<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED September 30, 1997
COMMISSION FILE NUMBER 000-21043
PACIFIC GATEWAY EXCHANGE, INC.
------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 94-3134065
(State of Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)
533 Airport Blvd, Suite 505, Burlingame, California, 94010
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 375 6700
-------------
None
----
(Former Name, Former Address and
Former Fiscal Year if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of October 31, 1997, the number of the registrant's Common Shares of $.0001
par value outstanding was 18,830,590
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated condensed balance sheets as of
September 30, 1997 and December 31, 1996 1
Consolidated condensed statements of income
for the three-and nine-month periods ended
September 30, 1997 and 1996 2
Consolidated condensed statements of cash flows
for the nine-month periods ended
September 30, 1997 and 1996 3
Notes to consolidated condensed financial statements 4
Item 2: Management's discussion and analysis
of financial condition and results
of operations 6
Part II - OTHER INFORMATION
Item 1: Legal Proceedings 11
Item 2: Changes in Securities and Use of Proceeds 11
Item 3: Defaults upon Senior Securities 11
Item 4: Submission of matters to a vote of security holders 11
Item 5: Other information 11
Item 6: Exhibits and reports on Form 8-K 11
</TABLE>
<PAGE>
Item 1. Financial Statements
<TABLE>
<CAPTION>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
(Unaudited)
September 30, December 31,
1997 1996
----------- ----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 30,174 $ 45,563
Accounts receivable, net of allowance for doubtful accounts
of $3,508 in 1997 and $1,679 in 1996 54,055 25,145
Accounts receivable, related party 2,622 3,066
Prepaid expenses 843 729
Deferred income tax 1,442 1,184
Other current assets 427 --
--------- ---------
Total current assets 89,563 75,687
Property and equipment, net 52,824 27,636
Goodwill 596 --
Deposits and other assets 1,025 493
--------- ---------
Total assets $ 144,008 $ 103,816
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 64,889 $ 36,472
Accrued liabilities 3,431 1,304
Income taxes payable 1,282 2,493
Current portion of capitalized lease obligations 216 --
Other liabilities 644 367
--------- ---------
Total current liabilities 70,462 40,636
Long-term portion of capitalized lease obligations 240 --
Deferred income tax 1,375 708
--------- ---------
Total liabilities 72,077 41,344
--------- ---------
Stockholders' Equity:
Preferred stock, $.0001 par value, authorized
5,000,000 shares, no shares issued -- --
Common stock, $.0001 par value, authorized 25,000,000 shares,
issued 18,974,150 shares, outstanding 18,830,590 shares
in 1997 and issued 19,040,050 shares, outstanding 18,896,490
shares in 1996 2 2
Additional paid in capital 55,725 55,113
Retained earnings 16,551 7,757
Common stock held in treasury, at cost
(143,560 shares in 1997 and 1996) (400) (400)
Foreign currency translation 53 --
--------- ---------
Total stockholders' equity 71,931 62,472
--------- ---------
Total liabilities and stockholders' equity $ 144,008 $ 103,816
========= =========
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements
1
<PAGE>
<TABLE>
<CAPTION>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except net income per share)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ -----------------------
1997 1996 1997 1996
--------- ---------- --------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 76,087 $ 38,702 $ 183,015 $ 97,492
Revenues - related party 3,910 5,547 11,619 15,730
--------- --------- --------- ---------
Total revenues 79,997 44,249 194,634 113,222
Cost of long distance services 68,099 37,449 163,207 99,227
--------- --------- --------- ---------
Gross margin 11,898 6,800 31,427 13,995
Selling, general and administrative expenses 5,587 3,054 15,030 7,259
Depreciation 1,595 547 3,715 1,410
--------- --------- --------- ---------
Total operating expenses 7,182 3,601 18,745 8,669
--------- --------- --------- ---------
Operating income 4,716 3,199 12,682 5,326
Other income/(expense), net 162 (73) 330 (73)
Interest income/(expense), net 377 488 1,392 242
--------- --------- --------- ---------
Income before income taxes 5,255 3,614 14,404 5,495
Provision for income taxes 1,965 1,446 5,610 2,197
--------- --------- --------- ---------
Net income $ 3,290 $ 2,168 $ 8,794 $ 3,298
========= ========= ========= =========
Net income per share, primary
and fully diluted $ 0.17 $ 0.12 $ 0.45 $ 0.21
========= ========= ========= =========
Weighted average number of common shares
outstanding 19,663 18,586 19,656 15,655
========= ========= ========= =========
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------------
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Operating Activities:
Net Income $ 8,794 $ 3,298
Adjustments to net income:
Depreciation 3,715 1,410
Noncash items 84 --
Bad debts provision 1,829 705
Changes in operating assets and liabilities, net of
business acquisition:
Accounts receivable (30,113) (10,027)
Accounts receivable, related party 444 --
Prepaid expenses (26) --
Deferred tax asset (258) (74)
Deposits and other assets (959) (527)
Accounts payable 25,302 16,888
Accrued liabilities 2,127 (772)
Other liabilities 277 (138)
Deferred tax liability 667 --
Income taxes payable (1,385) 340
-------- --------
Net cash provided by operating activities 10,498 11,103
-------- --------
Investing Activities:
Purchase of property and equipment (26,483) (8,737)
Acquisition of business, net of cash acquired 222 --
-------- --------
Net cash used in investing activities (26,261) (8,737)
-------- --------
Financing Activities:
Proceeds from issuance of Common Stock -- 53,915
Repayments on revolving lines of credit, related party -- (5,420)
Repayments on capital lease obligations (154) --
Exercise of stock options 528 --
-------- --------
Net cash provided by financing activities 374 48,495
-------- --------
Net decrease in cash and cash equivalents (15,389) 50,861
Cash and cash equivalents at beginning of the period 45,563 1,792
-------- --------
Cash and cash equivalents at end of the period $ 30,174 $ 52,653
======== ========
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements
3
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) GENERAL
The financial statements included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and Securities Exchange Commission ("SEC") regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the financial statements reflect all adjustments (of a normal and
recurring nature) which are necessary to present fairly the financial position,
results of operations and cash flows for the interim periods. These financial
statements should be read in conjunction with the annual report on Form 10-K of
Pacific Gateway Exchange, Inc. (the "Company" or "Pacific Gateway") for the year
ended December 31, 1996. The results for the three and nine month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
(2) ACCOUNTING FOR INTERNATIONAL LONG DISTANCE TRAFFIC
The Company has entered into operating agreements with 37 telecommunications
carriers in 26 different countries under which international long distance
traffic is both delivered and received. Under these agreements, the foreign
carriers are contractually obligated to adhere to the policy of the Federal
Communications Commission (the "FCC"), whereby traffic from the foreign country
is routed to international carriers, such as the Company, in the same proportion
as traffic carried into the foreign country from the international carrier.
Mutually exchanged traffic between the Company and foreign carriers is settled
through a formal settlement policy that generally extends over a six-month
period at an agreed upon rate. The Company records the amount due to the
foreign partner as an expense in the period the traffic is delivered from the
foreign carrier. Of the agreements the Company had in service at September 30,
1997, 13 agreements provided that the Company generally must wait up to six
months before it actually receives the proportional return traffic. For these
agreements, the Company recognizes a loss in the period in which it sells to a
customer because the amount due to the foreign partner generally exceeds the
amount the Company charges its customers. As a result, a significant increase
in traffic with one or more of the carriers with which the Company must wait up
to six months to receive return traffic may cause the Company to report a net
loss in the accounting period in which such increase occurred. Historically,
when the return traffic is received in the future period, the Company generally
realizes a gross margin on the return traffic that, when combined with the prior
period loss on the outbound traffic, has resulted in a gross profit on the total
transaction. Although the Company can reasonably estimate the revenue it will
receive under the FCC's proportional share policy, there is no guarantee that
there will be traffic delivered back to the United States or what impact changes
in either future settlement rates or changes in foreign exchange rates will have
on net payments made and revenue received.
(3) ACQUISITIONS
The Company acquired 70% of the outstanding shares in Rustelnet. The
acquisition was accounted for by the purchase method and accordingly the results
of operations of the acquired business have been included in the accompanying
consolidated financial statements from the date of acquisition. The price was
$36,000 with Rustelnet having cash balances of $257,000 at the time. Rustelnet
is a provider of enhanced services to the Russian market. The fair value of net
liabilities acquired in the acquisition was $158,000. The excess of purchase
price over the estimated fair market value of $627,000 has been allocated to
goodwill. Goodwill is being amortized on a straight line basis over a 10 year
period.
4
<PAGE>
(4) NEW ACCOUNTING PRONOUNCEMENTS
In December 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which is effective for both the interim periods and annual periods
ending after December 15, 1997. SFAS No. 128 establishes standards for computing
and presenting earnings per share (EPS). This statement replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. The Company does not expect the
impact on the financial statements to be material.
On June 30, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for the reporting and display of
the comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating SFAS No. 130.
On June 30, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards
for the way that a public enterprise reports information about operating
segments in annual financial statements and segments in interim financial
reports issued to shareholders. SFAS No. 131 requires restatement of earlier
periods presented. Management is currently evaluating SFAS No. 131.
5
<PAGE>
Item 2: Management Discussion and Analysis of Financial Condition and Results of
Operations
This Quarterly Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including statements
regarding expected future revenue from delayed proportional return traffic from
foreign partners pursuant to certain operating agreements. Forward-looking
statements are statements other than historical information or statements of
current condition. Some forward looking statements may be identified by use of
such terms as "believes," "anticipates," "intends," or "expects." These
forward-looking statements relate to the plans, objectives and expectations of
the Company for future operations. In light of the risks and uncertainties
inherent in all future projections, the inclusion of forward-looking statements
in this report should not be regarded as a representation by the Company or any
other person that the objectives, plans or expectations of the Company will be
achieved. The Company's revenues and results of operations are difficult to
forecast and could differ materially from those projected in the forward-looking
statements as a result of numerous factors including the following: (i) changes
in international settlement rates; (ii) changes in the ratios between outgoing
and incoming traffic; (iii) foreign currency fluctuations; (iv) termination of
certain operating agreements or inability to enter into additional operating
agreements; (v) inaccuracies in the Company's forecast of traffic growth; (vi)
changes in or developments under domestic or foreign laws, regulations,
licensing requirements or telecommunication standards; (vii) foreign political
or economic instability; (viii) changes in the availability of transmission
facilities; (ix) loss of the services of key officers, such as Howard A.
Neckowitz, Chairman of the Board, President and Chief Executive Officer or Gail
E. Granton, Executive Vice President, International Business Development and
Secretary; (x) loss of a customer which provides significant revenues to the
Company; (xi) highly competitive market conditions in the industry; or (xii)
concentration of credit risk. The foregoing review of the important factors
should not be considered as exhaustive; the Company undertakes no obligation to
release publicly the results of any future revisions it may make to forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
The following table sets forth income statement data as a percentage of revenues
for the period indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ------------------------
1997 1996 1997 1996
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of long distance services 85.1% 84.6% 83.9% 87.6%
-------- -------- -------- --------
Gross margin 14.9% 15.4% 16.1% 12.4%
Selling, general and administrative
expenses 7.0% 6.9% 7.7% 6.4%
Depreciation 2.0% 1.2% 1.9% 1.2%
-------- -------- -------- --------
Total operating expenses 9.0% 8.1% 9.6% 7.7%
-------- -------- -------- --------
Operating income 5.9% 7.2% 6.5% 4.7%
Other income/(expense), net 0.2% -0.2% 0.2% -0.1%
Interest income/(expense), net 0.5% 1.1% 0.7% 0.2%
-------- -------- -------- --------
Income before income taxes 6.6% 8.2% 7.4% 4.9%
Provision for income taxes 2.5% 3.3% 2.9% 1.9%
-------- -------- -------- --------
Net income 4.1% 4.9% 4.5% 2.9%
======== ======== ======== ========
</TABLE>
6
<PAGE>
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996.
Revenues: Total revenues in the three months ended September 30, 1997
increased 81% to $80.0 million from $44.2 million in the three months ended
September 30, 1996. The increase was the result of several factors, including
an increase in the number of operating agreements to 37 at September 30, 1997
from 30 at September 30, 1996 and an increase in the number of customers to 115
at September 30, 1997 from 69 at September 30, 1996. As a result, total
minutes increased 76.8% from the three months ended September 30, 1996, while
the average price per minute charged to customers improved slightly to 29
cents in the three months ended September 30, 1997, compared to 28 cents in
the same quarter last year. Changes in the terminating country mix with
significantly different rates per minute, reductions in the rates received for
the traffic terminating in and transiting the U.S. and increases in the
incidental U.S. domestic terminating traffic are factors influencing the
average customer price per minute. During the third quarter (as in all prior
quarters), Pacific Gateway sent more minutes out than it received under its
operating agreements. Because the same rate is charged by the foreign carrier
to terminate calls in their country as the Company charges the foreign carrier
to terminate calls in the United States, declining rates have an adverse
effect on revenue and estimated return traffic revenue backlog, but, as a
result of sending more calls out than the Company receives, declining rates
improve the gross margin received on the entire transaction of a minute
delivered with such foreign carriers.
Gross margin: Gross margin increased 75.0% to $11.9 million in the three
months ended September 30, 1997 from $6.8 million in the three months ended
September 30, 1996. As a percentage of revenue, gross margin decreased from
15.4% in the prior period to 14.9% in the current period. The decrease in margin
resulted from costs associated with the significant increase in revenue and
higher fixed costs due to offshore start-ups and reconfiguring of the U.S.
network. The cost of long distance service increased to $68.1 million in the
three months ended September 30, 1997 from $37.4 million in the three months
ended September 30, 1996. This increase in costs represents growth in outbound
traffic on new and existing routes in advance of receiving proportional return
traffic, resulting in an increase in the estimated delayed proportional return
traffic backlog amount at September 30, 1997.
Selling General and Administrative Expenses: Selling, general and
administrative expenses as a percentage of revenues were 7.0% in the three
months ended September 30,1997, essentially unchanged from the same quarter last
year. Actual expenses increased 82.9% to $5.6 million in the three months ended
September 30, 1997 from $3.1 million in the three months ended September 30,
1996. This increase was due primarily to increased personnel and sales
commission expenses. The increase in personnel expenses was directly related to
the increase in employees to 71 at September 30, 1997 from 45 at September 30,
1996. The increase in sales commission expenses was primarily due to increased
revenues. Additionally, the UK and Russian offshore subsidiaries, the
international 800 and travel services programs, the retail marketing programs
and the New York technical center expansion are all currently in roll-out
phases.
Depreciation: Depreciation increased 191.6% to $1.6 million in the three
months ended September 30, 1997 from $0.5 million in the three months ended
September 30, 1996. Depreciation as a percentage of revenues was 2.0% of
revenue for the three months ended September 30, 1997 and 1.2% for the same
quarter last year. The increase in the dollar amount was primarily due to
depreciation of additional transmission facilities acquired since September 30,
1996.
Income Tax: Income taxes increased to $2.0 million in the three months ended
September 30, 1997 from $1.4 million in the three months ended September 30,
1996, primarily due to increased operating income. The effective tax rate was
40.0% in 1996 and 37.4% in 1997.
7
<PAGE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996.
Revenues: Total revenues in the nine months ended September 30, 1997
increased 71.9% to $194.6 million from $113.2 million in the nine months ended
September 30, 1996. The increase was primarily the result of both increased
sales to existing customers, due to an increase in the number of operating
agreements to 37 at September 30, 1997 from 30 at September 30, 1996, and an
increase in the number of customers to 115 at September 30, 1997 from 69 at
September 30, 1996.
Gross margin: Gross margin increased 124.6% to $31.4 million in the nine
months ended September 30, 1997 from $14.0 million in the nine months ended
September 30, 1996. As a percentage of revenue, gross profit increased from
12.4% in the prior period to 16.1% in the current period. This percentage
increase was primarily a result of an increase of 75.2% in the total minutes.
The cost of long distance service increased to $163.2 million in the nine
months ended September 30, 1997 from $99.2 million in the nine months ended
September 30, 1996.
Selling General and Administrative Expenses: Selling, general and
administrative expenses as a percentage of revenues increased from 6.4% in the
prior period to 7.7% in the current period. Actual expenses increased 107.1% to
$15.0 million in the nine months ended September 30, 1997 from $7.3 million in
the nine months ended September 30, 1996. This increase was due primarily to
increased personnel and sales commission expenses. The increase in personnel
expenses was directly related to the increase in employees to 71 at September
30, 1997 from 45 at September 30, 1996. The increase in sales commission
expenses was primarily due to increased revenues. Additionally, the UK and
Russian offshore subsidiaries, the international 800 and travel services
programs and the retail marketing programs are all currently in roll-out phases.
Depreciation: Depreciation increased 163.5% to $3.7 million in the nine months
ended September 30, 1997 from $1.4 million in the nine months ended September
30,1996. Depreciation as a percentage of revenues increased from 1.2% in the
prior period to 1.9% in the current period. The increase in dollar amount was
primarily due to depreciation of additional transmission facilities acquired
since September 30, 1996.
Income Tax: Income taxes increased to $5.7 million from $2.2 million,
primarily due to increased operating income. The effective tax rate was 40.0%
in 1996 and 38.9% in 1997.
Liquidity and Capital Resources
The Company has financed its rapid growth, including its capital expenditures,
through funds received in July 1996 from its initial public offering. The length
of the Company's accounts payable turnover is partially due to its accounts
payable with foreign partners, which generally have 180 day terms as a result of
the six month lag inherent in the international telecommunications service
settlement process.
Net cash provided by operating activities was $10.5 million for the nine months
ended September 30, 1997 and $11.1 million for the nine months ended September
30, 1996. This decrease was primarily a result of a decrease in accounts
payable, which exceeded the increases in accounts receivable.
Net cash used in investing activities was $26.3 million for the nine months
ended September 30, 1997 and $8.7 million for the nine months ended September
30, 1996. Substantially all of these expenditures were for the acquisition of
partial ownership interests in international fiber optic cable transmission
systems and related equipment.
Net cash provided by financing activities was $0.4 million for the nine months
ended September 30, 1997 and $48.5 million for the nine months ended September
30, 1996. A line of credit with a major shareholder was put in place in 1995,
but was repaid in the second quarter of 1996.
8
<PAGE>
At September 30, 1997, the Company had outstanding commitments of $16.5 million
for the acquisition of additional ownership in digital undersea fiber optic
cables and network equipment. The Company believes that the net proceeds from
the initial public offering in July 1996, together with cash provided by
operating activities and other existing sources of liquidity, will be sufficient
to meet its outstanding capital commitments and its expected capital
expenditures and working capital needs through the end of 1997. However, the
Company may raise additional funds through an equity offering or other financing
arrangements to fund growth opportunities that the Company's management
identifies may be beneficial to the Company.
Other Operating Data
The information set forth below illustrates management's estimate of the amount
of revenue derived from the proportional delayed return traffic which certain
carriers are contractually obligated to provide to the Company within six months
of the Company delivering certain outbound calls. See Note 2 to the Financial
Statements. The estimated delayed return traffic revenue is based on the
anticipated ratios between the outgoing and incoming traffic and anticipated
settlement rates. The information concerning estimated delayed return traffic
revenue backlog contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act
of 1934. The actual results and actual amounts of delayed return traffic
revenue could differ materially from the estimated amounts reflected herein as a
result of numerous factors, including, but not limited to, changes in
international settlement rates, changes in ratios between outgoing and incoming
traffic, foreign currency fluctuations, termination of certain operating
agreements and changes in U.S. tax law.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues received in current period
from delayed return traffic/1/ 2,882 4,535 13,672 10,677
Estimated delayed return traffic revenue
backlog at end of period/2/ 14,475 11,812/5/ 14,475 11,812/5/
Estimated delay return traffic revenue
backlog at end of preceding period/3/ 14,102 10,946 13,719 6,142
Increase (decrease) in estimated revenues
from delayed return traffic/4/ 373 866 756 5,670
</TABLE>
(1) Represents revenue recorded in the current period from certain of the
Company's operating agreements which require the Company to wait up to six
months to receive the return traffic. See Note 2 to the Financial
Statements.
(2) The amount as of the three and nine month periods ended September 30, 1997
and 1996 reflects management's estimate of the revenue to be received by
the Company from delayed return traffic during the six months ending March
31, 1997 and 1996, such estimate being based on the anticipated ratios
between outgoing and incoming traffic, anticipated settlement rates and
forecast foreign exchange rates.
9
<PAGE>
(3) To reflect the increase in delayed return traffic revenue for each
respective period, the information presented reflects, for the purpose of
computing such increase, the amount of the estimated return traffic
revenue for the preceding period.
(4) The increase in the amount of estimated delayed return traffic revenue
during the quarter and nine months ended June 30, 1997 and 1996, is (1)
for the quarter ended September 30, 1997, the difference between the
amount of estimated delayed return traffic revenue backlog at September
30, 1997 and June 30, 1997, (2) for the nine months ended September 30,
1997, the difference between the amount of estimated delayed return
traffic revenue backlog at September 30, 1997 and December 31, 1996, (3)
for the quarter ended September 30, 1996, the difference between the
amount of estimated delayed return traffic revenue backlog at September
30, 1996 and June 30, 1996 and (4) for the nine months ended September 30,
1996, the difference between the amount of estimated delayed return
traffic revenue backlog at September 30, 1996 and December 31, 1995. The
amount of the increase reflects management's estimate of such revenue
earned in the particular six month period, although not reported on the
Company's financial statements until up to six months later, under the
operating agreements which require the Company to wait up to six months
before such revenue is actually received pursuant to the contractual
obligation of foreign carriers to deliver such return traffic.
Historically the Company has realized an after tax net margin of
approximately 50% on the amount of such revenues when these are received.
(5) At the end of each quarter, the Company determines the actual amount of
delayed return traffic revenue received for each preceding six month
period and uses this actual amount as the "estimated" return traffic
backlog for the period ending six months earlier. As a result, in each
current quarter and the immediately preceding quarter, the amounts
represent estimates. However, in the preceding comparison period, the
delayed return backlog represents the amount that the Company actually
received in the ensuing six months.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended June
30, 1997. The Exhibits filed as part of this report are listed below:
11 Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC GATEWAY EXCHANGE, INC.
Dated: November 14, 1997
By: /s/ Howard A. Neckowitz
-------------------------------
Howard A. Neckowitz
President and CEO
(Authorized Signatory)
By: /s/ Sandra Grey
-------------------------------
Sandra Grey
Chief Financial Officer
(Principal Financial and Accounting Officer)
12
<PAGE>
<TABLE>
<CAPTION>
PACIFIC GATEWAY EXCHANGE
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(in thousands, except net income per share)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ----------------------
1997 1996 1997 1996
------- ------- ------- ----------
<S> <C> <C> <C> <C>
COMPUTATION OF EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE:
Average Shares Outstanding
18,938 18,173 18,938 15,410
Add:
Common stock equivalent of stock
options and warrants
725 413 718 245
------- ------- ------- ----------
19,663 18,586 19,656 15,655
======= ======= ======= ==========
Net income
$ 3,290 $ 2,168 $ 8,794 $ 3,298
======= ======= ======= ==========
Primary net income per share
$ 0.17 $ 0.12 $ 0.45 $ 0.21
======= ======= ======= ==========
COMPUTATION OF EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE
ASSUMING FULL DILUTION:
Average shares outstanding 18,938 18,173 18,938 15,410
Add:
Common stock equivalent of stock
options and warrants
759 413 795 245
======= ======= ======= ==========
19,697 18,586 19,733 15,655
======= ======= ======= ==========
Net income
$ 3,290 $ 2,168 $ 8,794 $ 3,298
======= ======= ======= ==========
Fully diluted net income per share $ 0.17 $ 0.12 $ 0.45 $ 0.21
======= ======= ======= ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 30,174
<SECURITIES> 0
<RECEIVABLES> 54,055
<ALLOWANCES> 3,508
<INVENTORY> 0
<CURRENT-ASSETS> 89,563
<PP&E> 60,275
<DEPRECIATION> 7,451
<TOTAL-ASSETS> 144,008
<CURRENT-LIABILITIES> 70,462
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 71,929
<TOTAL-LIABILITY-AND-EQUITY> 144,008
<SALES> 194,634
<TOTAL-REVENUES> 194,634
<CGS> 163,207
<TOTAL-COSTS> 163,207
<OTHER-EXPENSES> (330)
<LOSS-PROVISION> 1,829
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,404
<INCOME-TAX> 5,610
<INCOME-CONTINUING> 8,794
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,794
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
