<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 June 30, 1998
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 (650) 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 July 31, 1998, the number of the registrant's Common Shares of $.0001 par
value outstanding was 19,144,686
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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
June 30, 1998 and December 31, 1997 1
Consolidated condensed statements of income
for the three-month and six-month periods ended
June 30 , 1998 and 1997 2
Consolidated condensed statements of cash flows
for the six-month period ended
June 30 , 1998 and 1997 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 10
Item 2: Changes in Securities and Use of Proceeds 10
Item 3: Defaults upon Senior Securities 10
Item 4: Submission of matters to a vote of security holders 10
Item 5: Other information 10
Item 6: Exhibits and reports on Form 8-K 11
</TABLE>
<PAGE>
Item 1. Financial Statements
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 31,265 $ 43,850
Accounts receivable, net of allowance for doubtful accounts
of $3,314 in 1998 and $2,230 in 1997 83,109 62,313
Accounts receivable, related party - -
Prepaid expenses 872 511
Other current assets - 1,769
-------- --------
Total current assets 115,246 108,443
Property and equipment, net 71,085 61,433
Investment in companies 5,149 184
Deposits and other assets 2,703 1,557
-------- --------
Total assets $194,183 $171,617
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 98,734 $ 87,949
Accrued liabilities 3,974 3,733
Income taxes payable 859 1,491
Other liabilities 2,461 1,871
-------- --------
Total liabilities 106,028 95,044
-------- --------
Commitment and contingencies (Note 6)
Stockholders' Equity:
Preferred stock, $.0001 par value, authorized
5,000,000 shares, no shares issued - -
Common stock, $.0001 par value, authorized 70,000,000 shares,
issued 19,288,246 shares, outstanding 19,144,686 shares
in 1998 and issued 19,216,710 shares, outstanding 19,073,150
shares in 1997 2 2
Additional paid in capital 63,049 60,849
Deferred compensation-restricted stock (3,927) (4,134)
Foreign currency translation 60 2
Retained earnings 29,371 20,254
Common stock held in treasury, at cost
(143,560 shares in 1998 and 1997) (400) (400)
-------- --------
Total stockholders' equity 88,155 76,573
-------- --------
Total liabilities and stockholders' equity $194,183 $171,617
======== ========
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements
1
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PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except net income per share)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1998 1997 1998 1997
-------- ------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $109,952 $59,404 $215,024 $106,928
Revenues - related party - 3,782 - 7,709
-------- ------- -------- --------
Total revenues 109,952 63,186 215,024 114,637
Cost of long distance services 92,951 51,967 182,192 95,108
-------- ------- -------- --------
Gross margin 17,001 11,219 32,832 19,529
Selling, general and administrative expenses 7,290 5,618 14,852 9,443
Depreciation 2,146 1,267 4,109 2,120
-------- ------- -------- --------
Total operating expenses 9,436 6,885 18,961 11,563
-------- ------- -------- --------
Operating income 7,565 4,334 13,871 7,966
Other (income) expense, net 496 (168) 594 (168)
Interest (income) expense, net (556) (527) (1,169) (1,015)
-------- ------- -------- --------
Income before income taxes 7,625 5,029 14,446 9,149
Provision for income taxes 2,740 1,987 5,185 3,645
-------- ------- -------- --------
Net income $ 4,885 $ 3,042 $ 9,261 $ 5,504
======== ======= ======== ========
Net income per share, basic $ 0.26 $ 0.16 $ 0.49 $ 0.29
======== ======= ======== ========
Net income per share, diluted $ 0.25 $ 0.16 $ 0.46 $ 0.28
======== ======= ======== ========
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
2
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PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Operating Activities:
Net income $ 9,261 $ 5,504
Adjustments to net income:
Depreciation 4,108 2,055
Stock compensation expense 304 (17)
Bad debts provision 1,204 1,499
Equity in net loss of affiliated companies 152 -
Changes in operating assets and liabilities:
Accounts receivable (22,110) (11,359)
Accounts receivable, related party - 576
Prepaid expenses (361) (56)
Deposits and other assets 953 (868)
Accounts payable 10,807 7,803
Accrued liabilities 241 401
Federal income taxes payable (recoverable) (554) (2,247)
Other liabilities 409 243
-------- --------
Net cash used in operating activities 4,414 3,534
-------- --------
Investing Activities:
Purchase of property and equipment (13,988) (22,049)
Purchase of investment (3,314) 222
-------- --------
Net cash used in investing activities (17,302) (21,827)
-------- --------
Financing Activities:
Exercise of stock options 360 183
Other (57) (78)
-------- --------
Net cash provided by financing activities 303 105
-------- --------
Net decrease in cash and cash equivalents (12,585) (18,188)
Cash and cash equivalents at beginning of the period 43,850 45,563
-------- --------
Cash and cash equivalents at end of the period $ 31,265 $ 27,375
======== ========
Supplemental data for non-cash investing
and financing activities:
Common stock issued to investee $ 1,800 $ -
</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) that 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, 1997. The results for the three- and six-month
periods ended June 30, 1998 are not necessarily indicative of the results that
may be expected for future periods.
In accordance with American Institute of Certified Public Accountants
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", during the first quarter of 1998, the
Company began capitalizing costs associated with developing computer software
for internal use.
Certain prior-year amounts have been reclassified to conform to the 1998
financial statement presentation.
(2) ACQUISITIONS
- -----------------
On February 13, 1998, the Company purchased of 16.6% of Ekonom S.A. de
C.V., a Mexican multimedia company existing under the laws of the United Mexican
States, for $3,300,000 in cash and $1,800,000 in Pacific Gateway's stock. The
Company's investment in Ekonom is accounted for under the cost method.
(3) EARNINGS PER SHARE
- -----------------------
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(in thousands, except per share amounts) (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1998
BASIC EPS:
Income available to common stockholders $4,885 19,060 $0.26
Effect of stock-based compensation 874
-------------- -------------- --------------
DILUTED EPS $4,885 19,934 $0.25
============== ============== ==============
THREE MONTHS ENDED JUNE 30, 1997
BASIC EPS:
Income available to common stockholders $3,042 18,938 $0.16
Effect of stock-based compensation 622
-------------- -------------- --------------
DILUTED EPS $3,042 19,560 $0.16
============== ============== ==============
SIX MONTHS ENDED JUNE 30, 1998
BASIC EPS:
Income available to common stockholders $9,261 19,041 $0.49
Effect of stock-based compensation 890
-------------- -------------- --------------
DILUTED EPS $9,261 19,931 $0.46
============== ============== ==============
SIX MONTHS ENDED JUNE 30, 1997
BASIC EPS:
Income available to common stockholders $5,504 18,938 $0.29
Effect of stock-based compensation 675
-------------- -------------- --------------
DILUTED EPS $5,504 19,613 $0.28
============== ============== ==============
</TABLE>
4
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(4) COMPREHENSIVE INCOME
- -------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency translation
adjustments. In accordance with the adoption of SFAS No. 130, total other
comprehensive income consisted of foreign currency translation totaling
approximately $32,000 and $58,000 for the three- and six-month period ending
June 30, 1998 respectively.
(5) NEW ACCOUNTING PRONOUNCEMENTS
- ----------------------------------
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". This statement establishes standards
for the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
is in the process of evaluating the disclosure impact of adopting this new
standard. The disclosures prescribed by SFAS No. 131 will be made for the full
year financial statements for the year ended December 31, 1998.
In March 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". SFAS No. 132 significantly changes
current financial statement disclosure requirements from those that were
required under SFAS 87. The Company currently does not have a pension or other
postretirement benefit plan. Therefore, SFAS No. 132 will not be applicable to
the Company.
(6) CONTINGENCIES
- ------------------
The Company currently has operating subsidiaries in foreign locations
including U.K., New Zealand and Russia. The Company's operations are subject
to certain risks, such as changes in foreign government regulations and
telecommunications standards, licensing requirements, tariffs, taxes and other
trade barriers, as well as political and economic instability. Subsequent to
June 30, 1998, the Company's Russian subsidiary, Rustelnet, was notified by
the Russian local tax authorities of a potential local tax liability. The
management of Rustelnet has advised the Company that Rustelnet has strong
defenses and intends to defend itself vigorously in this matter, since the
Company follows policies that are consistent with tax practices utilized in
the Russian telecommunications industry. Although no assurances are possible,
the Company does not believe that this development will have a material
adverse effect on its financial condition or results of operations.
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 terms such as "believes," "anticipates," "plans," "intends"
or "expects." These forward-looking statements relate to the plans, objectives
and expectations of Pacific Gateway Exchange, Inc. ("Pacific Gateway" or the
"Company") regarding its future operations or financial performance or related
to the Company's expectations regarding the telecommunications industry. In
light of the inherent risks and uncertainties of any forward-looking statement,
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
forward-looking statements will come true. The revenues and results of
operations of the Company, and future developments in the telecommunications
industry, 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 forecasts of traffic; (vi) changes in or developments under domestic
or foreign laws, regulations, licensing requirements or telecommunications
standards; (vii) foreign political or economic instability; (viii) changes in
the availability of transmission facilities such as undersea fiber optic cable
or in the feasibility of building such 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; (xii) future management decisions regarding, for
example, acquisitions, capital expenditures or financings; (xiii) concentration
of credit risk; (xiv) natural disasters and catastrophic events, or (xv)
opportunities for (and problems resulting from) the acquisition of other
companies or offshore facilities. The foregoing review of important factors,
including those discussed in detail below, should not be construed 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 Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total Revenues 100.0% 100.0% 100.0% 100.0%
Cost of long distance services 84.5% 82.2% 84.7% 83.0%
----------- ----------- ----------- -----------
Gross margin 15.5% 17.8% 15.3% 17.0%
Selling, general and administrative
expenses 6.6% 8.9% 6.9% 8.2%
Depreciation 2.0% 2.0% 1.9% 1.9%
----------- ----------- ----------- -----------
Total operating expenses 8.6% 10.9% 8.8% 10.1%
----------- ----------- ----------- -----------
Operating income 6.9% 6.9% 6.5% 7.0%
Interest (income) expense, net -0.5% -0.8% -0.5% -0.9%
Other (income) expense, net 0.5% -0.3% 28.0% -0.2%
----------- ----------- ----------- -----------
Income before income taxes 6.9% 8.0% 6.7% 8.0%
Provision for income taxes 2.5% 3.1% 2.4% 3.2%
----------- ----------- ----------- -----------
Net income 4.4% 4.8% 4.3% 4.8%
=========== =========== =========== ===========
</TABLE>
6
<PAGE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997.
REVENUES: Total revenues for the three months ended June 30, 1998 increased
74% to $110.0 million from $63.2 million for the three months ended June 30,
1997 and increased 5% from $105.0 million in the quarter ended March 31,
1998. The increase from the quarter ended June 30, 1997 was the result of
several factors. First, the Company increased the number of its operating
agreements to 43 at June 30, 1998 from 37 at June 30, 1997. Second, the number
of wholesale carrier customers increased to 153 at June 30, 1998 from 106 at
June 30, 1997. Third, revenues from the Company's retail customers were $4.6
million for the quarter ended June 30, 1998. The Company was not engaged in
the retail business for the quarter ended June 30, 1997. As a result of these
factors, total minutes increased 70.1% from the three months ended June 30,
1997, while the average price per minute charged to customers improved
slightly to $0.29 in the three months ended June 30, 1998, compared to $0.28
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 influenced the average customer
price per minute. During the second quarter of 1998 (as in all prior
quarters), the Company 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: As a percentage of revenue, gross margin was 15.5% in the current
three-month period, down from 17.8% in the same period in the prior year. The
decrease in margin resulted from higher fixed costs due to offshore start-ups
and reconfiguring of the U.S. network. The cost of long distance service
increased to $93.0 million in the three months ended June 30, 1998 from $52.0
million in the three months ended June 30, 1997. This increase in costs
represents continued growth in outbound traffic on new and existing routes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses as a percentage of revenues were 6.6% in the three
months ended June 30, 1998, down from 8.9% in the same period in the prior year.
Actual expenses increased 29.8% to $7.3 million in the three months ended June
30, 1998 from $5.6 million in the three months ended June 30, 1997. This
increase was due primarily to increased personnel and sales commission expenses.
The increase in personnel expenses was directly related to the increase in the
number of employees in the Company's wholly owned subsidiaries to 129 at June
30, 1998 from 67 at June 30, 1997. The increase in sales commission expenses
was primarily due to increased revenues.
DEPRECIATION: Depreciation increased 69.4% to $2.1 million in the three months
ended June 30, 1998 from $1.3 million in the three months ended June 30, 1997.
Depreciation as a percentage of revenues was 2.0% of revenue for the three
months ended June 30, 1998 and 1997. The increase in the dollar amount was
primarily due to depreciation of additional transmission facilities acquired
since June 30, 1997.
INCOME TAX: Income taxes increased to $2.7 million in the three months ended
June 30, 1998 from $2.0 million in the three months ended June 30, 1997,
primarily due to increased operating income. The effective tax rate was 40.0%
in 1997 and 36.0% in 1998. The decrease in effective tax rate was attributable
to earnings of certain non-U.S. subsidiaries. A portion of these earnings is
intended to be reinvested indefinitely in operations outside the U.S.
7
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997.
REVENUES: Total revenues for the six months ended June 30, 1998 increased 93%
to $215.0 million from $106.9 million in the six months ended June 30, 1997.
The increase was primarily the result of increased sales to existing
customers, an increase in the number of operating agreements with foreign
partners to 43 at June 30, 1998 from 37 at June 30, 1996, and an increase in
the number of wholesale customers to 153 at June 30, 1998 from 106 at June 30,
1997. In addition, revenues from the Company's retail customers were $7.7
million for the six months ended June 30, 1998, while there were no retail
revenues for the six months ended June 30, 1997.
GROSS MARGIN: As a percentage of revenue, gross margin was 15.3% for the first
half of 1998, down from 17.0% for the first half of 1997. The decrease in
margin resulted from higher fixed costs due to offshore start-ups and
reconfiguring of the U.S. network. The cost of long distance service increased
to $182.2 million in the six months ended June 30, 1998 from $95.1 million in
the six months ended June 30, 1997. This increase in costs represents
continued growth in outbound traffic on new and existing routes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses as a percentage of revenues were 6.9% in the six months
ended June 30, 1998, down from 8.2% in the same period in the prior year.
Actual expenses increased 57.3% to $14.9 million in the six months ended June
30, 1998 from $9.4 million in the six months ended June 30, 1997. This increase
was due primarily to increased personnel and sales commission expenses. The
increase in personnel expenses was directly related to the increase in the
number of employees in the Company's wholly owned subsidiaries to 129 at June
30, 1998 from 67 at June 30, 1997. The increase in sales commission expenses
was primarily due to increased revenues.
DEPRECIATION: Depreciation increased 93.8% to $4.1 million in the six months
ended June 30, 1998 from $2.1 million in the six months ended June 30, 1997.
Depreciation as a percentage of revenues was 1.9% of revenue for the six months
ended June 30, 1998 and 1997. The increase in the dollar amount was primarily
due to depreciation of additional transmission facilities acquired since June
30, 1997.
INCOME TAX: Income taxes increased to $5.2 million in the six months ended
June 30, 1998 from $3.6 million in the six months ended June 30, 1997, primarily
due to increased operating income. The effective tax rate was 39.8% in 1997 and
36.0% in 1998. The decrease in effective tax rate was attributable to earnings
of certain non-U.S. subsidiaries. A portion of these earnings is intended to be
reinvested indefinitely in operations outside the U.S.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its rapid growth, including its capital
expenditures, through funds provided by operations and the funds from the public
offering completed in the third quarter of 1996. Due to the timing differences
in the international settlement process, the Company's accounts receivable
turnover varies from its accounts payable turnover. The length of these
turnovers is a function of different timing requirements in the Company's
agreements with foreign partners. For example, 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 in
the international settlement process.
Net cash used in operating activities was $4.4 million for the six months
ended June 30, 1998 and $3.5 million for the quarter ended June 30, 1997. This
increase in cash used in operating activities was primarily a result of
increased accounts receivable balances, which exceeded the cash inflow from
greater cash generating net income and higher accounts payable balances.
Net cash used in investing activities was $17.3 million for the six months
ended June 30, 1998 and $21.8 million for the six months ended June 30, 1997.
Capital expenditures for the first half of 1998 were $14.0 million, down from
$22.0 million in the first half of the prior year. Capital expenditures in
both 1997 and 1998 were for the acquisition of partial ownership interests in
international fiber optic cable
8
<PAGE>
transmission systems and related equipment. In addition, in the first quarter
of 1998, the Company acquired 16.66% of Ekonom S.A. de C.V. ("Ekonom"), a
Mexican multimedia company for $3.3 million in cash and $1.8 million in
Pacific Gateway's common stock.
Net cash provided by financing activities was $0.3 million for the six
months ended June 30, 1998 and $0.1 million for the six months ended June 30,
1997. Substantially all of these cash inflows were from the exercise of stock
options.
At June 30, 1998, the Company had outstanding commitments of $11.9 million
for the acquisition of additional ownership in digital undersea fiber optic
cables and network equipment. Since June 30, 1998, the Company has committed to
purchase undersea fiber optic cable in the US-Japan cable network for $86
million. This investment is expected to be expended over the next two years and
funded through operating cash flows and existing cash balances. The Company
believes that existing cash balances, 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 1998. However, the Company may raise
additional funds through offerings of equity or debt securities or other
financing arrangements to fund growth opportunities that management believes are
beneficial to the Company.
9
<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
The Company's annual meeting of stockholders was held on June 19, 1998.
The following table sets forth information regarding the number of
votes for, against, withheld, or abstaining and broker non-votes,
with respect to each matter presented at the meeting.
1. Both nominees for Class I director were elected as follows:
NOMINEES FOR WITHHOLD
Charles M. Dalfen 12,123,868 640,490
Barry J. Volante 12,123,868 640,490
2. The amendment to the Company's 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 was
approved as follows:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
11,573,546 1,185,312 5,550 0
3. The selection of Coopers&Lybrand L.L.P. as the Company's independent
auditors for the fiscal year ending December 31, 1998 was approved
as follow:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
12,742,688 8,220 13,550 50
Item 5. Other Information
None
10
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The Exhibits filed as part of this report are listed below:
10.4 Proxy dated April 30, 1998 by Gail E. Granton, individually and as
trustee of The Granton Foundation
10.5.1 Employment Agreement effective January 1, 1998 between Howard A.
Neckowitz and Pacific Gateway Exchange
10.5.2 Employment Agreement effective January 1, 1998 between Gail E.
Granton and Pacific Gateway Exchange
10.5.3 Employment Agreement effective January 1, 1998 between Ronald D.
Anderson and Pacific Gateway Exchange
10.5.4 Employment Agreement effective January 1, 1998 between Robert F.
Craver and Pacific Gateway Exchange
10.5.5 Employment Agreement effective January 1, 1998 between Fred A.
Weismiller and Pacific Gateway Exchange
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter ended
June 30, 1998
11
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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: August 14, 1998
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>
EXHIBIT 10.4
IRREVOCABLE PROXY AND VOTING AGREEMENT
I, Gail E. Granton, a shareholder of Pacific Gateway Exchange, Inc., a
Delaware corporation (the "Corporation"), individually and as the trustee of the
Granton Foundation (the "Foundation") hereby appoint Howard A. Neckowitz to be
my proxy agent and the proxy agent of the Foundation and to vote all of my
shares in the Corporation and all shares in the Corporation held by the
Foundation (the "Shares") with respect to all matters submitted to the
stockholders at all meetings of the stockholders, or any adjournments thereof,
and in all consents to any actions taken without a meeting. This appointment
shall commence immediately and end on January 1, 1999. During said period,
Howard A. Neckowitz shall have all of the power that I or the Foundation would
possess with respect to the voting of my shares and all of the Foundation's
shares and granting my consent and the Foundation's consent. I hereby ratify and
confirm all acts that the proxy pursuant to this Irrevocable Proxy and Voting
Agreement (the "Proxy") shall do or cause to be done by virtue of and within the
limitations set forth in this Proxy.
If, during the term of this proxy, Howard A. Neckowitz becomes unable to
perform his duties as an officer of Pacific Gateway Exchange, Inc. due to his
voluntary resignation, termination for cause, long-term disability, physical or
mental incapacity, or death, then this Proxy shall be null and void. Except as
set forth in this paragraph, this Proxy shall be irrevocable.
I agree that any transfer of the Shares by me or the Foundation prior to
January 1, 1999 other than pursuant to a registered underwritten offering under
the Securities Act of 1933, as amended, (the "Act") or pursuant to Rule 144
under the Act shall be subject to this Proxy. It shall be a condition of such
transfer that the transferee appoint Howard A. Neckowitz as such stockholder's
proxy on terms identical to this Proxy for the term ending upon termination of
this Proxy.
I agree that the Shares shall bear the following legend until this Proxy
terminates as set forth above:
The shares represented by this certificate are subject to a
Irrevocable Proxy and Voting Agreement dated as of April 30, 1998, a
copy of which is on file with the Secretary of the Corporation. Any
purchaser of such shares prior to January 1, 1999, other than pursuant
to a registered underwritten offering under the Securities Act of
1933, as amended, (the "Act") or pursuant to Rule 144 under the Act
shall be bound by such agreement.
IN WITNESS WHEREOF, I have executed this Proxy effective as of the 30th day
of April 1998.
/s/ Gail Granton
----------------
Gail E. Granton
The Granton Foundation
By: /s/ Gail Granton
----------------
Gail E. Granton
Trustee
<PAGE>
Exhibit 10.5.1
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
This Agreement, made and entered into effective as of January 1, 1998 (the
"Effective Date") by and between PACIFIC GATEWAY EXCHANGE, INC. (the "Company")
and HOWARD NECKOWITZ (the "Executive"),
WITNESSETH THAT:
---------------
WHEREAS, the parties desire to enter into this Agreement pertaining to the
continued employment of the Executive by the Company;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth below, it is hereby covenanted and agreed by the Company and the Executive
as follows:
1. Employment Period. Subject to the terms and conditions of this
-----------------
Agreement, the Company hereby agrees to employ the Executive during the
Employment Period (as defined below) and the Executive hereby agrees to remain
in the employ of the Company and to provide services during the Employment
Period in accordance with this Agreement. The "Employment Period" shall be the
period beginning on the Effective Date and ending on the fifth anniversary
thereof. After the fifth anniversary of the Effective Date, the Employment
Period shall be automatically extended for 24-month periods, unless one party to
this Agreement provides written notice of non-renewal to the other at least 90
days before the last day of the Employment Period.
2. Duties.
------
(a) Subject to the terms of this Agreement, the Company hereby agrees to employ
the Executive as its President and Chief Executive Officer during the
Employment Period, and the Executive hereby agrees to remain in the employ
of the Company during the Employment Period and, if elected, to serve as a
member of the Board of Directors of the Company (the "Board") and for so
long as he is serving on the Board, Executive agrees to serve as Chairman
of the Board, as a member of the Executive Committee, and as a member of
any other Board committee if the Board shall elect Executive to such
positions. In any and all such capacities, Executive shall report only to
the Board. Executive shall have and perform such duties, responsibilities,
and authorities as are customary for the chief executive officer of a
publicly held corporation of the size, type, and nature of the Company as
they may exist from time to time and consistent with such position and
status, but in no event shall such duties, responsibilities, and
authorities be reduced from those of Executive prior to the Effective Date.
Executive shall devote substantial business time and attention, and his
best efforts, abilities, experience, and talent to the position of
President and Chief Executive Officer and for the businesses of the
Company.
<PAGE>
(b) Except as set forth in paragraph 2(c), during the Employment Period,
Executive will not render services to any other person or entity, for
compensation or otherwise, without the prior written consent of the Board,
and Executive will not engage in any activity which conflicts or interferes
in any material way with the performance of the duties and responsibilities
of his position with the Company. During his employment with the Company,
Executive will not, either as an employee, employer, consultant,
independent contractor, agent, principal, partner, stockholder or in any
other individual or representative capacity, engage or participate in any
employment, consulting, business or other activity that is in competition
in any manner with the business of the Company.
(c) Notwithstanding paragraph 2(a), Executive may devote a reasonable amount of
personal time to the supervision of his personal investments which may
include securities of Matrix Telecom, Pacific Telecom America and passive
investments of up to 1% of the outstanding securities of any public
company; and activities involving professional, charitable, civic,
educational, religious and similar activities and engagements, to the
extent that such activities do not conflict or interfere in any material
way with his duties and responsibilities to the Company.
3. Compensation. Subject to the terms and conditions of this Agreement,
------------
during the Employment Period while the Executive is employed by the Company, the
Company shall compensate him for his services as follows:
(a) The Executive shall receive, for each 12-consecutive month period
beginning on the Effective Date and each anniversary thereof, an
annual salary of $600,000 (the "Salary"), which Salary shall be
payable in substantially equal monthly installments. The Executive's
Salary rate shall be reviewed by the Compensation Committee of the
Board (the "Compensation Committee") annually on or about the
anniversary of the Effective Date, to determine whether an increase in
the amount of Salary is appropriate. In no event shall the Salary of
the Executive be reduced to an amount that is less than the amount
specified in this paragraph (a), or to an amount that is less than the
amount that he was previously receiving.
(b) The Executive shall be entitled to incentive compensation in the form
of an annual cash bonus of up to $600,000. However, the Compensation
Committee may award additional bonus amounts in recognition of
outstanding performance. The amount of such bonus, if any, shall be
determined by the Compensation Committee taking into consideration
whether the Executive has met the performance targets that may have
been set by the Compensation Committee for such year, the relative
contribution by the Executive to the business of the Company, general
economic conditions, and such other factors as the Compensation
Committee deems relevant.
<PAGE>
(c) The Company shall obtain term life insurance coverage on the
Executive's life providing $3 million in death benefits, but subject
to the Executive's satisfactory completion of a physical examination
and other aspects of the application process. Death benefits under
such coverage shall be payable to the beneficiary named by the
Executive. During the period of the Executive's employment with the
Company, the Company shall pay the premiums with respect to such
policy.
(d) Except as otherwise specifically provided to the contrary in this
Agreement, the Executive shall be provided with the retirement,
welfare benefits and other fringe benefits to the same extent and on
the same terms as those benefits are provided by the Company from time
to time to the Company's other senior management employees.
(e) The Executive shall be reimbursed by the Company, on terms and
conditions that are substantially similar to those that apply to other
similarly situated senior management employees of the Company, for
reasonable expenses for entertainment, travel, meals, lodging and
similar items which are authorized by the Company and actually
incurred by the Executive in the promotion of the Company's business.
In addition, the Executive shall be reimbursed by the Company for
reasonably incurred legal expenses in connection with the negotiation
and preparation of the Executive's employment arrangements.
(f) The Executive may elect to defer the receipt of all or part of any
bonus payable under paragraph 3(b) in accordance with the terms of a
deferred compensation plan to be established by the Compensation
Committee. Under such deferred compensation plan the deferred bonus
amounts will be converted to stock units, based on the value of the
Company's stock on the date the bonus would otherwise have been paid.
Such stock units will be credited to a bookkeeping account maintained
by the Company and shall be fully vested at all times. Additional
stock units shall also be credited to the Executive's account in an
amount equal to 25% of the amount of the deferred bonus, and such
additional stock units shall vest 50% one year after initial crediting
and the remaining 50% shall vest two years after initial crediting.
If dividends are paid on shares of the Company's stock while any stock
units are credited to the Executive's bookkeeping account, dividend
equivalents will be credited to the Executive's account as additional
stock units subject to the same vesting provisions as the stock units
on which such dividend equivalents are based.
(g) In addition to the Company's standard four-year vesting schedule and
accelerated vesting upon a Change in Control (as defined in Exhibit A
hereto), stock options awarded to the Executive under any option plans
of the Company shall provide for 100% vesting of such awards upon the
occurrence of a termination of the
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<PAGE>
Executive's employment by the Company for reasons other than Cause (as
defined in paragraph 4(h)), resignation by the Executive for Good
Reason (as defined in paragraph 4(h)), or non-renewal of this
Agreement and shall provide for exercisability of stock options for a
one-year period after any such events. The Executive shall be entitled
to stock option awards under the Company's 1997 Long Term Incentive
Plan to purchase 500,000 shares of common stock of the Company on each
of December 30, 1998 and December 30, 1999, provided that he remains
employed by the Company on each such date. The per-share exercise
price of the options under a given award shall be the fair market
value of a share of the Company's common stock on the date of such
award. If, prior to the granting of one or both of the stock option
awards described in this paragraph 3(g), (i) a Change in Control
occurs while the Executive remains employed with the Company, (ii) the
Executive's employment is terminated by the Company for reasons other
than Cause, or (iii) the Executive resigns for Good Reason, then upon
the date of such Change in Control or separation, whichever is
applicable, the Executive shall receive a cash payment from the
Company in the amount described in the next sentence and the Executive
shall no longer be entitled to the stock option award or awards which
have not yet been granted. The cash payment described in the preceding
sentence shall be equal to A times B, where A equals the excess, if
any, of the fair market value of a share of the Company's common stock
on the date of the Change in Control or separation, whichever is
applicable, over $50.1875, and B equals 1,000,000 in the event such
Change in Control or separation occurs before December 30, 1998 and
500,000 in the event such Change in Control or separation occurs on or
after December 30, 1998 and before December 30, 1999.
(h) The Company shall maintain directors and officers liability insurance
in commercially reasonable amounts (as reasonably determined by the
Board), and the Executive shall be covered under such insurance to the
same extent as other senior management employees of the Company. The
Executive shall be eligible for indemnification by the Company under
the Company by-laws as currently in effect or, if more favorable to
the Executive, the provisions of such by-laws as in effect at the time
indemnification is required. The Company agrees that it shall not
take any action that would impair the Executive's rights to
indemnification under the Company by-laws, as currently in effect.
(i) The Company shall make available, at the Executive's advance election,
the following perquisites: (i) the costs and expenses for the lease of
a car according to Company policy; (ii) dues and memberships for two
luncheon clubs and one country club; (iii) financial and tax planning
services; (iv) first-class air travel and first-class hotel
accommodations; and (v) security.
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<PAGE>
4. Rights and Payments Upon Termination or Change in Control. The
---------------------------------------------------------
Executive's right to benefits and payments, if any, for periods after the date
on which his employment with the Company terminates for any reason (his
"Termination Date") shall be determined in accordance with this Section 4:
(a) Minimum Payments. If the Executive's Termination Date occurs during
----------------
the Employment Period for any reason, the Executive shall be entitled
to the following payments, in addition to any payments or benefits to
which the Executive may be entitled under the following provisions of
this Section 4 (other than this paragraph (a)):
(i) his earned but unpaid Salary for the period ending on his
Termination Date; and
(ii) his accrued but unpaid vacation pay for the period ending with
his Termination Date, as determined in accordance with the
Company's policy as in effect from time to time.
Payments to be made to the Executive pursuant to this paragraph 4(a)
shall be made in a lump sum as soon as practicable after the
Executive's Termination Date. Except as may be otherwise expressly
provided to the contrary in this Agreement, nothing in this Agreement
shall be construed as requiring the Executive to be treated as
employed by the Company following his Termination Date for purposes of
any employee benefit plan or arrangement in which he may participate
at such time.
(b) Termination By Company for Cause. If the Executive's Termination Date
--------------------------------
occurs during the Employment Period and is a result of the Company's
termination of the Executive's employment on account of Cause then,
except as agreed in writing between the Executive and the Company, the
Executive shall have no right to future payments or benefits under
this Agreement (and the Company shall have no obligation to make any
such future payments or provide any such future benefits) for periods
after the Executive's Termination Date.
(c) Termination for Death or Disability. If the Executive's Termination
-----------------------------------
Date occurs during the Employment Period on account of the Executive's
death or disability (as defined below), then the Executive (or in the
event of his death, his estate) shall be entitled to the following:
(i) continuing payments of his Salary for the period commencing on
his Termination Date and ending on the earliest of (i) the last
day of the 90-day period commencing on the Termination Date, (ii)
the last day of the
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<PAGE>
Employment Period, or (iii) in the case of the Executive's
disability, the date on which the Executive violates the
provisions of Section 7 of this Agreement;
(ii) for such period of that time that the Executive or any of his
dependents is eligible for and elects COBRA continuation coverage
(as described in section 4980B of the Internal Revenue Code of
1986, as amended (the "Code")) under any Company group health
plan, the Company shall pay 100% of the premiums necessary to
maintain such COBRA continuation coverage;
(iii) a pro rata bonus payment, payable in a lump sum as soon as
practicable after the Termination Date, in an amount equal to the
product of:
(A) the bonus the Executive received for the Company's fiscal
year prior to the fiscal year which includes his Date of
Termination;
Multiplied By
-------------
(B) a fraction, the numerator of which is the number of days in
the fiscal year which includes the Executive's Date of
Termination, but excluding the days following such Date of
Termination, and the denominator of which is 365 (or, if the
fiscal year in which the Effective Date occurs is a short
year, the number of days during which the Executive would
have been employed by the Company during that year if he had
remained in the Company's active employment until the end of
the year).
(d) Termination by the Company for Reasons Other Than Cause and
-----------------------------------------------------------
Termination by the Executive for Good Reason. If the Executive's
--------------------------------------------
Termination Date occurs during the Employment Period and is a result
of the Executive's termination of employment by the Company for
reasons other than Cause or the Executive's resignation for Good
Reason (as defined in paragraph (h) below), and is not on account of
the Executive's death or disability, then the Executive shall be
entitled to receive the following:
(i) for the period commencing on his Termination Date and ending on
the earliest of (i) the 36-month anniversary of his Termination
Date, (ii) the date on which the Executive violates the
provisions of Section 7 of this Agreement, or (iii) 90 days after
the date of the Executive's death, the Company shall pay to the
Executive the Salary and annual cash bonus (assuming all targets
have been met), both as in effect as of his Termination Date,
payable in substantially equal monthly installments;
-6-
<PAGE>
(ii) for such period of that time that the Executive or any of his
dependents is eligible for and elects COBRA continuation coverage
(as described in section 4980B of the Code under any Company
group health plan, the Company shall pay 100% of the premiums
necessary to maintain such COBRA continuation coverage: and
(iii) the Executive shall become fully vested in the shares of
restricted stock granted to the Executive by the Company on
December 30, 1997.
(e) Termination for Voluntary Resignation. If the Executive's Termination
-------------------------------------
Date occurs during the Employment Period on account of his voluntary
resignation then, except as agreed in writing between the Executive
and the Company, the Executive shall have no right to future payments
or benefits under this Agreement (and the Company shall have no
obligation to make any such future payments or provide any such future
benefits) for periods after the Executive's Termination Date.
(f) Payment Upon a Change in Control. In the event of a Change in Control
--------------------------------
(as defined in Exhibit A hereto), the Executive shall receive from the
Company (without regard to whether the Executive's Termination Date
occurs in connection with such Change in Control) a lump sum payment
equal to the amount that would have been payable to the Executive
pursuant to paragraph 4(d)(i) had the Executive's employment with the
Company been terminated as of the date of the Change in Control under
circumstances that would have entitled the Executive to benefits under
paragraph 4(d). In the event the Executive receives a payment
pursuant to this paragraph (f), then upon the Executive's subsequent
termination of employment with the Company for any reason, the
Executive shall have no right to future payments or benefits under
this Agreement (and the Company shall have no obligation to make any
such future payments or provide any such future benefits), other than
those provided under paragraph 4(a), for periods after the Executive's
Termination Date.
(g) Notice of Termination. Any termination of the Executive's employment
---------------------
by the Company or the Executive (other than a termination pursuant to
death) must be communicated by a written Notice of Termination to the
other party hereto. For purposes of this Agreement, a "Notice of
Termination" means a dated notice which indicates the specific
termination provision in this Agreement relied on and which sets forth
in reasonable detail the facts and circumstances, if any, claimed to
provide a basis for termination of the Executive's employment under
the provision so indicated.
-7-
<PAGE>
(h) Definitions. For purposes of this Agreement:
-----------
(i) The term "Cause" shall mean (1) The willful and continued failure
by the Executive to substantially perform his duties under this
Agreement, other than by reason of his being disabled (as defined
below), for which the Executive must receive at least two prior
written notices from the Board of Directors, describing specific
reasonable duties or tasks, identifying the perceived failure to
perform, and giving the Executive a good faith opportunity to
satisfactorily perform those duties or tasks within a reasonable
period of time. In addition, for this reason to constitute a
termination for Cause for purposes of this Agreement, the Board
of Directors must pass a resolution authorizing the Executive's
termination for these reasons after providing the written
notifications and opportunity to improve as described above. (2)
The willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or its
affiliates. (3) Conduct by the Executive that involves theft or
fraud or, in connection with his duties under this Agreement,
dishonesty. (4) Executive's violation of the provisions of
Section 7 hereof. or (5) Conviction of felony involving moral
turpitude.
(ii) The term "disability" shall mean the inability of the Executive,
after reasonable accommodation, to continue to perform his duties
under this Agreement on a full-time basis as a result of mental
or physical illness, sickness or injury for a period of 180 days
within any 12-month period, as determined by a licensed,
practicing physician mutually agreed upon by the Company and the
Executive.
(ii) No act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that
the Executive's action or omission was in the best interest of
the Company.
(iii) The term "Good Reason" shall mean any of the following which
occur without the Executive's consent and which are not corrected
by the Company within 10 days of written notice to the Company by
the Executive: (1) a diminution of the Executive's duties, titles
(including Chairman of the Board, President of the Company, and
Chief Executive Officer of the Company), or positions or the
assignment to him of duties that are inconsistent in any
substantial respect with the position, authority or
responsibilities associated with the position of Chairman of the
Board, President and Chief Executive Officer; (2) a reduction in
the Executive's Salary rate or bonus potential; (3) a relocation,
without the Executive's
-8-
<PAGE>
consent, of the Executive's principal office from his current
office as of the Effective Date to an office that is more than 10
miles of the Executive's current office, except for required
travel on Company business to an extent substantially consistent
with the Executive's business travel obligations on the Effective
Date; (4) the failure of the Executive to be reelected to the
Board or to be reelected Chairman of the Board; or (5) the
failure of the Company to obtain the assumption of this Agreement
by any successor.
(i) Duties on Termination. Subject to the terms and conditions of this
---------------------
Agreement, during the period beginning on the date of delivery of a
Notice of Termination, and ending on the Date of Termination, the
Executive shall continue to perform his duties as set forth in this
Agreement, and shall also perform such services for the Company as are
necessary and appropriate for a smooth transition to the Executive's
successor, if any.
(j) Notwithstanding any other provision of this Agreement, the Executive
shall automatically cease to be an officer and/or director of the
Company and its affiliates as of his Termination Date.
5. Tax Gross-Up. In the event that there shall occur a Change in Control
------------
of the Company and the Executive becomes entitled any payment, benefit,
distribution, acceleration of vesting or combination thereof (the "Total
Payments") by the Company or any affiliated company, which are or become subject
to the excise tax imposed by Section 4999 of the Code, or any similar tax that
may hereafter be imposed (the "Excise Tax"), the Company shall pay to Executive
at the time specified below an additional amount (the "Gross-up Payment") (which
shall include, without limitation, reimbursement for any penalties and interest
that may accrue in respect of such Excise Tax) such that the net amount retained
by the Executive, after reduction for any Excise Tax (including any penalties or
interest thereon) on the Total Payments and any federal, state and local income
or employment tax and Excise Tax on the Gross-up Payment provided for under this
Section 5, but before reduction for any federal, state, or local income or
employment tax on the Total Payments, shall be equal to the sum of (i) the Total
Payments, and (ii) an amount equal to the product of any deductions disallowed
for federal, state, or local income tax purposes because of the inclusion of the
Gross-up Payment in Executive's adjusted gross income multiplied by the highest
applicable marginal rate of federal, state, or local income taxation,
respectively, for the calendar year in which the Gross-up Payment is to be made.
6. No Mitigation; No Set-Off. In the event of any termination of
-------------------------
employment, the Executive shall be under no obligation to seek other employment
and there shall be no offset against amounts due him under the Agreement on
account of any remuneration attributable to any subsequent employment that he
may obtain or any claims the Company may have against him.
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<PAGE>
7. Confidential Information. The Executive agrees that:
------------------------
(a) Except as may be required by the lawful order of a court or
governmental agency having supervisory authority over the business of
the Company or by any administrative or legislative body (including a
committee thereof) with jurisdiction to order the Executive to
divulge, disclose or make accessible such information, or as necessary
to carry out his duties to the Company and its affiliates, or except
to the extent that the Executive has express authorization from the
Company, he shall keep secret and confidential indefinitely all non-
public information (including, without limitation, information
regarding litigation and pending litigation) concerning the Company
and its affiliates which was acquired by or disclosed to the Executive
during the course of his employment with the Company or during the
course of his consultation with the Company following his termination
of employment and not to disclose the same, either directly or
indirectly, to any other person, firm, or business entity, or to use
it in any way.
(b) Upon his Termination Date or at the Company's earlier request, he will
promptly return to the Company any and all records, documents,
physical property, information, computer disks or other materials
relating to the business of the Company and its affiliates obtained by
him during his course of employment with the Company, provided that
such materials shall not include his personal rolodex and diaries.
(c) Nothing in the foregoing provisions of this Section 7 shall be
construed so as to prevent the Executive from using, in connection
with his employment for himself or an employer other than the Company
or any of its affiliates, knowledge which was acquired by him during
the course of his employment with the Company and its affiliates, and
which is generally known to persons of his experience in other
companies in the same industry.
8. Equitable Remedies. The Executive acknowledges that the Company would
------------------
be irreparably injured by a violation of Section 7 and agrees that the Company,
in addition to other remedies available to it for such breach or threatened
breach, shall be entitled to seek a preliminary injunction, temporary
restraining order, other equivalent relief, restraining the Executive from any
actual or threatened breach of Section 7 without any bond or other security
being required.
9. Defense of Claims. The Executive agrees that, on and after the
-----------------
Effective Date, he will assist with the Company and its affiliates in the
defense of any claims that may be made against the Company or its affiliates to
the extent that such claims may relate to services performed by him for the
Company. The Company shall reimburse the Executive for, or advance to the
Executive, all reasonable out-of-pocket expenses incurred by the Executive in
connection with
-10-
<PAGE>
the Executive's testimony and assistance under this Section 9, including
reasonable fees and disbursements for independent counsel for the Executive if
the Executive reasonably determines that the litigation, arbitration, proceeding
or investigation is of a nature which requires that he have independent
representation. To the extent travel is required to comply with the requirements
of this Section 9, the Company, shall to the extent possible, provide the
Executive with notice at least 10 days prior to the date on which such travel
would be required and the Company agrees to reimburse the Executive for all of
his reasonable actual expenses associated with such travel; provided, however,
that if the Company reasonably expects the travel to be extensive or unduly
burdensome to the Executive from a financial perspective, the Company may
provide to the Executive pre-paid tickets for transportation in connection with
such travel. The Executive shall not be obligated to make more than 20 days in
any calendar year available for the purpose of furnishing assistance pursuant to
this Section 9. In any event, any request for such assistance shall take into
account (i) the significance of the matters at issue in the litigation,
arbitration, proceeding or investigation and (ii) the Executive's other personal
and business commitments. If Executive is no longer receiving payments under
Section 4, the Executive shall be entitled to a fee of $2,000 per day (or a pro
rata fee for a portion of a day) for furnishing such assistance, such fee to be
paid promptly following the Executive's submission of a statement therefor.
10. Notices. Notices provided for in this Agreement shall be in writing
-------
and shall be deemed to have been duly received when delivered in person or sent
by facsimile transmission, on the first business day after it is sent by air
express courier service or on the second business day following deposit in the
United States registered or certified mail, return receipt requested, postage
prepaid and addressed, in the case of the Company to the following address:
Pacific Gateway Exchange
533 Airport Boulevard, Suite 505
Burlingame, California 94010
Attention: Corporate Secretary
or to the Executive at his last residence address as shown on the Company's
payroll records, or such other address as either party may have furnished to the
other in writing in accordance herewith, except that a notice of change of
address shall be effective only upon actual receipt.
11. Withholding. All compensation payable under this Agreement shall be
-----------
subject to customary withholding taxes and other employment taxes as required
with respect to compensation paid by a corporation to an employee and the amount
of compensation payable hereunder shall be reduced appropriately to reflect the
amount of any required withholding. The Company shall have no obligation to
make any payments to the Executive or to make the Executive whole for the amount
of any required taxes.
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<PAGE>
12. Successors. This Agreement shall be binding on, and inure to the
----------
benefit of, the Company and its successors and assigns and any person acquiring,
whether by merger, reorganization, consolidation, by purchase of assets or
otherwise, all or substantially all of the assets of the Company.
13. Nonalienation. The interests of the Executive under this Agreement
-------------
are not subject to the claims of his creditors, other than the Company, and may
not otherwise be voluntarily or involuntarily assigned, alienated or encumbered.
14. Waiver of Breach. The waiver by either the Company or the Executive
----------------
of a breach of any provision of this Agreement shall not operate as or be deemed
a waiver of any subsequent breach by either the Company or the Executive.
Continuation of payments hereunder by the Company following a breach by the
Executive of any provision of this Agreement shall not preclude the Company from
thereafter terminating said payments based upon the same violation.
15. Arbitration. Any dispute, claim or controversy relating to or arising
-----------
out of this Agreement (or the breach thereof) shall be settled by final, binding
and non-appealable arbitration before the American Arbitration Association (the
"Association"), with the hearing to be held in Santa Clara or San Mateo County,
California, under the California Employment Dispute Resolution Rules then in
effect for that organization. This Section 15 shall not be construed to limit
the Company's right to obtain relief under Section 8 with respect to any matter
or controversy subject to Section 8, and, pending a final determination by the
arbitrator with respect to any such matter or controversy, the Company shall be
entitled to obtain any such relief by direct application to a court of law,
without being required to first arbitrate such matter or controversy.
Arbitration shall be conducted before a single arbitrator selected by the
Company and the Executive. In the event the parties cannot agree on an
arbitrator, then the Association will supply both parties with a list of seven
names from which the parties will alternately strike one name until only one
remains, first choice is determined by a coin toss. The party winning the coin
toss has the option of striking first. Judgment may be entered on the
arbitrator's award in any court of competent jurisdiction to prevent any
continuation of any violation of the provisions of this Agreement. The cost of
the arbitrator, any record or transcript of the arbitration, and administrative
fees, shall be borne by the Company. Each party shall bear the fees of their
respective attorneys, the expenses of their witnesses and any other expenses
connected with presenting their cases.
16. Severability. It is mutually agreed and understood by the parties
------------
that should any of the agreements and covenants contained herein be determined
by any court of competent jurisdiction to be invalid by virtue of being vague or
unreasonable, including but not limited to the provisions of Section 7, then the
parties hereto consent that this Agreement shall be amended retroactive to the
date of its execution to include the terms and conditions said court deems to be
reasonable and in conformity with the original intent of the parties and the
parties hereto consent
-12-
<PAGE>
that under such circumstances, said court shall have the power and authority to
determine what is reasonable and in conformity with the original intent of the
parties to the extent that said covenants and/or agreements are enforceable.
17. Applicable Law. This Agreement shall be construed in accordance with
--------------
the laws of the State of California.
18. Amendment. This Agreement may be amended or canceled by mutual
---------
Agreement of the parties in writing without the consent of any other person.
19. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute one and the same instrument.
Each counterpart may consist of a copy hereof containing multiple signature
pages, each signed by one party hereto, but together signed by both of the
parties hereto.
20. Other Agreements. This Agreement constitutes the sole and complete
----------------
Agreement between the Company and the Executive and supersedes all other
agreements, both oral and written, between the Company and the Executive with
respect to the matters contained herein including, without limitation any prior
employment agreements between the Company and the Executive. No verbal or other
statements, inducements, or representations have been made to or relied upon by
the Executive. The parties have read and understand this Agreement.
Dated as of the date set forth above.
PACIFIC GATEWAY EXCHANGE
By:__________________________________
Its:
_____________________________________
EXECUTIVE
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<PAGE>
Exhibit A
Definition of Change in Control
For purposes of the Agreement, a "Change in Control" shall mean the
earliest to occur of any one of the following events:
(1) any "Person", as such term is used in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
(other than the Company, the Executive, any corporation owned,
directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company, and any trustee or other fiduciary holding securities under
an employee benefit plan of the Company), becomes the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange Act),
of 25% or more of the combined voting power of the Company's then
outstanding securities having the right to vote for the election of
directors ("Voting Stock");
(2) the majority of the Board of Directors of the Company (the "Board")
does not consist of individuals who are Incumbent Directors, which
term means the members of the Board on the date of this Agreement;
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 any plan of liquidation for the distribution of
all or substantially all of its assets;
(4) the Company mergers with or into another company, or all or
substantially all of the assets or business of the Company is
disposed of pursuant to a merger, consolidation or other transaction,
unless the shareholders of the Company immediately prior to such
merger, consolidation or other transaction beneficially own, directly
or indirectly, in substantially the same proportion as they owned the
Voting Stock of the Company, all of the Voting Stock or other
ownership interest of the entity or entities, if any, that succeed to
the business of the Company; or
(5) the Company combines with any other company and is the surviving
corporation but, immediately after the combination, the shareholders
of the Company immediately prior to the combination hold, directly or
indirectly, 50% or less of the Voting Stock of the combined company
(there being excluded from the number of shares held by such
shareholders, but not from the Voting Stock of
<PAGE>
the combined company, any shares received by affiliates of such other
company in exchange for stock of such other company).
Once a Change in Control has occurred, no subsequent event shall be considered a
Change in Control for purposes of this Agreement.
<PAGE>
Exhibit 10.5.2
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
This Agreement made and entered into as of January 1, 1998 (the "Effective
Date") by and between PACIFIC GATEWAY EXCHANGE (the "Company") and GAIL GRANTON
(the "Executive"),
WITNESSETH THAT:
---------------
WHEREAS, the parties desire to enter into this Agreement pertaining to the
continued employment of the Executive by the Company;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth below, it is hereby covenanted and agreed by the Company and the Executive
as follows:
1. Employment Period. Subject to the terms and conditions of this
-----------------
Agreement, the Company hereby agrees to employ the Executive during the
Employment Period (as defined below) and the Executive hereby agrees to remain
in the employ of the Company and to provide services during the Employment
Period in accordance with this Agreement. The "Employment Period" shall be the
period beginning on the Effective Date and ending on the third anniversary
thereof. After the third anniversary of the Effective Date, the Employment
Period shall be automatically extended for 12-month periods, unless one party to
this Agreement provides written notice of non-renewal to the other at least 90
days before the last day of the Employment Period.
2. Duties.
------
(a) Subject to the terms of this Agreement, the Company hereby agrees to employ
the Executive as its Executive Vice President, International Business
Development during the Employment Period, and the Executive hereby agrees
to remain in the employ of the Company during the Employment Period.
During the Employment Period, while the Executive is employed by the
Company, the Executive shall devote substantially all of her business time,
energies and talents to serving as its Executive Vice President,
International Business Development. The Executive agrees that she shall
perform her duties faithfully and efficiently subject to the directions of
the President of the Company (the "President"). The Executive will have
such authority and power as are inherent to the undertakings applicable to
her positions and necessary to carry out her responsibilities and the
duties required of her hereunder.
<PAGE>
(b) Except as set forth in paragraph 2(c), during the Employment Period,
Executive will not render services to any other person or entity, for
compensation or otherwise, without the prior written consent of the Board,
and Executive will not engage in any activity which conflicts or interferes
in any material way with the performance of the duties and responsibilities
of her position with the Company. During her employment with the Company,
Executive will not, either as an employee, employer, consultant,
independent contractor, agent, principal, partner, stockholder or in any
other individual or representative capacity, engage or participate in any
employment, consulting, business or other activity that is in competition
in any manner with the business of the Company.
(c) Notwithstanding paragraph 2(a), Executive may devote a reasonable amount of
personal time to the supervision of her personal investments which may
include securities of Matrix Telecom, Pacific Telecom America and passive
investments of up to 1% of the outstanding securities of any public
company; and activities involving professional, charitable, civic,
educational, religious and similar activities and engagements, to the
extent that such activities do not conflict or interfere in any material
way with her duties and responsibilities to the Company.
3. Compensation. Subject to the terms and conditions of this Agreement,
------------
during the Employment Period while the Executive is employed by the Company, the
Company shall compensate her for her services as follows:
(a) The Executive shall receive, for each 12-consecutive month period
beginning on the Effective Date and each anniversary thereof, an
annual salary of $200,000 (the "Salary"), which Salary shall be
payable in substantially equal monthly installments. The Executive's
Salary rate shall be reviewed annually on or about the anniversary of
the Effective Date, to determine whether an increase in the amount of
Salary is appropriate. In no event shall the Salary of the Executive
be reduced to an amount that is less than the amount specified in this
paragraph (a), or to an amount that is less than the amount that she
was previously receiving.
(b) The Executive shall be entitled to incentive compensation in the form
of a target annual cash bonus of $100,000. The amount of such bonus,
if any, shall be determined by the President taking into consideration
whether the
<PAGE>
Executive has met the performance targets that may have been set by
the President for such year, the relative contribution by the
Executive to the business of the Company, general economic conditions,
and such other factors as the President deems relevant.
Notwithstanding the foregoing, the President may award additional
bonus amounts in recognition of outstanding performance.
(c) Except as otherwise specifically provided to the contrary in this
Agreement, the Executive shall be provided with the retirement,
welfare benefits and other fringe benefits to the same extent and on
the same terms as those benefits are provided by the Company from time
to time to the Company's other senior management employees. During
the term of this Agreement, the Executive shall be provided with four
weeks paid vacation annually.
(d) The Executive shall be reimbursed by the Company, on terms and
conditions that are substantially similar to those that apply to other
similarly situated senior management employees of the Company, for
reasonable expenses for entertainment, travel, meals, lodging and
similar items which are authorized by the Company and actually
incurred by the Executive in the promotion of the Company's business.
(e) The Executive may elect to defer the receipt of all or part of any
bonus payable under paragraph 3(b) in accordance with the terms of a
deferred compensation plan to be established by the Compensation
Committee. Under such deferred compensation plan the deferred bonus
amounts will be converted to stock units, based on the value of the
Company's stock on the date the bonus would otherwise have been paid.
Such stock units will be credited to a bookkeeping account maintained
by the Company and shall be fully vested at all times. Additional
stock units shall also be credited to the Executive's account in an
amount equal to 25% of the amount of the deferred bonus, and such
additional stock units shall vest 50% one year after initial crediting
and the remaining 50% shall vest two years after initial crediting.
If dividends are paid on shares of the Company's stock while any stock
units are credited to the Executive's bookkeeping account, dividend
equivalents will be credited to the Executive's account as additional
stock units subject to the same vesting provisions as the stock units
on which such dividend equivalents are based.
-3-
<PAGE>
4. Rights and Payments Upon Termination or Change in Control. The
---------------------------------------------------------
Executive's right to benefits and payments, if any, for periods after the date
on which her employment with the Company terminates for any reason (her
"Termination Date") shall be determined in accordance with this Section 4:
(a) Minimum Payments. If the Executive's Termination Date occurs during
----------------
the Employment Period for any reason, the Executive shall be entitled
to the following payments, in addition to any payments or benefits to
which the Executive may be entitled under the following provisions of
this Section 4 (other than this paragraph (a)):
(i) her earned but unpaid Salary for the period ending on her
Termination Date; and
(ii) her accrued but unpaid vacation pay for the period ending with
her Termination Date, as determined in accordance with the
Company's policy as in effect from time to time.
Payments to be made to the Executive pursuant to this paragraph 4(a)
shall be made in a lump sum as soon as practicable after the
Executive's Termination Date. Except as may be otherwise expressly
provided to the contrary in this Agreement, nothing in this Agreement
shall be construed as requiring the Executive to be treated as
employed by the Company following her Termination Date for purposes of
any employee benefit plan or arrangement in which she may participate
at such time.
(b) Termination By Company for Cause. If the Executive's Termination Date
--------------------------------
occurs during the Employment Period and is a result of the Company's
termination of the Executive's employment on account of Cause (as
defined in paragraph (f) below), then, except as agreed in writing
between the Executive and the Company, the Executive shall have no
right to future payments or benefits under this Agreement (and the
Company shall have no obligation to make any such future payments or
provide any such future benefits) for periods after the Executive's
Termination Date.
(c) Termination for Death or Disability. If the Executive's Termination
-----------------------------------
Date occurs during the Employment Period on account of the Executive's
death or disability (as defined below), then the Executive (or in the
event of her
-4-
<PAGE>
death, her estate) shall be entitled to continuing payments of her
Salary for the period commencing on her Termination Date and ending on
the earliest of (i) 30 days from her Termination Date, (ii) the last
day of the Employment Period, or (iii) in the case of the Executive's
disability, the date on which the Executive violates the provisions of
Section 7 of this Agreement.
(d) Termination for Good Reason or by the Company for Reasons Other Than
--------------------------------------------------------------------
Cause. If the Executive's Termination Date occurs during the
-----
Employment Period and before the date of a Change in Control (as
defined in Exhibit A hereto), and is a result of the Executive's
termination of employment by the Company for any reason other than
Cause or on account of termination by the Executive for Good Reason
(as defined in paragraph (f)), and is not on account of the
Executive's death, disability, or voluntary resignation, the mutual
agreement of the parties or any other reason, then:
(A) The Executive shall receive from the Company for the period
commencing on her Termination Date and ending on the earliest of (i)
the 18-month anniversary of her Termination Date, (ii) the date on
which the Executive violates the provisions of Section 7 of this
Agreement, or (iii) the date of the Executive's death, the Salary in
effect as of her Termination Date (without regard to any reduction in
such Salary which gives the Executive the right to termination
employment for Good Reason), payable in accordance with the provisions
of paragraph 3(a).
(B) Stock options awarded to the Executive under any option plans of
the Company shall be 100% vested upon the occurrence of the
Executive's Termination Date as described in this paragraph (d) and
shall be exercisable for the period after the Termination Date as
specified for vested options in the applicable option agreement.
(e) Termination for Voluntary Resignation, Mutual Agreement or Other
----------------------------------------------------------------
Reasons. If the Executive's Termination Date occurs during the
-------
Employment Period on account of her voluntary resignation, mutual
agreement of the parties, or any reason other than those specified in
paragraphs (b), (c) or (d) above then, except as agreed in writing
between the Executive and the Company, the Executive shall have no
right to future payments or benefits under this Agreement (and the
Company shall
-5-
<PAGE>
have no obligation to make any such future payments or provide any
such future benefits) for periods after the Executive's Termination
Date.
(f) Payment Upon a Change in Control. In the event of a Change in Control
--------------------------------
(as defined in Exhibit A hereto), the Executive shall receive from the
Company (without regard to whether the Executive's Termination Date
occurs in connection with such Change in Control) a lump sum payment
equal to the amount that would have been payable to the Executive
pursuant to paragraph (d) next above had the Executive's employment
with the Company been terminated as of the date of the Change in
Control under circumstances that would have entitled the Executive to
payments under paragraph (d) next above. In the event the Executive
receive a payment pursuant to this paragraph (f), then upon the
Executive's subsequent termination of employment with the Company for
any reason, the Executive shall have no right to future payments or
benefits under this Agreement (and the Company shall have no
obligation to make any such future payments or provide any such future
benefits) for periods after the Executive's Termination Date.
(g) Non-Renewal of Agreement. In the event that this Agreement is not
------------------------
renewed at the end of the Employment Period, any stock options
outstanding and unvested at the end of the Employment Period shall
fully vest and shall be exercisable for the period of time after the
Employment Period as specified for vested options in the applicable
option agreement.
(h) Definitions. For purposes of this Agreement:
-----------
(i) the term "Cause" shall mean (1) the willful and continued failure
by the Executive to substantially perform her duties under this
Agreement, other than by reason of her being disabled (as defined
below) for which the Executive must receive at least two prior
written notices from the President, describing specific
reasonable duties or tasks, identifying the perceived failure to
perform, and giving the Executive a good faith opportunity to
satisfactorily perform those duties or tasks within a reasonable
period of time, (2) the willful engaging by the Executive in
conduct which is demonstrably and materially injurious to the
Company or its affiliates, (3) conduct by the Executive that
involves theft or fraud or, in connection with her duties under
this Agreement, dishonesty,
-6-
<PAGE>
(4) Executive's violation of the provisions of Section 7 hereof,
or (5) conviction of felony involving moral turpitude;
(ii) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that
the Executive's action or omission was in the best interest of
the Company;
(iii) the term "disability" shall mean the inability of the Executive,
after reasonable accommodation, to continue to perform her
duties under this Agreement on a full-time basis as a result of
mental or physical illness, sickness or injury for a period of
180 days within any 12-month period, as determined in the sole
discretion of the Board of Directors of the Company; and
(iv) the term "Good Reason" shall mean any of the following which
occur without the Executive's consent and which are not
corrected by the Company within 10 days of written notice to the
Company by the Executive: (1) a diminution of the Executive's
duties, title of Executive Vice President, International
Business Development or the assignment to her of duties that are
inconsistent in any substantial respect with the position,
authority or responsibilities associated with the position of
Executive Vice President, International Business Development, or
a change in her reporting relationship such that she reports to
a person other than the President; (2) a reduction in the
Executive's Salary rate or bonus potential; or (3) a relocation,
without the Executive's consent, of the Executive's principal
office from her current office as of the Effective Date to an
office that is more than 10 miles of the Executive's current
office, except for required travel on Company business to an
extent substantially consistent with the Executive's business
travel obligations on the Effective Date.
Notwithstanding any other provision of this Agreement, the Executive shall
automatically cease to be an officer and/or director of the Company and its
affiliates as of her Termination Date.
5. Tax Gross-Up. In the event that there shall occur a Change in Control
------------
of the Company and the Executive becomes entitled any payment, benefit,
distribution, acceleration of vesting or combination thereof (the "Total
Payments") by the Company
-7-
<PAGE>
or any affiliated company, which are or become subject to the excise tax imposed
by Section 4999 of the Internal Revenue Code of 1986, as amended, or any similar
tax that may hereafter be imposed (the "Excise Tax"), the Company shall pay to
Executive at the time specified below an additional amount (the "Gross-up
Payment") (which shall include, without limitation, reimbursement for any
penalties and interest that may accrue in respect of such Excise Tax) such that
the net amount retained by the Executive, after reduction for any Excise Tax
(including any penalties or interest thereon) on the Total Payments and any
federal, state and local income or employment tax and Excise Tax on the Gross-up
Payment provided for under this Section 5, but before reduction for any federal,
state, or local income or employment tax on the Total Payments, shall be equal
to the sum of (i) the Total Payments, and (ii) an amount equal to the product of
any deductions disallowed for federal, state, or local income tax purposes
because of the inclusion of the Gross-up Payment in Executive's adjusted gross
income multiplied by the highest applicable marginal rate of federal, state, or
local income taxation, respectively, for the calendar year in which the Gross-up
Payment is to be made.
6. Set-Off. The Company shall be entitled to set off against the amounts
-------
payable to the Executive under this Agreement, any amounts owed to the Company
or its affiliates by the Executive.
7. Confidential Information. The Executive agrees that:
------------------------
(a) Except as may be required by the lawful order of a court or agency of
competent jurisdiction or as necessary to carry out her duties to the
Company and its affiliates, or except to the extent that the Executive
has express authorization from the Company, she shall keep secret and
confidential indefinitely all non-public information (including,
without limitation, information regarding litigation and pending
litigation) concerning the Company and its affiliates which was
acquired by or disclosed to the Executive during the course of her
employment with the Company or during the course of her consultation
with the Company following her termination of employment and not to
disclose the same, either directly or indirectly, to any other person,
firm, or business entity, or to use it in any way.
(b) Upon her Termination Date or at the Company's earlier request, she
will promptly return to the Company any and all records, documents,
physical property, information, computer disks or other materials
relating to the
-8-
<PAGE>
business of the Company and its affiliates obtained by her during her
course of employment with the Company.
(c) Nothing in the foregoing provisions of this Section 7 shall be
construed so as to prevent the Executive from using, in connection
with her employment for himself or an employer other than the Company
or any of its affiliates, knowledge which was acquired by her during
the course of her employment with the Company and its affiliates, and
which is generally known to persons of her experience in other
companies in the same industry.
8. Equitable Remedies. The Executive acknowledges that the Company would
------------------
be irreparably injured by a violation of Section 7 and agrees that the Company,
in addition to other remedies available to it for such breach or threatened
breach, shall be entitled to a preliminary injunction, temporary restraining
order, other equivalent relief, restraining the Executive from any actual or
threatened breach of Section 7 without any bond or other security being
required.
9. Defense of Claims. The Executive agrees that, on and after the
-----------------
Effective Date, she will cooperate with the Company and its affiliates in the
defense of any claims that may be made against the Company or its affiliates to
the extent that such claims may relate to services performed by her for the
Company. To the extent travel is required to comply with the requirements of
this Section 9, the Company shall, to the extent possible, provide the Executive
with notice at least 10 days prior to the date on which such travel would be
required and the Company agrees to reimburse the Executive for all of her
reasonable actual expenses associated with such travel; provided, however, that
if the Company reasonably expects the travel to be extensive or unduly
burdensome to the Executive from a financial perspective, the Company may
provide to the Executive pre-paid tickets for transportation in connection with
such travel.
10. Notices. Notices provided for in this Agreement shall be in writing
-------
and shall be deemed to have been duly received when delivered in person or sent
by facsimile transmission, on the first business day after it is sent by air
express courier service or on the second business day following deposit in the
United States registered or certified mail, return receipt requested, postage
prepaid and addressed, in the case of the Company to the following address:
Pacific Gateway Exchange
-9-
<PAGE>
533 Airport Boulevard, Suite 505
Burlingame, California 94010
Attention: Howard A. Neckowitz
or to the Executive at her last residence address as shown on the Company's
payroll records, or such other address as either party may have furnished to the
other in writing in accordance herewith, except that a notice of change of
address shall be effective only upon actual receipt.
11. Withholding. All compensation payable under this Agreement shall be
-----------
subject to customary withholding taxes and other employment taxes as required
with respect to compensation paid by a corporation to an employee and the amount
of compensation payable hereunder shall be reduced appropriately to reflect the
amount of any required withholding. The Company shall have no obligation to
make any payments to the Executive or to make the Executive whole for the amount
of any required taxes.
12. Successors. This Agreement shall be binding on, and inure to the
----------
benefit of, the Company and its successors and assigns and any person acquiring,
whether by merger, reorganization, consolidation, by purchase of assets or
otherwise, all or substantially all of the assets of the Company.
13. Nonalienation. The interests of the Executive under this Agreement
-------------
are not subject to the claims of her creditors, other than the Company, and may
not otherwise be voluntarily or involuntarily assigned, alienated or encumbered.
14. Waiver of Breach. The waiver by either the Company or the Executive
----------------
of a breach of any provision of this Agreement shall not operate as or be deemed
a waiver of any subsequent breach by either the Company or the Executive.
Continuation of payments hereunder by the Company following a breach by the
Executive of any provision of this Agreement shall not preclude the Company from
thereafter terminating said payments based upon the same violation.
15. Arbitration. Any dispute, claim or controversy relating to or arising
-----------
out of this Agreement (or the breach thereof) shall be settled by final, binding
and non-appealable arbitration before the American Arbitration Association (the
"Association"), with the hearing to be held in Santa Clara or San Mateo County,
California, under the California Employment Dispute Resolution Rules then in
effect
-10-
<PAGE>
for that organization. This Section 15 shall not be construed to limit the
Company's right to obtain relief under Section 8 with respect to any matter or
controversy subject to Section 8, and, pending a final determination by the
arbitrator with respect to any such matter or controversy, the Company shall be
entitled to obtain any such relief by direct application to a court of law,
without being required to first arbitrate such matter or controversy.
Arbitration shall be conducted before a single arbitrator selected by the
Company and the Executive. In the event the parties cannot agree on an
arbitrator, then the Association will supply both parties with a list of seven
names from which the parties will alternately strike one name until only one
remains, first choice is determined by a coin toss. The party winning the coin
toss has the option of striking first. Judgment may be entered on the
arbitrator's award in any court of competent jurisdiction to prevent any
continuation of any violation of the provisions of this Agreement. The cost of
the arbitrator, any record or transcript of the arbitration, and administrative
fees, shall be borne by the Company. Each party shall bear the fees of their
respective attorneys, the expenses of their witnesses and any other expenses
connected with presenting their cases.
15. Severability. It is mutually agreed and understood by the parties
------------
that should any of the agreements and covenants contained herein be determined
by any court of competent jurisdiction to be invalid by virtue of being vague or
unreasonable, including but not limited to the provisions of Section 7, then the
parties hereto consent that this Agreement shall be amended retroactive to the
date of its execution to include the terms and conditions said court deems to be
reasonable and in conformity with the original intent of the parties and the
parties hereto consent that under such circumstances, said court shall have the
power and authority to determine what is reasonable and in conformity with the
original intent of the parties to the extent that said covenants and/or
agreements are enforceable.
16. Applicable Law. This Agreement shall be construed in accordance with
--------------
the laws of the State of California.
17. Amendment. This Agreement may be amended or canceled by mutual
---------
Agreement of the parties in writing without the consent of any other person.
18. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute one and the same instrument.
Each counterpart may consist of a copy hereof containing multiple signature
pages, each signed by one party hereto, but together signed by both of the
parties hereto.
-11-
<PAGE>
19. Other Agreements. This Agreement constitutes the sole and complete
----------------
Agreement between the Company and the Executive and supersedes all other
agreements, both oral and written, between the Company and the Executive with
respect to the matters contained herein including, without limitation any prior
employment agreements between the Company and the Executive. No verbal or other
statements, inducements, or representations have been made to or relied upon by
the Executive. The parties have read and understand this Agreement.
Dated as of the date set forth above.
PACIFIC GATEWAY EXCHANGE
By: /s/ Howard A. Neckowitz
Its: President and Chief Executive Officer
/s/ Gail Granton
EXECUTIVE
-12-
<PAGE>
Exhibit A
Definition of Change in Control
For purposes of the Agreement, a "Change in Control" shall mean the
earliest to occur of any one of the following events:
(1) any "Person", as such term is used in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
(other than the Company, the Executive, any corporation owned,
directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company, and any trustee or other fiduciary holding securities under
an employee benefit plan of the Company), becomes the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange Act),
of 25% or more of the combined voting power of the Company's then
outstanding securities having the right to vote for the election of
directors ("Voting Stock");
(2) the majority of the Board of Directors of the Company (the "Board")
consists of individuals other than Incumbent Directors, which term
means the members of the Board on the date of this Agreement;
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 any plan of liquidation for the distribution of
all or substantially all of its assets;
(4) all or substantially all of the assets or business of the Company is
disposed of pursuant to a merger, consolidation or other transaction,
(unless the shareholders of the Company immediately prior to such
merger, consolidation or other transaction beneficially own, directly
or indirectly, in substantially the same proportion as they owned the
Voting Stock of the Company, all of the Voting Stock or other
ownership interest of the entity or entities, if any, that succeed to
the business of the Company); or
<PAGE>
(5) the Company combines with any other company and is the surviving
corporation but, immediately after the combination, the shareholders
of the Company immediately prior to the combination hold, directly or
indirectly, 50% or less of the Voting Stock of the combined company
(there being excluded from the number of shares held by such
shareholders, but not from the Voting Stock of the combined company,
any shares received by affiliates of such other company in exchange
for stock of such other company).
Once a Change in Control has occurred, no subsequent event shall be considered a
Change in Control for purposes of this Agreement.
<PAGE>
Exhibit 10.5.3
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
This Agreement made and entered into as of January 1, 1998 (the "Effective
Date") by and between PACIFIC GATEWAY EXCHANGE (the "Company") and RONALD D.
ANDERSON (the "Executive"),
WITNESSETH THAT:
---------------
WHEREAS, the parties desire to enter into this Agreement pertaining to the
continued employment of the Executive by the Company;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth below, it is hereby covenanted and agreed by the Company and the Executive
as follows:
1. Employment Period. Subject to the terms and conditions of this
-----------------
Agreement, the Company hereby agrees to employ the Executive during the
Employment Period (as defined below) and the Executive hereby agrees to remain
in the employ of the Company and to provide services during the Employment
Period in accordance with this Agreement. The "Employment Period" shall be the
period beginning on the Effective Date and ending on the third anniversary
thereof. After the third anniversary of the Effective Date, the Employment
Period shall be automatically extended for 12-month periods, unless one party to
this Agreement provides written notice of non-renewal to the other at least 90
days before the last day of the Employment Period.
2. Duties. Subject to the terms of this Agreement, the Company hereby
------
agrees to employ the Executive as its Senior Vice President, Operations and
Engineering during the Employment Period, and the Executive hereby agrees to
remain in the employ of the Company during the Employment Period. During the
Employment Period, while the Executive is employed by the Company, the Executive
shall devote substantially all of his business time, energies and talents to
serving as its Senior Vice President, Operations and Engineering. The Executive
agrees that he shall perform his duties faithfully and efficiently subject to
the directions of the President of the Company (the "President"). The Executive
will have such authority and power as are inherent to the undertakings
applicable to his positions and necessary to carry out his responsibilities and
the duties required of him hereunder.
3. Compensation. Subject to the terms and conditions of this Agreement,
------------
during the Employment Period while the Executive is employed by the Company, the
Company shall compensate him for his services as follows:
<PAGE>
(a) The Executive shall receive, for each 12-consecutive month period
beginning on the Effective Date and each anniversary thereof, an
annual salary of $175,000 (the "Salary"), which Salary shall be
payable in substantially equal monthly installments. The Executive's
Salary rate shall be reviewed annually on or about the anniversary of
the Effective Date, to determine whether an increase in the amount of
Salary is appropriate. In no event shall the Salary of the Executive
be reduced to an amount that is less than the amount specified in this
paragraph (a), or to an amount that is less than the amount that he
was previously receiving.
(b) The Executive shall be entitled to incentive compensation in the form
of a target annual cash bonus of $60,000. The actual bonus paid may
be more or less than the target and shall be determined by the
President taking into consideration whether the Executive has met the
performance targets set by the President for such year, (which shall
be set by the President, in consultation with the Executive, on or
about January 31 of each year), the relative contribution by the
Executive to the business of the Company, the Company's financial
performance for the year, general economic conditions, and such other
factors as the President deems relevant.
(c) Except as otherwise specifically provided to the contrary in this
Agreement, the Executive shall be provided with the retirement,
welfare benefits and other fringe benefits to the same extent and on
the same terms as those benefits are provided by the Company from time
to time to the Company's other senior management employees.
(d) The Executive shall be reimbursed by the Company, on terms and
conditions that are substantially similar to those that apply to other
similarly situated senior management employees of the Company, for
reasonable expenses for entertainment, travel, meals, lodging and
similar items which are authorized by the Company and actually
incurred by the Executive in the promotion of the Company's business.
4. Rights and Payments Upon Termination or Change in Control. The
---------------------------------------------------------
Executive's right to benefits and payments, if any, for periods after the date
on which his employment with the Company terminates for any reason (his
"Termination Date") shall be determined in accordance with this Section 4:
(a) Minimum Payments. If the Executive's Termination Date occurs during
----------------
the Employment Period for any reason, the Executive shall be entitled
to the following payments, in addition to any payments or benefits to
which the Executive may be entitled under the following provisions of
this Section 4 (other than this paragraph (a)):
(i) his earned but unpaid Salary for the period ending on his
Termination Date; and
-2-
<PAGE>
(ii) his accrued but unpaid vacation pay for the period ending with
his Termination Date, as determined in accordance with the
Company's policy as in effect from time to time.
Payments to be made to the Executive pursuant to this paragraph 4(a)
shall be made in a lump sum as soon as practicable after the
Executive's Termination Date. Except as may be otherwise expressly
provided to the contrary in this Agreement, nothing in this Agreement
shall be construed as requiring the Executive to be treated as
employed by the Company following his Termination Date for purposes of
any employee benefit plan or arrangement in which he may participate
at such time.
(b) Termination By Company for Cause. If the Executive's Termination Date
--------------------------------
occurs during the Employment Period and is a result of the Company's
termination of the Executive's employment on account of Cause (as
defined in paragraph (g) below), then, except as agreed in writing
between the Executive and the Company, the Executive shall have no
right to future payments or benefits under this Agreement (and the
Company shall have no obligation to make any such future payments or
provide any such future benefits) for periods after the Executive's
Termination Date.
(c) Termination for Death or Disability. If the Executive's Termination
-----------------------------------
Date occurs during the Employment Period on account of the Executive's
death or disability (as defined below), then the Executive (or in the
event of his death, his estate) shall be entitled to continuing
payments of his Salary for the period commencing on his Termination
Date and ending on the earliest of (i) 30 days from his Termination
Date, (ii) the last day of the Employment Period, or (iii) in the case
of the Executive's disability, the date on which the Executive
violates the provisions of Section 6 of this Agreement.
(d) Termination for Good Reason or by the Company for Reasons Other Than
--------------------------------------------------------------------
Cause. If the Executive's Termination Date occurs during the
-----
Employment Period and before the date of a Change of Control (as
defined in Exhibit A hereto), and is a result of the Executive's
termination of employment by the Company for any reason other than
Cause or on account of termination by the Executive for Good Reason (
as defined in paragraph (g)), and is not on account of the Executive's
death, disability, or voluntary resignation, the mutual agreement of
the parties or any other reason, then:
(A) The Executive shall receive from the Company for the period
commencing on his Termination Date and ending on the earliest of (i)
the 18-month anniversary of
-3-
<PAGE>
his Termination Date, (ii) the date on which the Executive violates
the provisions of Section 6 of this Agreement, or (iii) the date of
the Executive's death, the Salary in effect as of his Termination Date
(without regard to any reduction in such Salary which gives the
Executive the right to termination employment for Good Reason),
payable in accordance with the provisions of paragraph 3(a).
(B) Stock options awarded to the Executive under any option plans of
the Company shall be 100% vested upon the occurrence of the
Executive's Termination Date as described in this paragraph (d) and
shall be exercisable for the period after the Termination Date as
specified for vested options in the applicable option agreement.
(e) Termination for Voluntary Resignation, Mutual Agreement or Other
----------------------------------------------------------------
Reasons. If the Executive's Termination Date occurs during the
-------
Employment Period on account of his voluntary resignation, mutual
agreement of the parties, or any reason other than those specified in
paragraphs (b), (c) or (d) above then, except as agreed in writing
between the Executive and the Company, the Executive shall have no
right to future payments or benefits under this Agreement (and the
Company shall have no obligation to make any such future payments or
provide any such future benefits) for periods after the Executive's
Termination Date.
(f) Payment Upon a Change in Control. If the Executive's Termination Date
--------------------------------
occurs within two years following a Change in Control, including a
Termination Date occurring on the date of a Change of Control, on
account of termination by the Company for reasons other than Cause or
on account of termination by the Executive for Good Reason, then the
Executive shall receive from the Company a lump sum payment equal to
18 months Severance in effect as of his Termination Date (without
regard to any reduction in such Salary which gives the Executive the
right to termination employment for Good Reason).
(g) Definitions. For purposes of this Agreement:
-----------
(i) the term "Cause" shall mean (1) the willful and continued failure
by the Executive to substantially perform his duties under this
Agreement, other than by reason of his being disabled (as defined
below), (2) the willful engaging by the Executive in conduct
which is demonstrably and materially injurious to the Company or
its affiliates, (3) conduct by the Executive that involves theft
or fraud or, in connection with his duties under this Agreement,
dishonesty, (4) Executive's violation of the provisions of
Sections 6 and 7 hereof, or (5) conviction of felony involving
moral turpitude;
-4-
<PAGE>
(ii) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that
the Executive's action or omission was in the best interest of
the Company; and
(iii) the term "disability" shall mean the inability of the Executive,
after reasonable accommodation, to continue to perform his
duties under this Agreement on a full-time basis as a result of
mental or physical illness, sickness or injury for a period of
180 days within any 12-month period, as determined in the sole
discretion of the Board of Directors of the Company; and
(iii) the term "Good Reason" shall mean any of the following which
occur without the Executive's consent and which are not
corrected by the Company within 10 days of written notice to the
Company by the Executive: (1) a diminution of the Executive's
duties or the assignment to him of duties that are inconsistent
in any substantial respect with the position, authority or
responsibilities associated with the position of Senior Vice
President, Operations and Engineering, (2) a reduction in the
Executive's Salary rate or bonus potential; or (3) a relocation,
without the Executive's consent, of the Executive's principal
office from his current office as of the Effective Date to an
office that is more than 10 miles of the Executive's current
office, except for required travel on Company business to an
extent substantially consistent with the Executive's business
travel obligations on the Effective Date.
Notwithstanding any other provision of this Agreement, the Executive shall
automatically cease to be an officer and/or director of the Company and its
affiliates as of his Termination Date.
5. Set-Off. The Company shall be entitled to set off against the amounts
-------
payable to the Executive under this Agreement, any amounts owed to the Company
or its affiliates by the Executive.
6. Confidential Information. The Executive agrees that:
------------------------
(a) Except as may be required by the lawful order of a court or agency of
competent jurisdiction or as necessary to carry out his duties to the
Company and its affiliates, or except to the extent that the Executive
has express authorization from the Company, he shall keep secret and
confidential indefinitely all non-public information (including,
without limitation, information regarding litigation and pending
litigation) concerning the Company and its affiliates which was
acquired
-5-
<PAGE>
by or disclosed to the Executive during the course of his employment
with the Company or during the course of his consultation with the
Company following his termination of employment and not to disclose
the same, either directly or indirectly, to any other person, firm, or
business entity, or to use it in any way.
(b) Upon his Termination Date or at the Company's earlier request, he will
promptly return to the Company any and all records, documents,
physical property, information, computer disks or other materials
relating to the business of the Company and its affiliates obtained by
him during his course of employment with the Company.
(c) Nothing in the foregoing provisions of this Section 6 shall be
construed so as to prevent the Executive from using, in connection
with his employment for himself or an employer other than the Company
or any of its affiliates, knowledge which was acquired by him during
the course of his employment with the Company and its affiliates, and
which is generally known to persons of his experience in other
companies in the same industry.
7. Noncompetition. During the Noncompetition Period (as defined below),
--------------
the Executive agrees that he will not directly or indirectly engage in, assist,
perform services for, establish or open, or have any equity interest (other than
ownership of 5% or less of the outstanding stock of any corporation listed on
the New York or American Stock Exchange or included in the National Association
of Securities Dealers Automated Quotation System) in any person, firm,
corporation, or business entity (whether as an employee, officer, director,
agent, security holder, creditor, consultant, or otherwise) that engages in the
business of providing international or domestic long distance telephone
services. Nothing in this Section 7 shall be construed as limiting the
Executive's duty of loyalty to the Company while he is employed by the Company,
or any other duty he may otherwise have to the Company while he is employed by
the Company. For purposes of this Agreement, the "Noncompetition Period" shall
be the period while the Executive is employed by the Company and for the period,
if any, after the Executive's Termination Date that he is receiving payments
pursuant to Section 4 hereof
8. Equitable Remedies. The Executive acknowledges that the Company would
------------------
be irreparably injured by a violation of Sections 6 and 7 and agrees that the
Company, in addition to other remedies available to it for such breach or
threatened breach, shall be entitled to a preliminary injunction, temporary
restraining order, other equivalent relief, restraining the Executive from any
actual or threatened breach of Sections 6 and 7 without any bond or other
security being required.
9. Defense of Claims. The Executive agrees that, on and after the
-----------------
Effective Date, he will cooperate with the Company and its affiliates in the
defense of any claims that may be made against the Company or its affiliates to
the extent that such claims may relate to services
-6-
<PAGE>
performed by him for the Company. To the extent travel is required to comply
with the requirements of this Section 9, the Company shall, to the extent
possible, provide the Executive with notice at least 10 days prior to the date
on which such travel would be required and the Company agrees to reimburse the
Executive for all of his reasonable actual expenses associated with such travel;
provided, however, that if the Company reasonably expects the travel to be
extensive or unduly burdensome to the Executive from a financial perspective,
the Company may provide to the Executive pre-paid tickets for transportation in
connection with such travel.
10. Notices. Notices provided for in this Agreement shall be in writing
-------
and shall be deemed to have been duly received when delivered in person or sent
by facsimile transmission, on the first business day after it is sent by air
express courier service or on the second business day following deposit in the
United States registered or certified mail, return receipt requested, postage
prepaid and addressed, in the case of the Company to the following address:
Pacific Gateway Exchange
533 Airport Boulevard, Suite 505
Burlingame, California 94010
Attention: Howard A. Neckowitz
or to the Executive at his last residence address as shown on the Company's
payroll records, or such other address as either party may have furnished to the
other in writing in accordance herewith, except that a notice of change of
address shall be effective only upon actual receipt.
11. Withholding. All compensation payable under this Agreement shall be
-----------
subject to customary withholding taxes and other employment taxes as required
with respect to compensation paid by a corporation to an employee and the amount
of compensation payable hereunder shall be reduced appropriately to reflect the
amount of any required withholding. The Company shall have no obligation to
make any payments to the Executive or to make the Executive whole for the amount
of any required taxes.
12. Successors. This Agreement shall be binding on, and inure to the
----------
benefit of, the Company and its successors and assigns and any person acquiring,
whether by merger, reorganization, consolidation, by purchase of assets or
otherwise, all or substantially all of the assets of the Company.
13. Nonalienation. The interests of the Executive under this Agreement
-------------
are not subject to the claims of his creditors, other than the Company, and may
not otherwise be voluntarily or involuntarily assigned, alienated or encumbered.
14. Waiver of Breach. The waiver by either the Company or the Executive
----------------
of a breach of any provision of this Agreement shall not operate as or be deemed
a waiver of any subsequent
-7-
<PAGE>
breach by either the Company or the Executive. Continuation of payments
hereunder by the Company following a breach by the Executive of any provision of
this Agreement shall not preclude the Company from thereafter terminating said
payments based upon the same violation.
15. Arbitration. Any dispute, claim or controversy relating to or arising
-----------
out of this Agreement (or the breach thereof) shall be settled by final, binding
and non-appealable arbitration before the American Arbitration Association (the
"Association"), with the hearing to be held in Santa Clara or San Mateo County,
California, under the California Employment Dispute Resolution Rules then in
effect for that organization. This Section 15 shall not be construed to limit
the Company's right to obtain relief under Section 8 with respect to any matter
or controversy subject to Section 8, and, pending a final determination by the
arbitrator with respect to any such matter or controversy, the Company shall be
entitled to obtain any such relief by direct application to a court of law,
without being required to first arbitrate such matter or controversy.
Arbitration shall be conducted before a single arbitrator selected by the
Company and the Executive. In the event the parties cannot agree on an
arbitrator, then the Association will supply both parties with a list of seven
names from which the parties will alternately strike one name until only one
remains, first choice is determined by a coin toss. The party winning the coin
toss has the option of striking first. Judgment may be entered on the
arbitrator's award in any court of competent jurisdiction to prevent any
continuation of any violation of the provisions of this Agreement. The cost of
the arbitrator, any record or transcript of the arbitration, and administrative
fees, shall be borne by the Company. Each party shall bear the fees of their
respective attorneys, the expenses of their witnesses and any other expenses
connected with presenting their cases.
16. Severability. It is mutually agreed and understood by the parties
------------
that should any of the agreements and covenants contained herein be determined
by any court of competent jurisdiction to be invalid by virtue of being vague or
unreasonable, including but not limited to the provisions of Sections 6 and 7,
then the parties hereto consent that this Agreement shall be amended retroactive
to the date of its execution to include the terms and conditions said court
deems to be reasonable and in conformity with the original intent of the parties
and the parties hereto consent that under such circumstances, said court shall
have the power and authority to determine what is reasonable and in conformity
with the original intent of the parties to the extent that said covenants and/or
agreements are enforceable.
17. Applicable Law. This Agreement shall be construed in accordance with
--------------
the laws of the State of California.
18. Amendment. This Agreement may be amended or canceled by mutual
---------
Agreement of the parties in writing without the consent of any other person.
19. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall
-8-
<PAGE>
together constitute one and the same instrument. Each counterpart may consist of
a copy hereof containing multiple signature pages, each signed by one party
hereto, but together signed by both of the parties hereto.
20. Other Agreements. This Agreement constitutes the sole and complete
----------------
Agreement between the Company and the Executive and supersedes all other
agreements, both oral and written, between the Company and the Executive with
respect to the matters contained herein including, without limitation any prior
employment agreements between the Company and the Executive. No verbal or other
statements, inducements, or representations have been made to or relied upon by
the Executive. The parties have read and understand this Agreement.
Dated as of the date set forth above.
PACIFIC GATEWAY EXCHANGE
By: /s/ Howard A. Neckowitz
Its: President and Chief Executive Officer
/s/ Ronald D. Anderson
EXECUTIVE
-9-
<PAGE>
Exhibit A
Definition of Change in Control
For purposes of the Agreement, a "Change in Control" shall mean the
earliest to occur of any one of the following events:
(1) any "Person", as such term is used in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
(other than the Company, the Executive, any corporation owned,
directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company, and any trustee or other fiduciary holding securities under
an employee benefit plan of the Company), becomes the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange Act),
of 25% or more of the combined voting power of the Company's then
outstanding securities having the right to vote for the election of
directors ("Voting Stock");
(2) the majority of the Board of Directors of the Company (the "Board")
does not consist of individuals who are Incumbent Directors, which
term means the members of the Board on the date of this Agreement;
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 any plan of liquidation for the distribution of
all or substantially all of its assets;
(4) the company merges with or into another company, or all or
substantially all of the assets or business of the Company is
disposed of pursuant to a merger, consolidation or other transaction
(unless the shareholders of the Company immediately prior to such
merger, consolidation or other transaction beneficially own, directly
or indirectly, in substantially the same proportion as they owned the
Voting Stock of the Company, all of the Voting Stock or other
ownership interest of the entity or entities, if any, that succeed to
the business of the Company); or
(5) the Company combines with any other company and is the surviving
corporation but, immediately after the combination, the shareholders
of the Company immediately prior to the combination hold, directly or
indirectly, 50% or less of the Voting Stock of
<PAGE>
the combined company (there being excluded from the number of shares
held by such shareholders, but not from the Voting Stock of the
combined company, any shares received by affiliates of such other
company in exchange for stock of such other company). Once a Change
in Control has occurred, no subsequent event shall be considered a
Change in Control for purposes of this Agreement.
<PAGE>
Exhibit 10.5.4
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
This Agreement made and entered into as of January 1, 1998 (the "Effective
Date") by and between PACIFIC GATEWAY EXCHANGE (the "Company") and ROBERT F.
CRAVER (the "Executive"),
WITNESSETH THAT:
---------------
WHEREAS, the parties desire to enter into this Agreement pertaining to the
continued employment of the Executive by the Company;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth below, it is hereby covenanted and agreed by the Company and the Executive
as follows:
1. Employment Period. Subject to the terms and conditions of this
-----------------
Agreement, the Company hereby agrees to employ the Executive during the
Employment Period (as defined below) and the Executive hereby agrees to remain
in the employ of the Company and to provide services during the Employment
Period in accordance with this Agreement. The "Employment Period" shall be the
period beginning on the Effective Date and ending on the second anniversary
thereof. After the second anniversary of the Effective Date, the Employment
Period shall be automatically extended for 12-month periods, unless one party to
this Agreement provides written notice of non-renewal to the other at least 90
days before the last day of the Employment Period.
2. Duties. Subject to the terms of this Agreement, the Company hereby
------
agrees to employ the Executive as its Senior Vice President, International
Relations during the Employment Period, and the Executive hereby agrees to
remain in the employ of the Company during the Employment Period. During the
Employment Period, while the Executive is employed by the Company, the Executive
shall devote substantially all of his business time, energies and talents to
serving as its Senior Vice President, International Relations. The Executive
agrees that he shall perform his duties faithfully and efficiently subject to
the directions of the President of the Company (the "President"). The Executive
will have such authority and power as are inherent to the undertakings
applicable to his positions and necessary to carry out his responsibilities and
the duties required of him hereunder.
3. Compensation. Subject to the terms and conditions of this Agreement,
------------
during the Employment Period while the Executive is employed by the Company, the
Company shall compensate him for his services as follows:
<PAGE>
(a) The Executive shall receive, for each 12-consecutive month period
beginning on the Effective Date and each anniversary thereof, an
annual salary of $150,000 (the "Salary"), which Salary shall be
payable in substantially equal monthly installments. The Executive's
Salary rate shall be reviewed annually on or about the anniversary of
the Effective Date, to determine whether an increase in the amount of
Salary is appropriate. In no event shall the Salary of the Executive
be reduced to an amount that is less than the amount specified in this
paragraph (a), or to an amount that is less than the amount that he
was previously receiving.
(b) The Executive shall be entitled to incentive compensation in the form
of an annual cash bonus that shall be determined by the President
taking into consideration whether the Executive has met the
performance targets set by the President for such year, (which shall
be set by the President, in consultation with the Executive, on or
about January 31 of each year), the relative contribution by the
Executive to the business of the Company, the Company's financial
performance for the year, general economic conditions, and such other
factors as the President deems relevant.
(c) Except as otherwise specifically provided to the contrary in this
Agreement, the Executive shall be provided with the retirement,
welfare benefits and other fringe benefits to the same extent and on
the same terms as those benefits are provided by the Company from time
to time to the Company's other senior management employees.
(d) The Executive shall be reimbursed by the Company, on terms and
conditions that are substantially similar to those that apply to other
similarly situated senior management employees of the Company, for
reasonable expenses for entertainment, travel, meals, lodging and
similar items which are authorized by the Company and actually
incurred by the Executive in the promotion of the Company's business.
4. Rights and Payments Upon Termination or Change in Control. The
---------------------------------------------------------
Executive's right to benefits and payments, if any, for periods after the date
on which his employment with the Company terminates for any reason (his
"Termination Date") shall be determined in accordance with this Section 4:
(a) Minimum Payments. If the Executive's Termination Date occurs during
----------------
the Employment Period for any reason, the Executive shall be entitled
to the following payments, in addition to any payments or benefits to
which the Executive may be entitled under the following provisions of
this Section 4 (other than this paragraph (a)):
(i) his earned but unpaid Salary for the period ending on his
Termination Date; and
-2-
<PAGE>
(ii) his accrued but unpaid vacation pay for the period ending with
his Termination Date, as determined in accordance with the
Company's policy as in effect from time to time.
Payments to be made to the Executive pursuant to this paragraph 4(a)
shall be made in a lump sum as soon as practicable after the
Executive's Termination Date. Except as may be otherwise expressly
provided to the contrary in this Agreement, nothing in this Agreement
shall be construed as requiring the Executive to be treated as
employed by the Company following his Termination Date for purposes of
any employee benefit plan or arrangement in which he may participate
at such time.
(b) Termination By Company for Cause. If the Executive's Termination Date
--------------------------------
occurs during the Employment Period and is a result of the Company's
termination of the Executive's employment on account of Cause (as
defined in paragraph (g) below), then, except as agreed in writing
between the Executive and the Company, the Executive shall have no
right to future payments or benefits under this Agreement (and the
Company shall have no obligation to make any such future payments or
provide any such future benefits) for periods after the Executive's
Termination Date.
(c) Termination for Death or Disability. If the Executive's Termination
-----------------------------------
Date occurs during the Employment Period on account of the Executive's
death or disability (as defined below), then the Executive (or in the
event of his death, his estate) shall be entitled to continuing
payments of his Salary for the period commencing on his Termination
Date and ending on the earliest of (i) 30 days from his Termination
Date, (ii) the last day of the Employment Period, or (iii) in the case
of the Executive's disability, the date on which the Executive
violates the provisions of Section 6 of this Agreement.
(d) Termination for Good Reason or by the Company for Reasons Other Than
--------------------------------------------------------------------
Cause. If the Executive's Termination Date occurs during the
-----
Employment Period and before the date of a Change in Control (as
defined in Exhibit A hereto), and is a result of the Executive's
termination of employment by the Company for any reason other than
Cause or on account of termination by the Executive for Good Reason
(as defined in paragraph (g)), and is not on account of the
Executive's death, disability, or voluntary resignation, the mutual
agreement of the parties or any other reason, then:
(A) The Executive shall receive from the Company for the period
commencing on his Termination Date and ending on the earliest of (i)
the 6-month anniversary of his Termination Date, (ii) the date on
which the Executive violates the
-3-
<PAGE>
provisions of Section 6 of this Agreement, or (iii) the date of the
Executive's death, the Salary in effect as of his Termination Date
(without regard to any reduction in such Salary which gives the
Executive the right to termination employment for Good Reason),
payable in accordance with the provisions of paragraph 3(a).
(B) Stock options awarded to the Executive under any option plans of
the Company shall be 100% vested upon the occurrence of the
Executive's Termination Date as described in this paragraph (d) and
shall be exercisable for the period after the Termination Date as
specified for vested options in the applicable option agreement.
(e) Termination for Voluntary Resignation, Mutual Agreement or Other
----------------------------------------------------------------
Reasons. If the Executive's Termination Date occurs during the
-------
Employment Period on account of his voluntary resignation, mutual
agreement of the parties, or any reason other than those specified in
paragraphs (b), (c) or (d) above then, except as agreed in writing
between the Executive and the Company, the Executive shall have no
right to future payments or benefits under this Agreement (and the
Company shall have no obligation to make any such future payments or
provide any such future benefits) for periods after the Executive's
Termination Date.
(f) Termination Following a Change in Control. If the Executive's
-----------------------------------------
Termination Date occurs within two years following a Change in
Control, including a Termination Date occurring on the date of a
Change in Control, on account of termination by the Company for
reasons other than Cause or on account of termination by the Executive
for Good Reason, then the Executive shall receive from the Company a
lump sum payment equal to 6 months Salary in effect as of his
Termination Date (without regard to any reduction in such Salary which
gives the Executive the right to termination employment for Good
Reason).
(g) Definitions. For purposes of this Agreement:
-----------
(i) the term "Cause" shall mean (1) the willful and continued failure
by the Executive to substantially perform his duties under this
Agreement, other than by reason of his being disabled (as defined
below), (2) the willful engaging by the Executive in conduct
which is demonstrably and materially injurious to the Company or
its affiliates, (3) conduct by the Executive that involves theft
or fraud or, in connection with his duties under this Agreement,
dishonesty, (4) Executive's violation of the provisions of
Sections 6 or 7 hereof, or (5) conviction of felony involving
moral turpitude;
-4-
<PAGE>
(ii) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that
the Executive's action or omission was in the best interest of
the Company; and
(iii) the term "disability" shall mean the inability of the
Executive, after reasonable accommodation, to continue to perform
his duties under this Agreement on a full-time basis as a result
of mental or physical illness, sickness or injury for a period of
180 days within any 12-month period, as determined in the sole
discretion of the Board of Directors of the Company; and
(iii) the term "Good Reason" shall mean any of the following which
occur without the Executive's consent and which are not corrected
by the Company within 10 days of written notice to the Company by
the Executive: (1) a diminution of the Executive's duties or the
assignment to him of duties that are inconsistent in any
substantial respect with the position, authority or
responsibilities associated with the position of Senior Vice
President, International Relations (2) a reduction in the
Executive's Salary rate or bonus potential; or (3) a relocation,
without the Executive's consent, of the Executive's principal
office from his current office as of the Effective Date to an
office that is more than 10 miles of the Executive's current
office, except for required travel on Company business to an
extent substantially consistent with the Executive's business
travel obligations on the Effective Date.
Notwithstanding any other provision of this Agreement, the Executive shall
automatically cease to be an officer and/or director of the Company and its
affiliates as of his Termination Date.
5. Set-Off. The Company shall be entitled to set off against the amounts
-------
payable to the Executive under this Agreement, any amounts owed to the Company
or its affiliates by the Executive.
6. Confidential Information. The Executive agrees that:
------------------------
(a) Except as may be required by the lawful order of a court or agency of
competent jurisdiction or as necessary to carry out his duties to the
Company and its affiliates, or except to the extent that the Executive
has express authorization from the Company, he shall keep secret and
confidential indefinitely all non-public information (including,
without limitation, information regarding litigation and pending
litigation) concerning the Company and its affiliates which was
acquired by or disclosed to the Executive during the course of his
employment with the Company or during the course of his consultation
with the
-5-
<PAGE>
Company following his termination of employment and not to disclose
the same, either directly or indirectly, to any other person, firm, or
business entity, or to use it in any way.
(b) Upon his Termination Date or at the Company's earlier request, he will
promptly return to the Company any and all records, documents,
physical property, information, computer disks or other materials
relating to the business of the Company and its affiliates obtained by
him during his course of employment with the Company.
(c) Nothing in the foregoing provisions of this Section 6 shall be
construed so as to prevent the Executive from using, in connection
with his employment for himself or an employer other than the Company
or any of its affiliates, knowledge which was acquired by him during
the course of his employment with the Company and its affiliates, and
which is generally known to persons of his experience in other
companies in the same industry.
7. Noncompetition. During the Noncompetition Period (as defined below),
--------------
the Executive agrees that he will not directly or indirectly engage in, assist,
perform services for, establish or open, or have any equity interest (other than
ownership of 5% or less of the outstanding stock of any corporation listed on
the New York or American Stock Exchange or included in the National Association
of Securities Dealers Automated Quotation System) in any person, firm,
corporation, or business entity (whether as an employee, officer, director,
agent, security holder, creditor, consultant, or otherwise) that engages in the
business of providing international or domestic long distance telephone
services. Nothing in this Section 7 shall be construed as limiting the
Executive's duty of loyalty to the Company while he is employed by the Company,
or any other duty he may otherwise have to the Company while he is employed by
the Company. For purposes of this Agreement, the "Noncompetition Period" shall
be the period while the Executive is employed by the Company and for the period,
if any, after the Executive's Termination Date that he is receiving payments
pursuant to Section 4 hereof.
8. Equitable Remedies. The Executive acknowledges that the Company would
------------------
be irreparably injured by a violation of Sections 6 or 7 and agrees that the
Company, in addition to other remedies available to it for such breach or
threatened breach, shall be entitled to a preliminary injunction, temporary
restraining order, other equivalent relief, restraining the Executive from any
actual or threatened breach of Sections 6 or 7 without any bond or other
security being required.
9. Defense of Claims. The Executive agrees that, on and after the
-----------------
Effective Date, he will cooperate with the Company and its affiliates in the
defense of any claims that may be made against the Company or its affiliates to
the extent that such claims may relate to services performed by him for the
Company. To the extent travel is required to comply with the
-6-
<PAGE>
requirements of this Section 9, the Company shall, to the extent possible,
provide the Executive with notice at least 10 days prior to the date on which
such travel would be required and the Company agrees to reimburse the Executive
for all of his reasonable actual expenses associated with such travel; provided,
however, that if the Company reasonably expects the travel to be extensive or
unduly burdensome to the Executive from a financial perspective, the Company may
provide to the Executive pre-paid tickets for transportation in connection with
such travel.
10. Notices. Notices provided for in this Agreement shall be in writing
-------
and shall be deemed to have been duly received when delivered in person or sent
by facsimile transmission, on the first business day after it is sent by air
express courier service or on the second business day following deposit in the
United States registered or certified mail, return receipt requested, postage
prepaid and addressed, in the case of the Company to the following address:
Pacific Gateway Exchange
533 Airport Boulevard, Suite 505
Burlingame, California 94010
Attention: Howard A. Neckowitz
or to the Executive at his last residence address as shown on the Company's
payroll records, or such other address as either party may have furnished to the
other in writing in accordance herewith, except that a notice of change of
address shall be effective only upon actual receipt.
11. Withholding. All compensation payable under this Agreement shall be
-----------
subject to customary withholding taxes and other employment taxes as required
with respect to compensation paid by a corporation to an employee and the amount
of compensation payable hereunder shall be reduced appropriately to reflect the
amount of any required withholding. The Company shall have no obligation to
make any payments to the Executive or to make the Executive whole for the amount
of any required taxes.
12. Successors. This Agreement shall be binding on, and inure to the
----------
benefit of, the Company and its successors and assigns and any person acquiring,
whether by merger, reorganization, consolidation, by purchase of assets or
otherwise, all or substantially all of the assets of the Company.
13. Nonalienation. The interests of the Executive under this Agreement
-------------
are not subject to the claims of his creditors, other than the Company, and may
not otherwise be voluntarily or involuntarily assigned, alienated or encumbered.
14. Waiver of Breach. The waiver by either the Company or the Executive
----------------
of a breach of any provision of this Agreement shall not operate as or be deemed
a waiver of any subsequent breach by either the Company or the Executive.
Continuation of payments hereunder by the
-7-
<PAGE>
Company following a breach by the Executive of any provision of this Agreement
shall not preclude the Company from thereafter terminating said payments based
upon the same violation.
15. Arbitration. Any dispute, claim or controversy relating to or arising
-----------
out of this Agreement (or the breach thereof) shall be settled by final, binding
and non-appealable arbitration before the American Arbitration Association (the
"Association"), with the hearing to be held in Santa Clara or San Mateo County,
California, under the California Employment Dispute Resolution Rules then in
effect for that organization. This Section 15 shall not be construed to limit
the Company's right to obtain relief under Section 8 with respect to any matter
or controversy subject to Section 8, and, pending a final determination by the
arbitrator with respect to any such matter or controversy, the Company shall be
entitled to obtain any such relief by direct application to a court of law,
without being required to first arbitrate such matter or controversy.
Arbitration shall be conducted before a single arbitrator selected by the
Company and the Executive. In the event the parties cannot agree on an
arbitrator, then the Association will supply both parties with a list of seven
names from which the parties will alternately strike one name until only one
remains, first choice is determined by a coin toss. The party winning the coin
toss has the option of striking first. Judgment may be entered on the
arbitrator's award in any court of competent jurisdiction to prevent any
continuation of any violation of the provisions of this Agreement. The cost of
the arbitrator, any record or transcript of the arbitration, and administrative
fees, shall be borne by the Company. Each party shall bear the fees of their
respective attorneys, the expenses of their witnesses and any other expenses
connected with presenting their cases.
16. Severability. It is mutually agreed and understood by the parties
------------
that should any of the agreements and covenants contained herein be determined
by any court of competent jurisdiction to be invalid by virtue of being vague or
unreasonable, including but not limited to the provisions of Sections 6 or 7,
then the parties hereto consent that this Agreement shall be amended retroactive
to the date of its execution to include the terms and conditions said court
deems to be reasonable and in conformity with the original intent of the parties
and the parties hereto consent that under such circumstances, said court shall
have the power and authority to determine what is reasonable and in conformity
with the original intent of the parties to the extent that said covenants and/or
agreements are enforceable.
17. Applicable Law. This Agreement shall be construed in accordance with
--------------
the laws of the State of California.
18. Amendment. This Agreement may be amended or canceled by mutual
---------
Agreement of the parties in writing without the consent of any other person.
19. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute one and the same instrument.
Each counterpart may consist of a copy hereof
-8-
<PAGE>
containing multiple signature pages, each signed by one party hereto, but
together signed by both of the parties hereto.
20. Other Agreements. This Agreement constitutes the sole and complete
----------------
Agreement between the Company and the Executive and supersedes all other
agreements, both oral and written, between the Company and the Executive with
respect to the matters contained herein including, without limitation any prior
employment agreements between the Company and the Executive. No verbal or other
statements, inducements, or representations have been made to or relied upon by
the Executive. The parties have read and understand this Agreement.
Dated as of the date set forth above.
PACIFIC GATEWAY EXCHANGE
By: /s/ Howard A. Neckowitz
Its: President and Chief Executive Officer
/s/ Robert F. Craver
EXECUTIVE
-9-
<PAGE>
Exhibit A
Definition of Change in Control
For purposes of the Agreement, a "Change in Control" shall mean the
earliest to occur of any one of the following events:
(1) any "Person", as such term is used in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
(other than the Company, the Executive, any corporation owned,
directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company, and any trustee or other fiduciary holding securities under
an employee benefit plan of the Company), becomes the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange Act),
of 25% or more of the combined voting power of the Company's then
outstanding securities having the right to vote for the election of
directors ("Voting Stock");
(2) the majority of the Board of Directors of the Company (the "Board")
does not consist of individuals who are Incumbent Directors, which
term means the members of the Board on the date of this Agreement;
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 any plan of liquidation for the distribution of
all or substantially all of its assets;
(4) the company merges with or into another company, or all or
substantially all of the assets or business of the Company is
disposed of pursuant to a merger, consolidation or other transaction
(unless the shareholders of the Company immediately prior to such
merger, consolidation or other transaction beneficially own, directly
or indirectly, in substantially the same proportion as they owned the
Voting Stock of the Company, all of the Voting Stock or other
ownership interest of the entity or entities, if any, that succeed to
the business of the Company); or
(5) the Company combines with any other company and is the surviving
corporation but, immediately after the combination, the shareholders
of the Company immediately prior to the combination hold, directly or
indirectly, 50% or less of the Voting Stock of
<PAGE>
the combined company (there being excluded from the number of shares
held by such shareholders, but not from the Voting Stock of the
combined company, any shares received by affiliates of such other
company in exchange for stock of such other company).
Once a Change in Control has occurred, no subsequent event shall be considered a
Change in Control for purposes of this Agreement.
<PAGE>
Exhibit 10.5.5
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
This Agreement made and entered into as of January 1, 1998 (the "Effective
Date") by and between PACIFIC GATEWAY EXCHANGE (the "Company") and FRED A.
WEISMILLER (the "Executive"),
WITNESSETH THAT:
---------------
WHEREAS, the parties desire to enter into this Agreement pertaining to the
continued employment of the Executive by the Company;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth below, it is hereby covenanted and agreed by the Company and the Executive
as follows:
1. Employment Period. Subject to the terms and conditions of this
-----------------
Agreement, the Company hereby agrees to employ the Executive during the
Employment Period (as defined below) and the Executive hereby agrees to remain
in the employ of the Company and to provide services during the Employment
Period in accordance with this Agreement. The "Employment Period" shall be the
period beginning on the Effective Date and ending on the second anniversary
thereof. After the second anniversary of the Effective Date, the Employment
Period shall be automatically extended for 12-month periods, unless one party to
this Agreement provides written notice of non-renewal to the other at least 90
days before the last day of the Employment Period.
2. Duties. Subject to the terms of this Agreement, the Company hereby
------
agrees to employ the Executive as its Executive Vice President, International
Marketing during the Employment Period, and the Executive hereby agrees to
remain in the employ of the Company during the Employment Period. During the
Employment Period, while the Executive is employed by the Company, the Executive
shall devote substantially all of his business time, energies and talents to
serving as its Executive Vice President, International Marketing. The Executive
agrees that he shall perform his duties faithfully and efficiently subject to
the directions of the President of the Company (the "President"). The Executive
will have such authority and power as are inherent to the undertakings
applicable to his positions and necessary to carry out his responsibilities and
the duties required of him hereunder.
3. Compensation. Subject to the terms and conditions of this Agreement,
------------
during the Employment Period while the Executive is employed by the Company, the
Company shall compensate him for his services as follows:
(a) The Executive shall receive, for each 12-consecutive month period
beginning on the Effective Date and each anniversary thereof, an
annual salary of $137,800 (the "Salary"), which Salary shall be
payable in substantially equal monthly
<PAGE>
installments. The Executive's Salary rate shall be reviewed annually
on or about the anniversary of the Effective Date, to determine
whether an increase in the amount of Salary is appropriate. In no
event shall the Salary of the Executive be reduced to an amount that
is less than the amount specified in this paragraph (a), or to an
amount that is less than the amount that he was previously receiving.
(b) The Executive shall be entitled to incentive compensation in the form
of an annual cash bonus that shall be determined by the President
taking into consideration whether the Executive has met the
performance targets set by the President for such year, (which shall
be set by the President, in consultation with the Executive, on or
about January 31 of each year), the relative contribution by the
Executive to the business of the Company, the Company's financial
performance for the year, general economic conditions, and such other
factors as the President deems relevant.
(c) Except as otherwise specifically provided to the contrary in this
Agreement, the Executive shall be provided with the retirement,
welfare benefits and other fringe benefits to the same extent and on
the same terms as those benefits are provided by the Company from time
to time to the Company's other senior management employees.
(d) The Executive shall be reimbursed by the Company, on terms and
conditions that are substantially similar to those that apply to other
similarly situated senior management employees of the Company, for
reasonable expenses for entertainment, travel, meals, lodging and
similar items which are authorized by the Company and actually
incurred by the Executive in the promotion of the Company's business.
4. Rights and Payments Upon Termination or Change in Control. The
---------------------------------------------------------
Executive's right to benefits and payments, if any, for periods after the date
on which his employment with the Company terminates for any reason (his
"Termination Date") shall be determined in accordance with this Section 4:
(a) Minimum Payments. If the Executive's Termination Date occurs during
----------------
the Employment Period for any reason, the Executive shall be entitled
to the following payments, in addition to any payments or benefits to
which the Executive may be entitled under the following provisions of
this Section 4 (other than this paragraph (a)):
(i) his earned but unpaid Salary for the period ending on his
Termination Date; and
-2-
<PAGE>
(ii) his accrued but unpaid vacation pay for the period ending with
his Termination Date, as determined in accordance with the
Company's policy as in effect from time to time.
Payments to be made to the Executive pursuant to this paragraph 4(a)
shall be made in a lump sum as soon as practicable after the
Executive's Termination Date. Except as may be otherwise expressly
provided to the contrary in this Agreement, nothing in this Agreement
shall be construed as requiring the Executive to be treated as
employed by the Company following his Termination Date for purposes of
any employee benefit plan or arrangement in which he may participate
at such time.
(b) Termination By Company for Cause. If the Executive's Termination Date
--------------------------------
occurs during the Employment Period and is a result of the Company's
termination of the Executive's employment on account of Cause (as
defined in paragraph (g) below), then, except as agreed in writing
between the Executive and the Company, the Executive shall have no
right to future payments or benefits under this Agreement (and the
Company shall have no obligation to make any such future payments or
provide any such future benefits) for periods after the Executive's
Termination Date.
(c) Termination for Death or Disability. If the Executive's Termination
-----------------------------------
Date occurs during the Employment Period on account of the Executive's
death or disability (as defined below), then the Executive (or in the
event of his death, his estate) shall be entitled to continuing
payments of his Salary for the period commencing on his Termination
Date and ending on the earliest of (i) 30 days from his Termination
Date, (ii) the last day of the Employment Period, or (iii) in the case
of the Executive's disability, the date on which the Executive
violates the provisions of Section 6 of this Agreement.
(d) Termination for Good Reason or by the Company for Reasons Other Than
--------------------------------------------------------------------
Cause. If the Executive's Termination Date occurs during the
-----
Employment Period and before the date of a Change in Control (as
defined in Exhibit A hereto), and is a result of the Executive's
termination of employment by the Company for any reason other than
Cause or on account of termination by the Executive for Good Reason
(as defined in paragraph (g)), and is not on account of the
Executive's death, disability, or voluntary resignation, the mutual
agreement of the parties or any other reason, then:
(A) The Executive shall receive from the Company for the period
commencing on his Termination Date and ending on the earliest of (i)
the 6-month anniversary
-3-
<PAGE>
of his Termination Date, (ii) the date on which the Executive violates
the provisions of Section 6 of this Agreement, or (iii) the date of
the Executive's death, the Salary in effect as of his Termination Date
(without regard to any reduction in such Salary which gives the
Executive the right to termination employment for Good Reason),
payable in accordance with the provisions of paragraph 3(a).
(B) Stock options awarded to the Executive under any option plans of
the Company shall be 100% vested upon the occurrence of the
Executive's Termination Date as described in this paragraph (d) and
shall be exercisable for the period after the Termination Date as
specified for vested options in the applicable option agreement.
(e) Termination for Voluntary Resignation, Mutual Agreement or Other
----------------------------------------------------------------
Reasons. If the Executive's Termination Date occurs during the
-------
Employment Period on account of his voluntary resignation, mutual
agreement of the parties, or any reason other than those specified in
paragraphs (b), (c) or (d) above then, except as agreed in writing
between the Executive and the Company, the Executive shall have no
right to future payments or benefits under this Agreement (and the
Company shall have no obligation to make any such future payments or
provide any such future benefits) for periods after the Executive's
Termination Date.
(f) Termination Following a Change in Control. If the Executive's
-----------------------------------------
Termination Date occurs within two years following a Change in
Control, including a Termination Date occurring on the date of a
Change of Control, on account of termination by the Company for
reasons other than Cause or on account of termination by the Executive
for Good Reason, then the Executive shall receive from the Company a
lump sum payment equal to 6 months Salary in effect as of his
Termination Date (without regard to any reduction in such Salary which
gives the Executive the right to termination employment for Good
Reason).
(g) Definitions. For purposes of this Agreement:
-----------
(i) the term "Cause" shall mean (1) the willful and continued failure
by the Executive to substantially perform his duties under this
Agreement, other than by reason of his being disabled (as defined
below), (2) the willful engaging by the Executive in conduct
which is demonstrably and materially injurious to the Company or
its affiliates, (3) conduct by the Executive that involves theft
or fraud or, in connection with his duties under this Agreement,
dishonesty, (4) Executive's violation of the provisions of
Sections 6 or 7 hereof, or (5) conviction of felony involving
moral turpitude;
-4-
<PAGE>
(ii) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that
the Executive's action or omission was in the best interest of
the Company; and
(iii) the term "disability" shall mean the inability of the
Executive, after reasonable accommodation, to continue to perform
his duties under this Agreement on a full-time basis as a result
of mental or physical illness, sickness or injury for a period of
180 days within any 12-month period, as determined in the sole
discretion of the Board of Directors of the Company; and
(iv) the term "Good Reason" shall mean any of the following which
occur without the Executive's consent and which are not corrected
by the Company within 10 days of written notice to the Company by
the Executive: (1) a diminution of the Executive's duties or the
assignment to him of duties that are inconsistent in any
substantial respect with the position, authority or
responsibilities associated with the position of Executive Vice
President, International Marketing (2) a reduction in the
Executive's Salary rate or bonus potential; or (3) a relocation,
without the Executive's consent, of the Executive's principal
office from his current office as of the Effective Date to an
office that is more than 10 miles of the Executive's current
office, except for required travel on Company business to an
extent substantially consistent with the Executive's business
travel obligations on the Effective Date.
Notwithstanding any other provision of this Agreement, the Executive shall
automatically cease to be an officer and/or director of the Company and its
affiliates as of his Termination Date.
5. Set-Off. The Company shall be entitled to set off against the amounts
-------
payable to the Executive under this Agreement, any amounts owed to the Company
or its affiliates by the Executive.
6. Confidential Information. The Executive agrees that:
------------------------
(a) Except as may be required by the lawful order of a court or agency of
competent jurisdiction or as necessary to carry out his duties to the
Company and its affiliates, or except to the extent that the Executive
has express authorization from the Company, he shall keep secret and
confidential indefinitely all non-public information (including,
without limitation, information regarding litigation and pending
litigation) concerning the Company and its affiliates which was
acquired
-5-
<PAGE>
by or disclosed to the Executive during the course of his
employment with the Company or during the course of his consultation
with the Company following his termination of employment and not to
disclose the same, either directly or indirectly, to any other person,
firm, or business entity, or to use it in any way.
(b) Upon his Termination Date or at the Company's earlier request, he will
promptly return to the Company any and all records, documents,
physical property, information, computer disks or other materials
relating to the business of the Company and its affiliates obtained by
him during his course of employment with the Company.
(c) Nothing in the foregoing provisions of this Section 6 shall be
construed so as to prevent the Executive from using, in connection
with his employment for himself or an employer other than the Company
or any of its affiliates, knowledge which was acquired by him during
the course of his employment with the Company and its affiliates, and
which is generally known to persons of his experience in other
companies in the same industry.
7. Noncompetition. During the Noncompetition Period (as defined below),
--------------
the Executive agrees that he will not directly or indirectly engage in, assist,
perform services for, establish or open, or have any equity interest (other than
ownership of 5% or less of the outstanding stock of any corporation listed on
the New York or American Stock Exchange or included in the National Association
of Securities Dealers Automated Quotation System) in any person, firm,
corporation, or business entity (whether as an employee, officer, director,
agent, security holder, creditor, consultant, or otherwise) that engages in the
business of providing international or domestic long distance telephone
services. Nothing in this Section 7 shall be construed as limiting the
Executive's duty of loyalty to the Company while he is employed by the Company,
or any other duty he may otherwise have to the Company while he is employed by
the Company. For purposes of this Agreement, the "Noncompetition Period" shall
be the period while the Executive is employed by the Company and for the period,
if any, after the Executive's Termination Date that he is receiving payments
pursuant to Section 4 hereof.
8. Equitable Remedies. The Executive acknowledges that the Company would
------------------
be irreparably injured by a violation of Sections 6 or 7 and agrees that the
Company, in addition to other remedies available to it for such breach or
threatened breach, shall be entitled to a preliminary injunction, temporary
restraining order, other equivalent relief, restraining the Executive from any
actual or threatened breach of Sections 6 or 7 without any bond or other
security being required.
9. Defense of Claims. The Executive agrees that, on and after the
-----------------
Effective Date, he will cooperate with the Company and its affiliates in the
defense of any claims that may be made against the Company or its affiliates to
the extent that such claims may relate to services
-6-
<PAGE>
performed by him for the Company. To the extent travel is required to comply
with the requirements of this Section 9, the Company shall, to the extent
possible, provide the Executive with notice at least 10 days prior to the date
on which such travel would be required and the Company agrees to reimburse the
Executive for all of his reasonable actual expenses associated with such travel;
provided, however, that if the Company reasonably expects the travel to be
extensive or unduly burdensome to the Executive from a financial perspective,
the Company may provide to the Executive pre-paid tickets for transportation in
connection with such travel.
10. Notices. Notices provided for in this Agreement shall be in writing
-------
and shall be deemed to have been duly received when delivered in person or sent
by facsimile transmission, on the first business day after it is sent by air
express courier service or on the second business day following deposit in the
United States registered or certified mail, return receipt requested, postage
prepaid and addressed, in the case of the Company to the following address:
Pacific Gateway Exchange
533 Airport Boulevard, Suite 505
Burlingame, California 94010
Attention: Howard A. Neckowitz
or to the Executive at his last residence address as shown on the Company's
payroll records, or such other address as either party may have furnished to the
other in writing in accordance herewith, except that a notice of change of
address shall be effective only upon actual receipt.
11. Withholding. All compensation payable under this Agreement shall be
-----------
subject to customary withholding taxes and other employment taxes as required
with respect to compensation paid by a corporation to an employee and the amount
of compensation payable hereunder shall be reduced appropriately to reflect the
amount of any required withholding. The Company shall have no obligation to
make any payments to the Executive or to make the Executive whole for the amount
of any required taxes.
12. Successors. This Agreement shall be binding on, and inure to the
----------
benefit of, the Company and its successors and assigns and any person acquiring,
whether by merger, reorganization, consolidation, by purchase of assets or
otherwise, all or substantially all of the assets of the Company.
13. Nonalienation. The interests of the Executive under this Agreement
-------------
are not subject to the claims of his creditors, other than the Company, and may
not otherwise be voluntarily or involuntarily assigned, alienated or encumbered.
14. Waiver of Breach. The waiver by either the Company or the Executive
----------------
of a breach of any provision of this Agreement shall not operate as or be deemed
a waiver of any subsequent
-7-
<PAGE>
breach by either the Company or the Executive. Continuation of payments
hereunder by the Company following a breach by the Executive of any provision of
this Agreement shall not preclude the Company from thereafter terminating said
payments based upon the same violation.
15. Arbitration. Any dispute, claim or controversy relating to or arising
-----------
out of this Agreement (or the breach thereof) shall be settled by final, binding
and non-appealable arbitration before the American Arbitration Association (the
"Association"), with the hearing to be held in Santa Clara or San Mateo County,
California, under the California Employment Dispute Resolution Rules then in
effect for that organization. This Section 15 shall not be construed to limit
the Company's right to obtain relief under Section 8 with respect to any matter
or controversy subject to Section 8, and, pending a final determination by the
arbitrator with respect to any such matter or controversy, the Company shall be
entitled to obtain any such relief by direct application to a court of law,
without being required to first arbitrate such matter or controversy.
Arbitration shall be conducted before a single arbitrator selected by the
Company and the Executive. In the event the parties cannot agree on an
arbitrator, then the Association will supply both parties with a list of seven
names from which the parties will alternately strike one name until only one
remains, first choice is determined by a coin toss. The party winning the coin
toss has the option of striking first. Judgment may be entered on the
arbitrator's award in any court of competent jurisdiction to prevent any
continuation of any violation of the provisions of this Agreement. The cost of
the arbitrator, any record or transcript of the arbitration, and administrative
fees, shall be borne by the Company. Each party shall bear the fees of their
respective attorneys, the expenses of their witnesses and any other expenses
connected with presenting their cases.
16. Severability. It is mutually agreed and understood by the parties
------------
that should any of the agreements and covenants contained herein be determined
by any court of competent jurisdiction to be invalid by virtue of being vague or
unreasonable, including but not limited to the provisions of Sections 6 or 7,
then the parties hereto consent that this Agreement shall be amended retroactive
to the date of its execution to include the terms and conditions said court
deems to be reasonable and in conformity with the original intent of the parties
and the parties hereto consent that under such circumstances, said court shall
have the power and authority to determine what is reasonable and in conformity
with the original intent of the parties to the extent that said covenants and/or
agreements are enforceable.
17. Applicable Law. This Agreement shall be construed in accordance with
--------------
the laws of the State of California.
18. Amendment. This Agreement may be amended or canceled by mutual
---------
Agreement of the parties in writing without the consent of any other person.
19. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall
-8-
<PAGE>
together constitute one and the same instrument. Each counterpart may consist of
a copy hereof containing multiple signature pages, each signed by one party
hereto, but together signed by both of the parties hereto.
20. Other Agreements. This Agreement constitutes the sole and complete
----------------
Agreement between the Company and the Executive and supersedes all other
agreements, both oral and written, between the Company and the Executive with
respect to the matters contained herein including, without limitation any prior
employment agreements between the Company and the Executive. No verbal or other
statements, inducements, or representations have been made to or relied upon by
the Executive. The parties have read and understand this Agreement.
Dated as of the date set forth above.
PACIFIC GATEWAY EXCHANGE
By: /s/ Howard A. Neckowitz
Its: President and Chief Executive Officer
/s/ Fred A. Weismiller
EXECUTIVE
-9-
<PAGE>
Exhibit A
Definition of Change in Control
For purposes of the Agreement, a "Change in Control" shall mean the
earliest to occur of any one of the following events:
(1) any "Person", as such term is used in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
(other than the Company, the Executive, any corporation owned,
directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company, and any trustee or other fiduciary holding securities under
an employee benefit plan of the Company), becomes the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange Act),
of 25% or more of the combined voting power of the Company's then
outstanding securities having the right to vote for the election of
directors ("Voting Stock");
(2) the majority of the Board of Directors of the Company (the "Board")
does not consist of individuals who are Incumbent Directors, which
term means the members of the Board on the date of this Agreement;
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 any plan of liquidation for the distribution of
all or substantially all of its assets;
(4) the Company merges with or into another company, or all or
substantially all of the assets or business of the Company is
disposed of pursuant to a merger, consolidation or other transaction
(unless the shareholders of the Company immediately prior to such
merger, consolidation or other transaction beneficially own, directly
or indirectly, in substantially the same proportion as they owned the
Voting Stock of the Company, all of the Voting Stock or other
ownership interest of the entity or entities, if any, that succeed to
the business of the Company); or
(5) the Company combines with any other company and is the surviving
corporation but, immediately after the combination, the shareholders
of the Company immediately prior to the combination hold, directly or
indirectly, 50% or less of the Voting Stock of the combined company
(there being excluded from the number of shares held by such
shareholders, but not from the Voting Stock of
-10-
<PAGE>
the combined company, any shares received by affiliates of such other
company in exchange for stock of such other company).
Once a Change in Control has occurred, no subsequent event shall be considered a
Change in Control for purposes of this Agreement.
-11-
<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 JUNE
30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 31,265
<SECURITIES> 0
<RECEIVABLES> 83,109
<ALLOWANCES> 3,314
<INVENTORY> 0
<CURRENT-ASSETS> 115,246
<PP&E> 84,086
<DEPRECIATION> 13,001
<TOTAL-ASSETS> 194,183
<CURRENT-LIABILITIES> 106,028
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 88,153
<TOTAL-LIABILITY-AND-EQUITY> 194,183
<SALES> 215,024
<TOTAL-REVENUES> 215,024
<CGS> 182,192
<TOTAL-COSTS> 182,192
<OTHER-EXPENSES> 594
<LOSS-PROVISION> 1,204
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,446
<INCOME-TAX> 5,185
<INCOME-CONTINUING> 9,261
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,261
<EPS-PRIMARY> $0.49
<EPS-DILUTED> $0.46
</TABLE>
