<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[ ] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
PACIFIC GATEWAY EXCHANGE, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
[LOGO OF PACIFIC GATEWAY EXCHANGE]
Dear Stockholders:
Enclosed please find Pacific Gateway Exchange's Annual Report on Form 10-K
for the year ended December 31, 1996, along with the Company's Proxy Statement
for the 1997 Annual Meeting.
We have just finished a momentous year for the Company. In July, 1996 we
completed our initial public offering, including the sale of approximately
9.5% of the Company's outstanding common stock to Kokusai Denshin Denwa
("KDD"), the leading international telecommunications carrier based in Japan.
The Company's stock is now traded on the NASDAQ National Market under the
symbol "PGEX".
In addition to becoming a public company, we also set record revenues and
net income for the year ended December 31, 1996. Revenues for the year ended
December 31, 1996 were $162 million, 113% over last year. Net income for this
same period was $5.8 million, more than 220% from the same period last year.
Net income per share for the year increased to $0.35 in 1996 compared to $0.12
in 1995. This growth is particularly exciting as it was achieved solely as a
result of the Company's internal expansion and not from acquisition.
The estimated return traffic revenue backlog increased 16% to $13.7 million
at December 31, 1996 from $11.8 million at September 30, 1996, representing an
increase of $1.9 million. Estimated return traffic revenue backlog represents
the Company's best estimate of the revenue to be received during the next six
months from its foreign partners in reciprocation for the traffic Pacific
Gateway Exchange has delivered to its foreign partners during the period.
The Company expanded its investment in undersea fiber optic cables and
switches to over $27 million by the end of 1996. The Company expects to
significantly increase the investment in these facilities during 1997 by
purchasing cable facilities to new markets and expanding facilities with
existing carriers.
These results affirm Pacific Gateway Exchange's operating strategy which has
the following elements that will carry the Company forward:
.secure additional operating agreements with foreign carriers, particularly
in fast-growing markets in Asia, the Pacific Rim, Eastern Europe and
Latin America;
.expand and enhance global network facilities;
.pursue strategic alliances, joint ventures and acquisitions to increase
both overseas-originated and U.S.-originated traffic;
.broaden the offering of higher margin value-added products and services;
.leverage its existing network facilities through targeted direct marketing
of international services to retail markets located around our switching
facilities; and
.maintain efficient, low-cost operations.
Based on our 1996 results, we are convinced that this strategy combined with
leveraging the existing network with more value-added products and services
will enable us to expand to reach new emerging and liberalized markets, as
well as to become more efficient in our existing markets.
Pacific Gateway Exchange has operating agreements with 30 foreign carriers
in 24 countries around the world and is currently negotiating operating
agreements with several prospective foreign partners. The Company has expanded
its direct service to Germany, South Korea, Malaysia, Hong Kong, Taiwan,
Vietnam, Thailand and Indonesia. We have also begun service using the Dallas
switch which gives us greater access to the U.S. and Latin American markets.
<PAGE>
In 1996, the Company obtained an international facilities license and an
international simple resale license through its wholly owned subsidiary in the
United Kingdom. These licenses place the Company in a position to market
service in both the United Kingdom and the United States and to gain more
efficient access to other European markets as these fully open. The United
Kingdom is one of the largest international markets and we believe it will
become a significant revenue base for Pacific Gateway. Leveraging on our
existing base of international agreements, the Company is positioning itself to
be an international carrier in offshore markets for both termination and
origination.
In July 1996, the Company and KDD entered 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; and assistance by KDD to the Company with respect to the
Company's business in Asia. The Company is excited about its agreement with KDD
and intends to develop other international alliances and equity investments in
anticipation of the liberalization in foreign markets. We are currently
developing plans with other strong telecommunication operators in Europe and
Latin America.
Pacific Gateway Exchange is poised to capitalize on the FCC's recently
announced policy allowing telecommunication carriers, such as the Company, to
deviate in most open markets from the rules that have effectively kept U.S.-
based international telecommunication companies from negotiating lower rates
for completing overseas calls. The Company also anticipates opportunity for
growth arising from the global agreement on telecommunications which has been
signed by over 60 countries under the auspices of the World Trade Organization.
The Company expects the pact to open the global telecommunication market to
greater competition, in which the Company hopes to participate. International
services need to be marketed at both ends of the circuit and as these foreign
markets open, Pacific Gateway expects to have infrastructure in place.
The Company is very pleased with its 1996 performance, as the fifth largest
U.S. facilities-based international telecommunications carrier. We are
committed to work diligently to build an even brighter future. We have
assembled a strong management team with many years of international experience
to accomplish that goal. We thank you, our stockholders, for your support in
our first year as a public company.
LOGO
Howard A. Neckowitz, Chairman, President
and Chief Executive Officer
<PAGE>
[LOGO OF PACIFIC GATEWAY EXCHANGE]
PACIFIC GATEWAY EXCHANGE, INC.
533 AIRPORT BOULEVARD, SUITE 505
BURLINGAME, CALIFORNIA 94010
(415) 375-6700
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 16, 1997
----------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual
Meeting") of Pacific Gateway Exchange, Inc., a Delaware corporation (the
"Company"), will be held on Friday, May 16, 1997, at 10:00 a.m., Burlingame,
California time, at the San Francisco Airport Marriott, 1800 Old Bayshore
Highway, Burlingame, California 94010, for the following purposes, all of which
are set forth more completely in the accompanying proxy statement:
(1) To elect five persons to the Company's Board of Directors;
(2) To approve an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock from
Twenty-Five Million (25,000,000) shares to Fifty Million (50,000,000)
shares and to increase the number of authorized shares of Preferred
Stock from One Million (1,000,000) shares to Five Million (5,000,000)
shares;
(3) To approve an amendment to the Company's Certificate of Incorporation
to provide for the division of the Board of Directors into classes of
directors with staggered terms;
(4) To approve an amendment to the Company's Certificate of Incorporation
to require all stockholder action be taken at a meeting of
stockholders;
(5) To approve the Company's Long-Term Incentive Plan;
(6) To approve the selection of Coopers & Lybrand L.L.P. as the Company's
independent auditors for the fiscal year ending December 31, 1997; and
(7) To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
Pursuant to the Company's Bylaws, the Board of Directors has fixed the close
of business on March 27, 1997 as the record date for the determination of
stockholders entitled to notice of and to vote at the Annual Meeting. A proxy
statement with respect to the Annual Meeting accompanies and forms a part of
this Notice. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 filed with the Securities and Exchange Commission also
accompanies this Notice.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE MARK, SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH
DOES NOT REQUIRE POSTAGE IF MAILED IN THE UNITED STATES.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Howard A. Neckowitz
Howard A. Neckowitz, Chairman,
President and Chief Executive
Officer
Burlingame, California
April 21, 1997
<PAGE>
LOGO
PACIFIC GATEWAY EXCHANGE, INC.
533 AIRPORT BOULEVARD, SUITE 505
BURLINGAME, CALIFORNIA 94010
(415) 375-6700
----------------
1997 PROXY STATEMENT
----------------
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of Pacific Gateway Exchange, Inc., a Delaware corporation
(the "Company"), of proxies for use at the Annual Meeting of Stockholders of
the Company to be held on Friday, May 16, 1997, beginning at 10:00 a.m.,
Burlingame, California time, at the San Francisco Airport Marriott, 1800 Old
Bayshore Highway, Burlingame, California 94010, and at any adjournment(s)
thereof. The approximate date on which this Proxy Statement and the enclosed
proxy are first being mailed to stockholders is April 21, 1997.
VOTING RIGHTS AND PROCEDURES
The Company's common stock, $.0001 par value per share (the "Common Stock"),
is the only issued and outstanding class of stock. At the close of business on
March 27, 1997, the Company had outstanding 18,896,490 shares of Common Stock
(each, a "Share"). Each Share entitles the holder thereof to one vote on each
matter submitted to a vote of stockholders. Only holders of record of the
Common Stock on March 27, 1997 (the "Record Date"), are entitled to notice of
and to vote at the Annual Meeting or any adjournment(s) thereof.
Shares represented by an effective proxy given by a stockholder will be
voted as directed by the stockholder. A stockholder who submits a proxy on the
accompanying form has the right to revoke it at any time prior to its use by
(i) delivering a written notice to the Secretary of the Company, (ii)
executing a later-dated proxy or (iii) attending the Annual Meeting and voting
in person. However, such action must be taken in sufficient time to permit the
necessary examination and tabulation of the subsequent proxy or revocation
before the vote is taken. The form of proxy provides a space for stockholders
to withhold their vote for any proposal. Stockholders are urged to indicate
their vote on each matter in the space provided. If a properly executed proxy
form is returned to the Company and no space is marked, it will be voted at
the meeting by the persons therein named as proxies as follows: (1) FOR the
election of the directors recommended by the Board of Directors, (2) FOR an
amendment to the Company's Certificate of Incorporation to increase the number
of authorized shares of Common Stock from Twenty-Five Million (25,000,000)
shares to Fifty Million (50,000,000) shares and to increase the number of
authorized shares of Preferred Stock from One Million (1,000,000) to Five
Million (5,000,000) shares, (3) FOR an amendment to the Company's Certificate
of Incorporation to provide for the division of the Board of Directors into
classes of directors with staggered terms, (4) FOR an amendment to the
Company's Certificate of Incorporation to require all stockholder action be
taken at a meeting of stockholders; (5) FOR approval of the Company's Long-
Term Incentive Plan, (6) FOR the selection of Coopers & Lybrand L.L.P.
("Coopers & Lybrand") as the Company's independent auditors for the fiscal
year ending on December 31, 1997, and (7) in their discretion, upon such other
business as may properly come before the meeting. Whether or not you plan to
attend the meeting, please fill in, sign and return your proxy card. A return
addressed envelope is enclosed for your convenience.
A majority of the outstanding Shares entitled to vote, represented either in
person or by proxy, will constitute a quorum at the Annual Meeting. Directors
will be elected by a plurality of the votes present in person or represented
by proxy at the Annual Meeting and voting for the election of directors,
provided a quorum is present. Stockholders are not allowed to cumulate their
votes in the election of directors. Approval of each
<PAGE>
proposed amendment to the Company's Certificate of Incorporation will require
an affirmative vote of the holders of a majority of the outstanding Shares
entitled to vote at the Annual Meeting. Approval of the proposed Long-Term
Incentive Plan and the selection of Coopers & Lybrand as the Company's
independent auditors for the fiscal year ending on December 31, 1997 will
require an affirmative vote of the holders of a majority of the Shares present
or represented at the Annual Meeting and voting on such proposal, provided a
quorum is present.
In all cases, abstentions will be treated as Shares that are present or
represented and entitled to vote for purposes of determining the presence of a
quorum. Accordingly, abstentions will have no effect on the outcome of the
election of directors, but will have the same effect as voting against the
proposals to amend the Company's Certificate of Incorporation, to adopt the
Long-Term Incentive Plan and to approve the selection of Coopers & Lybrand as
the Company's independent auditors.
In instances where brokers are prohibited from exercising discretionary
authority for beneficial owners who have not returned a proxy (so-called
"broker non-votes"), those Shares will be treated as present or represented
for purposes of determining the presence of a quorum, but will not be treated
as present or represented and entitled to vote for purposes of determining the
number of votes necessary for the approval of any matter on which they do not
have discretionary authority to vote. Accordingly, broker non-votes will have
no effect on the number of votes necessary to elect directors, to approve the
selection of Coopers & Lybrand or to approve the Long-Term Incentive Plan.
Broker non-votes will have the same effect as a vote against the proposals to
amend the Company's Certificate of Incorporation.
In the event that there are not sufficient votes for approval of any of the
matters to be voted upon at the meeting, the meeting may be adjourned in order
to permit further solicitation of proxies. Votes cast by proxy or in person at
the Annual Meeting will be tabulated by the election inspectors appointed for
the Annual Meeting and such election inspectors will determine whether or not
a quorum is present.
The Company will bear all costs of soliciting proxies including charges made
by brokers and other persons holding stock in their names or in the names of
nominees for reasonable expenses incurred in sending proxy material to
beneficial owners and obtaining their proxies. In addition to solicitation by
mail, directors, officers and employees of the Company may solicit proxies
personally and by telephone and telegraph, all without extra compensation. The
Company has retained Georgeson & Company Inc. to assist in the solicitation of
proxies. The fee to be paid to such firm for such services will be borne by
the Company and is not expected to exceed $600 plus reasonable expenses.
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Board of Directors consists of five persons. If the proposal
to amend the Company's Certificate of Incorporation to provide for the
division of the Board into classes of directors with staggered terms is
adopted, the Board elected at the Annual Meeting will be divided into three
classes and two directors will be elected for a term expiring at the 1998
annual meeting, two directors will be elected for a term expiring at the 1999
annual meeting and one director will be elected for a term expiring at the
2000 annual meeting. Specifically, if the directors are divided into classes
through the adoption of the proposed amendment Charles M. Dalfen and Barry J.
Volante (Class I directors) are nominated for a term expiring at the 1998
annual meeting, Gail E. Granton and James J. Junewicz (Class II directors) are
nominated for a term expiring at the 1999 annual meeting and Howard A.
Neckowitz (Class III director) is nominated for a term expiring at the 2000
annual meeting and, in each case, until his or her successor is elected or
qualified. If the proposed amendment to the Company's Certificate of
Incorporation to stagger the terms of the directors is not adopted, all five
directors will be elected for a one-year term expiring at the 1998 annual
meeting.
The five nominees for whom the enclosed proxy is intended to be voted are
set forth below. All nominees are now serving as directors of the Company,
except for Mr. Volante. Each of these nominees has indicated his
2
<PAGE>
or her willingness to serve if elected, and the Board of Directors has no
reason to believe that any of these nominees will be unavailable for election,
but if such a situation should arise, the proxy will be voted in accordance
with the best judgment of the proxyholder for such person or persons as may be
designated by the Board, unless the stockholder has directed otherwise.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- ----------
<S> <C> <C>
Howard A. Neckowitz............. 43 Chairman, President, Chief Executive
Officer and Director
Gail E. Granton................. 41 Executive Vice President, International
Business Development, Secretary and
Director
Charles M. Dalfen............... 54 Director
James J. Junewicz............... 46 Director
Barry J. Volante................ 62 Director-Nominee
</TABLE>
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 switch service market. From 1977 to 1982, Mr. Neckowitz worked
at AT&T in its Overseas Department.
Gail E. Granton has served as 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 August 1991 to August 1996,
she served as Chief Financial Officer of the Company. 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 operation 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.
Charles M. Dalfen has served as a member of the Board of Directors since
December 1996. He has been the President of Dalfen Associates, a consulting
firm specializing in telecommunications regulation, since 1982. Prior to that,
Mr. Dalfen served from 1976 to 1980 as a Vice Chairman of the Canadian Radio-
television and Telecommunications Commission ("CRTC").
James J. Junewicz has served as a member of the Board of Directors since
December 1996. He has been a partner of the law firm of Mayer, Brown & Platt
in Chicago, Illinois since 1987. Mayer, Brown & Platt currently serves as
corporate counsel for the Company. Prior to joining Mayer, Brown & Platt in
1984, he served as Assistant General Counsel of the United States Securities
and Exchange Commission in Washington, D.C.
Barry J. Volante has served as Vice President--Telecommunications Finance of
General Electric Capital Corporation ("GECC") since 1994. From 1985 to 1994,
Mr. Volante served as Manager, Telecommunications Planning Corporation
Information Technology of General Electric Company. From 1983 to 1985, Mr.
Volante was self-employed as an independent telecommunications consultant
advising foreign and domestic clients on telecommunications infrastructure
projects.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
ELECTION OF EACH NOMINEE FOR DIRECTOR NAMED ABOVE.
3
<PAGE>
MEETINGS AND COMMITTEES OF THE BOARD
The Board has two standing committees: the Compensation Committee and the
Audit Committee. The Board does not have a Nominating Committee or any
committee performing similar functions. During the fiscal year ended December
31, 1996 ("fiscal 1996"), the Board met twice and on four occasions, acted by
unanimous written consent. In 1996, the Audit Committee did not meet. Prior to
December 16, 1996, the entire Board of Directors fulfilled the functions of
the Compensation Committee. On December 16, 1996, the Board formed a
Compensation Committee consisting of Mr. Neckowitz, Ms. Granton, Mr. Jensen
and Mr. Dalfen. Although the Compensation Committee did not meet in 1996, the
full Board of Directors met twice and acted by written consent four times.
During fiscal 1996, all directors attended at least 75% of the aggregate of
such meetings of the Board of Directors and the committees of the Board of
which they were a member (or of such meetings during such director's tenure on
the Board of Directors).
Mr. Neckowitz, Ms. Granton, Mr. Jensen and Mr. Dalfen are the current
members of the Compensation Committee. Mr. Dalfen acts as chairman of the
Compensation Committee. Mr. Jensen has declined to stand for re-election to
the Board of Directors. The Compensation Committee generally establishes the
salaries, benefits and overall compensation of the officers and employees of
the Company, administers any employee benefit plans of the Company and
periodically grants options and other equity-based awards to employees,
directors or other individuals providing services to the Company.
Messrs. Charles Dalfen, Ronald Jensen and James Junewicz are the current
members of the Audit Committee. Mr. Jensen has acted as chairman of the Audit
Committee. Mr. Jensen has declined to stand for re-election to the Board of
Directors. The Audit Committee's responsibilities include recommending to the
Board the selection of the Company's independent certified public accountants,
reviewing the arrangements and the scope of the independent audit and
reviewing all financial statements.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors, officers
and certain stockholders to file with the Commission an initial statement of
beneficial ownership and certain statements of changes in beneficial ownership
of equity securities of the Company. Based solely upon a review of Forms 3 and
4 furnished to the Company during fiscal 1996, Forms 5 furnished with respect
to fiscal 1996, and certain written representations received by the Company
from certain reporting persons in regard to filing requirements, the Company
has determined that Mr. Neckowitz and Ms. Granton each did not timely file a
Form 3 for the month of July and a Form 4 for the month of August and Mr.
Jensen did not timely file a Form 3 for the month of July and a Form 4 for the
month of October. All filings required by Section 16(a) of the Exchange Act
have now been made.
4
<PAGE>
OWNERSHIP OF THE CAPITAL STOCK OF THE COMPANY
The following table sets forth certain information with respect to the
beneficial ownership of the outstanding Common Stock as of February 28, 1997
(unless otherwise indicated) by (i) each director of the Company, (ii) the
Company's chief executive officer and the individuals serving as executive
officers of the Company as of December 31, 1996 named in the table under
"Compensation of Directors and Executive Officers--Summary Compensation Table"
and (iii) all directors and executive officers of the Company as of February
28, 1997 as a group.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OF
COMMON STOCK OUTSTANDING
BENEFICIALLY SHARES
OWNED(1) OWNED(1)
------------ -------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Howard A. Neckowitz(2).............................. 11,360,000 60.12%
Ronald L. Jensen(3)................................. 2,191,720 11.60%
Gail E. Granton(4).................................. 1,045,118 5.53%
Charles M. Dalfen................................... 1,000 *
James J. Junewicz................................... 0 *
Ronald D. Anderson.................................. 248,994 1.32%
Robert F. Craver.................................... 148,484 *
Fred A. Weismiller.................................. 140,850 *
All directors and executive officers as a group (9
persons)(5)........................................ 15,136,166 80.10%
5% STOCKHOLDERS
Julie J. Jensen..................................... 1,163,820 6.16%
1023 15th Street N.W.
Washington, D.C. 20005
Jeffrey J. Jensen................................... 1,203,820 6.37%
2121 Precinct Line Road
Hurst, Texas 76054
Janet Jensen Krieger................................ 1,318,820 6.98%
9003 Airport Freeway
Fort Worth, Texas 76180
James J. Jensen..................................... 1,203,820 6.37%
6304 Alexandria Circle
Atlanta, Georgia 30326
Jami J. Jensen...................................... 1,163,820 6.16%
1933 Swede Gulch
Golden, Colorado 80120
KDD America, Inc.................................... 1,800,000 9.53%
201 3rd Street, Suite 911
San Francisco, California 94103
</TABLE>
- --------
*Less than 1%
(1) Calculated pursuant to Rule 13d-3 under the Exchange Act. Under Rule 13d-
3(d), shares not outstanding that are subject to options, warrants, rights
or conversion privileges exercisable within 60 days of February 28, 1997,
are deemed outstanding for the purpose of calculating the number and
percentage owned by such person, but are not deemed outstanding for the
purpose of calculating the percentage owned by each other person listed.
5
<PAGE>
(2) Includes 1,163,820 shares held by Julie J. Jensen, 1,203,820 shares held
by Jeffrey J. Jensen, 1,318,820 shares held by Janet J. Krieger, 1,203,820
shares held by James J. Jensen, 1,163,820 shares held by Jami J. Jensen
and 1,020,414 shares held by Gail E. Granton for which Mr. Neckowitz has
been given an irrevocable proxy to vote such shares. 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. Also includes
2,191,720 shares held by Ronald L. Jensen for which Mr. Neckowitz has been
given an irrevocable proxy to vote such shares until July 31, 2003 or
until either party terminates the arrangement pursuant to the terms of the
agreement 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, long-term disability, physical
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. Also includes 7,000 shares held
by the Genesis Foundation, a charitable trust of which Mr. Neckowitz is a
co-trustee, and 119,640 shares held by Mr. Neckowitz's wife. The shares
held by the Genesis Foundation and Mr. Neckowitz's wife are subject to an
irrevocable proxy granting Mr. Neckowitz the right to vote such shares.
Mr. Neckowitz disclaims beneficial ownership of such shares owned by his
wife and the Genesis Foundation.
(3) 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 and shares
owned by the Ronald L. Jensen Foundation Charitable Trust, all of which
Mr. Jensen disclaims beneficial ownership. 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 granting
Mr. Neckowitz the right to vote all of Mr. Jensen's shares in the Company
until July 31, 2003, however, either party may terminate the agreement
after July 31, 1999 by giving the other party eighteen months' advance
written notice (the earliest notice date is July 31, 1999 for a
termination of January 21, 2001). The agreement is null and void if Mr.
Neckowitz becomes unable to perform his duties as an officer of the
Company due to his voluntary resignation, termination for cause, long-term
disability, physical incapacity or death.
(4) Includes 4,000 shares held by the Granton Foundation, a charitable trust
of which she is the trustee.
(5) Information provided is for the individuals who were directors and
executive officers of the Company on February 28, 1997 and includes
121,632 shares issuable upon exercise of stock options that are
exercisable within 60 days.
6
<PAGE>
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth in summary form, the compensation earned by
Howard A. Neckowitz, the Company's Chairman, President and Chief Executive
Officer, and each of the Company's other executive officers whose salary and
benefits for periods presented exceeded $100,000 (the "Named Executive
Officers").
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR ENDED SALARY BONUS OPTIONS (#)
- --------------------------- DECEMBER 31, -------- -------- ------------
<S> <C> <C> <C> <C>
Howard A. Neckowitz........... 1996 $295,000 -- --
Chairman, President and 1995 $240,000 $ 17,528 141,176
Chief Executive Officer 1994 $200,250 $ 17,528 --
Gail E. Granton............... 1996 $159,167 -- --
Executive Vice President, 1995 $144,167 $ 10,711 65,882
International Business 1994 $122,000 $ 10,711 --
Development, Secretary and
Director
Ronald D. Anderson............ 1996 $123,744 -- --
Senior Vice President, 1995 $119,167 $ 10,711 41,000
Operations and Engineering 1994 $110,785 $ 10,711 --
Robert F. Craver.............. 1996 $148,750 $100,000 10,000
Senior Vice President, 1995 $142,500 $ 37,500 35,000
International Relations 1994 $ 97,077(/1/) $ 2,000 --
Fred A. Weismiller............ 1996 $137,800 -- --
Executive Vice President, 1995 $137,800 $ 1,000 14,640
International Marketing 1994 $ 29,797(/2/) $ 1,000 --
</TABLE>
- --------
(1) Employed as of February 1994
(2) Employed as of November 1994
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning exercisable and
unexercisable stock options at December 31, 1996 for the Named Executive
Officers.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT FISCAL YEAR AT FISCAL YEAR END
END(#) ($)
------------------------------------- --------------------
NAME UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- EXERCISABLE ------------- ----------- --------------------
<S> <C> <C> <C> <C>
Howard A. Neckowitz. 44,117 97,059 $1,610,271 $3,542,654
Gail E. Granton..... 20,587 45,295 $ 751,426 $1,653,268
Ronald D. Anderson.. 12,813 28,187 $ 467,675 $1,028,826
Robert F. Craver.... 10,938 34,062 $ 399,237 $1,243,263
Fred A. Weismiller.. 4,575 10,065 $ 166,988 $ 367,373
</TABLE>
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for services
provided as a director. Under the Company's Long-Term Incentive Plan, non-
employee Directors will receive an initial option to purchase 20,000 shares of
Common Stock 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. The exercise price of each share underlying the option is equal to the
fair market value of a share of Common Stock on the date the option is
granted.
7
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has entered into employment agreements with each of Howard A.
Neckowitz, President, Chief Executive Officer and Chairman of the Board, Gail
E. Granton, Executive Vice President, International Business Development and
Secretary, Ronald D. Anderson, Senior Vice President, Operations and
Engineering, Robert F. Craver, Senior Vice President, International Relations
and Fred A. Weismiller, Executive Vice President, International Marketing.
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 their 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. 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 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 agreements with Mr. Craver and Mr. Weismiller are for a term of two years
each. 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 base salary for Ms. Granton, Mr. Anderson, Mr. Craver
and Mr. Weismiller 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 pay date
in accordance with the Company's then-existing normal payroll practices. Upon
any such payment of severance or upon any termination by mutual agreement of
the parties, full vesting of any outstanding stock options will occur. In the
event of a change of control, each of such employees would be entitled to
severance following their resignation from the Company resulting from
diminution of their duties. The agreements require the officers 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.
The Company is conducting a review of the compensation levels of its
management team, although no decisions have been made. In view of the
performance of the Company and its Common Stock since the Company's initial
public offering in July 1996, the Company may enter new employment agreements
with certain executive officers and the overall compensation of such
executives, including Mr. Neckowitz and Ms. Granton, may be increased.
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
Prior to December 16, 1996, the entire Board of Directors, of which Mr.
Neckowitz and Ms. Granton were and are members, fulfilled the functions of the
Compensation Committee. On December 16, 1996, the Board formed a Compensation
Committee consisting of Mr. Neckowitz, Ms. Granton, Mr. Jensen and Mr. Dalfen.
THE BOARD OF DIRECTOR'S REPORT ON EXECUTIVE COMPENSATION
The Company's compensation program is designed to enable the Company to
attract, motivate and retain the best possible executive talent, people who
provide the experience and skills which are vital for the Company to achieve
its goals. The Company strives to align executives with the financial
interests of stockholders in an effort to maximize stockholder value.
During 1996, the salary of the Company's executive officers was generally
set pursuant to employment agreements. See "Employment Contracts, Termination
of Employment and Change-in-Control Arrangements".
8
<PAGE>
Pursuant to their employment agreements, Howard A. Neckowitz and Gail E.
Granton received total salary of $295,000 and $159,167, respectively, which is
approximately the base salary provided by their employment contracts. Neither
Mr. Neckowitz nor Ms. Granton were awarded bonuses during 1996.
Prior to December 16, 1996, the entire Board of Directors fulfilled the
functions of the Compensation Committee. On December 16, 1996, the Board
formed a Compensation Committee consisting of Mr. Neckowitz, Ms. Granton, Mr.
Jensen and Mr. Dalfen. The Compensation Committee's role is to advise the
Board concerning executive compensation, including adjustments to base
salaries, bonuses and the bases for any such bonus, grants of stock options,
health, life insurance and other benefits and the development of other equity-
based compensation plans. The Compensation Committee's recommendations are to
be reviewed by the Board without the participation or vote of any executive
officers of the Company who are also members of the Board.
The Company is conducting a review of the compensation levels of its
management team, although no decisions have been made. As a result of this
review the Company may enter new employment agreements with certain executive
officers and the overall compensation of such executives, including Mr.
Neckowitz and Ms. Granton, may be increased.
The Company intends to retain a professional consultant to research the
executive compensation levels of similar companies to assist and advise the
Company in the setting of its own executive compensation levels. Negotiations
to retain such a professional consultant are currently ongoing.
The Compensation Committee expects to base its determinations of overall
executive compensation, which will include salary, bonus, certain benefits and
stock option awards and possibly other forms of equity-based compensation, on
subjective factors based upon consideration of, among other factors, the
annual and long-term financial performance of the Company, including the
creation of stockholder value, the historical financial performance of the
Company, the individual executive officer's contribution to the achievement of
operating goals and business objectives and levels of compensation in
comparable companies at similar stages of development, with particular
emphasis on those operating in the telecommunications industry. The
Compensation Committee intends to base executive compensation on financial
performance criteria, including price of the Company stock, in the context of
the telecommunication industry as well as the economy in general.
The Company believes that equity based compensation is an effective way of
aligning executive compensation with increases in stockholder value. As
discussed elsewhere in this proxy statement, the Board of Directors has
approved the Long-Term Incentive Plan, subject to stockholder approval. The
Board believes that this plan will increase the ability of the Company to tie
executive interests with the interests of the Company, thereby benefiting the
Company and its stockholders.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code")
limits the Company's deduction for compensation paid to the executive officers
named in the Summary Compensation Table to $1 million unless certain
requirements are met. The policy of the Compensation Committee with respect to
section 162(m) is to establish and maintain a compensation program which will
optimize the deductibility of compensation. In that regard, no executive
officer received compensation in excess of $1 million during fiscal 1996. The
Compensation Committee, however, reserves the right to use its judgment, where
merited by the Compensation Committee's need for flexibility to respond to
changing business conditions or by an executive officer's individual
performance, to authorize compensation which may not, in a specific case, be
fully deductible by the Company.
By The Board of Directors:
Howard A. Neckowitz
Gail E. Granton
Ronald L. Jensen
Charles M. Dalfen
James J. Junewicz
9
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the total return on the Common Stock with the
cumulative total return on the Nasdaq Market Index--U.S. Companies (a broad
market index) and the Nasdaq Telecommunications Index (an industry index) for
the period from July 19, 1996, the date upon which the Common Stock was
registered pursuant to Section 12 of the Exchange Act, through December 31,
1996. The comparison reflects the investment of $100 on July 19, 1996, and the
reinvestment of dividends (if paid), in each of the Company's Common Stock
(for which no dividends have been paid), the Nasdaq Market Index and the
Nasdaq Telecommunications Index (an industry index). The stock price
performance of the Company reflected in this comparison is not necessarily
indicative of the future stock price performance of the Company's Common
Stock.
<TABLE>
<CAPTION>
PACIFIC GATEWAY NASDAQ NASDAQ MARKET INDEX
EXCHANGE, INC. TELECOMMUNICATIONS INDEX - U.S. COMPANIES
--------------- ------------------------ -------------------
<S> <C> <C> <C>
7/19/96 100.00 100.00 100.00
7/31/96 94.12 100.00 100.00
8/30/96 187.25 104.82 105.60
9/30/96 231.37 108.00 113.68
10/31/96 243.14 103.63 112.43
11/29/96 220.59 105.33 119.40
12/31/96 286.27 108.19 119.26
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS
On July 24, 1996, the Company repaid and retired certain indebtedness in the
amount of approximately $3.3 million owed to Mr. Jensen, a director of the
Company, outstanding under a $9.0 million revolving credit facility.
Outstanding borrowings under the revolving credit facility were subject to
interest at the prime rate plus 2%, payable monthly. During fiscal 1996, the
Company made aggregate interest payments pursuant to such indebtedness of
$186,856.
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.
10
<PAGE>
AGREEMENTS WITH AFFILIATES
Mr. Neckowitz has been granted proxies to vote an aggregate of 8,245,820
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 and a proxy to
vote 1,020,414 shares held by Ms. Granton. All such proxies except the proxy
granted by Ronald L. Jensen expire on the earlier of January 1, 1998 or 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. Ronald Jensen has entered
into an Irrevocable Proxy and Voting Agreement with Mr. Neckowitz granting Mr.
Neckowitz the right to vote all of Mr. Jensen's shares in the Company until
July 31, 2003; however, either party may terminate the agreement after July
31, 1999 by giving the other party eighteen months' advance written notice
(the earliest notice date is July 31, 1999 for a termination of January 21,
2001). The agreement is null and void if Mr. Neckowitz becomes unable to
perform his duties as an officer of the Company due to his voluntary
resignation, termination for cause, long-term disability, physical incapacity
or death.
During fiscal 1996, Mr. Jensen, a director of the Company, was a director of
Matrix until December 16, 1996 and owns approximately 24.2% of the outstanding
shares of common stock of Matrix. Mr. Neckowitz, President, Chief Executive
Officer and Chairman of the Board, was the Chairman of the Board of Matrix
until December 16, 1996 and owns approximately 2.6% of the outstanding shares
of common stock of Matrix. Ms. Granton, Executive Vice President,
International Business Development, Secretary and a director of the Company
owns approximately 1.0% of the outstanding shares of common stock of Matrix.
Ronald D. Anderson, Senior Vice President, Operations and Engineering, of the
Company owns approximately 0.7% of the outstanding shares of common stock of
Matrix. Matrix is currently one of the Company's largest customers, with the
Company recording revenues from sales to Matrix of approximately $20.5 million
during fiscal 1996, accounting for approximately 12.6% of the Company's
revenues. In the fourth quarter of 1996, Matrix accounted for 9.7% of the
Company's revenues. Through May of 1996, Matrix also provided the Company with
certain data processing services for which the Company incurred expenses of
$246,221. These functions were taken over by the Company in May 1996 and it is
not anticipated that Matrix will provide any of these services in the future.
Pursuant to an agreement dated May 1, 1995, as amended, Matrix agreed to send
substantially all its international telecommunications traffic and its
domestic telecommunicationstraffic in the Northeast, California and Hawaii
through the Company's network until November 1996, subject to earlier
termination if the Company did not match a bona fide competitive pricing offer
Matrix may have received from a third party. The term of the agreement
automatically extends on a month-to-month basis. Either party may terminate
the agreement by giving the other 30 days' notice of termination.
In December 1995, the Company advanced $100,000 to Mr. Neckowitz. Such
advance was repaid in its entirety during the first quarter of 1996.
In connection with the Company's public offering of common stock in July
1996, the Company sold 1,800,000 shares, or approximately 9.5% of the
outstanding shares directly to KDD America, Inc. ("KDD America"), a subsidiary
of Kokusai Denshin Denwa, an international telecommunications carrier based in
Japan ("KDD Japan"). At that time, the Company and KDD Japan entered 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 the
Company and KDD Japan regarding the telecommunications market and industry in
the United States and Japan, respectively. During fiscal 1996, the Company
made net payments to KDD Japan, reduced by amounts owed to the Company by KDD
Japan, of approximately $5.9 million in connection with exchanging traffic.
The Company has retained Mayer, Brown & Platt, the law firm of which James
J. Junewicz is a partner, as legal counsel for the Company.
11
<PAGE>
PROPOSALS 2-4
APPROVAL OF AMENDMENTS TO CERTIFICATE OF INCORPORATION
The Board of Directors has declared advisable and directed that there be
submitted to the stockholders of the Company at the Annual Meeting three
amendments to the Certificate of Incorporation of the Company. Each proposed
amendment to the Company's Certificate of Incorporation is set forth below for
separate vote by the stockholders. Any amendment can be adopted without regard
to whether the other amendments are also adopted.
If any or all of the proposed amendments to the Certificate of Incorporation
are approved, the appropriate officers of the Company will execute and file
with the Secretary of State of the state of Delaware an Amended Certificate of
Incorporation reflecting such amendments and other documents as are necessary
to reflect the amendments to the Certificate of Incorporation.
Proposal 2--Increased Number of Authorized Shares of Common Stock and
Preferred Stock
The Board of Directors approved and recommended to stockholders a proposal
to amend the Company's Certificate of Incorporation to increase the number of
authorized shares of Common Stock, $.0001 par value, from Twenty-Five Million
(25,000,000) shares to Fifty Million (50,000,000) shares and to increase the
number of authorized shares of Preferred Stock, $.0001 par value, from One
Million (1,000,000) to Five Million (5,000,000) shares.
If the proposed amendment is approved by stockholders, the first paragraph
of Article III of the Company's Certificate of Incorporation would be amended
in its entirety to read as follows:
"The Corporation is authorized to issue two classes of stock to
be designated, respectively "Common Stock" and "Preferred
Stock". The total number of shares which the Corporation is
authorized to issue is Fifty-Five Million (55,000,000) shares.
Fifty Million (50,000,000) shares shall be Common Stock, $.0001
par value per share, and Five Million (5,000,000) shares shall
be Preferred Stock, $.0001 par value per share."
As of March 27, 1997, the number of shares of the Company's Common Stock
issued and outstanding was 18,896,490 and no shares of the Company's Preferred
Stock were issued or outstanding. While the issuance of additional shares
could have the effect of diluting the Company's current stockholders, the
Board of Directors believes that the increase in the number of authorized
shares of Common Stock and Preferred Stock will benefit the Company by
improving its flexibility to consider and respond to future business
opportunities. Although there are no present plans for their use, the
additional authorized shares of Common Stock and Preferred Stock also will be
available for issuance from time to time in connection with the Company's
employee stock-based incentive or benefit plans, possible financings,
acquisitions of other companies or other corporate purposes.
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, conversion rights, conversion
rates, rights and terms of redemption and other rights, preferences and
restrictions of each series, any or all or 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. Subject to the requirements and
limitations of the Nasdaq market, authorized shares of the Company's Common
Stock and Preferred Stock may be issued from time to time without action by
the Company's stockholders to such persons and for such consideration and on
such terms as the Board of Directors determines.
12
<PAGE>
For a discussion concerning certain potential anti-takeover effects of the
foregoing proposal, see "Potential Anti-takeover Effect of Certain Proposed
Amendments to the Company's Certificate of Incorporation."
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
APPROVAL OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AND PREFERRED STOCK.
Proposal 3--Classified Board of Directors and Staggered Terms
The Board of Directors approved and recommended to stockholders a proposal
to amend the Company's Certificate of Incorporation to provide for the
division of the Board into classes of directors with staggered terms.
If the proposed amendment is approved by stockholders, the Company's
Certificate of Incorporation would be amended by adding a second and third
paragraph to Article VII to read as follows:
"The directors shall be divided into three classes, designated
by Class I, Class II and Class III. At the 1997 annual meeting
of stockholders, Class I directors shall be elected for a term
expiring at the 1998 annual meeting of stockholders, Class II
directors for a term expiring at the 1999 annual meeting of
stockholders and Class III directors for a term expiring at the
2000 annual meeting of stockholders. At each succeeding annual
meeting of stockholders, successors to directors whose terms
expire at that annual meeting shall be of the same class as the
directors they succeed and shall be elected for three-year
terms. If the number of directors is decreased by resolution of
the Board of Directors pursuant to Article II Section 2.1 of the
Corporation's Bylaws, in no case shall that decrease shorten the
term of any incumbent director. Vacancies in the Board of
Directors may be filled by a majority of the directors then in
office, though less than a quorum, and directors so chosen shall
hold office for a term expiring at the next annual meeting of
stockholders.
Notwithstanding anything contained in this Certificate of
Incorporation or the Corporation's Bylaws to the contrary, the
affirmative vote of the holders of at least sixty-six and two-
thirds percent (66 2/3%) of the outstanding shares entitled to
vote shall be required to amend or repeal, or adopt any
provision inconsistent with, this Article VII."
This charter provision, if adopted, will provide staggered three year terms
for directors, with approximately one-third of the Board being elected each
year. To preserve the benefits of the classified board, amendment or repeal of
the classified board provision or the adoption of any provision of the
Certificate of Incorporation inconsistent therewith would require the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares entitled to vote. Under Delaware law
(unless the certificate of incorporation provides otherwise), directors
sitting on a classified board may be removed only for cause. Accordingly,
adoption of the proposed classified board amendment would mean stockholders
could remove directors only for cause.
The Board of Directors believes that a classified board will help assure the
continuity and stability of the Board and the Company's business strategies
and policies as determined by the Board of Directors because a majority of the
directors at any given time will have prior experience as directors of the
Company. The classified board provision should also help to ensure that the
Board of Directors, if confronted with an unsolicited proposal from a third
party that has acquired a block of the voting shares of the Company, will have
sufficient time to review the proposal and appropriate alternatives and to
seek the best available result for all stockholders.
While a staggered system may also make it more difficult to remove a
director, even in cases where stockholders may generally deem removal
beneficial, the Board believes the benefits of the staggered system in
moderating the pace of change in the Company's decision-making body warrants
the adoption of the proposal in favor of a staggered board of directors.
13
<PAGE>
For a discussion concerning certain potential anti-takeover effects of the
foregoing proposal, see "Potential Anti-takeover Effect of Certain Proposed
Amendments to the Company's Certificate of Incorporation."
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
APPROVAL OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO PROVIDE FOR
THE DIVISION OF THE BOARD INTO CLASSES OF DIRECTORS WITH STAGGERED TERMS.
Proposal No. 4--No Stockholder Action by Written Consent
The Board of Directors approved and recommended to stockholders a proposal
to amend the Company's Certificate of Incorporation to eliminate actions of
the stockholders by written consent without a meeting.
If the proposed amendment is approved by stockholders the Company's
Certificate of Incorporation would be amended by adding a second and third
paragraph to Article IX to read as follows:
"No action required to be taken or which may be taken at any
annual or special meeting of the stockholders of the Corporation
may be taken by stockholders without a meeting, and the power of
stockholders to consent in writing, without a meeting, to the
taking of any action is specifically denied.
Notwithstanding anything contained in this Certificate of
Incorporation or the Corporation's Bylaws to the contrary, the
affirmative vote of the holders of at least sixty-six and two-
thirds percent (66 2/3%) of the outstanding shares entitled to
vote shall be required to amend or repeal, or adopt any
provision inconsistent with, this Article IX."
Currently, the Certificate of Incorporation of the Company does not specify
whether action to be taken or which may be taken at an annual or special
meeting of stockholders may be taken without prior notice and without a vote
if a consent in writing setting forth the action so taken is signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. In the absence of
such a provision, Delaware law permits stockholder action by written consent.
The proposed amendment would eliminate the ability of the stockholders to take
action without a meeting of stockholders. To preserve the benefits of this
provision, amendment or repeal of this provision requiring all stockholder
action be taken at a meeting or the adoption of any provision of the
Certificate of Incorporation inconsistent therewith would require the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares entitled to vote.
Under Delaware law, when stockholders are to take action at a meeting a
corporation must give written notice of the meeting to all stockholders
entitled to vote, even when one stockholder or group will have a majority of
the votes to be cast. This prior notice allows minority stockholders the
opportunity to take whatever action they deem appropriate to protect their
interests, including seeking to persuade majority stockholders to follow a
different course, selling their shares or litigation. If action is taken by
majority holders by written consent, no prior notice is necessary and minority
holders may not have any opportunity to protect their interests. The primary
purpose of the proposed amendment is to prevent stockholder action without
prior notice to all stockholders.
For a discussion concerning certain potential anti-takeover effects of the
foregoing proposal, see "Potential Anti-takeover Effect of Certain Proposed
Amendments to the Company's Certificate of Incorporation."
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
APPROVAL OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO ELIMINATE
ACTIONS OF THE STOCKHOLDERS BY WRITTEN CONSENT WITHOUT A MEETING.
14
<PAGE>
Potential Anti-takeover Effect of Certain Proposed Amendments to the Company's
Certificate of Incorporation
In a public corporation such as the Company, third parties can accumulate
substantial stock positions and then use their stock positions to force a
restructuring, merger or consolidation of that corporation or to force the
corporation to repurchase the third parties' stock at a premium. Such actions
are often taken without advance notice to or consultation with the board of
directors or management of the corporation. In many cases, such third parties
seek representation on the corporation's board of directors in order to
increase the likelihood that the corporation will implement their proposals.
If the corporation resists the efforts to obtain representation on the
corporation's board, such third parties may commence proxy contests to have
themselves or their nominees elected to the board of directors in place of
certain directors or the entire board. These contests can be a prelude to a
third party's takeover attempt of the corporation. In some cases, the third
party may not be interested in taking over the corporation, but uses the
threat of a proxy fight or takeover bid as a means of forcing the corporation
to repurchase the third party's holdings at a substantial premium over market
price.
The proposed amendments to the Certificate of Incorporation will alter the
Certificate of Incorporation in a way that may make the acquisition of control
of the Company by means of a tender offer, open market purchases, a proxy
fight or otherwise more difficult. The proposed amendments are designed, in
addition to other purposes, to encourage persons seeking to acquire control of
the Company to negotiate the terms of such acquisition with the Board. The
Board believes that, as a general rule, the interest of the Company's
stockholders will be best served if any change in control results from
negotiations with the Board. The Board will negotiate based upon careful
consideration of the proposed terms, such as the price to be paid to
stockholders, the form of consideration to be paid and the anticipated tax
effects on the transaction.
However, the proposed amendments could have the effect of discouraging a
prospective acquiror from making a tender offer or otherwise attempting to
obtain control of the Company. To the extent that the proposed amendments
discourage takeover attempts, they could deprive stockholders of opportunities
to realize takeover premiums for their shares. Moreover, the proposed
amendments could discourage accumulations of large blocks of Company shares,
thus depriving stockholders of any advantages which large accumulations of
shares might provide. The Board of Directors has not proposed the Amendments
to the Company's Certificate of Incorporation in response to any actual or
threatened change in control of the Company and neither the Board of Directors
nor management is aware of any proposed takeover plans with respect to the
Company.
Proposal 2--Increased Number of Authorized Shares of Common Stock and
Preferred Stock. The issuance of additional shares of Common Stock or
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or discouraging a third
party from attempting to acquire, control of the Company. Although the Board
has no present intent to do so, the Board's power to approve the issuance of
series of Preferred Stock could, depending on the terms of such series, either
impede or facilitate the completion of a merger, tender offer or other
takeover attempt. Similarly, the Board's existing ability to issue additional
shares of Common Stock could, depending upon the circumstances of their issue,
either impede or facilitate the completion of a merger, tender offer or other
takeover attempt. For example, the issuance of new shares might impede a
business combination if they were issued in connection with a rights plan or
if the terms of those shares include series voting rights which would enable
the holder to block business combinations. Alternatively, the issuance of new
shares might facilitate a business combination if those shares have general
voting rights sufficient to cause an applicable percentage vote requirement to
be satisfied. The Board will make any determination regarding issuance of
additional shares based on its judgment as to the best interests of the
Company and its stockholders.
Proposal 3--Classified Board of Directors and Staggered Terms. If adopted,
the proposed amendment to provide for the division of the Board into classes
of directors with staggered terms would operate to increase the amount of time
it would take a purchaser to obtain control of the Board of Directors. The
delay arises because, under the proposed amendment, it will generally take at
least two annual meetings of stockholders instead of one to effect a change in
control of the Board of Directors. Once the classified board is implemented,
directors can be removed only for cause. The holders of at least 66 2/3% of
the outstanding shares of the Company entitled to
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vote would have to approve any amendments to the provision, making it more
difficult for a purchaser to eliminate the classified board provision. The
adoption of the proposed amendment may deter purchase of the Company's
securities by persons seeking to obtain control over the Company, as well as
possible takeover attempts which some or a majority of holders of Common Stock
may deem to be in their best interest. The proposed amendment will also make
it more difficult for the stockholders to change the composition of the Board
of Directors even if the stockholders believe such a change would be
desirable.
By stabilizing the composition of the board with the use of staggered terms,
proposal 3 should encourage any person who might seek to acquire control of
the Company to consult with the Company's Board of Directors and to negotiate
the terms of any proposed business combination or tender offer. While
management might conceivably use this perceived bargaining power in
negotiations with a potential acquiror to negotiate more favorable terms for
management, the Board believes that any takeover attempt or business
combination in which the Company is involved should be thoroughly studied by
the Company's then-serving board of directors to assure that all of the
Company's shareholders are treated fairly.
Proposal 4--No Stockholder Action by Written Consent. Action by written
consent may, in some circumstances, permit the stockholders to take action
opposed by the Board of Directors more rapidly than would be possible if a
meeting were required. Such action may include proposals to approve offers to
acquire the Company or its assets or replace members of the Board of Directors
which the Board may oppose. Therefore, the proposed amendment to the Company's
Certificate of Incorporation to eliminate stockholder action by written
consent may therefore complicate or delay any attempt to assume control of the
Company without the approval of the Board of Directors, especially since the
Company's Bylaws permit stockholders to call special meetings only if they
represent 50% of the outstanding shares entitled to vote. In addition, the
provision in the proposed amendment to Article IX requiring the affirmative
vote of the holders of at least 66 2/3% of the outstanding shares entitled to
vote could have an anti-takeover effect as the proposed amendment makes it
more difficult to change the Certificate of Incorporation to eliminate the
provision requiring any stockholder action be taken at a meeting.
Other Anti-takeover Measures. SEC rules also require disclosure of charter
and by-law provisions that could have an anti-takeover effect. The Company is
subject to Section 203 of the Delaware Law, an anti-takeover law. In general,
Section 203 of the Delaware Law prevents an interested stockholder from
engaging in a business combination 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 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 number of
directors shall be determined by a majority of the Board of Directors.
Further, vacancies in the 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. The Company's Bylaws permit
the stockholders to call a special meeting of stockholders only if they
represent 50% of the outstanding shares entitled to vote. These and other
provisions may have the effect of deferring hostile takeovers or delaying
changes in control or management of the Company. In addition, the Board of
Directors may issue authorized capital stock in a manner that would make a
takeover more difficult.
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PROPOSAL 5
APPROVAL OF LONG-TERM INCENTIVE PLAN
PLAN SUMMARY
The following summary of the Long-Term Incentive Plan is qualified in its
entirety by reference to the complete text of the Long-Term Incentive Plan,
which is set forth in Exhibit A to this Proxy Statement.
On February 17, 1997, the Company adopted the Pacific Gateway Exchange, Inc.
1997 Long-Term Incentive Plan (the "Long-Term Incentive Plan"), subject to the
approval of the Company's stockholders, to attract and retain employees and
other service providers to the Company and to identify the interests of the
such individuals with the Company's stockholders through the use of equity-
based compensation. The Long-Term Incentive Plan will replace the Company's
1995 Stock Option Plan, and no further options will be granted under the 1995
Stock Option Plan.
Administration. The Compensation Committee of the Board of Directors has
been appointed to administer the Long-Term Incentive Plan, and has the
exclusive authority to make awards under the plan and all interpretations and
determinations affecting the Long-Term Incentive Plan.
Participation. Subject to the terms of the Long-Term Incentive Plan, the
Compensation Committee determines which employees, directors, or other
individuals providing services to the Company shall be eligible to receive
awards under the Long-Term Incentive Plan, and the amount, price, timing and
other terms and conditions applicable to such awards. The Plan also provides
for the automatic award of stock options to non-employee directors of the
Company.
Shares Available for Awards. The number of shares which may be awarded under
the Long-Term Incentive Plan shall not exceed 4,000,000 shares in the
aggregate, and no more than 500,000 shares may be awarded to any one
individual in any one-year period. Shares issued under the Long-Term Incentive
Plan may be authorized and unissued shares or treasury shares. In the event of
certain transactions affecting the type or number of outstanding shares, the
number of shares subject to the Long-Term Incentive Plan, the number or type
of shares subject to outstanding awards, and the exercise price thereof, shall
be appropriately adjusted. The closing price per share of Common Stock on
March 27, 1997 was $24.75, as reported on the Nasdaq National Market System.
Awards; Change in Control. The Long-Term Incentive Plan authorizes the award
of stock options, stock appreciation rights ("SARs"), stock grants (which may
be subject to restrictions), performance stock and performance units, and
authorizes the establishment of one or more stock purchase programs. All
awards under the Plan will become fully vested upon a change in control of the
Company. Generally, for purposes of the Long-Term Incentive Plan, a change in
control will be deemed to occur upon (i) the acquisition of more than 50% of
the Company's voting stock by any party (other than by certain related
parties), or (ii) the approval of a merger or reorganization of the Company
(other than certain mergers or reorganizations where the approving
shareholders continue to hold more than 50% of the voting securities of the
corporation resulting from such merger or reorganization), a sale of
substantially all of the Company's assets, the liquidation of the Company, or
(iii) the election of directors to the Board which were not recommended by the
incumbent directors.
Stock Options and Stock Appreciation Rights. Options awarded under the Long-
Term Incentive Plan may be either incentive stock options which are intended
to satisfy the requirements of Section 422 of the Code, or non-qualified stock
options which are not intended to satisfy Section 422 of the Code. SARs may be
granted in tandem or otherwise in connection with options, or may granted as
free-standing awards. Exercise of an option will result in the corresponding
surrender of any tandem SAR. Under the terms of the Long-Term Incentive Plan,
options and SARs will have an exercise price that is established by the
Committee. Options and SARs become exercisable in accordance with the terms
established by the Compensation Committee, which may include conditions
relating to completion of a specified period of service or achievement of
performance standards. Options and SARs shall expire on the date determined by
the Compensation Committee which shall not be later than the earliest to occur
of (i) the tenth anniversary of the grant date, (ii) the first anniversary of
the participant's
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termination of employment by reason of death or disability, (iii) the third
anniversary of the participant's termination of employment by reason of
retirement, or (iv) the three month anniversary of the participant's
termination of employment for any other reason. Shares transferred to a
participant pursuant to the exercise of an option may be subject to such
additional restrictions or limitations as the Compensation Committee may
determine.
In the event that the holder of an option pays all or a portion of the
exercise price in shares of Common Stock, the Compensation Committee may award
an option (a "Reload Option") to purchase the number of shares surrendered in
payment of the exercise price. The exercise price of the Reload Option shall
be fair market value of a share of Common Stock on the date of grant, the
Reload Option shall not be exercisable for a period of six months, and shall
expire on the same date as original option with respect to which it was
granted.
Each non-employee Director receives an option to purchase 20,000 shares of
Common Stock upon his or her initial appointment to the Board of Directors (an
"Initial Option"). On each subsequent anniversary of the Initial Option, the
non-employee Director receives an option to purchase an additional 10,000
shares of Common Stock, unless the non-employee Director has terminated
service on the Board prior to such date. The exercise price of each share
underlying the option is equal to the fair market value of a share of Common
Stock on the date the option is granted. The options vest and become
exercisable with respect to 25% of the shares awarded on each of the first
through fourth anniversaries of the grant date. The options expire on the
earliest to occur of (i) the tenth anniversary of the grant date, (ii) the
first anniversary of the Director's termination of service by reason of death
or disability, or (iii) the three month anniversary of the Director's
termination of service for any other reason.
Stock Awards and Purchase Programs. Under the Long-Term Incentive Plan, the
Compensation Committee may grant awards of Common Stock to participants, which
shall be subject to such conditions and restrictions, if any, as the
Compensation Committee may determine. During the period a stock award is
subject to restrictions or limitations, the Compensation Committee may award
the participant dividend rights with respect to such shares. The Long-Term
Incentive Plan also provides that the Compensation Committee may establish one
or more stock programs which may permit purchases of Common Stock at up to a
50% discount, or provide for the award of matching Common Stock at a matching
rate which is not greater than one matching share for each share of Common
Stock purchased by the participant. Matching awards may not be made in
connection with discount purchases of stock.
Performance Shares. The Compensation Committee may award participants
performance stock, the distribution of which is subject to achievement of
performance objectives, or performance units which entitle the participant to
receive value for the units at the end of a performance period to the extent
provided under the award. In either case, the number of shares or units and
the performance measures and periods shall be established by the Compensation
Committee at the time the award is made.
Tax Consequences of Option Awards. A participant who is granted a stock
option will not be subject to federal income tax at the time of grant, and the
Company will not be entitled to a tax deduction by reason of such grant. Upon
exercise of a nonqualified option, generally the difference between the option
price and the fair market value of the Common Stock on the date of exercise
will be considered ordinary income to the participant, and generally the
Company will be entitled to a corresponding tax deduction.
Upon exercise of an incentive stock option, no taxable income will be
recognized by the participant and the Company is not entitled to a tax
deduction by reason of such exercise. However, if Common Stock purchased
pursuant to the exercise of an incentive stock option is sold within two years
from the date of grant or within one year after the transfer of such Common
Stock to the participant, then the difference, with certain adjustments,
between the fair market value of the Common Stock at the date of exercise and
the option price will be considered ordinary income to the participant, and
generally the Company will be entitled to a corresponding tax deduction.
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PLAN BENEFITS
Approximately 50 current employees, 20 estimated new employees and 30 outside
consultants will be eligible for discretionary awards under the Long-Term
Incentive Plan. No decision has been made with respect to which eligible
individuals, if any, will receive discretionary awards under the Long-Term
Incentive Plan or the amount or type of any such awards.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE APPROVAL
OF THE LONG-TERM INCENTIVE PLAN.
PROPOSAL 6
APPROVAL OF SELECTION OF AUDITORS
Unless marked to the contrary, proxies will be voted for the selection of
Coopers & Lybrand as the Company's independent auditors for the fiscal year
ending on December 31, 1997. Coopers & Lybrand was engaged as the Company's
independent auditors in June 1995 and has audited the Company's consolidated
financial statements for the fiscal years ended December 31, 1994, 1995, and
1996.
Representatives of Coopers & Lybrand are expected to appear at the Annual
Meeting, will have an opportunity to make a statement, if they wish to do so,
and will be available to answer appropriate questions from stockholders at that
time.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
SELECTION OF COOPERS & LYBRAND AS THE COMPANY'S INDEPENDENT AUDITORS.
OTHER MATTERS
The Board of Directors is not aware of any other business that may come
before the Annual Meeting. However, if additional matters properly come before
the meeting, proxies will be voted at the discretion of the proxy-holders.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the 1998 Annual Meeting of
Stockholders must be received by the Company not later than December 8, 1997,
at its principal executive offices, Attention: Howard A. Neckowitz, Chairman,
President and Chief Executive Officer, in order to be considered for inclusion
in the Company's proxy statement and form of proxy relating to that annual
meeting.
ADDITIONAL INFORMATION
A copy of the Company's Annual Report to Stockholders for fiscal 1996 is
being provided to stockholders with this Proxy Statement.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Howard A. Neckowitz
Howard A. Neckowitz, Chairman, President and
Chief Executive Officer
April 21, 1997
Burlingame, California
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EXHIBIT A
LONG TERM INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1................................................................... 1
GENERAL................................................................... 1
1.1. Purpose............................................................ 1
1.2. Participation...................................................... 1
SECTION 2................................................................... 1
OPTIONS................................................................... 1
2.1. Definition......................................................... 1
2.2. Eligibility........................................................ 1
2.3. Price.............................................................. 2
2.4. Exercise........................................................... 2
2.5. Post-Exercise Limitations.......................................... 2
2.6. Expiration Date.................................................... 2
2.7. Reload Provision................................................... 3
SECTION 3................................................................... 3
STOCK APPRECIATION RIGHTS................................................. 3
3.1. Definition......................................................... 3
3.2. Eligibility........................................................ 3
3.3. Exercise........................................................... 3
3.4. Settlement of Award................................................ 4
3.5. Post-Exercise Limitations.......................................... 4
3.6. Expiration Date.................................................... 4
SECTION 4................................................................... 4
STOCK AWARDS.............................................................. 4
4.1. Definition......................................................... 4
4.2. Eligibility........................................................ 4
4.3. Terms and Conditions of Awards..................................... 5
SECTION 5................................................................... 5
STOCK PURCHASE PROGRAM.................................................... 5
5.1. Purchase of Stock.................................................. 5
5.2. Matching Shares.................................................... 5
5.3. Restrictions on Shares............................................. 5
SECTION 6................................................................... 6
PERFORMANCE UNITS......................................................... 6
6.1. Definition......................................................... 6
6.2. Eligibility........................................................ 6
6.3. Terms and Conditions of Awards..................................... 6
6.4. Settlement......................................................... 6
6.5. Termination during Performance Period.............................. 6
SECTION 7................................................................... 7
OPERATION AND ADMINISTRATION.............................................. 7
7.1. Effective Date..................................................... 7
7.2. Shares Subject to Plan............................................. 7
7.3. Individual Limits on Awards........................................ 7
7.4. Adjustments to Shares.............................................. 7
7.5. Limit on Distribution.............................................. 9
7.6. Liability for Cash Payments........................................ 9
7.7. Performance-Based Compensation..................................... 9
7.8. Withholding........................................................ 9
7.9. Transferability.................................................... 9
7.10. Notices........................................................... 10
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
7.11. Form and Time of Elections........................................ 10
7.12. Agreement With Company............................................ 10
7.13. Limitation of Implied Rights...................................... 10
7.14. Evidence.......................................................... 10
7.15. Action by Company or Related Company.............................. 10
7.16. Gender and Number................................................. 10
SECTION 8................................................................... 11
COMMITTEE................................................................. 11
8.1. Administration..................................................... 11
8.2. Selection of Committee............................................. 11
8.3. Powers of Committee................................................ 11
8.4. Delegation by Committee............................................ 11
8.5. Information to be Furnished to Committee........................... 11
8.6. Liability and Indemnification of Committee......................... 11
SECTION 9................................................................... 12
CHANGE IN CONTROL......................................................... 12
SECTION 10.................................................................. 13
AMENDMENT AND TERMINATION................................................. 13
APPENDIX A
AWARDS TO NONEMPLOYEE DIRECTORS........................................... 14
</TABLE>
(ii)
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PACIFIC GATEWAY EXCHANGE, INC.
1997 LONG-TERM INCENTIVE PLAN
SECTION 1
GENERAL
1.1. Purpose. The Pacific Gateway Exchange, Inc. 1997 Long-Term Incentive
Plan (the "Plan") has been established by Pacific Gateway Exchange, Inc. (the
"Company") to:
(a) attract and retain employees and other persons providing services to
the Company and the Related Companies (as defined below);
(b) motivate Participants, by means of appropriate incentives, to achieve
long-range goals;
(c) provide incentive compensation opportunities that are competitive
with those of other major corporations; and
(d) further identify Participants' interests with those of the Company's
other stockholders through compensation that is based on the Company's
common stock;
and thereby promote the long-term financial interest of the Company and the
Related Companies, including the growth in value of the Company's equity and
enhancement of long-term stockholder return. The term "Related Company" means
any company during any period in which it is a "subsidiary corporation" (as
that term is defined in Code section 424(f)) with respect to the Company.
1.2. Participation. Subject to the terms and conditions of the Plan, the
Committee (as described in Section 8) shall determine and designate, from time
to time, from among the Eligible Individuals, those persons who will be
granted one or more awards under Sections 2, 3, 4, 5 or 6 of the Plan (an
"Award"), and thereby become "Participants" in the Plan. In the discretion of
the Committee, and subject to the terms of the Plan, a Participant may be
granted any Award permitted under the provisions of the Plan, and more than
one Award may be granted to a Participant. Except as otherwise agreed by the
Company and the Participant, or except as otherwise provided in the Plan, an
Award under the Plan shall not affect any previous Award under the Plan or an
award under any other plan maintained by the Company or the Related Companies.
For purposes of the Plan, the term "Eligible Individual" shall mean any
employee of the Company or a Related Company, any director and any other
person providing material services to the Company or a Related Company.
SECTION 2
OPTIONS
2.1. Definitions. The grant of an "Option" under this Section 2 entitles the
Participant to purchase shares of common stock of the Company ("Stock") at a
price fixed at the time the Option is granted, subject to the terms of this
Section. Options granted under this Section may be either Incentive Stock
Options or Non-Qualified Stock Options, as determined in the discretion of the
Committee. An "Incentive Stock Option" is an Option that is intended to
satisfy the requirements applicable to an "incentive stock option" described
in section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
A "Non-Qualified Stock Option" is an Option that is not intended to be an
Incentive Stock Option.
2.2. Eligibility. The Committee shall designate the Participants to whom
Options are to be granted under this Section and shall determine the number of
shares of Stock subject to each such Option. To the extent that the aggregate
fair market value of Stock with respect to which Incentive Stock Options are
exercisable for the first time by any individual during any calendar year
(under all plans of the Company and all Related Companies) exceeds $100,000,
such options shall be treated as Non-Qualified Stock Options, to the extent
required by section 422 of the Code.
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2.3. Price. The determination and payment of the purchase price of a share
of Stock under each Option granted under this Section shall be subject to the
following:
(a) The purchase price shall be established by the Committee at the time
the Option is granted; provided, however, that in no event shall such price
be less than the par value of a share of Stock on such date; further,
provided, in no event shall the purchase price of a share of Stock under an
Incentive Stock Option be less than the Fair Market Value (defined below)
of a share of stock at the time the Option is granted.
(b) Subject to the following provisions of this subsection, the full
purchase price of each share of Stock purchased upon the exercise of any
Option shall be paid at the time of such exercise and, as soon as
practicable thereafter, a certificate representing the shares so purchased
shall be delivered to the person entitled thereto.
(c) The purchase price shall be payable in cash or in shares of Stock
(valued at Fair Market Value as of the day of exercise) that have been held
by the Participant at least six months, or in any combination thereof, as
determined by the Committee.
(d) A Participant may elect to pay the purchase price upon the exercise
of an Option through a cashless exercise arrangement to the extent provided
by the Committee.
(e) The "Fair Market Value" of a share of Stock of the Company as of any
date shall be the closing price per share of Stock (or the mean of the
closing bid and asked prices of a share, if the Stock is so reported) on
the National Association of Securities Dealers Automated Quotation System
("NASDAQ"), the NASDAQ National Market System or other national or regional
securities exchange or market system on which the Stock is primarily
traded, or, if there shall have been no such sale so reported on that date,
on the last preceding date on which such a sale was so reported
2.4. Exercise. Except as otherwise expressly provided in the Plan, an Option
granted under this Section shall be exercisable in accordance with the
following terms of this subsection:
(a) The terms and conditions relating to exercise of an Option shall be
established by the Committee, and may include, without limitation,
conditions relating to completion of a specified period of service (subject
to paragraph (b) below), achievement of performance standards prior to
exercise of the Option or achievement of Stock ownership objectives by the
Participant. The Committee, in its sole discretion, may accelerate the
vesting of any Option under circumstances designated by it at the time the
Option is granted or thereafter.
(b) No Option may be exercised by a Participant after the Expiration Date
(as defined in subsection 2.6) applicable to that Option.
(c) The exercise of an Option will result in the surrender of the
corresponding rights under a tandem Stock Appreciation Right (as described
in Section 3), if any.
2.5. Post-Exercise Limitations. The Committee, in its discretion, may impose
such restrictions on shares of Stock acquired pursuant to the exercise of an
Option (including stock acquired pursuant to the exercise of a tandem Stock
Appreciation Right) as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, Stock ownership by the Participant
and such other factors as the Committee determines to be appropriate.
2.6. Expiration Date. The "Expiration Date" with respect to an Option means
the date established as the Expiration Date by the Committee at the time of
the grant; provided, however, that the Expiration Date with respect to any
Option shall not be later than the earliest to occur of:
(a) the ten-year anniversary of the date on which the Option is granted;
(b) if the Participant's Date of Termination occurs by reason of death or
Disability, the one-year anniversary of such Date of Termination;
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(c) if the Participant's Date of Termination occurs by reason of
Retirement, the three-year anniversary of such Date of Termination; or
(d) if the Participant's Date of Termination occurs for reasons other
than Retirement, death or Disability, the three-month anniversary of such
Date of Termination.
For purposes of the Plan, a Participant's "Date of Termination" shall be the
date on which he both ceases to be an employee of the Company and the Related
Companies and ceases to perform material services for the Company and the
Related Companies, regardless of the reason for the cessation; provided that a
"Date of Termination" shall not be considered to have occurred during the
period in which the reason for the cessation of services is a leave of absence
approved by the Company or the Related Company which was the recipient of the
Participant's services. Except as otherwise provided by the Committee, a
Participant shall be considered to have a "Disability" during the period in
which he is unable, by reason of a medically determinable physical or mental
impairment, to engage in any substantial gainful activity, which condition, in
the opinion of a physician selected by the Committee, is expected to have a
duration of not less than 120 days. "Retirement" of a Participant shall mean
the occurrence of a Participant's Date of Termination after providing at least
five years of service to the Company or the Related Companies and attaining
age 65.
2.7. Reload Provision. In the event the Participant exercises an Option and
pays all or a portion of the purchase price in Stock in the manner permitted
by subsection 2.3, or satisfies withholding obligations in Stock if permitted
under subsection 7.8, such Participant (either pursuant to the terms of the
Option Award, or pursuant to the exercise of Committee discretion at the time
the Option is exercised) may be issued a new Option to purchase additional
shares of Stock equal to the number of shares of Stock surrendered to the
Company in such payment. Such new Option shall have an exercise price equal to
the Fair Market Value per share on the date such new Option is granted, shall
first be exercisable six months from the date of grant of the new Option and
shall have an Expiration Date on the same date as the Expiration Date of the
original Option so exercised by payment of the purchase price or withholding
in shares of Stock.
SECTION 3
STOCK APPRECIATION RIGHTS
3.1. Definition. Subject to the terms of this Section, a "Stock Appreciation
Right" granted under the Plan entitles the Participant to receive, in cash or
Stock (as determined in accordance with subsection 3.4), value equal to all or
a portion of the excess of: (a) the Fair Market Value of a specified number of
shares of Stock at the time of exercise over (b) a specified price designated
at the time the Stock Appreciation Right is granted or, if granted in tandem
with an Option, the exercise price with respect to shares under the tandem
Option.
3.2. Eligibility. Subject to the provisions of the Plan, the Committee shall
designate the Participants to whom Stock Appreciation Rights are to be granted
under the Plan, shall determine the exercise price or a method by which the
price shall be established with respect to each such Stock Appreciation Right
and shall determine the number of shares of Stock on which each Stock
Appreciation Right is based. A Stock Appreciation Right may be granted in
connection with all or any portion of a previously or contemporaneously-
granted Option or not in connection with an Option. If a Stock Appreciation
Right is granted in connection with an Option then, in the discretion of the
Committee, the Stock Appreciation Right may, but need not, be granted in
tandem with the Option.
3.3. Exercise. The exercise of Stock Appreciation Rights shall be subject to
the following:
(a) If a Stock Appreciation Right is not in tandem with an Option, then
the Stock Appreciation Right shall be exercisable in accordance with the
terms established by the Committee in connection with such rights; and may
include, without limitation, conditions relating to completion of a
specified period of service, achievement of performance standards prior to
exercise of the Stock Appreciation Rights or
3
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achievement of objectives relating to Stock ownership by the Participant.
The Committee, in its sole discretion, may accelerate the vesting of any
Stock Appreciation Right under circumstances designated by it at the time
the Stock Appreciation Right is granted or thereafter. No Stock
Appreciation Right subject to this paragraph may be exercised by a
Participant after the Expiration Date (as defined in subsection 3.6)
applicable to that Stock Appreciation Right.
(b) If a Stock Appreciation Right is in tandem with an Option, then the
Stock Appreciation Right shall be exercisable at the time the tandem Option
is exercisable. The exercise of a Stock Appreciation Right will result in
the surrender of the corresponding rights under the tandem Option.
3.4. Settlement of Award. Upon the exercise of a Stock Appreciation Right,
the value to be distributed to the Participant, in accordance with subsection
3.1, shall be distributed in shares of Stock (valued at their Fair Market
Value at the time of exercise), in cash or in a combination thereof, in the
discretion of the Committee.
3.5. Post-Exercise Limitations. The Committee, in its discretion, may impose
such restrictions on shares of Stock acquired pursuant to the exercise of a
Stock Appreciation Right as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, ownership of Stock by the
Participant and such other factors as the Committee determines to be
appropriate.
3.6. Expiration Date. If a Stock Appreciation Right is in tandem with an
Option, then the "Expiration Date" for the Stock Appreciation Right shall be
the Expiration Date for the related Option. If a Stock Appreciation Right is
not in tandem with an Option, then the "Expiration Date" for the Stock
Appreciation Right shall be the date established as the Expiration Date by the
Committee; provided, however, that subject to the following provisions of this
subsection, the Expiration Date with respect to any Stock Appreciation Right
shall not be later than the earliest to occur of:
(a) the ten-year anniversary of the date on which the Stock Appreciation
Right is granted;
(b) if the Participant's Date of Termination occurs by reason of death or
Disability, the one-year anniversary of such Date of Termination; or
(c) if the Participant's Date of Termination occurs by reason of
Retirement, the three-year anniversary of such Date of Termination; or
(d) if the Participant's Date of Termination occurs by reason other than
Retirement, death or Disability, the three-month anniversary of such Date
of Termination.
SECTION 4
STOCK AWARDS
4.1. Definition. Subject to the terms of this Section, a Stock Award under
the Plan is a grant of shares of Stock to a Participant, the earning, vesting
or distribution of which is subject to one or more conditions established by
the Committee. Such conditions may relate to events (such as performance or
continued employment) occurring before or after the date the Stock Award is
granted, or the date the Stock is earned by, vested in or delivered to the
Participant. If the vesting of Stock Awards is subject to conditions occurring
after the date of grant, the period beginning on the date of grant of a Stock
Award and ending on the vesting or forfeiture of such Stock (as applicable) is
referred to as the "Restricted Period". Stock Awards may provide for delivery
of the shares of Stock at the time of grant or may provide for a deferred
delivery date. A Stock Award may, but need not, be made in conjunction with a
cash-based incentive compensation program maintained by the Company and may,
but need not, be in lieu of cash otherwise awardable under such program.
4.2. Eligibility. The Committee shall designate the Participants to whom
Stock Awards are to be granted and the number of shares of Stock that are
subject to each such Award.
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4.3. Terms and Conditions of Awards. Stock Awards granted to Participants
under the Plan shall be subject to the following terms and conditions:
(a) Beginning on the date of grant (or, if later, the date of
distribution) of shares of Stock comprising a Stock Award, and including
any applicable Restricted Period, the Participant as owner of such shares
shall have the right to vote such shares.
(b) Payment of dividends with respect to Stock Awards shall be subject to
the following:
(i) On and after date that a Participant has a fully earned and
vested right to the shares comprising a Stock Award, and the shares
have been distributed to the Participant, the Participant shall have
all dividend rights (and other rights) of a stockholder with respect to
such shares.
(ii) Prior to the date that a Participant has a fully earned and
vested right to the shares comprising a Stock Award, the Committee, in
its sole discretion, may award Dividend Rights with respect to such
shares.
(iii) On and after the date that a Participant has a fully earned and
vested right to the shares comprising a Stock Award, but before the
shares have been distributed to the Participant, the Participant shall
be entitled to Dividend Rights with respect to such shares, at the time
and in the form determined by the Committee.
(iv) A "Dividend Right" with respect to shares comprising a Stock
Award shall entitle the Participant, as of each dividend payment date,
to an amount equal to the dividends payable with respect to a share of
Stock multiplied by the number of such shares. Dividend Rights shall be
settled in cash or in shares of Stock, as determined by the Committee,
shall be payable at the time and in the form determined by the
Committee and shall be subject to such other terms and conditions as
the Committee may determine.
SECTION 5
STOCK PURCHASE PROGRAM
5.1. Purchase of Stock. The Committee may, from time to time, establish one
or more programs under which Participants will be permitted to purchase shares
of Stock under the Plan and shall designate the Participants eligible to
participate under such Stock purchase programs. The purchase price for shares
of Stock available under such programs, and other terms and conditions of such
programs, shall be established by the Committee; provided, however, that with
respect to shares of Stock purchased under a program that does not result in
an award of matching shares (as provided in subsection 5.2), the purchase
price may not be less than 50% of the Fair Market Value of the Stock at the
time of purchase (or, in the Committee's discretion, the average stock value
over a period determined by the Committee), and further provided that the
purchase price may not be less than par value.
5.2. Matching Shares. Except as otherwise provided in subsection 5.1, any
Stock purchase program established by the Committee under this Section may
provide for the award of matching shares of Stock.
5.3. Restrictions on Shares. The Committee may impose such restrictions with
respect to shares purchased under subsection 5.1, or matching shares awarded
pursuant to subsection 5.2, as the Committee determines to be appropriate.
Such restrictions may include, without limitation, restrictions of the type
that may be imposed with respect to Stock Awards under Section 4.
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SECTION 6
PERFORMANCE UNITS
6.1. Definition. Subject to the terms of this Section, the Award of
Performance Units under the Plan entitles the Participant to receive value for
the units at the end of a Performance Period to the extent provided under the
Award. The number of units earned, and the value received for them, will be
contingent on the degree to which the performance measures established at the
time of grant of the Award are met. For purposes of the Plan, the "Performance
Period" with respect to the award of any Performance Units shall be the period
over which the applicable performance is to be measured.
6.2. Eligibility. The Committee shall designate the Participants to whom
Performance Units are to be granted and the number of units subject to each
such Award.
6.3. Terms and Conditions of Awards. For each Participant, the Committee
will determine the value of units, which may be stated either in cash or in
units representing shares of Stock; the performance measures used for
determining whether the Performance Units are earned; the Performance Period
during which the performance measures will apply; the relationship between the
level of achievement of the performance measures and the degree to which
Performance Units are earned; whether, during or after the Performance Period,
any revision to the performance measures or Performance Period should be made
to reflect significant events or changes that occur during the Performance
Period; and the number of earned Performance Units that will be paid in cash
and the number of earned Performance Units to be paid in shares of Stock.
6.4. Settlement. Settlement of Performance Units shall be subject to the
following:
(a) The Committee will compare the actual performance to the performance
measures established for the Performance Period and determine the number of
units as to which settlement is to be made, and the value of such units.
(b) Settlement of units earned shall be wholly in cash, wholly in Stock
or in a combination of the two and distributed in a lump sum or
installments, as determined by the Committee.
(i) For Performance Units stated in units representing shares of
Stock when granted, either one share of Stock will be distributed for
each unit earned or cash will be distributed for each unit earned equal
to either (A) the Fair Market Value of a share of Stock at the end of
the Performance Period or (B) the average Stock value over a period
determined by the Committee.
(ii) For Performance Units stated in cash when granted, the value of
each unit earned will be distributed in its initial cash value or
shares of Stock will be distributed based on the cash value of the
units earned divided by (A) the Fair Market Value of a share of Stock
at the end of the Performance Period or (B) the average Stock value
over a period determined by the Committee.
(c) Shares of Stock distributed in settlement of the units shall be
subject to such vesting requirements and other conditions, if any, as the
Committee shall determine. Such vesting restrictions may include, without
limitation, restrictions of the type that may be imposed with respect to
Stock Awards under Section 4.
6.5. Termination during Performance Period. If a Participant's Date of
Termination occurs during a Performance Period with respect to any Performance
Units granted to him, the Committee may determine that the Participant will be
entitled to settlement of all or any portion of the Performance Units as to
which he would otherwise be eligible and may accelerate the determination of
the value and settlement of such Performance Units or make such other
adjustments as the Committee, in its sole discretion, deems desirable.
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SECTION 7
OPERATION AND ADMINISTRATION
7.1. Effective Date. The Plan shall be effective as of the date it is
adopted by the Board of Directors of the Company (the "Board"); provided,
however, that Awards granted under the Plan prior to its approval by
stockholders will be contingent on approval of the Plan by the Company's
stockholders. The Plan shall be unlimited in duration and, in the event of
Plan termination, shall remain in effect as long as any shares of Stock
awarded under it are outstanding and not fully vested; provided, however, that
no new Awards shall be made under the Plan on or after the tenth anniversary
of the date on which the Plan is adopted by the Board.
7.2. Shares Subject to Plan. The shares of Stock with respect to which
Awards may be made under the Plan shall be shares currently authorized but
unissued or currently held or subsequently acquired by the Company as treasury
shares, including shares purchased in the open market or in private
transactions. Subject to the provisions of subsection 7.4, the number of
shares of Stock which may be issued with respect to Awards under the Plan
shall not exceed 4,000,000 shares in the aggregate. Except as otherwise
provided herein, any shares subject to an Award which for any reason expires
or is terminated without issuance of shares (whether or not cash or other
consideration is paid to a Participant in respect of such shares) shall again
be available under the Plan.
7.3. Individual Limits on Awards. Notwithstanding any other provision of the
Plan to the contrary, no Participant shall receive any Award of an Option or
Stock Appreciation Right under the Plan to the extent that the sum of:
(a) the number of shares of Stock subject to such Award;
(b) the number of shares of Stock subject to all other prior Awards of
Options and Stock Appreciation Rights under the Plan during the one-year
period ending on the date of the Award; and
(c) the number of shares of Stock subject to all other prior stock
options and stock appreciation rights granted to the Participant under
other plans or arrangements of the Company and Related Companies during the
one-year period ending on the date of the Award;
would exceed the Participant's Individual Limit under the Plan. The
determination made under the foregoing provisions of this subsection shall be
based on the shares subject to the awards at the time of grant, regardless of
when the awards become exercisable. Subject to the provisions of subsection
7.4, a Participant's "Individual Limit" shall be 500,000 shares.
7.4. Adjustments to Shares.
(a) If the Company shall effect any subdivision or consolidation of
shares of Stock or other capital readjustment, payment of stock dividend,
stock split, combination of shares or recapitalization or other increase or
reduction of the number of shares of Stock outstanding without receiving
compensation therefor in money, services or property, then the Committee
shall adjust (i) the number of shares of Stock available under the Plan;
(ii) the number of shares available under any individual or other limits;
(iii) the number of shares of Stock subject to outstanding Awards; and (iv)
the per-share price under any outstanding Award to the extent that the
Participant is required to pay a purchase price per share with respect to
the Award.
(b) If the Company is reorganized, merged or consolidated or is party to
a plan of exchange with another corporation, pursuant to which
reorganization, merger, consolidation or plan of exchange, the stockholders
of the Company receive any shares of stock or other securities or property,
or the Company shall distribute securities of another corporation to its
stockholders, there shall be substituted for the shares subject to
outstanding Awards an appropriate number of shares of each class of stock
or amount of other securities or property which were distributed to the
stockholders of the Company in respect of such shares, subject to the
following:
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(i) If the Committee determines that the substitution described in
accordance with the foregoing provisions of this paragraph would not be
fully consistent with the purposes of the Plan or the purposes of the
outstanding Awards under the Plan, the Committee may make such other
adjustments to the Awards to the extent that the Committee determines
such adjustments are consistent with the purposes of the Plan and of
the affected Awards.
(ii) All or any of the Awards may be cancelled by the Committee on or
immediately prior to the effective date of the applicable transaction,
but only if the Committee gives reasonable advance notice of the
cancellation to each affected Participant, and only if either: (A) the
Participant is permitted to exercise the Award for a reasonable period
prior to the effective date of the cancellation; or (B) the Participant
receives payment or other benefits that the Committee determines to be
reasonable compensation for the value of the cancelled Awards.
(iii) Upon the occurrence of a reorganization of the Company or any
other event described in this paragraph (b), any successor to the
Company shall be substituted for the Company to the extent that the
Company and the successor agree to such substitution.
(c) Upon (or, in the discretion of the Committee, immediately prior to)
the sale to (or exchange with) a third party unrelated to the Company of
all or substantially all of the assets of the Company, all Awards shall be
cancelled. If Awards are cancelled under this paragraph, then, with respect
to any affected Participant, either:
(i) the Participant shall be provided with reasonable advance notice
of the cancellation, and the Participant shall be permitted to exercise
the Award for a reasonable period prior to the effective date of the
cancellation; or
(ii) the Participant shall receive payment or other benefits that the
Committee determines to be reasonable compensation for the value of the
cancelled Awards.
The foregoing provisions of this paragraph shall also apply to the sale
of all or substantially all of the assets of the Company to a related
party, if the Committee determines such application is appropriate.
(d) In determining what action, if any, is necessary or appropriate under
the foregoing provisions of this subsection, the Committee shall act in a
manner that it determines to be consistent with the purposes of the Plan
and of the affected Awards and, where applicable or otherwise appropriate,
in a manner that it determines to be necessary to preserve the benefits and
potential benefits of the affected Awards for the Participants and the
Company.
(e) The existence of this Plan and the Awards granted hereunder shall not
affect in any way the right or power of the Company or its stockholders to
make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, any merger or consolidation of the Company, any issue of bonds,
debentures, preferred or prior preference stocks ahead of or affecting the
Company's Stock or the rights thereof, the dissolution or liquidation of
the Company, any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
(f) Except as expressly provided by the terms of this Plan, the issue by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, for cash or property or for labor or
services, either upon direct sale, upon the exercise of rights or warrants
to subscribe therefor or upon conversion of shares or obligations of the
Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof, shall be made with respect to Awards
then outstanding hereunder.
(g) Awards under the Plan are subject to adjustment under this subsection
only during the period in which they are considered to be outstanding under
the Plan. For purposes of this subsection, an Award is considered
"outstanding" on any date if the Participant's ability to obtain all
benefits with respect to the
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Award is subject to limits imposed by the Plan (including any limits
imposed by the Agreement reflecting the Award). The determination of
whether an Award is outstanding shall be made by the Committee.
7.5. Limit on Distribution. Distribution of shares of Stock or other amounts
under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall
have no liability to deliver any shares of Stock under the Plan or make any
other distribution of benefits under the Plan unless such delivery or
distribution would comply with all applicable laws and the applicable
requirements of any securities exchange or similar entity.
(b) In the case of a Participant who is subject to Section 16(a) and
16(b) of the Securities Exchange Act of 1934, the Committee may, at any
time, add such conditions and limitations to any Award to such Participant,
or any feature of any such Award, as the Committee, in its sole discretion,
deems necessary or desirable to comply with Section 16(a) or 16(b) and the
rules and regulations thereunder or to obtain any exemption therefrom.
(c) To the extent that the Plan provides for issuance of certificates to
reflect the transfer of shares of Stock, the transfer of such shares may be
effected on a non-certificated basis, to the extent not prohibited by
applicable law or the rules of any stock exchange.
7.6. Liability for Cash Payments. Subject to the provisions of this Section,
each Related Company shall be liable for payment of cash due under the Plan
with respect to any Participant to the extent that such benefits are
attributable to the service rendered for that Related Company by the
Participant. Any disputes relating to liability of a Related Company for cash
payments shall be resolved by the Committee.
7.7. Performance-Based Compensation. To the extent that the Committee
determines that it is necessary or desirable to conform any Awards under the
Plan with the requirements applicable to "Performance-Based Compensation", as
that term is used in Code section 162(m)(4)(C), it may, at or prior to the
time an Award is granted, take such steps and impose such restrictions with
respect to such Award as it determines to be necessary to satisfy such
requirements including, without limitation:
(a) The establishment of performance goals that must be satisfied prior
to the payment or distribution of benefits under such Awards.
(b) The submission of such Awards and performance goals to the Company's
stockholders for approval and making the receipt of benefits under such
Awards contingent on receipt of such approval.
(c) Providing that no payment or distribution be made under such Awards
unless the Committee certifies that the goals and the applicable terms of
the Plan and Agreement reflecting the Awards have been satisfied.
To the extent that the Committee determines that the foregoing requirements
relating to Performance-Based Compensation do not apply to Awards under the
Plan because the Awards constitute Options or Stock Appreciation Rights, the
Committee may, at the time the Award is granted, conform the Awards to
alternative methods of satisfying the requirements applicable to Performance-
Based Compensation.
7.8. Withholding. All Awards and other payments under the Plan are subject
to withholding of all applicable taxes, which withholding obligations may be
satisfied, with the consent of the Committee, through the surrender of shares
of Stock which the Participant already owns or to which a Participant is
otherwise entitled under the Plan.
7.9. Transferability. Awards under the Plan are not transferable except as
designated by the Participant by will or by the laws of descent and
distribution. To the extent that the Participant who receives an Award under
the Plan has the right to exercise such Award, the Award may be exercised
during the lifetime of the Participant only by the Participant.
Notwithstanding the foregoing provisions of this subsection, the Committee may
permit
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Awards under the Plan to be transferred to or for the benefit of the
Participant's family (including, without limitation, to a trust for the
benefit of a Participant's family), subject to such limits as the Committee
may establish. In no event shall an Incentive Stock Option be transferable to
the extent that such transferability would violate the requirements applicable
to such option under Code section 422.
7.10. Notices. Any notice or document required to be filed with the
Committee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Committee, in care of the Company, at
its principal executive offices. The Committee may, by advance written notice
to affected persons, revise such notice procedure from time to time. Any
notice required under the Plan (other than a notice of election) may be waived
by the person entitled to notice.
7.11. Form and Time of Elections. Unless otherwise specified herein, each
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification or
revocation thereof, shall be in writing filed with the Committee at such
times, in such form, and subject to such restrictions and limitations, not
inconsistent with the terms of the Plan, as the Committee shall require.
7.12. Agreement With Company. At the time of an Award to a Participant under
the Plan, the Committee may require a Participant to enter into an agreement
with the Company (the "Agreement") in a form specified by the Committee,
agreeing to the terms and conditions of the Plan and to such additional terms
and conditions, not inconsistent with the Plan, as the Committee may, in its
sole discretion, prescribe.
7.13. Limitation of Implied Rights.
(a) Neither a Participant nor any other person shall, by reason of the
Plan, acquire any right in or title to any assets, funds or property of the
Company or any Related Company whatsoever, including, without limitation,
any specific funds, assets, or other property which the Company or any
Related Company, in its sole discretion, may set aside in anticipation of a
liability under the Plan. A Participant shall have only a contractual right
to the amounts, if any, payable under the Plan, unsecured by any assets of
the Company and any Related Company. Nothing contained in the Plan shall
constitute a guarantee by the Company or any Related Company that the
assets of such companies shall be sufficient to pay any benefits to any
person.
(b) The Plan does not constitute a contract of employment, and selection
as a Participant will not give any employee the right to be retained in the
employ of the Company or any Related Company, nor any right or claim to any
benefit under the Plan, unless such right or claim has specifically accrued
under the terms of the Plan. Except as otherwise provided in the Plan, no
Award under the Plan shall confer upon the holder thereof any right as a
stockholder of the Company prior to the date on which he fulfills all
service requirements and other conditions for receipt of such rights and
shares of Stock are registered in his name.
7.14. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting
on it considers pertinent and reliable, and signed, made or presented by the
proper party or parties.
7.15. Action by Company or Related Company. Any action required or permitted
to be taken by the Company or any Related Company shall be by resolution of
its board of directors, or by action of one or more members of the board
(including a committee of the board) who are duly authorized to act for the
board or (except to the extent prohibited by applicable law or the rules of
any stock exchange) by a duly authorized officer of the company.
7.16. Gender and Number. Where the context admits, words in any gender shall
include any other gender, words in the singular shall include the plural and
the plural shall include the singular.
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SECTION 8
COMMITTEE
8.1. Administration. The authority to control and manage the operation and
administration of the Plan shall be vested in a committee (the "Committee") in
accordance with this Section 8.
8.2. Selection of Committee. The Committee shall be selected by the Board,
and shall consist of not fewer than two members of the Board or such greater
number as may be required for compliance with Rule 16b-3 issued under the
Securities Exchange Act of 1934.
8.3. Powers of Committee. The authority to manage and control the operation
and administration of the Plan shall be vested in the Committee, subject to
the following:
(a) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select employees to receive Awards, to
determine the time or times of receipt, to determine the types of Awards
and the number of shares covered by the Awards, to establish the terms,
conditions, performance criteria, restrictions, and other provisions of
such Awards, and to cancel or suspend Awards. In making such Award
determinations, the Committee may take into account the nature of services
rendered by the respective employee, his present and potential contribution
to the Company's success and such other factors as the Committee deems
relevant.
(b) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to determine the extent to which Awards under the
Plan will be structured to conform to the requirements applicable to
Performance-Based Compensation, and to take such action, establish such
procedures, and impose such restrictions at the time such Awards are
granted as the Committee determines to be necessary or appropriate to
conform to such requirements.
(c) The Committee will have the authority and discretion to interpret the
Plan, to establish, amend and rescind any rules and regulations relating to
the Plan, to determine the terms and provisions of any agreements made
pursuant to the Plan and to make all other determinations that may be
necessary or advisable for the administration of the Plan.
(d) Any interpretation of the Plan by the Committee and any decision made
by it under the Plan is final and binding on all persons.
(e) Except as otherwise expressly provided in the Plan, where the
Committee is authorized to make a determination with respect to any Award.
8.4. Delegation by Committee. Except to the extent prohibited by applicable
law or the rules of any stock exchange, the Committee may allocate all or any
portion of its responsibilities and powers to any one or more of its members
and may delegate all or any part of its responsibilities and powers to any
person or persons selected by it. Any such allocation or delegation may be
revoked by the Committee at any time.
8.5. Information to be Furnished to Committee. The Company and Related
Companies shall furnish the Committee with such data and information as may be
required for it to discharge its duties. The records of the Company and
Related Companies as to an employee's or Participant's employment (or other
provision of services), termination of employment (or cessation of the
provision of services), leave of absence, reemployment and compensation shall
be conclusive on all persons unless determined to be incorrect. Participants
and other persons entitled to benefits under the Plan must furnish the
Committee such evidence, data or information as the Committee considers
desirable to carry out the terms of the Plan.
8.6. Liability and Indemnification of Committee. No member or authorized
delegate of the Committee shall be liable to any person for any action taken
or omitted in connection with the administration of the Plan unless
attributable to his own fraud or willful misconduct; nor shall the Company or
any Related Company be liable to any person for any such action unless
attributable to fraud or willful misconduct on the part of a director or
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employee of the Company or Related Company. The Committee, the individual
members thereof, and persons acting as the authorized delegates of the
Committee under the Plan, shall be indemnified by the Company against any and
all liabilities, losses, costs and expenses (including legal fees and
expenses) of whatsoever kind and nature which may be imposed on, incurred by
or asserted against the Committee or its members or authorized delegates by
reason of the performance of a Committee function if the Committee or its
members or authorized delegates did not act dishonestly or in willful
violation of the law or regulation under which such liability, loss, cost or
expense arises. This indemnification shall not duplicate but may supplement
any coverage available under any applicable insurance.
SECTION 9
CHANGE IN CONTROL
Except as otherwise provided in the Plan or in the agreement reflecting the
applicable Award, ten days prior to the occurrence of a Change in Control (i)
all outstanding Options and Stock Appreciation Rights shall become immediately
exercisable, (ii) all shares of Restricted Stock and Performance Stock shall
become fully vested, (iii) all vesting restrictions imposed under subsection
6.3 (relating to restrictions on shares purchased by Participants and matching
shares) shall cease to apply, and (iv) Performance Units may be paid out in
such manner and amounts as determined by the Committee; provided, however,
such vesting, lapse of restrictions and payments shall be contingent upon the
consummation of the Change in Control. For purposes of the Plan, a "Change in
Control" shall be deemed to occur on the earliest of the existence of one of
the following events:
(a) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 50% or more of either the then
outstanding shares of common stock of the Company entitled to vote
generally in the election of directors, but excluding, for this purpose,
any such acquisition by the Company or any of its subsidiaries, or any
employee benefit plan (or related trust) of the Corporation, or any
corporation with respect to which, following such acquisition, more than
50% of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the common stock and voting securities of the
Company immediately prior to such acquisition in substantially the same
proportion as their ownership, immediately prior to such acquisition, of
the then outstanding shares of common stock of the Company or the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors, as the case may
be;
(b) individuals who, as of the date hereof, constitute the Board (as of
the date hereof the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board, provided that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial
assumption of office is in connection with an actual or threatened
"election contest" relating to the election of the directors of the Company
(as such term is used in Rule 14a-11 of Regulation 14A promulgated under
the Exchange Act); or
(c) approval by the Company's shareholders of a reorganization, merger or
consolidation of the Company, in each case, with respect to which all or
substantially all of the individuals and entities who were the respective
beneficial owners of the common stock and voting securities of the Company
immediately prior to such reorganization, merger or consolidation do not,
following such reorganization, merger or consolidation, beneficially own,
directly and indirectly, more than 50% of, respectively, the then
outstanding shares of common stock or the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from
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such reorganization, merger or consolidation, or of a complete liquidation
or dissolution of the Company or of the sale or other disposition of all or
substantially all of the assets of the Company.
SECTION 10
AMENDMENT AND TERMINATION
The Board may, at any time, amend or terminate the Plan, provided that,
subject to subsection 7.4 (relating to certain adjustments to shares), no
amendment or termination may materially adversely affect the rights of any
Participant or beneficiary under any Award made under the Plan prior to the
date such amendment is adopted by the Board.
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APPENDIX A
AWARDS TO NONEMPLOYEE DIRECTORS
1. Eligible Directors. Each director of the Company who is not an employee
of the Company or Related Company and who does not own stock possessing more
than 3% of the total combined voting power of all classes of stock of the
Company (a "Nonemployee Director") shall be eligible for awards under this
Appendix A.
2. Option Award. Each individual who is a Nonemployee Director upon his or
her initial election or appointment to the Board shall be awarded an Option to
purchase 20,000 shares of Stock upon such initial election or appointment (an
"Initial Option"). Thereafter, on each subsequent anniversary of such election
or appointment, if the Nonemployee Director is then a member of the Board, the
Nonemployee Director shall be awarded an Option to purchase 10,000 shares of
Stock (an "Annual Option"). Nonemployee Directors who were first appointed to
the Board prior to the effective date of this Plan and received an Initial
Option under the Pacific Gateway Exchange, Inc. 1995 Stock Option Plan (the
"1995 Plan") shall be eligible for Annual Options under this Plan on the
anniversary of the Initial Option awarded under the 1995 Plan, to the extent
that the Company determines that Annual Awards will no longer be made under
the 1995 Plan.
3. Exercise Price. The exercise price per share with respect to an Option
awarded under this Appendix A shall be the Fair Market Value of a share of
Stock on the date such Option is awarded.
4. Vesting. Each Option granted under this Appendix A shall become
exercisable with respect to 25% of the shares awarded on the first anniversary
of the grant date, and with respect to an additional 25% of the shares awarded
on each subsequent anniversary of the grant date. All outstanding Options
awarded under this Appendix A shall become immediately exercisable upon a
Change in Control of the Company.
5. Expiration. The Expiration Date with respect to any Option awarded under
this Appendix A shall be the earliest to occur of:
(a) the ten-year anniversary of the date on which the Option is granted;
(b) if the Nonemployee Director's service on the Board terminates by
reason of death or Disability, the one-year anniversary of such termination
of service;
(c) if the Nonemployee Director's service on the Board terminates for any
reason other than death or Disability, the three-month anniversary of such
termination of service.
6. Other Terms and Conditions. Except as provided in this Appendix A, the
Option shall be subject to all of the terms and conditions of the Plan.
14
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC. 1997 PROXY
ANNUAL MEETING OF STOCKHOLDERS--MAY 16, 1997
LOGO THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Howard A. Neckowitz and Gail E. Granton, and
each of them, as proxies with full power of substitution, to vote all shares of
common stock which the undersigned has power to vote at the annual meeting of
stockholders (the "Annual Meeting") of Pacific Gateway Exchange, Inc. (the
"Company") to be held on May 16, 1997 at 10:00 a.m., pacific time, at the San
Francisco Airport Marriott, 1800 Old Bayshore Highway, Burlingame, California
94010, and at any adjournment thereof, in accordance with the instructions set
forth herein and with the same effect as though the undersigned were present in
person and voting such shares. The proxies are authorized in their discretion
to vote upon such other business as may properly come before the meeting.
THE DIRECTORS RECOMMEND A VOTE "FOR" ITEMS 1 THROUGH 6
NOTE:PLEASE COMPLETE SECTIONS 1(A)--(D) TO ELECT DIRECTORS WITH STAGGERED TERMS
IF ITEM 3 IS APPROVED OR OTHERWISE TO ELECT DIRECTORS FOR ONE A YEAR TERM.
1.(a)Election of the following directors to serve as Class I directors for a
term expiring at the 1998 annual meeting, contingent upon stockholders'
approval of item 3.
CHARLES M. DALFEN BARRY J. VOLANTE
[_] FOR all listed nominees [_] WITHHOLD AUTHORITY to vote for all
listed nominees
[_] LISTED NOMINEES except the following: (Instruction: To withhold
authority to vote for any individual nominee, write the name of such
nominee(s) on the line below.)
- --------------------------------------------------------------------------------
(b)Election of the following directors to serve as Class II directors for a
term expiring at the 1999 annual meeting, contingent upon stockholders'
approval of item 3.
GAIL E. GRANTON JAMES J. JUNEWICZ
[_] FOR all listed nominees [_] WITHHOLD AUTHORITY to vote for all listed
nominees
[_] LISTED NOMINEES except the following: (Instruction: To withhold
authority to vote for any individual nominee, write the name of such
nominee(s) on the line below.)
- --------------------------------------------------------------------------------
(c)Election of the following director to serve as a Class III director for a
term expiring at the 2000 annual meeting, contingent upon stockholders'
approval of item 3.
HOWARD A. NECKOWITZ
[_] FOR all listed nominees [_] WITHHOLD AUTHORITY to vote for all
listed nominees
[_] LISTED NOMINEES except the following: (Instruction: To withhold
authority to vote for any individual nominee, write the name of such
nominee(s) on the line below.)
- --------------------------------------------------------------------------------
(Continued, and to be signed and dated on reverse side)
(Continued from other side)
(d)Election of the following directors to serve for a one-year term expiring
at the 1998 annual meeting if the stockholders do not approve item 3.
HOWARD A. NECKOWITZ; GAIL E. GRANTON; CHARLES M. DALFEN; JAMES J. JUNEWICZ;
BARRY J. VOLANTE
[_] FOR all listed nominees [_] WITHHOLD AUTHORITY to vote for all
listed nominees
[_] LISTED NOMINEES except the following: (Instruction: To withhold
authority to vote for any individual nominee, write the name of such
nominee(s) on the line below.)
- --------------------------------------------------------------------------------
2. Approval of an amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of common stock, from Twenty Five
Million (25,000,000) shares to Fifty Million (50,000,000) shares and to
increase the number of authorized shares of preferred stock from One Million
(1,000,000) shares to Five Million (5,000,000) shares.
[_] FOR [_] AGAINST [_] ABSTAIN
3. Approval of an amendment to the Company's Certificate of Incorporation to
provide for the division of the Board of Directors into classes of directors
with staggered terms.
[_] FOR [_] AGAINST [_] ABSTAIN
4. Approval of an amendment to the Company's Certificate of Incorporation to
require all stockholder action to be taken at a meeting of stockholders.
[_] FOR [_] AGAINST [_] ABSTAIN
5. Approval of the Company's Long-
Term Incentive Plan.
[_] FOR [_] AGAINST [_] ABSTAIN
6. Approval of the selection of
Coopers & Lybrand L.L.P. as the
Company's independent auditors for
the fiscal year ending December 31,
1997.
[_] FOR [_] AGAINST [_] ABSTAIN
7. Transaction of such other
business as may properly come
before the Annual Meeting or any
adjournment thereof.
THIS PROXY WILL BE VOTED AS
DIRECTED. IF NO DIRECTION IS MADE,
IT WILL BE VOTED "FOR" ITEMS 1
THROUGH 6.
Dated __________, 1997
------------------------------------
Signature(s) of Stockholder(s)
------------------------------------
Signature if held jointly
PLEASE SIGN exactly as name appears
above. Joint owners should each
sign. Executors, administrators,
trustees, etc. should so indicate
when signing. If signer is a
corporation, please sign full name
by duly authorized officer.
