<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 Materials Pursuant to (S)240.14a-11(c) or (S)240.14a-12
PACIFIC GATEWAY EXCHANGE, INC.
(Name of Registrant as Specified In Its Charter)
PACIFIC GATEWAY EXCHANGE, INC.
(Name of Person(s) Filing Proxy Statement
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rule 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transactions applies:
2) Aggregate number of securities to which transactions applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined).
4) Proposed maximum aggregate value of transaction:
5) Total Fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
[LOGO OF PACIFIC GATEWAY EXCHANGE, INC.]
PACIFIC GATEWAY EXCHANGE, INC.
533 AIRPORT BOULEVARD, SUITE 505
BURLINGAME, CALIFORNIA 94010
(650) 375-6700
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 19, 1998
----------------
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, June 19, 1998, 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 two persons to the Company's Board of Directors;
(2) To consider and vote upon a resolution (which is attached as Exhibit A
to the accompanying Proxy Statement) to amend Article III of the
Company's Restated Certificate of Incorporation to increase the number
of authorized shares of Common Stock from Fifty Million (50,000,000) to
Seventy Million (70,000,000) shares;
(3) To approve the selection of Coopers & Lybrand L.L.P. as the Company's
independent auditors for the fiscal year ending December 31, 1998; and
(4) 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 April 24, 1998 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 for the fiscal year ended December
31, 1997 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
June 1, 1998
<PAGE>
[LOGO OF PACIFIC GATEWAY EXCHANGE, INC.]
PACIFIC GATEWAY EXCHANGE, INC.
533 AIRPORT BOULEVARD, SUITE 505
BURLINGAME, CALIFORNIA 94010
(650) 375-6700
----------------
1998 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, June 19, 1998, 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 June 2, 1998.
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
April 24, 1998, the Company had outstanding 19,114,111 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 April 24, 1998 (the "Record Date"), are entitled to notice of
and to vote at the Annual Meeting or any adjournment(s) thereof. Each share of
Common Stock is coupled with a right to acquire Series A Junior Participating
Preferred Stock.
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 Restated Certificate of Incorporation to increase
the number of authorized shares of Common Stock from Fifty Million
(50,000,000) to Seventy Million (70,000,000) shares, (3) 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, 1998, and (4) 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 the proposed amendment to the
Company's Restated 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
<PAGE>
selection of Coopers & Lybrand as the Company's independent auditors for the
fiscal year ending on December 31, 1998 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 Restated Certificate of Incorporation 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 or to approve
the selection of Coopers & Lybrand. Broker non-votes will have the same effect
as a vote against the proposal to amend the Company's Restated 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 $3,000 plus reasonable expenses.
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Board of Directors consists of five persons. The Company's
Restated Certificate of Incorporation provides that the Company's Board of
Directors shall be divided into three classes with the terms of office of each
class ending in successive years. The Board of Directors has nominated Charles
M. Dalfen and Barry J. Volante, both of whom are current directors of the
Company with terms expiring at the Annual Meeting, to election as directors
with a term expiring at the 2001 Annual Meeting.
It is the intention of the persons named as proxies, subject to any
direction to the contrary, to vote in favor of the candidates nominated by the
Board of Directors. Each of these nominees has indicated his 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 proxy-holder for such person or persons as may be designated by the Board,
unless the stockholder has directed otherwise.
2
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THESE NOMINEES
AS DIRECTORS OF THE COMPANY.
Set forth below is certain information with respect to the nominees for
directors and the other current directors of the Company:
CURRENT BOARD OF DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- ----------
<C> <C> <S>
Chairman, President, Chief Executive Officer
Howard A. Neckowitz....... 44 and Director
Gail E. Granton........... 42 Executive Vice President, International
Business Development, Secretary and Director
Charles M. Dalfen......... 55 Director
James J. Junewicz......... 47 Director
Barry J. Volante.......... 63 Director
</TABLE>
NOMINEES SEEKING REELECTION
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").
Barry J. Volante has served as a member of the Board of Directors since May
1997. He is currently Chief Executive Officer and President of Asset Channels,
Inc., a consulting company engaged in the business of telecommunications
finance and technology evaluation. He served as Vice President--
Telecommunications Finance of General Electric Capital Corporation ("GECC")
from 1994 to 1997. 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.
DIRECTORS WHOSE TERMS OF OFFICE WILL CONTINUE AFTER THIS MEETING
Howard A. Neckowitz has served as President, Chief Executive Officer and
Chairman of the Board of the Company since its inception in August 1991. Mr.
Neckowitz previously served as a consultant to major U.S. and overseas
telecommunications companies with respect to valuation and due diligence
processes for the acquisition of ongoing foreign telecommunications operations
and the start-up of competitive carrier operations for international, long
distance, local and cellular operations in various countries. Prior to his
consulting experience, Mr. Neckowitz served from 1982 to 1986 as Director,
International Services, at GTE Sprint, where he founded and developed GTE
Sprint's international services operation. In this position he was responsible
for feasibility analyses supporting GTE Sprint's entrance into the
international switched service market. From 1977 to 1982, Mr. Neckowitz worked
at AT&T in its Overseas Department.
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
processes 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.
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, Mr. Junewicz served as Assistant General Counsel of the United States
Securities and Exchange Commission in Washington, D.C.
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, 1997 ("fiscal 1997"), the Board met 11 times and on 1 occasion acted by
unanimous written consent. In fiscal 1997, the Audit Committee met 1 time and
the Compensation Committee met 8 times. During fiscal 1997, 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).
All of the directors of the Company are members of the Compensation
Committee. Mr. Dalfen and Mr. Volante act as Co-chairman of the Compensation
Committee. The Compensation Committee generally establishes the salaries,
benefits and overall compensation of the officers and employees of the Company
and administers any employee benefit plans of the Company. A subcommittee of
the Compensation Committee, consisting solely of outside directors within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, administers
the Company's 1997 Long-Term Incentive Plan and periodically grants options
and other equity-based awards to employees, directors or other individuals
providing services to the Company pursuant to the 1997 Long-Term Incentive
Plan.
Messrs. Charles Dalfen, Barry Volante and James Junewicz are the current
members of the Audit Committee. Mr. Junewicz acts as Chairman of the Audit
Committee. 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 Securities and Exchange 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 1997, Forms 5
furnished with respect to fiscal 1997, and certain written representations
received by the Company from certain reporting persons in regard to filing
requirements, the Company has determined that Robert F. Craver and Ms. Granton
each did not timely file a Form 4 for the month of May. 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 April 29, 1998
(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 April 29, 1998 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 April 29,
1998 as a group.
<TABLE>
<CAPTION>
PERCENTAGE
SHARES OF OF
COMMON STOCK OUTSTANDING
BENEFICIALLY SHARES
OWNED(1) OWNED(1)
------------ -----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Howard A. Neckowitz(2)................................ 3,922,948 20.4%
Gail E. Granton(3).................................... 867,494 4.5%
Charles M. Dalfen(4).................................. 16,000 *
James J. Junewicz(5).................................. 15,000 *
Barry J. Volante(6)................................... 5,000 *
Ronald D. Anderson(7)................................. 184,245 *
Robert F. Craver(8)................................... 139,295 *
Fred A. Weismiller(9)................................. 105,810 *
All directors and executive officers as a group (9 4,443,574 23.0%
persons)(10).........................................
ADDITIONAL 5% STOCKHOLDERS
Ronald Jensen(11)..................................... 1,230,760 6.4%
United Insurance Companies, Inc.
5215 North O'Connor Boulevard
Suite 300
Irving, Texas 75039
KDD America, Inc.(12)................................. 1,800,000 9.4%
201 3rd Street, Suite 911
San Francisco, California 94103
Nicholas-Applegate Capital Management(13)............. 1,103,600 5.8%
600 West Broadway, 29th Floor
San Diego, California 92101
Pilgrim Baxter & Associates, Ltd.(14)................. 1,136,600 5.9%
825 Duportail Road
Wayne, Pennsylvania 19087
</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 April 29,
1998 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.
(2) Includes 1,330,760 shares held by Ronald L. Jensen and the Ronald L.
Jensen Foundation Charitable Trust 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
5
<PAGE>
voluntary resignation, termination for cause, long-term disability,
physical incapacity or death. In addition, Mr. Neckowitz believes that he
has been promised proxies to vote all shares held by Mr. Jensen's adult
children, which would include approximately 1,540,680 shares. Also
includes (1) 23,141 shares held by the Genisis Foundation, a charitable
trust of which Mr. Neckowitz is a co-trustee, (2) 119,640 shares held by
Mr. Neckowitz's wife, (3) 96,045 shares held by the Howard A. and Cheryl
Neckowitz 1997 Trust of which Mr. Neckowitz is co-trustee, (4) 812,318
shares held by Gail Granton and (5) 14,000 shares held by the Granton
Foundation. The shares held by the Genisis Foundation, Mr. Neckowitz's
wife, the Howard A. Neckowitz and Cheryl Neckowitz 1997 Trust, Ms. Granton
and the Granton Foundation are subject to an irrevocable proxy granting
Mr. Neckowitz the right to vote such shares. Also includes 88,235 shares
issuable upon the exercise of stock options that are either currently
exercisable or will be exercisable by June 28, 1998.
(3) Includes 14,000 shares held by the Granton Foundation, a charitable trust
of which she is the trustee. Ms. Granton has granted an irrevocable proxy
to Mr. Neckowitz to vote the shares owned by Ms. Granton and the Granton
Foundation. Also includes 41,176 shares issuable upon the exercise of
stock options that are either currently exercisable or will be
exercisable by June 28, 1998.
(4) Includes 15,000 shares issuable upon the exercise of stock options that
are either currently exercisable or will be exercisable by June 28, 1998.
(5) Represents shares issuable upon the exercise of stock options that are
either currently exercisable or will be exercisable by June 28, 1998.
(6) Represents shares issuable upon the exercise of stock options that are
either currently exercisable or will be exercisable by June 28, 1998.
(7) Includes 25,625 shares issuable upon the exercise of stock options that
are either currently exercisable or will be exercisable by June 28, 1998.
(8) Includes 26,250 shares issuable upon the exercise of stock options that
are either currently exercisable or will be exercisable by June 28, 1998.
(9) Includes 96,660 shares held by the Weismiller Family Trust of which Mr.
Weismiller is co-trustee. The shares held by the Weismiller Family Trust
are subject to an irrevocable proxy granting Mr. Weismiller the right to
vote such shares. Also includes 9,150 shares issuable upon the exercise
of stock options that are either currently exercisable or will be
exercisable by June 28, 1998.
(10) Information provided is for the individuals who were directors and
executive officers of the Company on April 29, 1998 and includes 238,936
shares issuable upon the exercise of stock options that are either
currently exercisable or will be exercisable by June 28, 1998.
(11) Excludes shares held by Mr. Jensen's adult children Julie J. Jensen,
Jeffrey J. Jensen, Janet J. Jensen, James J. Jensen and Jami J. Jensen
and by certain trusts and foundations of which Mr. Jensen's adult
children are trustees. Mr. Jensen's adult children beneficially owned an
aggregate of 3,570,375 shares as of December 31, 1997 as reported on
Schedule 13G as filed with the Securities and Exchange Commission on
February 13, 1998. The Company's transfer agent reports that, as of April
27, 1998, Mr. Jensen's adult children (including shares owned by
affiliated foundations) were the record owners of 1,540,680 shares. As
reported on Schedule 13G, Mr. Jensen disclaims beneficial ownership of
all shares beneficially owned by his adult children. Also excludes shares
held by certain employees of companies associated with Mr. Jensen and
100,000 shares held by the Ronald L. Jensen Foundation Charitable Trust.
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.
(12) Share ownership current as of December 31, 1997 as reported on Schedule
13G filed with the Securities and Exchange Commission on March 23, 1998.
(13) Share ownership current as of December 31, 1997 as reported on Schedule
13G filed with the Securities and Exchange Commission on February 3,
1998.
(14) Share ownership current as of December 31, 1997 as reported on Schedule
13G filed with the Securities and Exchange Commission on February 12,
1998.
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>
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
----------------- -------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL YEAR ENDED STOCK UNDERLYING
POSITION DECEMBER 31 SALARY BONUS AWARDS OPTIONS (#)
- ------------------ ----------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Howard A. Neckowitz..... 1997 $300,000 $275,000 $4,134,375(1) 500,000
Chairman, President and 1996 $295,000 -- -- --
Chief Executive Officer 1995 $240,000 $ 17,528 -- 141,176
Gail E. Granton......... 1997 $160,000 $125,000 -- 225,000
Executive Vice
President, 1996 $159,167 -- -- --
International Business
Development, 1995 $144,167 $ 10,711 -- 65,882
Secretary and Director
Ronald D. Anderson...... 1997 $124,992 $100,000 -- 120,000
Senior Vice President, 1996 $123,744 -- -- --
Operations and
Engineering 1995 $119,167 $ 10,711 -- 41,000
Robert F. Craver........ 1997 $150,000 $ 39,961 -- 40,000
Senior Vice President, 1996 $148,750 $100,000 -- 10,000
International Relations 1995 $142,500 $ 37,500 -- 35,000
Fred A. Weismiller...... 1997 $137,800 $ 49,330 -- 40,000
Executive Vice
President, 1996 $137,800 -- -- --
International Marketing 1995 $137,800 $ 1,000 -- 14,640
</TABLE>
- --------
(1) The value of the restricted stock award was determined by multiplying the
number of shares awarded to Mr. Neckowitz (75,000) by the closing price of
the Company's common stock on NASDAQ on December 30, 1997 ($55.125), the
date of the award. The restricted stock vests at a rate of 10% per year
and all restricted stock becomes 100% vested upon a change in control,
death, disability or termination of employment by the Company for reasons
other than cause.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to options granted
to the Named Executive Officers during 1997:
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
OPTIONS TOTAL OPTIONS APPRECIATION
AWARDED IN AWARDED TO EXERCISE OR FOR OPTION TERM
FISCAL EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME 1997 FISCAL 1997 ($/SH) DATE 5% 10%
---- ---------- ------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Howard A. Neckowitz..... 500,000 31% $50.188 12/30/07 $18,733,853 $44,694,533
Gail E. Granton......... 225,000 14% $38.500 11/24/07 $11,060,034 $22,742,339
Ronald D. Anderson...... 120,000 8% $38.500 11/24/07 $ 5,898,685 $12,129,248
Robert F. Craver........ 40,000 3% $38.500 11/24/07 $ 1,966,228 $ 4,043,083
Fred A. Weismiller...... 40,000 3% $38.500 11/24/07 $ 1,966,228 $ 4,043,083
</TABLE>
7
<PAGE>
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning exercisable and
unexercisable stock options at December 31, 1997 for the Named Executive
Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS AT
END (#) FISCAL YEAR END ($)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Howard A. Neckowitz........ 79,412 562,304 $4,273,398 $30,259,265
Gail E. Granton............ 37,059 197,941 $1,994,256 $10,651,799
Ronald D. Anderson......... 23,063 96,937 $1,241,089 $ 5,216,471
Robert F. Craver........... 23,438 61,562 $1,261,269 $ 3,312,836
Fred A. Weismiller......... 8,235 46,405 $ 443,150 $ 2,497,192
</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.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
During 1997, the Company had employment agreements in effect 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. New employment agreements have been executed with
each of these individuals, effective January 1, 1998, as described below. As
discussed in the Report of the Compensation Committee of the Board of
Directors on Executive Compensation, the Company retained a professional
consultant to provide advice regarding compensation of executives at
comparable companies and to generally advise the Compensation Committee. This
consultant reviewed the new employment agreements and found them to be fair
and reasonable.
The Company has entered into an agreement with Howard A. Neckowitz,
effective January 1, 1998, pursuant to which he is to serve as President and
Chief Executive Officer of the Company, and, subject to election, as a
director and Chairman of the Board. The agreement provides for an annual base
salary of $600,000 (which may be increased pursuant to an annual review by the
Compensation Committee); an annual discretionary cash bonus to be determined
by the Compensation Committee; options to purchase 500,000 shares at $50.1875
per share; $3,000,000 of life insurance; participation in the Company's
benefit plans on the same terms as provided to the Company's other senior
management employees; the right to receive certain executive perquisites (such
as club memberships); and reimbursement of reasonably incurred legal expenses
in connection with negotiation and preparation of his employment arrangements.
The employment agreement is for a five-year term, and is automatically
extended for 24-month periods unless notice of non-renewal is provided by
either party at least 90 days prior to the end of the employment term.
Under the new employment agreement, Mr. Neckowitz also is entitled to
receive on each of December 30, 1998 and December 30, 1999 options to purchase
500,000 shares of the Company's Common Stock at the market price in effect on
such dates. Such options shall fully vest upon termination of his employment
for reasons other than Cause (as defined in the agreement), resignation for
Good Reason (as defined in the agreement) or non-renewal of employment and
shall be exercisable for one year thereafter. In the event of a Change in
Control (as described below), a termination of Mr. Neckowitz's employment by
the Company for reasons other than Cause, or the resignation of Mr. Neckowitz
for Good Reason, prior to the granting of one or both of the above-referenced
stock options, Mr. Neckowitz shall receive in lieu of such option or options
cash in the amount of the excess of the fair market value of a share of the
Company's Common Stock on the date of the Change in Control or such separation
over $50.1875 multiplied by 1,000,000 (if the Change in Control or such
separation occurs before December 30, 1998) or by 500,000 (if the Change in
Control or such separation occurs on or after December 30, 1998 and before
December 30, 1999).
8
<PAGE>
If Mr. Neckowitz is terminated by the Company for reasons other than Cause
and not on account of death or disability or resigns for Good Reason, then he
shall receive a severance payment equal to the sum of three years salary and
annual cash bonuses (the "Severance Payment"), payable in equal monthly
amounts over a three-year period, as well as payment by the Company of his
group-health premiums for such time period that Mr. Neckowitz or any of his
dependents is eligible for and elects COBRA continuation coverage. Mr.
Neckowitz shall also become fully vested in the 75,000 shares of restricted
stock granted to him by the Company on December 30, 1997. Upon termination of
employment on account of death or disability, Mr. Neckowitz (or his estate) is
generally entitled to payments of salary for 90 days thereafter, payment by
the Company of his group-health premiums for such time period that Mr.
Neckowitz or any of his dependents is eligible for and elects COBRA
continuation coverage and a pro rata bonus payment. If the Company undergoes a
Change in Control, Mr. Neckowitz shall receive from the Company, without
regard to whether his employment terminates in connection with such Change in
Control, a lump sum payment equal to the Severance Payment described above in
lieu of such Severance Payment. Mr. Neckowitz shall be entitled to
reimbursement from the Company for any excise tax (including any additional
taxes resulting from such reimbursement) incurred on account of compensation
payable pursuant to a Change in Control. Mr. Neckowitz's employment agreement
also imposes upon him certain obligations of confidentiality.
Pursuant to a restricted stock agreement dated December 30, 1997, Mr.
Neckowitz was awarded 75,000 restricted shares of the Company's Common Stock.
Subject to certain conditions and exceptions, the restrictions on such
restricted shares expire as to 10% of such shares each year, provided,
however, that in the event of Mr. Neckowitz's death, total disability,
termination for reasons other than Cause or resignation for Good Reason or in
the event of a Change in Control, Mr. Neckowitz shall become vested in the
restricted shares as of such date.
New employment agreements between the Company and Gail Granton, Ronald D.
Anderson, Fred A. Weismiller and Robert F. Craver provide for annual base
salaries of $200,000, $175,000, $145,000 and $165,000, respectively (which may
be increased pursuant to an annual review); an annual discretionary cash bonus
determined by the President and based on the performance of the executive, the
performance of the Company and other relevant factors; and participation in
the Company's benefit plans on the same terms as provided to the Company's
other senior management employees. Ms. Granton's and Mr. Anderson's employment
agreements are for three-year terms, while Mr. Weismiller's and Mr. Craver's
are for two-year terms. At the end of their respective terms, each employment
agreement is automatically extended for 12-month periods, unless notice of
non-renewal is provided by either party at least 90 days prior to the end of
the employment term. Under the respective employment agreements, if employment
is terminated by the Company for any reason other than Cause (and not on
account of death, disability, voluntary resignation or mutual agreement) or if
the executive resigns for Good Reason, then the executive shall, subject to
certain limited exceptions, receive a severance payment equal to 18 months
salary (for Ms. Granton and Mr. Anderson) or six months salary (for Messrs.
Weismiller and Craver), and any unvested options held by the executive at such
time shall fully vest (and for Ms. Granton, her outstanding options shall
fully vest in the event of non-renewal of her agreement) and shall be
exercisable for the period after termination as specified for vested options
as stated in the option agreement. Termination of employment on account of
voluntary resignation, mutual agreement or Cause generally relieves the
Company of any obligation to make future payments or provide future benefits
to the executive, while termination of employment on account of death or
disability would entitle the executive officer (or his or her estate) to
payments of salary generally for a 30-day period.
Under the employment agreements between the Company and Messrs. Anderson,
Weismiller and Craver, if the Company undergoes a Change in Control and within
two years thereafter the Company terminates the executive for reasons other
than Cause or the executive terminates his employment for Good Reason, then
the executive shall be entitled to receive a lump sum payment equal to 18
months salary (for Mr. Anderson) or six months salary (for Messrs. Weismiller
and Craver). Upon a Change in Control, Ms. Granton shall, however, receive,
without regard to whether her employment terminates in connection with such
Change in Control, a lump sum payment equal to 18 months salary. Any such
payment made to Ms. Granton shall be in lieu of any severance payment
otherwise payable to her and she shall be entitled to reimbursement from the
Company for any excise tax (including any additional taxes resulting from such
reimbursement) incurred on account of compensation payable pursuant to a
Change in Control. The employment agreements between the Company and
9
<PAGE>
Ms. Granton and Messrs. Anderson, Weismiller and Craver also impose upon each
of them obligations of confidentiality, while Messrs. Anderson, Weismiller and
Craver's employment agreements also impose certain limited obligations not to
compete against the Company.
As used in the new employment agreements, "Change in Control" means the
earliest to occur of any one of the following events: (1) any person (with
certain limited exceptions) becomes the beneficial owner of 25% or more of the
Company's voting stock; (2) the majority of the Board of Directors does not
consist of individuals who are Incumbent Directors, which term means the
members of the Board as of January 1, 1998; provided that any person becoming
a director subsequent to such date whose election or nomination for election
was supported by three-quarters of the directors who then comprised the
Incumbent Directors shall be considered to be an Incumbent Director; (3) the
Company adopts a liquidation plan; (4) the merger or sale of substantially all
of the assets of the Company (unless proportional ownership of the Company's
stock does not change); or (5) the Company combines with any other company and
is the surviving corporation but the shareholders of the Company immediately
prior thereto own less than 50% of the voting stock.
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
Compensation decisions are made by the Compensation Committee which consists
of the directors of the Company. Mr. Neckowitz and Ms. Granton do not vote on
their respective compensation. Mr. Junewicz has abstained from voting on
compensation issues relating to Mr. Neckowitz and Ms. Granton due to his law
firm's representation of the Company. Grants under the Long-Term Incentive
Plan are made by a subcommittee of the Compensation Committee consisting of
Mr. Dalfen and Mr. Volante in consultation with the other directors, Company
management and, this year, with the consultant retained by the Company. All
directors concurred on the awards under the Long-Term Incentive Plan made by
the subcommittee (other than awards granted to that director).
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS 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 the personal financial interests of
its executives with the financial interests of stockholders in an effort to
maximize stockholder value.
The Compensation Committee of the Board of Directors and, where applicable,
the subcommittee of outside directors, sets executive compensation, including
adjustments to base salaries, bonuses and grants of equity-based awards. The
Compensation Committee bases its determinations of overall executive
compensation, which 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 bases
executive compensation on financial performance criteria, including the
Company's financial performance and the price of the Company stock, in the
context of the telecommunication industry as well as the economy in general.
All directors of the Company sit on the Compensation Committee of the Board
of Directors. However, Mr. Neckowitz and Ms. Granton do not vote on their
respective compensation. In addition, because of the relationship of Mr.
Junewicz's law firm with the Company, Mr. Junewicz abstains from voting on
matters voted upon by the Compensation Committee relating to the compensation
of Mr. Neckowitz and Ms. Granton. A subcommittee of the Compensation Committee
consisting of Mr. Dalfen and Mr. Volante makes awards under the Company's
Long-Term Incentive Plan, including stock options and restricted stock awards
in consultation with the other directors, Company management and, this year,
with the consultant retained by the Company. All directors concurred on the
awards under the Long-Term Incentive Plan made by the subcommittee (other than
awards granted to that director).
During 1997, the salary of the Company's executive officers including Mr.
Neckowitz was generally set pursuant to employment agreements. See "Summary
Compensation Table", as discussed in "Employment Contracts, Termination of
Employment and Change-in-Control Arrangements". The contracts for Mr.
Neckowitz, Ms. Granton, Mr. Anderson, Mr. Craver and Mr. Weismiller have been
superseded with new employment contracts.
10
<PAGE>
During 1997, the Company retained a professional consultant to research
executive compensation levels of similar companies and to advise the Board of
Directors. The corporations against which the Company compared the
compensation of its executives are not necessarily those included in the
indices used to compare stockholder return in the stock performance graph. As
a result of this review of executive compensation, in 1998 the Company entered
into new employment agreements with certain executive officers, including the
Named Executive Officers. In determining appropriate compensation levels for
key executive officers, including Mr. Neckowitz, the Compensation Committee
focused heavily on the financial and operating performance of the Company and
on the performance of the Company's Common Stock, which increased from $12 at
the time of the initial public offering in 1996 to a high of $55.125 in 1997
as well as on the compensation levels of top executives at other high-
performing companies, both in the telecommunications industry and in other
industries. The performance of the Company's stock significantly exceeds the
performance of the market as a whole as well as that of telecommunications
companies as reflected by certain indices. The Compensation Committee believes
that top management deserves the credit for this stock price increase and
deserves to be compensated accordingly. In particular, the Compensation
Committee approved the new contract for Mr. Neckowitz because the Committee
believed that Mr. Neckowitz is largely responsible for the increases in the
Company's revenue and net income during the period of this stock price
increase and that the continuation of Mr. Neckowitz's services are essential
to the future success of the Company. The new agreements ensure that the
Company and its shareholders will have the benefit of the services of top
management for the terms of the new agreements, which are five years for Mr.
Neckowitz, three years for Ms. Granton and Mr. Anderson and two years for
Messrs. Craver and Weismiller. The consultant reviewed the new employment
agreements and concluded that they were fair and reasonable. For a further
description of the new employment contracts, see "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements".
The Company believes that equity-based compensation is an effective way of
aligning executive compensation with increases in stockholder value. The
Company uses the Long-Term Incentive Plan in order to attract and retain
employees and other service providers and to identify such individuals with
the Company's stockholders through the use of equity-based compensation. The
Compensation Committee believes that option grants align executive interests
with stockholders interests by providing a direct link between compensation
and stockholder returns. The Compensation Committee believes that option
grants pursuant to the Long-Term Incentive Plan helps retain key executives in
highly competitive market for executive talent in the telecommunications
industry.
The Long-Term Incentive Plan authorizes the grant of options and other
awards, including restricted stock, to executives. Grants may be made from
time to time. Awards in 1997 were made based on various subjective factors,
including individual performance contributions and expected future
contributions as determined by the subcommittee. In making awards in 1997, the
subcommittee of the Compensation Committee gave considerable weight to
management's contributions to increased stock price.
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 1997. 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 Compensation Committee of the Board
of Directors:
Howard A. Neckowitz
Gail E. Granton
Charles M. Dalfen
James J. Junewicz
Barry J. Volante
11
<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,
1997. 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>
NASDAQ
PACIFIC GATEWAY TELECOMMUNICATIONS NASDAQ MARKET INDEX
EXCHANGE, INC. INDEX U.S. COMPANIES
--------------- ------------------ -------------------
<S> <C> <C> <C>
7/19/96 100.00 100.00 100.00
9/30/96 231.37 108.00 113.68
12/31/96 286.27 108.16 119.26
3/31/97 196.08 100.53 112.8
6/30/97 221.57 126.19 133.48
9/30/97 306.86 146.49 156.06
12/31/97 422.06 159.76 146.36
</TABLE>
ASSUMES $100 INVESTED ON JULY 19, 1996
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 1997
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
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, 1,330,760 shares on April 29, 1998, 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.
Mr. Neckowitz, Ms. Granton and Mr. Anderson beneficially own an aggregate of
approximately 3.8% of the outstanding stock of AvTel Communication, Inc.
("AvTel"). In addition, Ronald Jensen, the beneficial holder of 6.4% of the
Company's stock, beneficially owns 22.3% of the outstanding stock of AvTel,
according to AvTel's proxy statement filed with the Securities and Exchange
Commission on April 27, 1998. According to
12
<PAGE>
Avtel's proxy statement, Mr. Jensen's adult children are also significant
stockholders of AvTel owning an aggregate of 45.9% of Avtel's outstanding
stock, and Mr. Jeffrey Jensen, one of Ronald Jensen's sons, is a director of
Avtel. AvTel acquired Matrix Telecom, Inc. ("Matrix") pursuant to an exchange
transaction on December 1, 1997. Prior to such acquisition, the individuals
listed above were Matrix stockholders. The Company recorded revenues from
sales of telecommunication services to Matrix of approximately $15.5 million
during fiscal 1997, accounting for approximately 5.1% of the Company's
revenues. In the fourth quarter of 1997, Matrix accounted for 3.6% of the
Company's revenues.
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 communications 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 1997, the Company made net payments to KDD Japan, reduced by amounts
owed to the Company by KDD Japan, of approximately $3.7 million in connection
with exchanging traffic.
The Company obtains legal services from Mayer, Brown & Platt, the law firm
of which James J. Junewicz is a partner.
PROPOSAL 2
APPROVAL OF INCREASE IN NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Board of Directors has adopted a resolution declaring it advisable to
amend Article III of the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of Common Stock from Fifty Million
(50,000,000) to Seventy Million (70,000,000) shares (the "Amendment"). The
Board of Directors directed that the Amendment be submitted for consideration
by the stockholders at the Annual Meeting. The resolution approving the
Amendment being presented to stockholders, which contains the text of the
Amendment, is set forth on Exhibit A to this Proxy Statement. The Amendment
will not affect the number of shares of Preferred Stock authorized, which is
5,000,000 shares.
The Company's Restated Certificate of Incorporation currently authorizes the
issuance of up to 50,000,000 shares of Common Stock and 5,000,000 shares of
Preferred Stock, $.0001 per share. As of April 24, 1998, there were 19,114,111
shares of Common Stock issued and outstanding and no shares of Preferred Stock
issued and outstanding. In addition, as of the same date, approximately
4,000,000 shares of Common Stock were reserved for issuance under the
Company's 1997 Long-Term Incentive Plan and 903,225 shares were reserved for
issuance under the Company's other employee benefit plans, arrangements and
agreements. Each share of Common Stock currently outstanding is coupled with
one right to purchase one one-thousandth of a share of the Company's Series A
Junior Participating Preferred Stock, par value $.0001 per share, pursuant to
the Rights Agreement, dated November 17, 1997, between the Company and Norwest
Bank Minnesota, N.A. The Rights will automatically attach to any new shares of
Common Stock issued.
The additional authorized shares of Common Stock resulting from the
Amendment shall have rights identical to existing shares of Common Stock. All
outstanding shares of Common Stock would continue to have one vote per share
and would have no preemptive rights to subscribe for additional shares. See
the discussion under the caption "Voting Rights and Procedures."
13
<PAGE>
As is currently the case, the authorized shares of Common Stock in excess of
those presently outstanding will be available for issuance at such times and
for such purposes as the Board of Directors may deem advisable without further
action by the Company's stockholders, except as may be required by applicable
laws or regulations, including the rules for Nasdaq National Market companies.
These purposes may include the declaration of a stock dividend on the
Company's Common Stock which would be intended to enhance liquidity by making
the per share stock price lower without lowering total stockholders' equity or
the stockholders' proportional interest in the Company's Common Stock. (If a
stock dividend is declared, assuming transactions of an equivalent dollar
amount, brokerage commissions on purchases and sales of shares of Common Stock
after a stock dividend and transfer taxes, if any, may be somewhat higher than
prior to a stock dividend, depending on the specific number of shares
involved.) The additional authorized shares of Common Stock will also be
available for issuance by the Board in connection with possible financings,
potential acquisitions of other companies, the Company's employee benefit
programs or for other corporate purposes. Except for shares of Common Stock
issuable pursuant to the Company's employee benefit programs, the Company at
this time does not have any plans or commitments to issue shares of its Common
Stock, although the Company has been considering the advisability of declaring
a stock dividend or issuing shares in financings or acquisitions. The Board
does not intend to issue any stock except on terms or for reasons which the
Board deems to be in the best interests of the Company and its stockholders.
Because the holders of the Company's Common Stock do not have preemptive
rights, the issuance of shares of Common Stock (other than on a pro-rata basis
to all current stockholders such as pursuant to a stock dividend) would reduce
the current stockholders' proportionate interests. However, in any such event,
stockholders wishing to maintain their interests may be able to do so through
normal market purchases. Any future issuance of shares of Common Stock will be
subject to the rights of holders of outstanding shares of Preferred Stock the
Company may issue in the future.
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 at this time has no
plans or commitments to issue any shares of Preferred Stock, although the
Company is considering possible financing alternatives, and from time to time
considers acquisition alternatives, each of which could include the issuance
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.
Although a proposal to increase the authorized common stock of a company may
be construed as having an anti-takeover effect, since authorized and unissued
shares of Common Stock could be issued for the purpose of discouraging an
attempt by another person or entity to take control of the Company, neither
the management of the Company nor the Board of Directors views this proposal
in that light. The proposal has not been prompted by any effort by anyone to
gain control of the Company, and the Company is not aware of any such effort.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE INCREASE IN THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK. Proxies will be so voted unless
stockholders specify otherwise in their proxies. The affirmative vote of
holders of a majority of the outstanding shares is required for approval of
this proposal. Consequently, any shares not voted (whether by abstention,
broker non-vote or otherwise) will have the same effect as votes against the
proposed Amendment to the Company's Restated Certificate of Incorporation. If
this proposed Amendment is approved by the stockholders, it will become
effective upon the filing of the Articles of Amendment to the Company's
Restated Certificate of Incorporation, which will occur as soon as reasonably
practicable after approval.
14
<PAGE>
PROPOSAL 3
APPROVAL OF SELECTION OF AUDITORS
Unless marked to the contrary, proxies will be voted for the selection of
Coopers & Lybrand L.L.P. as the Company's independent auditors for the fiscal
year ending on December 31, 1998. Coopers & Lybrand L.L.P. 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, 1996 and 1997.
Representatives of Coopers & Lybrand L.L.P. 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 L.L.P. 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 1999 Annual Meeting of
Stockholders must be received by the Company not later than February 2, 1999,
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 1997 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
June 1, 1998
Burlingame, California
15
<PAGE>
EXHIBIT A
RESOLVED, that the first paragraph of Article III of the Restated
Certificate of Incorporation of the Company 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 Seventy-
Five Million (75,000,000) shares. Seventy Million (70,000,000) shares shall
be Common Stock, $.0001 par value per share, and Five Million (5,000,000)
shares shall be Preferred Stock, par value $.0001 per share."
16
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC. 1998 PROXY
ANNUAL MEETING OF STOCKHOLDERS--JUNE 19, 1998
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 June 19, 1998 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 3
1. Election of the following directors to serve as Class I directors for a term
expiring at the 2001 annual meeting.
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.)
- --------------------------------------------------------------------------------
2. Approval of the resolution attached as Exhibit A to the Proxy Statement to
amend Article III of the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of Common Stock from Fifty Million
(50,000,000) to Seventy Million (70,000,000) shares.
[_] FOR [_] AGAINST [_] ABSTAIN
- --------------------------------------------------------------------------------
(Continued, and to be signed and dated on reverse side)
(Continued from other side)
3. Approval of the selection of Coopers & Lybrand L.L.P. as the Company's
independent auditors for the fiscal year ending December 31, 1998.
[_] FOR [_] AGAINST [_] ABSTAIN
4. 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 4.
Dated __________, 1998
------------------------------------
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.
