar offerings, subject to the other provisions hereof.
10. Miscellaneous.
(a) Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered: (a) if
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to the Company or any Selling Stockholder, at the office of the Company, 533
Airport Boulevard, Suite 505, Burlingame, California 94010, Attention: Howard
A. Neckowitz, President, with a copy to Gray, Cary, Ware & Freidenrich, 400
Hamilton Avenue, Palo Alto, California 94301, Attention: Eric J. Lapp, Esq.; or
(b) if to Purchaser, to the office of Purchaser at 750 Lexington Avenue, 28th
Floor, New York, NY 10022 U.S.A., Attention: Hideo Yamamoto, President, with a
copy to Nishimura & Sanada, Ark Mori Building, 29th Floor, 12-32, Akasaka
1-Chome, Minato-Ku, Tokyo 107, Japan, Attention: Stephen B. Givens. Any such
notice shall be effective only upon receipt. Any notice may be made by telex
or telephone, but if so made shall be subsequently confirmed in writing.
(b) This Agreement and the Stock Purchase Agreement constitute the
entire agreement and understanding between the parties and there are no
agreements or commitments with respect to the transactions contemplated herein
except as set forth herein and therein. This Agreement and the Stock Purchase
Agreement supersede any prior offer, agreement or understanding between the
parties with respect to the transactions contemplated hereby.
(c) Any term or provision of this Agreement may be amended by a
writing signed by the Company and Purchaser. The observance of any term or
provision of this Agreement may be waived only by a writing signed by the party
to be bound by such waiver. No waiver by a party of any breach of this
Agreement will be deemed to constitute a waiver of any other breach or
succeeding breach.
(d) This Agreement has been and is made solely for the benefit of
the Company and Purchaser and their respective successors and permitted
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement.
(e) This Agreement may be signed in two or more counterparts with
the same effect as if the signatures thereto and hereto were upon the same
instrument.
(f) Except as otherwise provided, this Agreement may not be
assigned by any party directly or by operation of law without the prior written
consent of each other party hereto. This Agreement shall be binding upon, and
shall inure to the benefit of, the respective successors and permitted assigns
of the parties hereto.
(g) This Agreement shall be governed by and construed in
accordance with the laws of the State of California without regard to its
principles of conflicts of laws.
-17-
Rights Agreement
<PAGE> 34
(h) In case any provision in this Agreement shall be invalid,
illegal or enforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
(i) Should any proceeding be brought to enforce or interpret any
provision of this Agreement, the prevailing party shall be entitled to recover
reasonable attorneys' fees and costs to be fixed in amount by the court or
arbitrator.
(j) The parties expressly agree that the provisions of this
Agreement may be specifically enforced against each of the parties hereto in
any court of competent jurisdiction.
(k) The provisions of this Agreement shall terminate upon the
fifth anniversary of the date of this Agreement or such earlier date when KDD
owns less than 5% of the outstanding Common Stock of PGE. Notwithstanding the
foregoing, KDD's rights (i) under Section 2 shall continue for a period of
seven years from the date of this Agreement and (ii) under Section 9 with
respect to unregistered shares owned by KDD that would be restricted shares in
the hands of the transferee if sold by KDD pursuant to Rule 144, shall continue
for a period of ten years from the date of this Agreement or, in each case,
until such date when KDD owns less than 5% of the outstanding Common Stock of
PGE if earlier.
IN WITNESS WHEREOF, each of the undersigned has executed and delivered
this Agreement by as of the date first written above.
PACIFIC GATEWAY EXCHANGE, INC.,
a Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
KDD AMERICA, INC.,
a New York corporation
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
-18-
Rights Agreement
<PAGE> 35
EXHIBIT B
TO STOCK PURCHASE AGREEMENT
COOPERATION AGREEMENT, dated as of June __, 1996 (this "Agreement"),
between PACIFIC GATEWAY EXCHANGE, a California corporation ("PGE"), and
KOKUSAI DENSHIN DENWA, a Japanese kabushiki kaisha ("KDD").
W I T N E S S E T H:
WHEREAS PGE and KDD desire to strengthen their business relationship
in the international telecommunications markets; and
WHEREAS simultaneously with the execution of this Agreement, KDD
America, Inc. is entering into a Stock Purchase Agreement under which it has
agreed to purchase 1,800,000 shares of Common Stock of PGE subject to the
terms and conditions contained therein;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. FRAMEWORK OF COOPERATION.
The parties will actively seek opportunities for joint projects in the
field of international telecommunications, including joint product development
of new services, such as video teleconferencing, imaging and the Internet
together with related technical support and assistance; joint marketing
arrangements to promote small and medium-size business and retail and ethnic
marketing programs; continuing exchange of traffic; assistance by KDD to PGE
with respect to PGE's business in Asia; and through the Secondees and
otherwise, sharing of the types of information described in Section 2(b). When
such opportunities have been identified the parties will seek to negotiate
business agreements on mutually beneficial terms.
SECTION 2. SECONDMENT OF KDD EMPLOYEES.
(a) KDD, at its option and at its cost, will be entitled to maintain
up to three of its employees (or employees of subsidiaries and affiliates of
KDD) (each a "Secondee") at any given time or from time to time throughout the
term of this Agreement at PGE's principal offices. PGE, at KDD's request, will
pay the salaries and other compensation of the Secondees, provided KDD shall
reimburse PGE for any such payments. The Secondees will be given the
opportunity to be involved in all aspects of PGE's
<PAGE> 36
telecommunications businesses on the same basis as professional employees of
PGE. Such involvement shall include participation in the planning and
implementation of technology and product development and sales and marketing.
PGE will give the Secondees the same access to PGE's professional staff,
information, resources and material and logistical support as that
enjoyed by professional employees of PGE. This will include attendance at, and
participation in, meetings of PGE's technical, sales and marketing and
management personnel. Upon mutual consultation and agreement, PGE personnel
may be despatched to KDD's facilities in connection with specific projects.
(b) Throughout the term of this Agreement, each party will provide
to the other information as obtained, developed or requested regarding the
telecommunications market and industry in its home jurisdiction, including
information concerning the regulatory and market environment for different
types of telecommunications markets and products, changes and developments in
the legal and regulatory framework, and such other matters related to the
subject matter of this Agreement as the other party may request from time to
time.
SECTION 3. Term. The initial term of this Agreement shall be seven
years from and after the date hereof and shall thereafter be extended from year
to year unless either party delivers a written notice of termination to the
other not less than six months prior to the expiration of the then-current
term. This Agreement may be terminated by PGE or KDD upon one-month's prior
written notice if KDD owns less than 5% outstanding Common Stock of PGE or if
KDD invests in a U.S.-based Telecommunications Carrier pursuant to Section 7(b)
of the Rights Agreement.
SECTION 4. EXPENSES. Each party will bear the costs of its own legal
and accounting fees incurred in connection with the negotiation and preparation
of this Agreement.
SECTION 5. CONFIDENTIALITY. Each of KDD and PGE acknowledges that it
has and may, in connection with this Agreement, receive nonpublic,
confidential, proprietary or competitively sensitive materials, documents or
other information concerning each other and their respective affiliates and
subsidiaries, including, without limitation, trade secrets, customer lists,
details of employment agreements, financial data, due diligence materials,
operational methods, market and sales information, marketing plans and
strategies, business plans, personnel information,
-2-
Cooperation Agreement
<PAGE> 37
research projects, development plans or projects and computer software
(collectively, the "Information"), and agrees that with respect to such
Information concerning the other party, it will keep such Information strictly
confidential, and agrees not to disclose such Information to any person or
entity except as permitted hereby or as required by applicable law, court
process or stock exchange rules. To the extent one party to this Agreement
receives information on a confidential basis from any third party in the course
of underwriting or evaluating credits or otherwise and the other party to this
Agreement is given access to or otherwise becomes aware of such information,
such party will be bound to such confidentiality to the same extent as the
first party and such information shall constitute "Information" for the
purposes of this Agreement. Information shall not include information (i)
which is already in a party's possession and which was not obtained from the
other party; provided that such Information is not known by such party to be
subject to another confidentiality agreement with or other obligation of
secrecy to the other party or any third party; (ii) which becomes generally
available to the public other than as a result of a disclosure by such party or
its respective representatives in violation of this Agreement, (iii) which
becomes available to such other party or its representatives on a
nonconfidential basis from a source other than the other party or their
respective representatives; provided that such source is not prohibited from
disclosing such information to such party by a legal, contractual or fiduciary
obligation to the other party and is not known by such party as of any date to
be bound by a confidentiality agreement with or other obligation of secrecy to
the other party, or a third party, as the case may be; or (iv) which is
independently discovered, developed, or arrived at by such party without the
use of the Information. Notwithstanding anything to the contrary herein,
whenever KDD or PGE determines that such disclosure is necessary in connection
with the transactions contemplated by this Agreement, it may disclose
Information to its agents, employees, affiliates and subsidiaries to the extent
necessary; provided, however, that (i) each of KDD and PGE agrees to instruct
their respective agents, employees, affiliates and subsidiaries to keep all
Information strictly confidential and (ii) such agents, employees, affiliates
and subsidiaries agree in writing to be bound by and to comply with the
provisions of this Agreement with respect to all such Information.
-3-
Cooperation Agreement
<PAGE> 38
SECTION 5. MISCELLANEOUS PROVISIONS.
(a) Each of the parties hereto shall bear its own expenses
(including without limitation attorneys' fees) in connection with the
negotiation and consummation of the transactions contemplated hereby.
(b) Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be
mailed or delivered: (a) if to PGE, at the office of the Company, 533 Airport
Boulevard, Suite 505, Burlingame, California 94010, Attention: Howard A.
Neckowitz, President, with a copy to Gray, Cary, Ware & Freidenrich, 400
Hamilton Avenue, Palo Alto, California 94301, Attention: Eric J. Lapp, Esq.; or
(b) if to KDD, to the office of KDD America, Inc., at 750 Lexington Avenue,
28th Floor, New York, NY 10022 U.S.A., Attention: Hideo Yamamoto, President,
with a copy to Nishimura & Sanada, Ark Mori Building, 29th Floor, 12-32,
Akasaka 1-Chome, Minato-Ku, Tokyo 107, Japan, Attention: Stephen B. Givens.
Any such notice shall be effective only upon receipt. Any notice may be made
by telex or telephone, but if so made shall be subsequently confirmed in
writing.
(c) This Agreement, together with the Exhibits hereto,
constitute the entire agreement and understanding between the parties and
there are no agreements or commitments with respect to the transactions
contemplated herein except as set forth in this Agreement. This Agreement
supersedes any prior offer, agreement or understanding between the parties with
respect to the transactions contemplated hereby.
(d) Any term or provision of this Agreement may be amended by a
writing signed by both parties. The observance of any term or provision of
this Agreement may be waived only by a writing signed by the party to be bound
by such waiver. No waiver by a party of any breach of this Agreement will be
deemed to constitute a waiver of any other breach or succeeding breach.
(e) This Agreement may be signed in two or more counterparts
with the same effect as if the signatures thereto and hereto were upon the
same instrument.
(f) This Agreement may not be assigned by any party directly or
by operation of law without the prior written consent of each other party
hereto except that KDD may assign its rights and delegate its obligations
hereunder to any wholly-owned subsidiary of KDD. This Agreement shall
-4-
Cooperation Agreement
<PAGE> 39
be binding upon, and shall inure to the benefit of, the respective successors
and permitted assigns of the parties hereto.
(g) This Agreement shall be governed by and construed in
accordance with the laws of the State of California without regard to its
principles of conflicts of laws.
(h) In case any provision in this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
(i) Should any proceeding be brought to enforce or interpret any
provision of this Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees and costs to be fixed in amount by the court
or arbitrator.
IN WITNESS WHEREOF, each of the undersigned
has executed and delivered this Agreement by as of the date
first written above.
PACIFIC GATEWAY EXCHANGE,
a Delaware corporation
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
KOKUSAI DENSHIN DENWA
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
-5-
Cooperation Agreement
<PAGE> 40
June ___, 1996
KDD America, Inc.
750 Lexington Avenue, 28th Floor
New York, NY 10022
Pacific Gateway Exchange, Inc.
533 Airport Boulevard, Suite 505
Burlingame, CA 94010
Gentlemen:
Attached is a form of Stock Purchase Agreement between KDD
America, Inc. ("KDD") and Pacific Gateway Exchange, Inc. ("PGE") (draft dated
June 7, 1996) (the "Stock Purchase Agreement") providing for the purchase by
KDD of 1,800,000 shares of Common Stock of PGE.
Capitalized terms used herein without definition shall have
the meanings assigned thereto in the Stock Purchase Agreement.
KDD hereby offers to enter into the Stock Purchase Agreement
and to purchase the Shares from PGE subject to the terms and conditions of the
Stock Purchase Agreement. Such offer is irrevocable, subject to the following
conditions:
1. The Registration Statement on Form S-1 (Registration No.
33-80191) relating to the shares shall have been declared
effective by the Commission on or before July 31, 1996;
and
2. The information contained in the Registration Statement as
declared effective by the Commission shall not be
materially different from the information contained in
Amendment No. 4 to the Registration Statement delivered in
draft form to KDD on the date hereof.
This irrevocable offer has been duly and validly authorized by all
required corporate action on the part of KDD and constitutes a legal, valid and
binding obligation of KDD enforceable in accordance with its terms except to
the extent that such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws of general application
relating to the rights of creditors.
KDD acknowledges receipt of $10,000 from PGE as consideration
for the making of the foregoing irrevocable offer.
<PAGE> 41
This offer shall be governed by the law of the State of
California.
Very truly yours,
KDD AMERICA, INC.
-----------------------------
By: Hideo Yamamoto
Title: President
