UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-21043
Pacific Gateway Exchange, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3134065
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
533 Airport Boulevard, Suite 505, Burlingame, California 94010
--------------------------------------------------------------
(Address of principal executive offices)
Telephone Number: 650-375-6700
------------------------------
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights, Par Value $.0001 per Share
Common Shares, Par Value $.0001 per Share
(Title of class)
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. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of all classes of voting stock of the
registrant held by non-affiliates of the registrant on March 18, 1998 was
approximately $839,000,000, computed upon the basis of the closing sales price
of the Common Shares on that date. For the purposes of this computation, shares
held by directors (and shares held by any entities in which they serve as
officers) and executive officers of the registrant have been excluded. Such
exclusion is not intended, nor shall it be deemed to be an admission that such
persons are affiliates of the registrant.
As of March 18, 1998, there were outstanding 19,113,955 Common Shares of $.0001
par value, of the registrant.
<PAGE>
Part III
Item 10. Directors and Executive Officers of Registrant
The Company's Board of Directors consists of five persons. The Company's
Restated Certificate of Incorporation provides that the Company's Board of
Directors shall be divided into three classes with the terms of office of
each class ending in successive years.
Set forth below is certain information concerning the Board of
Directors of the Company:
Current Board of Directors
Name Age Position(s)
---- --- -----------
Howard A. Neckowitz............. 44 Chairman, President, Chief Executive
Officer and Director
Gail E. Granton................. 42 Executive Vice President,
International Business Development,
Secretary and Director
Charles M. Dalfen............... 55 Director
James J. Junewicz............... 47 Director
Barry J. Volante................ 63 Director
Howard A. Neckowitz has served as President, Chief Executive Officer
and Chairman of the Board of the Company since its inception in August
1991. Mr. Neckowitz previously served as a consultant to major U.S. and
overseas telecommunications companies with respect to valuation and due
diligence processes for the acquisition of ongoing foreign
telecommunications operations and the start-up of competitive carrier
operations for international, long distance, local and cellular operations
in various countries. Prior to his consulting experience, Mr. Neckowitz
served from 1982 to 1986 as Director, International Services, at GTE
Sprint, where he founded and developed GTE Sprint's international services
operation. In this position he was responsible for feasibility analyses
supporting GTE Sprint's entrance into the international switched service
market. From 1977 to 1982, Mr. Neckowitz worked at AT&T in its Overseas
Department.
Gail E. Granton has served as Executive Vice President, International
Business Development, Secretary and a member of the Board of Directors of
the Company since its inception in August 1991. From August 1991 to August
1996, she served as Chief Financial Officer of the Company. From 1986 to
August 1991, Ms. Granton served as a consultant to major U.S. and overseas
telecommunications companies, focusing on the valuation and due diligence
processes for the acquisition of ongoing foreign telecommunication
operations and the start-up of competitive carrier operations for
international, long distance, local and cellular operation in various
countries. From 1982 to 1986, Ms. Granton worked in the International
Department of GTE Sprint as a Manager, International Business Development,
reporting to Mr. Neckowitz.
Charles M. Dalfen has served as a member of the Board of Directors
since December 1996. He has been the President of Dalfen Associates, a
consulting firm specializing in telecommunications regulation, since 1982.
Prior to that, Mr. Dalfen served from 1976 to 1980 as a Vice Chairman of
the Canadian Radio-television and Telecommunications Commission ("CRTC").
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<PAGE>
James J. Junewicz has served as a member of the Board of Directors
since December 1996. He has been a partner of the law firm of Mayer, Brown
& Platt in Chicago, Illinois since 1987. Mayer, Brown & Platt currently
serves as corporate counsel for the Company. Prior to joining Mayer, Brown
& Platt in 1984, Mr. Junewicz served as Assistant General Counsel of the
United States Securities and Exchange Commission in Washington, D.C.
Barry J. Volante has served as a member of the Board of Directors
since May 1997. He is currently Chief Executive Officer and President of
Asset Channels, Inc. He served as Vice President--Telecommunications
Finance of General Electric Capital Corporation ("GECC") from 1994 to 1997.
From 1985 to 1994, Mr. Volante served as Manager, Telecommunications
Planning Corporation Information Technology of General Electric Company.
From 1983 to 1985, Mr. Volante was self-employed as an independent
telecommunications consultant advising foreign and domestic clients on
telecommunications infrastructure projects.
3
<PAGE>
Meetings and Committees of the Board
The Board has two standing committees: the Compensation Committee and
the Audit Committee. The Board does not have a Nominating Committee or any
committee performing similar functions. During the fiscal year ended
December 31, 1997 ("fiscal 1997"), the Board met 11 times and on 1 occasion
acted by unanimous written consent. In fiscal 1997, the Audit Committee met
1 time and the Compensation Committee met 8 times. During fiscal 1997, all
directors attended at least 75% of the aggregate of such meetings of the
Board of Directors and the committees of the Board of which they were a
member (or of such meetings during such director's tenure on the Board of
Directors).
All of the directors of the Company are members of the Compensation
Committee. Mr. Dalfen and Mr. Volante act as co-chairman of the
Compensation Committee. The Compensation Committee generally establishes
the salaries, benefits and overall compensation of the officers and
employees of the Company and administers any employee benefit plans of the
Company. A subcommittee of the Compensation Committee, consisting solely of
outside directors within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, administers the Company's 1997 Long-Term Incentive
Plan and periodically grants options and other equity-based awards to
employees, directors or other individuals providing services to the Company
pursuant to the 1997 Long-Term Incentive Plan.
Messrs. Charles Dalfen, Barry Volante and James Junewicz are the
current members of the Audit Committee. Mr. Junewicz acts as chairman of
the Audit Committee. The Audit Committee's responsibilities include
recommending to the Board the selection of the Company's independent
certified public accountants, reviewing the arrangements and the scope of
the independent audit and reviewing all financial statements.
SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
officers and certain stockholders to file with the Commission an initial
statement of beneficial ownership and certain statements of changes in
beneficial ownership of equity securities of the Company. Based solely upon
a review of Forms 3 and 4 furnished to the Company during fiscal 1997,
Forms 5 furnished with respect to fiscal 1997, and certain written
representations received by the Company from certain reporting persons in
regard to filing requirements, the Company has determined that Robert F.
Craver and Ms. Granton each did not timely file a Form 4 for the month of
May. All filings required by Section 16(a) of the Exchange Act have now
been made.
EXECUTIVE OFFICERS
Set forth below are the names, ages, positions and certain other
information concerning the current executive officers and other key members
of management of the Company.
<TABLE>
<CAPTION>
The executive officers of the Company are as follows:
<S> <C> <C>
Name Age Position
Howard A. Neckowitz.......................44 President and Chief Executive Officer
Gail E. Granton...........................42 Executive Vice President, International Business
Development and Secretary
Sandra D. Grey............................31 Chief Financial Officer and Vice President, Finance
Ronald D. Anderson........................41 Senior Vice President, Operations and Engineering
Robert F. Craver..........................55 Senior Vice President, International Relations
Fred A. Weismiller........................56 Executive Vice President, International Marketing
</TABLE>
MR. HOWARD A. NECKOWITZ has served as President, Chief Executive
Officer and Chairman of the Board of the Company since its inception in
August 1997. Mr. Neckowitz previously served as a consultant to major U.S.
and overseas telecommunications companies with respect to valuation and due
diligence processes for the acquisition of ongoing foreign
telecommunications operations and the start-up of competitive carrier
operations for international, long distance, local and cellular operations
in various countries. Prior to his consulting experience, Mr. Neckowitz
served
4
<PAGE>
from 1982 to 1986 as Director, International Services, at GTE Sprint, where
he founded and developed GTE Sprint's international services operation. In
this position he was responsible for feasibility analyses supporting GTE
Sprint's entrance into the international switch service market. From 1977
to 1982, Mr. Neckowitz worked at AT&T in its Overseas Department.
MS. GAIL E. GRANTON has served as Executive Vice President,
International Business Development, Secretary and a member of the Board of
Directors of the Company since its inception in August 1991. From August
1991 to August 1996, she served as Chief Financial Officer of the Company.
From 1986 to August 1991, Ms. Granton served as a consultant to major U.S.
and overseas telecommunications companies, focusing on the valuation and
due diligence process for the acquisition of ongoing foreign
telecommunication operations and the start-up of competitive carrier
operations for international, long distance, local and cellular operation
in various countries. From 1982 to 1986, Ms. Granton worked in the
International Department of GTE Sprint as a Manager, International Business
Development, reporting to Mr. Neckowitz.
MS. SANDRA D. GREY has served as a Chief Financial Officer of the
Company since 1996. From 1989 to 1996, Ms Grey worked for Telecom New
Zealand, the primary provider of telecommunications services in New
Zealand, where she was Chief Financial Officer of the international
subsidiary. Ms. Grey has more than 8 years experience in international
telecommunication.
MR. RONALD D. ANDERSON has served as Senior Vice President,
Operations and Engineering of the Company since December 1992. From 1986 to
1992, Mr. Anderson served in a similar position with TRT International,
Inc., an international telecommunications carrier that has since been
acquired by WorldCom. Mr. Anderson has more than 16 years of experience in
domestic and international telecommunications engineering and operations,
with significant experience in international signaling and transmission for
cable and satellite, PTT technical interface and bilateral technical
negotiations.
MR. ROBERT F. CRAVER has served as Senior Vice President,
International Relations of the Company since February 1994. Prior to
joining the Company, Mr. Craver worked at GTE Hawaiian Telephone Co., Inc.
from 1987 to 1994. While at GTE Hawaiian Telephone, Mr. Craver directed
that company's international program as Director of International Services.
Mr. Craver has also held international positions at Sprint and AT&T, for a
total of more than 21 years of experience in the international
telecommunications industry. Mr. Craver has extensive experience in
international negotiations with foreign partners and has served as an
officer of the Pacific Telecommunications Council.
MR. FRED A. WEISMILLER joined the Company in November 1994 as
Executive Vice President, International Marketing. Mr. Weismiller's
responsibilities include developing the value-added long distance services
which can be sold to U.S. carriers and to carriers in developing overseas
markets. From 1991 to 1994, Mr. Weismiller served as Managing Director and
Executive Director, Sales and Marketing at Telecom New Zealand. Mr.
Weismiller has 26 years of experience in international and domestic
telecommunications management, including 20 years with AT&T, where his
final assignment was in Hong Kong as the Managing Director of the AT&T
Regional Technical Center from 1989 to 1990.
Item 11. Executive Compensation
The following table sets forth in summary form, the compensation earned by
Howard A. Neckowitz, the Company's Chairman, President and Chief Executive
Officer, and each of the Company's other executive officers whose salary
and benefits for periods presented exceeded $100,000 (the "Named Executive
Officers").
5
<PAGE>
[CAPTION]
<TABLE>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Securities
Year Ended Restricted Underlying
Name and Principal Position December 31 Salary Bonus Stock Awards Options (#)
- --------------------------- ----------- ------ ----- ------------ ----------
<S> <C> <C> <C> <C> <C>
Howard A. Neckowitz 1997 $ 300,000 $ 275,000 $4,134,375 (1) 500,000
Chairman, President and 1996 $ 295,000 -- -- --
Chief Executive Officer 1995 $ 240,000 $ 17,528 -- 141,176
Gail E. Granton 1997 $ 160,000 $ 125,000 -- 225,000
Executive Vice President, 1996 $ 159,167 -- -- --
International Business 1995 $ 144,167 $ 10,711 -- 65,882
Development, Secretary and Director
Ronald D. Anderson 1997 $ 124,992 $ 100,000 -- 120,000
Senior Vice President, 1996 $ 123,744 -- -- --
Operations and Engineering 1995 $ 119,167 $ 10,711 -- 41,000
Robert F. Craver 1997 $ 150,000 $ 39,961 -- 40,000
Senior Vice President, 1996 $ 148,750 $ 100,000 -- 10,000
International Relations 1995 $ 142,500 $ 37,500 -- 35,000
Fred A. Weismiller 1997 $ 137,800 $ 49,330 -- 40,000
Executive Vice President, 1996 $ 137,800 -- -- --
International Marketing 1995 $ 137,800 $ 1,000 -- 14,640
</TABLE>
(1) The value of the restricted stock award was determined by multiplying
the number of shares awarded to Mr. Neckowitz (75,000) by the closing
price of the Company's common stock on NASDAQ on December 30, 1997
($55.125), the date of the award. The restricted stock vests at a rate
of 10% per year and all restricted stock becomes 100% vested upon a
change in control, death, disability or termination of employment by
the Company for reasons other than cause.
6
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth information with respect to options
granted to the Named Executive Officers during 1997:
[CAPTION]
<TABLE>
Percent of Potential Realized Value
Number of Total Options at Assumed Annual Rates
Options Awarded to Exercise or of Stock Price Appreciation
Awarded in Employees in Base Price for Option Term
Name Fiscal 1997 Fiscal 1997 ($/Sh) Expiration Date 5% 10%
---- ----------- ----------- ------ --------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Howard A. Neckowitz 500,000 31% $50.188 12/30/07 $18,733,853 $44,694,533
Gail E. Granton 225,000 14% $38.500 11/24/07 $11,060,034 $22,742,339
Ronald D. Anderson 120,000 8% $38.500 11/24/07 $ 5,898,685 $12,129,248
Robert F. Craver 40,000 3% $38.500 11/24/07 $ 1,966,228 $ 4,043,083
Fred A. Weismiller 40,000 3% $38.500 11/24/07 $ 1,966,228 $ 4,043,083
</TABLE>
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth information concerning exercisable and
unexercisable stock options at December 31, 1997 for the Named Executive
Officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Options at Fiscal Year End(#) (at Fiscal Year End ($)
----------------------------- -----------------------
------
Name Exercisable Unexercisable
---- Exercisable Unexercisable ----------- -------------
----------- -------------
<S> <C> <C> <C> <C>
Howard A. Neckowitz 79,412 562,304 $4,273,398 $30,259,265
Gail E. Granton 37,059 197,941 $1,994,256 $10,651,799
Ronald D. Anderson 23,063 96,937 $1,241,089 $ 5,216,471
Robert F. Craver 23,438 61,562 $1,261,269 $ 3,312,836
Fred A. Weismiller 8,235 46,405 $ 443,150 $ 2,497,192
</TABLE>
Compensation of Directors
Directors of the Company do not receive cash compensation for services
provided as a director. Under the Company's Long-Term Incentive Plan,
non-employee Directors will receive an initial option to purchase 20,000
shares of Common Stock upon his or her initial appointment or election to
the Board of Directors and yearly grants of options to purchase 10,000
shares of Common Stock. The exercise price of each share underlying the
option is equal to the fair market value of a share of Common Stock on the
date the option is granted.
7
<PAGE>
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
During 1997, the Company had employment agreements in effect with each
of Howard A. Neckowitz, President, Chief Executive Officer and Chairman of
the Board, Gail E. Granton, Executive Vice President, International
Business Development and Secretary, Ronald D. Anderson, Senior Vice
President, Operations and Engineering, Robert F. Craver, Senior Vice
President, International Relations and Fred A. Weismiller, Executive Vice
President, International Marketing.New employment agreements are being
executed with each of these individuals, effective January 1, 1998, as
described below. As discussed in the Report of the Compensation Committee
of the Board of Directors on Executive Compensation, the Company retained a
professional consultant to provide advice regarding compensation of
executives at comparable companies and to generally advise the Compensation
Committee. This consultant reviewed the new employment agreements and found
them to be fair and reasonable in view of the circumstances.
The Company is entering into an agreement with Howard A. Neckowitz,
effective January 1, 1998, pursuant to which he is to serve as President
and Chief Executive Officer of the Company, and, subject to election, as a
director and Chairman of the Board. The agreement provides for an annual
base salary of $600,000 (which may be increased pursuant to an annual
review by the Compensation Committee); an annual discretionary cash bonus
to be determined by the Compensation Committee of the Board; options to
purchase 500,000 shares at $50.1875 per share; $3,000,000 of life
insurance; participation in the Company's benefit plans on the same terms
as provided to the Company's other senior management employees; and
reimbursement of reasonably incurred legal expenses in connection with
negotiation and preparation of his employment arrangements. The employment
agreement is for a five-year term, and is automatically extended for
24-month periods unless notice of non-renewal is provided by either party
at least 90 days prior to the end of the employment term.
Under the new employment agreement, Mr. Neckowitz also is entitled to
receive on each of December 30, 1998 and December 30, 1999 options to
purchase 500,000 shares of the Company's Common Stock at the market price
in effect on such dates. In the event of a Change in Control (as described
below) prior to the granting of one or both of the above-referenced stock
options, Mr. Neckowitz shall receive in lieu of such option or options cash
in the amount of the excess of the fair market value of a share of the
Company's common stock on the date of the Change in Control over
$50.1875 multiplied by 1,000,000 (if the Change in Control occurs before
December 30, 1998) or 500,000 (if the Change in Control occurs on or after
December 30, 1998 and before December 30, 1999).
8
<PAGE>
If Mr. Neckowitz is terminated by the Company for reasons other than
Cause (as defined in the agreement), and not on account of death or
disability, or resigns for Good Reason, (as defined in the agreement) then
he shall receive a severance payment equal to the sum of three-years salary
and annual cash bonuses (the "Severance Payment"), payable in equal monthly
amounts over a 3-year period, as well as payment by the Company of his
group health plan premiums for such time period that Mr. Neckowitz or any
of his dependents is eligible for and elects COBRA continuation coverage.
Mr. Neckowitz shall also become fully vested in the 75,000 shares of
restricted stock granted to him by the Company on December 30, 1997. Upon
termination of employment on account of death or disability, Mr. Neckowitz
(or his estate) is generally entitled to payments of salary for 90 days
thereafter, payment of his group health plan premiums for such time period
that Mr. Neckowitz or any of his dependents is eligible for and elects
COBRA continuation coverage and a pro rata bonus payment. If the Company
undergoes a Change in Control, Mr. Neckowitz shall receive from the
Company, without regard to whether his employment terminates in connection
with such Change in Control, a lump sum payment equal to the Severance
Payment described above in lieu of such Severance Payment. Mr. Neckowitz
shall be entitled to reimbursement from the Company for any excise tax
(including any additional taxes resulting from such reimbursement) incurred
on account of compensation payable pursuant to a Change in Control. Mr.
Neckowitz's employment agreement also imposes upon him certain obligations
of confidentiality.
Pursuant to a restricted stock agreement dated December 30, 1997, Mr.
Neckowitz was awarded 75,000 restricted shares of the Company's Common
Stock. Subject to certain conditions and exceptions, the restrictions on
such restricted shares expire as to 10% of such shares each year, provided,
however, that in the event of Mr. Neckowitz's death, total disability,
termination for reasons other than Cause or resignation for Good Reason (as
defined herein) or in the event of a Change in Control, Mr. Neckowitz shall
become vested in the restricted shares as of such date.
New employment agreements between the Company and Gail Granton, Ronald
D. Anderson, Fred A. Weismiller and Robert F. Craver provide for annual
base salaries of $200,000, $175,000, $137,800 and $150,000 respectively
(subject to annual review); an annual discretionary cash bonus determined
by the President and based on the performance of the executive, the
performance of the Company and other relevant factors; and participation in
the Company's benefit plans on the same terms as provided to the Company's
other senior management employees. Ms. Granton's and Mr. Anderson's
employment agreements are for three-year terms, while Messrs. Weismiller's
and Craver's employment agreements are for two-year terms. At the end of
their respective terms, each employment agreement is automatically extended
for 12-month periods, unless notice of non-renewal is provided by either
party at least 90 days prior to the end of the employment term. Under the
respective employment agreements, if employment is terminated by the
Company for any reason other than Cause (and not on account of death,
disability, voluntary resignation or mutual agreement), then the executive
shall, subject to certain limited exceptions, receive a severance payment
equal to 18 months salary (for Ms. Granton and Mr. Anderson) or six months
salary (for Messrs. Weismiller and Craver). Termination of employment on
account of voluntary resignation, mutual agreement or Cause generally
relieves the Company of any obligation to make future payments or provide
future benefits to the executive officer, while termination of employment
on account of death or disability would entitle the executive officer (or
his or her estate) to payments of salary generally through the end of the
calendar month in which employment terminated.
Under the employment agreements between the Company and Mr. Anderson,
Mr. Weismiller and Mr. Craver, if the Company undergoes a Change in Control
and within two years thereafter the Company terminates the executive for
reasons other than Cause or the executive terminates his employment for
Good Reason, then the executive shall be entitled to receive a lump sum
payment equal to 18 months salary (for Mr. Anderson) or six months salary
(for Messrs. Weismiller and Craver). Upon a Change in Control, Ms. Granton
shall, receive, without regard to whether her employment terminates in
connection with such Change in Control, a lump sum payment equal to 18
months salary. Any such payment made to Ms. Granton shall be in lieu of any
severance payment otherwise payable to her and she shall be entitled to
reimbursement from the Company for any excise tax (including any additional
taxes resulting from such reimbursement) incurred on account of
compensation payable pursuant to a Change in Control. The employment
agreements between the Company and Ms. Granton and Messrs. Anderson,
Weismiller and Craver also impose upon
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<PAGE>
each of them obligations of confidentiality, while Messrs. Anderson,
Weismiller and Craver's employment agreements also impose upon them certain
limited obligations not to compete against the Company.
As used in the new employment agreements, "Change in Control" means the
earliest to occur of any one of the following events: (1) any person (with
certain limited exceptions) becomes the beneficial owner of 25% or more of
the Company's voting stock; (2) the majority of the Board of Directors does
not consist of individuals who are Incumbent Directors, which term means
the members of the Board as of January 1, 1998; provided that any person
becoming a director subsequent to such date whose election or nomination
for election was supported by three-quarters of the directors who then
comprised the Incumbent Directors shall be considered to be an Incumbent
Director, (3) the Company adopts a liquidation plan; (4) the merger or sale
of substantially all of the assets of the Company (unless proportional
ownership of the Company's stock does not change); or (5) the Company
combines with any other company and is the surviving corporation but the
shareholders of the Company immediately prior thereto own less than 50% of
the voting stock of the combined company.
Insider Participation in Compensation Decisions
Compensation decisions are made by the Compensation Committee which
consists of the directors of the Company. Mr. Neckowitz and Ms. Granton do
not vote on their respective compensation. Mr. Junewicz has abstained from
voting on compensation issues relating to Mr. Neckowitz and Ms. Granton due
to his law firm's representation of the Company. Grants under the Long-Term
Incentive Plan are made by a subcommittee of the Compensation Committee
consisting of Mr. Dalfen and Mr. Volante in consultation with the other
directors, Company management and, this year, with the consultant retained
by the Company. All directors concurred on the awards under the Long-Term
Incentive Plan made by the subcommittee (other than awards granted to that
director).
Report of the Compensation Committee of the Board of Directors on Executive
Compensation
The Company's compensation program is designed to enable the Company
to attract, motivate and retain the best possible executive talent, people
who provide the experience and skills which are vital for the Company to
achieve its goals. The Company strives to align the personal financial
interests of its executives with the financial interests of stockholders in
an effort to maximize stockholder value.
The Compensation Committee of the Board of Directors and, where
applicable, the subcommittee of outside directors, sets executive
compensation, including adjustments to base salaries, bonuses and grants of
equity-based awards. The Compensation Committee bases its determinations of
overall executive compensation, which include salary, bonus, certain
benefits and stock option awards and possibly other forms of equity-based
compensation, on subjective factors based upon consideration of, among
other factors, the annual and long-term financial performance of the
Company, including the creation of stockholder value, the historical
financial performance of the Company, the individual executive officer's
contribution to the achievement of operating goals and business objectives
and levels of compensation in comparable companies at similar stages of
development, with particular emphasis on those operating in the
telecommunications industry. The Compensation Committee bases executive
compensation on financial performance criteria, including the Company's
financial performance and the price of the Company stock, in the context of
the telecommunication industry as well as the economy in general.
All directors of the Company sit on the Compensation Committee of the
Board of Directors. However, Mr. Neckowitz and Ms. Granton do not vote on
their respective compensation. In addition, because of the relationship of
Mr. Junewicz's law firm with the Company, Mr. Junewicz abstains from voting
on matters voted upon by the Compensation Committee relating to the
compensation of Mr. Neckowitz and Ms. Granton. A subcommittee of the
Compensation Committee consisting of Mr. Dalfen and Mr. Volante makes
awards under the Company's Long-Term Incentive Plan, including stock
options and restricted stock awards in consultation with the other
directors, Company management and, this year, with the consultant retained
by the Company. All directors concurred on the awards under the Long-Term
Incentive Plan made by the subcommittee (other than awards granted to that
director).
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<PAGE>
During 1997, the salary of the Company's executive officers including
Mr. Neckowitz was generally set pursuant to employment agreements. See
"Summary Compensation Table". As discussed in "Employment Contracts
Termination of Employment and Change-in-Control Arrangements," the
contracts for Mr. Neckowitz, Ms. Granton, Mr. Anderson, Mr. Craver and Mr.
Weismiller have been superseded with new employment contracts.
During 1997, the Company retained a professional consultant to
research executive compensation levels of similar companies and to advise
the Board of Directors. The corporations against which the Company compared
the compensation of its executives are not necessarily those included in
the indices used to compare stockholder return in the stock performance
graph. As a result of this review of executive compensation, in early 1998
the Company entered into new employment agreements with certain executive
officers, including the Named Executive Officers. In determining
appropriate compensation levels for key executive officers, including Mr.
Neckowitz, the Compensation Committee focused heavily on the financial
operating performance of the Company and on the performance of the
Company's Common Stock, which increased from $12 at the time of the initial
public offering in 1996 to a high of $55.125 in 1997. The performance of
the Company's stock significantly exceeds the performance of the market as
a whole as well as that of telecommunications companies as reflected by
certain indices. The Compensation Committee believes that top management
deserves the credit for this stock price increase and deserves to be
compensated accordingly. In particular, the Compensation Committee approved
the new contract for Mr. Neckowitz because the Committee believed that Mr.
Neckowitz is largely responsible for the increases in the Company's revenue
and net income during the period of this stock price increase and that the
continuation of Mr. Neckowitz's services are essential to the future
success of the Company. The new agreements ensure that the Company and its
shareholders will have the benefit of the services of top management for
the terms of the new agreements, which are five years for Mr. Neckowitz,
three years for Ms. Granton and Mr. Anderson and two years for Messrs.
Craver and Weismiller. The consultant reviewed the new employment
agreements and concluded that they were fair and reasonable in view of the
circumstances. For a further description of the new employment contracts,
see "Employment Contracts, Termination of Employment and Change-in-Control
Arrangements".
The Company believes that equity based compensation is an effective
way of aligning executive compensation with increases in stockholder value.
The Company uses the Long-Term Incentive Plan in order to attract and
retain employees and other service providers and to identify such
individuals with the Company's stockholders through the use of equity-
based compensation. The Compensation Committee believes that option grants
align executive interests with stockholders interests by providing a direct
link between compensation and stockholder returns. The Compensation
Committee believes that option grants pursuant to the Long-Term Incentive
Plan helps retain key executives in highly competitive market for executive
talent in the telecommunications industry.
The Long-Term Incentive Plan authorizes the grant of options and other
awards, including restricted stock, to executives. Option grants may be
made from time to time. Option grants in 1997 were made based on various
subjective factors, including individual performance contributions and
expected future contributions as determined by the subcommittee. In
granting options in 1997, the subcommittee of the Compensation Committee
gave considerable weight to management's contributions to increased stock
price.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code") limits the Company's deduction for compensation paid to the
executive officers named in the Summary Compensation Table to $1 million
unless certain requirements are met. The policy of the Compensation
Committee with respect to section 162(m) is to establish and maintain a
compensation program which will optimize the deductibility of compensation.
In that regard, no executive officer received compensation in excess of $1
million during fiscal 1997. The Compensation Committee, however, reserves
the right to use its judgment, where merited by the Compensation
Committee's need for flexibility to respond to changing business conditions
or by an executive officer's individual performance, to authorize
compensation which may not, in a specific case, be fully deductible by the
Company.
By The Compensation Committee of the Board of
Directors:
Howard A. Neckowitz
Gail E. Granton
Charles M. Dalfen
James J. Junewicz
Barry J. Volante
11
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the total return on the Common Stock with
the cumulative total return on the Nasdaq Market Index--U.S. Companies (a
broad market index) and the Nasdaq Telecommunications Index (an industry
index) for the period from July 19, 1996, the date upon which the Common
Stock was registered pursuant to Section 12 of the Exchange Act, through
December 31, 1997. The comparison reflects the investment of $100 on July
19, 1996, and the reinvestment of dividends (if paid), in each of the
Company's Common Stock (for which no dividends have been paid), the Nasdaq
Market Index and the Nasdaq Telecommunications Index (an industry index).
The stock price performance of the Company reflected in this comparison is
not necessarily indicative of the future stock price performance of the
Company's Common Stock.
<TABLE>
<CAPTION>
NASDAQ
PACIFIC GATEWAY TELECOMMUNICATIONS NASDAQ MARKET
EXCHANGE, INC. INDEX INDEX
- U.S. COMPANIES
<S> <C> <C> <C>
7/19/96 100.00 100.00 100.00
9/30/96 231.37 108.00 113.68
12/31/96 286.27 108.16 119.26
3/31/97 196.08 100.53 112.8
6/30/97 221.57 126.19 133.48
9/30/97 306.86 146.49 156.06
12/31/97 422.06 159.76 146.36
</TABLE>
Assumes $100 Invested on July 19, 1996
Assumes Dividend Reinvested
Fiscal Year Ending December 31, 1997
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership of the outstanding Common Stock as of April 29, 1998
(unless otherwise indicated) by (i) each director of the Company, (ii) the
Company's chief executive officer and the individuals serving as executive
officers of the Company as of December 31, 1997 named in the table under
"Compensation of Directors and Executive Officers--Summary Compensation
Table" and (iii) all directors and executive officers of the Company as of
April 29, 1998 as a group.
Shares of Percentage
Common of
Stock Outstanding
Beneficially Shares
Owned(1) Owned(1)
------------ -----------
Directors and Executive Officers
Howard A. Neckowitz(2)....................... 3,922,948 20.4%
Gail E. Granton(3)........................... 867,494 4.5%
Charles M. Dalfen(4)......................... 16,000 *
12
<PAGE>
James J. Junewicz(5)......................... 15,000 *
Barry J. Volante(6).......................... 5,000 *
Anderson(7).................................. 184,245 *
Robert F. Craver(8).......................... 139,295 *
Fred A. Weismiller(9)........................ 105,810 *
All directors and executive officers as a group
(9 persons)(10)......................... 4,443,574 23.0%
Additional 5% Stockholders
Ronald Jensen(11)............................ 1,230,760 6.4%
United Insurance Companies, Inc.
5215 North O'Connor Boulevard
Suite 300
Irving, Texas 75039
KDD America, Inc.(12)........................ 1,800,000 9.4%
201 3rd Street, Suite 911
San Francisco, California 94103
Nicholas-Applegate Capital Management(13).... 1,103,600 5.8%
600 West Broadway, 29th Floor
San Diego, California 92101
Pilgrim Baxter & Associates, Ltd.(14)......... 1,136,600 5.9%
825 Duportail Road
Wayne, Pennsylvania 19087
_____________
* Less than 1%
(1) Calculated pursuant to Rule 13d-3 under the Exchange Act. Under Rule
13d-3(d), shares not outstanding that are subject to options,
warrants, rights or conversion privileges exercisable within 60 days
of April 29, 1998, are deemed outstanding for the purpose of
calculating the number and percentage owned by such person, but are
not deemed outstanding for the purpose of calculating the percentage
owned by each other person listed.
(2) Includes 1,330,760 shares held by Ronald L. Jensen and the Ronald L.
Jensen Foundation Charitable Trust for which Mr. Neckowitz has been
given an irrevocable proxy to vote such shares until July 31, 2003 or
until either party terminates the arrangement pursuant to the terms of
the agreement or, if earlier, the date on which Mr. Neckowitz becomes
unable to perform his duties as an officer of the Company due to his
voluntary resignation, termination for cause, long-term disability,
physical incapacity or death. In addition, Mr. Neckowitz believes that
he has been promised proxies to vote all shares held by Mr. Jensen's
adult children, which would include approximately 1,540,680 shares.
Also includes (1) 23,141 shares held by the Genisis Foundation, a
charitable trust of which Mr. Neckowitz is a co-trustee, (2) 119,640
shares held by Mr. Neckowitz's wife, (3) 96,045 shares held by the
Howard A. and Cheryl Neckowitz 1997 Trust of which Mr. Neckowitz is
co-trustee, (4) 812,318 shares held by Gail Granton and (5) 14,000
shares held by the Granton Foundation. The shares held by the Genisis
Foundation, Mr. Neckowitz's wife, the Howard A. Neckowitz and Cheryl
Neckowitz 1997 Trust, Ms. Granton and the Granton Foundation are
subject to an irrevocable proxy granting Mr. Neckowitz the right to
vote such shares. Also includes
13
<PAGE>
88,235 shares issuable upon the exercise of stock options that are
either currently exercisable or will be exercisable by June 28, 1998.
(3) Includes 14,000 shares held by the Granton Foundation, a charitable
trust of which she is the trustee. Ms. Granton has granted an
irrevocable proxy to Mr. Neckowitz to vote the shares owned by Ms.
Granton and the Granton Foundation. Also includes 41,176 shares
issuable upon the exercise of stock options that are either currently
exercisable or will be exercisable by June 28, 1998.
(4) Includes 15,000 shares issuable upon the exercise of stock options
that are either currently exercisable or will be exercisable by June
28, 1998.
(5) Represents shares issuable upon the exercise of stock options that are
either currently exercisable or will be exercisable by June 28, 1998.
(6) Represents shares issuable upon the exercise of stock options that are
either currently exercisable or will be exercisable by June 28, 1998.
(7) Includes 25,625 shares issuable upon the exercise of stock options
that are either currently exercisable or will be exercisable by June
28, 1998.
(8) Includes 26,250 shares issuable upon the exercise of stock options
that are either currently exercisable or will be exercisable by June
28, 1998.
(9) Includes 96,660 shares held by the Weismiller Family Trust of which
Mr. Weismiller is co-trustee. The shares held by the Weismiller Family
Trust are subject to an irrevocable proxy granting Mr. Weismiller the
right to vote such shares. Also includes 9,150 shares issuable upon
the exercise of stock options that are either currently exercisable or
will be exercisable by June 28, 1998.
(10) Information provided is for the individuals who were directors and
executive officers of the Company on April 29, 1998 and includes
238,936 shares issuable upon the exercise of stock options that
are either currently exercisable or will be exercisable by June
28, 1998.
(11) Excludes shares held by Mr. Jensen's adult children Julie J.
Jensen, Jeffrey J. Jensen, Janet J. Jensen, James J. Jensen and
Jami J. Jensen and by certain trusts and foundations of which Mr.
Jensen's adult children are trustees. Mr. Jensen's adult children
beneficially owned an aggregate of 3,570,375 shares as of December
31, 1997 as reported on Schedule 13G as filed with the Securities
and Exchange Commission on February 13, 1998. The Company's
transfer agent reports that, as of April 27, 1998, Mr. Jensen's
adult children (including shares owned by affiliated foundations)
were the record owners of 1,540,680 shares. As reported on
Schedule 13G, Mr. Jensen disclaims beneficial ownership of all
shares beneficially owned by his adult children. Also excludes
shares held by certain employees of companies associated with Mr.
Jensen and 100,000 shares held by the Ronald L. Jensen Foundation
Charitable Trust. Mr. Jensen has entered into an Irrevocable Proxy
and Voting Agreement with Mr. Neckowitz granting Mr. Neckowitz the
right to vote all of Mr. Jensen's shares in the Company until July
31, 2003, however, either party may terminate the agreement after
July 31, 1999 by giving the other party eighteen months' advance
written notice (the earliest notice date is July 31, 1999 for a
termination of January 21, 2001). The agreement is null and void
if Mr. Neckowitz becomes unable to perform his duties as an
officer of the Company due to his voluntary resignation,
termination for cause, long-term disability, physical incapacity
or death.
(12) Share ownership current as of December 31, 1997 as reported on
Schedule 13G filed with the Securities and Exchange Commission on
March 23, 1998.
(13) Share ownership current as of December 31, 1997 as reported on Schedule
13G filed with the Securities and Exchange Commission on
February 3, 1998.
14
<PAGE>
(14) Share ownership current as of December 31, 1997 as reported on
Schedule 13G filed with the Securities and
Exchange Commission on February 12, 1998.
Item 13. Certain Relationships and Related Transactions
The Company has entered into indemnification agreements with its
directors and officers. Such agreements require the Company to indemnify
such individuals and are, in some cases, broader than the specific
indemnification provisions contained in the Delaware Law.
Ronald Jensen has entered into an Irrevocable Proxy and Voting Agreement
with Mr. Neckowitz granting Mr. Neckowitz the right to vote all of Mr.
Jensen's shares, 1,330,760 shares on April 6, 1998, in the Company until
July 31, 2003; however, either party may terminate the agreement after July
31, 1999 by giving the other party eighteen months' advance written notice
(the earliest notice date is July 31, 1999 for a termination of January 21,
2001). The agreement is null and void if Mr. Neckowitz becomes unable to
perform his duties as an officer of the Company due to his voluntary
resignation, termination for cause, long-term disability, physical
incapacity or death.
Ronald Jensen, the beneficial holder of 6.4% of the Company's stock,
beneficially owns 22.3% of the outstanding stock of AvTel Communication,
Inc. ("AvTel"), according to AvTel's proxy statement filed with the
Securities and Exchange Commission on April 27, 1998. According to AvTel's
proxy statement, Mr. Jensen's adult children are also significant
stockholders of AvTel, owning an aggregate 45.9% of AvTel's outstanding
stock and Mr. Jeffrey Jensen, one of Mr. Jensen's sons, is a director of
AvTel. In addition, Mr. Neckowitz, Ms. Granton and Mr. Anderson own shares
of AvTel. AvTel acquired Matrix Telecom, Inc. ("Matrix") pursuant to an
exchange transaction on December 1, 1997. Prior to such acquisition, the
individuals listed above were Matrix stockholders. The Company recorded
revenues from sales of telecommunication services to Matrix of
approximately $15.5 million during fiscal 1997, accounting for
approximately 5.1% of the Company's revenues. In the fourth quarter of
1997, Matrix accounted for 3.6% of the Company's revenues.
In connection with the Company's public offering of common stock in July
1996, the Company sold 1,800,000 shares, or approximately 9.5% of the
outstanding shares, directly to KDD America, Inc. ("KDD America"), a
subsidiary of Kokusai Denshin Denwa, an international telecommunications
carrier based in Japan ("KDD Japan"). At that time, the Company and KDD
Japan entered into a seven-year cooperation agreement that contemplates
joint projects in the communications field, including joint product
development in new services, such as video teleconferencing, imaging and
Internet services together with related technical support and assistance;
joint marketing arrangements to promote small and medium-size business and
retail and ethnic marketing programs; continuing exchange of traffic;
assistance by KDD Japan to the Company with respect to the Company's
business in Asia; and sharing of information by the Company and KDD Japan
regarding the telecommunications market and industry in the United States
and Japan, respectively. During fiscal 1997, the Company made net payments
to KDD Japan, reduced by amounts owed to the Company by KDD Japan, of
approximately $3.7 million in connection with exchanging traffic.
The Company obtains legal services from Mayer, Brown & Platt, the law
firm of which James J. Junewicz is a partner.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
3. Exhibits
See Exhibit Index which is incorporated herein by reference.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, in Burlingame, California, on the 30th day of April, 1998.
PACIFIC GATEWAY EXCHANGE, INC.
By: /s/ Howard A. Neckowitz
Howard A. Neckowitz
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed by the following persons on
behalf of the Registrant and in the capacities indicated and on the 30th
day of April, 1998.
Signature Title
President, Chief Executive Officer
/s/ Howard A. Neckowitz and Chairman of the Board
Howard A. Neckowitz (Principal Executive Officer)
Executive Vice President,
/s/ Gail E. Granton International Business Development
Gail E. Granton and Director
/s/ Sandra D. Grey Chief Financial Officer
Sandra D. Grey (Principal Financial Officer)
(Principal Accounting Officer)
/s/ Charles M. Dalfen Director
Charles M. Dalfen
/s/ James J. Junewicz Director
James J. Junewicz
/s/ Barry J. Volante Director
Barry J. Volante
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
Exhibit
Number Description Method of Filing
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation, as Incorporated by reference to
amended May 20, 1997 Quarterly Report on Form 10-Q
for the quarter ended June 30,
1997 (No. 000-21043)
3.2 Amended and Restated Bylaws, as amended December 30, Previously Filed
1997
4.1 Specimen Certificate for Common Stock Incorporated by reference to
Registration Statement on form S-1
(No. 33-80191)
4.2 Amended and Restated Certificate of Incorporation, as Incorporated by reference to
amended May 20, 1997 Quarterly Report on Form 10-Q
for the quarter ended June 30,
1997 (No. 000-21043)
4.3 Rights Agreement dated as of November 17, 1997, between Incorporated by reference to Form
the Company and Norwest Bank Minnesota, N.A. as Rights 8-K filed November 21, 1997
Agent (No. 000-21043)
10.1 Form of Indemnification Agreement for directors and Previously Filed
officers
10.2 1997 Long-Term Incentive Plan Incorporated by reference to
quarterly Report on Form 10-Q for
the quarter ended June 30, 1997
(No. 000-21043)
10.3 Employee Stock Purchase Plan Incorporated by reference to
Registration Statement on Form S-1
(No. 33-80191)
10.4.1 Proxy dated December 10, 1994 by Julie J. Jensen Incorporated by reference to
Registration Statement on Form S-1
(No. 33-80191)
10.4.2 Proxy dated December 10, 1994 by Jeffrey J. Jensen Incorporated by reference to
Registration Statement on Form S-1
(No. 33-80191)
10.4.3 Proxy dated December 10, 1994 by Janet Jensen Kreiger Incorporated by reference to
Registration Statement on Form S-1
(No. 33-80191)
10.4.4 Proxy dated December 10, 1994 by James J. Jensen Incorporated by reference to
Registration Statement on Form S-1
(No. 33-80191)
<PAGE>
<CAPTION>
Exhibit
Number Description Method of Filing
<S> <C> <C>
10.4.5 Proxy dated December 10, 1994 by Jami J. Jensen Incorporated by reference to
Registration Statement on Form S-1
(No. 33-80191)
10.4.6 Proxy dated May 10, 1996 by Gail E. Granton Incorporated by reference to
Registration Statement on Form S-1
(No. 33-80191)
10.4.7 Proxy dated June 10, 1996 by Ronald L. Jensen Incorporated by reference to
Registration Statement on Form S-1
(No. 33-80191)
10.5.1 Employment Agreement dated October 1, 1995 between Incorporated by reference to
Howard A. Neckowitz and Pacific Gateway Exchange, Inc. Registration Statement on Form S-1
(No. 33-80191)
10.5.2 Employment Agreement Dated October 1, 1995 between Incorporated by reference to
Gail E. Granton and Pacific Gateway Exchange, Inc. Registration Statement on Form S-1
(No. 33-80191)
10.5.3 Employment Agreement dated as of October 1, 1995 Incorporated by reference to
between Ronald D. Anderson and Pacific Gateway Registration Statement on Form S-1
Exchange, Inc. (No. 33-80191)
10.5.4 Employment Agreement dated October 1, 1995 between Incorporated by reference to
Robert F. Craver and Pacific Gateway Exchange, Inc. Registration Statement on Form S-1
(No. 33-80191)
10.5.5 Employment Agreement dated October 1, 1995 between Incorporated by reference to
Fred A. Weismiller and Pacific Gateway Exchange, Inc. Annual Report on Form 10-K for
the year ended December 31, 1996
(No. 000-21043)
10.5.6 Restricted Stock Award Agreement dated December 30, Previously Filed
1997 between Howard A. Neckowitz and Pacific Gateway
Exchange, Inc.
10.6 Telephone Service dated May 1, 1995 between Matrix Incorporated by reference to
Telecom, Inc. and Pacific Gateway Exchange, Inc. Registration Statement on Form S-1
(No. 33-80191)
10.7 Agreement for Billing Services dated November 24, 1995 Incorporated by reference to
Between Matrix Telecom, Inc. and Pacific Gateway Registration Statement on Form S-1
Exchange, Inc. (No. 33-80191)
10.8 Form of Stock Purchase Agreement with KDD Incorporated by reference to
Registration Statement on Form S-1
(No. 33-80191)
21.1 Subsidiaries Previously Filed
23.1 Consent of Independent Accountants Previously Filed
23.2 Consent of Independent Accountants Filed with this document
27.1 Financial Data Schedule Previously Filed
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Pacific Gateway Exchange, Inc. on Form S-8 (File No. 333-24833) of our
report dated February 16, 1998, on our audits of the consolidated financial
statements and the financial statement schedules of Pacific Gateway
Exchange, Inc. as of December 31, 1997 and 1996, and for the years ended
December 31, 1997, 1996, and 1995, which report is included in this Annual
Report on Form 10-K, amended by Form 10-K/A Amendment No. 1.
/s/ COOPERS & LYBRAND L.L.P.
San Francisco, California
April 30, 1998
</TABLE>
