<PAGE>
SECURITIES AND EXCHANGE COMMISSION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED September 30, 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 October 30, 1998, the number of the registrant's Common Shares of $.0001
par value outstanding was 19,184,499
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated condensed balance sheets as of
September 30, 1998 and December 31, 1997 1
Consolidated condensed statements of income
for the three-month and nine-month periods ended
September 30 , 1998 and 1997 2
Consolidated condensed statements of cash flows
for the nine-month periods ended
September 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 11
Item 2: Changes in Securities and Use of Proceeds 11
Item 3: Defaults upon Senior Securities 11
Item 4: Submission of matters to a vote of security holders 11
Item 5: Other information 11
Item 6: Exhibits and reports on Form 8-K 12
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 31,471 $ 43,850
Accounts receivable, net of allowance for doubtful accounts
of $3,503 in 1998 and $2,230 in 1997 86,219 62,313
Prepaid expenses 1,440 511
Income taxes receivable 2,254 -
Other current assets 1,927 1,769
--------------- ------------
Total current assets 123,311 108,443
Property and equipment, net 85,819 61,433
Investment in companies 6,610 184
Deposits and other assets 1,739 1,557
--------------- ------------
Total assets $ 217,479 $ 171,617
=============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 116,411 $ 87,949
Accrued liabilities 4,669 3,733
Income taxes payable - 1,491
Other liabilities 2,213 1,871
--------------- ------------
Total liabilities 123,293 95,044
--------------- ------------
Commitments 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 19,323,809 shares, outstanding 19,180,249 shares
in 1998 and issued 19,216,710 shares, outstanding 19,073,150
shares in 1997 2 2
Additional paid in capital 64,226 60,849
Deferred compensation-restricted stock (4,821) (4,134)
Foreign currency translation 147 2
Retained earnings 35,032 20,254
Common stock held in treasury, at cost
(143,560 shares in 1998 and 1997) (400) (400)
--------------- ------------
Total stockholders' equity 94,186 76,573
--------------- ------------
Total liabilities and stockholders' equity $ 217,479 $ 171,617
=============== ============
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements
1
<PAGE>
<TABLE>
<CAPTION>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except net income per share)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------------- -------------------------------------
1998 1997 1998 1997
------------------ --------------- ------------------ ------------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 124,853 $ 76,087 $ 339,877 $ 183,015
Revenues - related party - 3,910 - 11,619
------------------ --------------- ------------------ ------------------
Total revenues 124,853 79,997 339,877 194,634
Cost of long distance services 104,644 68,099 286,836 163,207
------------------ --------------- ------------------ ------------------
Gross margin 20,209 11,898 53,041 31,427
Selling, general and administrative expenses 11,612 5,587 26,464 15,030
Depreciation 2,209 1,595 6,318 3,715
------------------ --------------- ------------------ ------------------
Total operating expenses 13,821 7,182 32,782 18,745
------------------ --------------- ------------------ ------------------
Operating income 6,388 4,716 20,259 12,682
Other (income) expense, net (1,712) (162) (1,118) (330)
Interest (income) expense, net (532) (377) (1,701) (1,392)
------------------ --------------- ------------------ ------------------
Income before income taxes 8,632 5,255 23,078 14,404
Provision for income taxes 2,980 1,965 8,165 5,610
------------------ --------------- ------------------ ------------------
Net income $ 5,652 $ 3,290 $ 14,913 $ 8,794
================== =============== ================== ==================
Net income per share, basic $ 0.30 $ 0.17 $ 0.78 $ 0.46
================== =============== ================== ==================
Net income per share, diluted $ 0.29 $ 0.17 $ 0.75 $ 0.45
================== =============== ================== ==================
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------------
1998 1997
---------------- --------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 14,913 $ 8,794
Adjustments to net income:
Depreciation 6,318 3,715
Stock compensation expense 456 84
Bad debts provision 620 1,829
Equity in net income of affiliated companies (1,311) -
Changes in operating assets and liabilities:
Accounts receivable (24,526) (30,113)
Accounts receivable, related party - 444
Prepaid expenses (929) (26)
Deposits and other assets (387) (1,217)
Accounts payable 28,607 25,302
Accrued liabilities 936 2,127
Federal income taxes payable (recoverable) (3,745) (1,385)
Other liabilities 723 944
---------------- --------------
Net cash provided by operating activities 21,675 10,498
---------------- --------------
INVESTING ACTIVITIES:
Purchase of property and equipment (30,924) (26,483)
Purchase of investment (3,314) 222
---------------- --------------
Net cash used in investing activities (34,238) (26,261)
---------------- --------------
FINANCING ACTIVITIES:
Exercise of stock options 491 528
Other (57) (154)
---------------- --------------
Net cash provided by financing activities 434 374
---------------- --------------
Net decrease in cash and cash equivalents (12,129) (15,389)
Cash and cash equivalents at beginning of the period 43,850 45,563
---------------- --------------
Cash and cash equivalents at end of the period $ 31,721 $ 30,174
================ ==============
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 nine-month
periods ended September 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 common 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 September 30, 1998
BASIC EPS:
Income available to common stockholders $ 5,652 19,065 $0.30
Effect of stock-based compensation 687
---------------- ------------------- ----------------
DILUTED EPS $ 5,652 19,752 $0.29
================ =================== ================
THREE MONTHS ENDED SEPTEMBER 30, 1997
BASIC EPS:
Income available to common stockholders $ 3,290 18,938 $0.17
Effect of stock-based compensation 759
---------------- ------------------- ----------------
DILUTED EPS $ 3,290 19,697 $0.17
================ =================== ================
Nine Months Ended September 30, 1998
BASIC EPS:
Income available to common stockholders $14,913 19,056 $0.78
Effect of stock-based compensation 868
---------------- ------------------- ----------------
DILUTED EPS $14,913 19,924 $0.75
================ =================== ================
NINE MONTHS ENDED SEPTEMBER 30, 1997
BASIC EPS:
Income available to common stockholders $ 8,794 18,938 $0.46
Effect of stock-based compensation 795
---------------- ------------------- ----------------
DILUTED EPS $ 8,794 19,733 $0.45
================ =================== ================
</TABLE>
4
<PAGE>
(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 gains totaling
approximately $87,000 and $145,000 for the three- and nine-month period ending
September 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
adoption of SFAS No. 133 must be made by the first quarter of the year 2000.
Because the Company has not entered into derivative financial instruments, the
implementation of SFAS No. 133 will not have an impact on the Company's
consolidated results of operations, financial position or cash flows.
(6) CONTINGENCIES
- --- -------------
The Company currently has operating subsidiaries in foreign locations
including, the U.K., New Zealand and Russia. The location of these subsidiaries
in foreign countries gives rise to particular risks, such as the possibility of
unexpected and adverse changes in foreign government regulations and
telecommunications standards, licensing requirements, tariffs, taxes and other
trade barriers, as well as general political and economic instability. During
the third quarter, 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, and that
Rustelnet 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.
<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; (xv)
opportunities for (and problems resulting from) the acquisition of other
companies or offshore facilities; or (xvi) the impact of the year 2000 issue and
any related noncompliance. 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 Nine Months
Ended Ended
September 30, September 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 83.8% 85.1% 84.4% 83.9%
----------- ----------- ----------- -----------
Gross margin 16.2% 14.9% 15.6% 16.2%
Selling, general and administrative
expenses 9.3% 7.0% 7.8% 7.2%
Depreciation 1.8% 2.0% 1.9% 1.9%
----------- ----------- ----------- -----------
Total operating expenses 11.1% 9.0% 9.6% 9.6%
----------- ----------- ----------- -----------
Operating income 5.0% 5.9% 6.0% 6.5%
Interest (income) expense, net -0.4% -0.2% -0.5% -0.2%
Other (income) expense, net -1.4% -0.5% -0.5% -0.7%
----------- ----------- ----------- -----------
Income before income taxes 6.9% 6.6% 6.8% 7.4%
Provision for income taxes 2.4% 2.5% 2.4% 2.9%
----------- ----------- ----------- -----------
Net income 4.5% 4.1% 4.4% 4.5%
=========== =========== =========== ===========
</TABLE>
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS
- --------------------------------------------------------------
ENDED SEPTEMBER 30, 1997.
- ------------------------
REVENUES: Total revenues for the three months ended September 30, 1998
- --------
increased 56% to $124.9 million from $80.0 million for the three months ended
September 30, 1997 and increased 14% from $110.0 million in the quarter ended
June 30, 1998. The increase from the quarter ended September 30, 1997 was the
result of several factors. First, the Company increased the number of its
operating agreements to 44 at September 30, 1998 from 37 at September 30, 1997.
Second, the number of wholesale carrier customers increased to 157 at September
30, 1998 from 115 at September 30, 1997. Third, revenues from the Company's
retail customers were $5.5 million for the quarter ended September 30, 1998,
while the Company was not engaged in the retail business for the quarter ended
September 30, 1997. As a result of these factors, total minutes increased 60.3%
from the three months ended September 30, 1997, while the average price per
minute charged to customers declined slightly to $0.28 in the three months ended
September 30, 1998, compared to $0.29 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 third 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 16.2% in the current
- ------------
three-month period, an increase from 14.9% in the same period in the prior year.
The increase in margin resulted from the reconfiguring of the U.S. network,
which led to lower costs per minute of revenue and traffic from the Company's
retail customers that yielded a higher profit margin. The cost of long distance
service increased to $104.6 million in the three months ended September 30, 1998
from $68.1 million in the three months ended September 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 ("SG&A") as a percentage of revenues were 9.3% in the
three months ended September 30, 1998, an increase from 7.8% in the same period
in the prior year. Actual expenses increased to $11.6 million in the three
months ended September 30, 1998 from $5.6 million in the three months ended
September 30, 1997. During the third quarter of 1998, SG&A increased by $2.4
million to reflect commissions paid by the Company to its joint venture,
PinTouch Telecom LLC. This increase in SG&A is offset by a corresponding
increase in the Company's equity in earnings of PinTouch Telecom LLC , of $2.4
million which is included in Other (income)expense, net, the remaining 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 142 at
September 30, 1998 from 71 at September 30, 1997. The increase in sales
commission expenses was primarily due to increased revenues.
DEPRECIATION: Depreciation increased 38.5% to $2.2 million in the quarter
- ------------
ended September 30, 1998 from $1.6 million in the quarter ended September 30,
1997. Depreciation as a percentage of revenues was 1.8% of revenue for the
current quarter, and 2.0% for the same quarter in the prior year. The increase
in the dollar amount was primarily due to depreciation of additional
transmission facilities acquired since September 30, 1997.
INCOME TAX: Income taxes increased to $3.0 million in the three months ended
- ----------
September 30, 1998 from $2.0 million in the three months ended September 30,
1997, primarily due to increased operating income. The effective tax rate was
37% in 1997 and 35% in 1998. The decrease in effective tax rate was
<PAGE>
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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
- ------------------------------------------------------------
ENDED SEPTEMBER 30, 1997.
- ------------------------
REVENUES: Total revenues for the nine months ended September 30, 1998
- --------
increased 75% to $339.9 million from $194.6 million in the nine months ended
September 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 44 at September 30, 1998 from 37 at September 30, 1997, and
an increase in the number of wholesale customers to 157 at September 30, 1998
from 115 at September 30, 1997. In addition, revenues from the Company's retail
customers were $13.2 million for the nine months ended September 30, 1998, while
there were no retail revenues for the nine months ended September 30, 1997.
GROSS MARGIN: As a percentage of revenue, gross margin was 15.6% for the nine
- ------------
months ended September 30, 1998, a decrease of 0.6% from 16.2% for the same
period in the prior year. The small 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 $286.8 million in the nine months
ended September 30, 1998 from $163.2 million in the nine months ended September
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 7.8% in the nine months
ended September 30, 1998, a slight increase from 7.7% in the same period in the
prior year. Actual expenses increased 76.1% to $26.5 million in the nine months
ended September 30, 1998 from $15.0 million in the nine months ended September
30, 1997. In the third quarter of 1998, SG&A was increased by $2.4 million to
reflect commissions paid to its joint venture, PinTouch Telecom LLC. This
increase in SG&A is offset by a corresponding increase in the Company's equity
in earnings of PinTouch Telecom LLC of $2.4 million which is included in Other
(income)expense, net, the remaining increase was primarily due 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 142 at September 30, 1998 from 71 at September 30,
1997. The increase in sales commission expenses was primarily due to increased
revenues.
DEPRECIATION: Depreciation increased 70.0% to $6.3 million in the nine months
- ------------
ended September 30, 1998 from $3.7 million in the nine months ended September
30, 1997. Depreciation as a percentage of revenues was 1.9% of revenue for the
nine months ended September 30, 1998 and 1997. The increase in the dollar
amount was primarily due to depreciation of additional transmission facilities
acquired since September 30, 1997.
INCOME TAX: Income taxes increased to $8.2 million in the nine months ended
- ----------
September 30, 1998 from $5.6 million in the nine months ended September 30,
1997, primarily due to increased operating income. The effective tax rate was
39.8% in 1997 and 35.6% 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.
<PAGE>
Net cash provided by operating activities was $21.7 million for the nine
months ended September 30, 1998 and $10.5 million for the nine months ended
September 30, 1997. This increase in cash provided by operating activities was
primarily due to cash inflows from greater cash generating net income, payments
received reducing accounts receivable balances and higher accounts payable
balances which is partially offset by cash outflows from income tax payments.
Net cash used in investing activities was $34.2 million for the nine months
ended September 30, 1998 and $26.3 million for the nine months ended September
30, 1997. Capital expenditures for the nine months in 1998 were $30.9 million,
an increase from $26.5 million in the same period in the prior year. Capital
expenditures in both 1997 and 1998 were for the acquisition of partial ownership
interests in international fiber optic cable 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 $0.4 million for the nine
months ended September 30, 1998 and 1997. Substantially all of these cash
inflows were from the exercise of stock options.
During October 1998, the Company signed a commitment letter from Bank of
America, NT&SA and NationsBancMontgomery LLC as lead arranger for a one-year
revolving line of credit of up to $30 million. This credit line will be used to
fund the Company's purchase commitments, letters of credit, working capital and
for general corporate purposes.
At September 30, 1998, the Company had outstanding commitments of $160
million for the acquisition of additional ownership in digital undersea fiber
optic cables and network equipment. This includes the commitment to purchase
undersea fiber optic cable in the US-Japan cable network for $86 million and in
TAT-14 cable system for $64 million. These cable commitments are expected to be
expended over the next two years and funded through expected operating cash
flows and existing cash balances and credit lines.
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.
YEAR 2000 ISSUE
The "Year 2000" issue affects the Company's internal computer systems,
network elements, software applications and other business systems that have
time-sensitive programs that may not properly reflect or recognize the year
2000. Because many computers and computer applications define dates by the last
two digits of the year, "00" may not be properly identified as the year 2000.
This error could result in miscalculations or system failures. The Year 2000
issue may also affect the systems and applications of the Company's vendors and
customers.
The Company has identified its Year 2000 risk in three categories: internal
information systems; non-financial software; and external noncompliance by
vendors and customers.
Internal information systems. The Company's internal information systems
----------------------------
were initially designed to be Year 2000 compliant. These systems, such as the
Company's billing system, have been extensively tested in a simulated Year 2000
environment and were preliminarily determined to be in compliance. Additional
tests will be conducted for final determination of Year 2000 compliance by mid-
<PAGE>
1999. The costs associated with testing the Year 2000 compliance are not
expected to be material to the Company's business, financial condition or
results of operations.
Non-financial software. The Company is in the process of assessing the
----------------------
impact of the Year 2000 on its non-financial software, such as
telecommunications switching equipment. The Company has conducted extensive
tests on its significant non-financial software and has preliminarily determined
it to be Year 2000 compliant. The Company intends to continue its testing for
final determination of Year 2000 compliance by mid-1999. The costs associated
with testing the Year 2000 compliance are not expected to be material to the
Company's business, financial condition or results of operations.
External noncompliance by vendors and customers. The Company is in the
-----------------------------------------------
process of preparing letters to send to its significant vendors and customers
requesting a response from those third parties on their Year 2000 readiness with
respect to information systems used by those entities which could impact
business with the Company. There is no assurance, however, that full Year 2000
compliance will be achieved by such third parties or that the Company will
receive assurances from such third parties. To the extent that responses to
Year 2000 readiness are unsatisfactory, the Company intends to identify
alternative and/or new vendors and customers who have demonstrated Year 2000
readiness. In the event that any of the Company's significant vendors and
customers do not successfully and timely achieve Year 2000 compliance, and the
Company is unable to replace them with new and/or alternative vendors and
customers, the Company's business or operations could be adversely affected.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Stockholder proposals must be received in writing by the
Secretary of the Company no later than February 3, 1999 and must comply
with the requirements of the Securities and Exchange Commission in
order to be considered for inclusion in the Company's proxy statement
and form of proxy relating to the Company's 1999 stockholder
meeting.
The Company's bylaws provide that for business to be properly
brought before a meeting by a stockholder, or for a stockholder to
nominate a person for election as a director, the stockholder must have
given timely notice thereof in writing to the Secretary of the Company.
To be timely, a stockholder proposal or nomination to be presented at
an annual meeting shall be received at the Company's principal
executive offices not less than 120 calendar days in advance of the
date that the Company's (or the Company's predecessor's) proxy
statement was released to stockholders in connection with the previous
year's annual meeting of stockholders. In the event of a nomination for
director to be elected at a special meeting at which directors are to
be elected pursuant to the Company's notice of special meeting, notice
by the stockholders to be timely must be received not later than the
closing of business on the tenth day following the day on which such
notice of the date of the special meeting was mailed. A stockholder's
notice to the Secretary with reference to a stockholder proposal shall
set forth as to each matter the stockholder proposes to bring before
the annual meeting (a) a brief description of the business desired to
be brought before the annual meeting and the reasons for conducting
such business at the annual meeting, (b) the name and address, as they
appear on the Company's books, of the stockholder proposing such
business, (c) the class and number of shares of the Company which are
beneficially owned by the stockholder, and (d) any material interest of
the stockholder in such business. A stockholder's notice to the
Secretary with reference to a nomination for director shall set forth:
(a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a
representation that the stockholder is a holder of record of stock of
the Company entitled to vote for the election of directors on the date
of such notice and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (c)
a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations
are to be made by the stockholder; (d) such other information regarding
each nominee
11
<PAGE>
proposed by such stockholder as would be required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and
Exchange Commission, had the nominee been nominated, or intended to be
nominated, by the Board of Directors; and (e) the consent of each
nominee to serve as a director of the Company if so elected.
Under the circumstances described in, and upon compliance with
Rule 14A-4(c) under the Securities Exchange Act of 1934, management may
solicit proxies which confer discretionary authority and vote such
proxies with respect to stockholder proposals which do not meet the
above described advance notice requirements.
Item 6. Exhibits and Reports on Form 8-K
(a) The Exhibits filed as part of this report are listed below:
3.2 Amended and Restated Bylaws, as amended October 23, 1998
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter ended
September 30, 1998
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC GATEWAY EXCHANGE, INC.
Dated: November 11, 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)
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
PACIFIC GATEWAY EXCHANGE, INC.
as amended through October 23, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
STOCKHOLDERS
<TABLE>
<CAPTION>
<S> <C> <C>
Section 1.1 Annual Meeting 1
Section 1.2 Special Meetings 1
Section 1.3 Notice of Meetings 1
Section 1.4 Quorum 2
Section 1.5 Conduct of the Stockholders' Meeting 2
Section 1.6 Conduct of Business 2
Section 1.7 Notice of Stockholder Business 3
Section 1.8 Proxies and Voting 3
Section 1.9 Stock List 4
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number and Term of Office 4
Section 2.2 Vacancies and Newly Created Directorships 4
Section 2.3 Removal 4
Section 2.4 Regular Meetings 5
Section 2.5 Special Meetings 5
Section 2.6 Quorum 5
Section 2.7 Participation in Meetings by Conference Telephone 5
Section 2.8 Conduct of Business 5
Section 2.9 Powers 5
Section 2.10 Compensation of Directors 6
Section 2.11 Nomination of Director Candidates 6
ARTICLE III
COMMITTEES
Section 3.1 Committees of the Board of Directors 7
Section 3.2 Conduct of Business 8
ARTICLE IV
OFFICERS
Section 4.1 Generally 8
Section 4.2 Chairman of the Board 8
Section 4.3 President 8
Section 4.4 Vice President 9
Section 4.5 Treasurer 9
Section 4.6 Secretary 9
Section 4.7 Delegation of Authority 9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Section 4.8 Removal 9
Section 4.9 Action With Respect to Securities of Other Corporations 9
ARTICLE V
STOCK
Section 5.1 Certificates of Stock 10
Section 5.2 Transfers of Stock 10
Section 5.3 Record Date 10
Section 5.4 Lost, Stolen or Destroyed Certificates 10
Section 5.5 Regulations 10
ARTICLE VI
NOTICES
Section 6.1 Notices 10
Section 6.2 Waivers 11
ARTICLE VII
MISCELLANEOUS
Section 7.1 Facsimile Signatures 11
Section 7.2 Corporate Seal 11
Section 7.3 Reliance Upon Books, Reports and Records 11
Section 7.4 Fiscal Year 11
Section 7.5 Time Periods 11
Section 7.6 Execution of Corporate Contracts and Instruments 12
Section 7.7 Checks, Drafts, Etc 12
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 8.1 Right to Indemnification 12
Section 8.2 Right of Claimant to Bring Suit 13
Section 8.3 Non-Exclusivity of Rights 13
Section 8.4 Indemnification Contracts 13
Section 8.5 Insurance 14
Section 8.6 Effect of Amendment 14
ARTICLE IX
AMENDMENTS
Section 9.1 Amendment of Bylaws 14
</TABLE>
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
A DELAWARE CORPORATION
AMENDED AND RESTATED BYLAWS
ARTICLE I
---------
STOCKHOLDERS
------------
Section 1.1 Annual Meeting. An annual meeting of the stockholders,
------------------------------
for the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix, which date shall be within thirteen subsequent to
the later of the date of incorporation or the last annual meeting of
stockholders.
Section 1.2 Special Meetings. Special meetings of the stockholders,
--------------------------------
for any purpose or purposes prescribed in the notice of the meeting, may be
called only (i) by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there
exists any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board of Directors for adoption) or (ii) by the
Chairman of the Board. Business transacted at special meetings shall be confined
to the purpose or purposes stated in the notice.
Section 1.3 Notice of Meetings. Written notice of the place, date,
----------------------------------
and time of all meetings of the stockholders shall be given, not less than ten
(10) nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as requited
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
<PAGE>
Section 1.4 Quorum. At any meeting of the stockholders, the holders
----------------------
of a majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by the proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
Section 1.5 Conduct of the Stockholders' Meeting. At every meeting
----------------------------------------------------
of the stockholders, the Chairman, if there is such an officer, or if not, the
President of the Corporation, or in his absence the Vice President designated by
the President, or in the absence of such designation any Vice President, or in
the absence of the President or any Vice President, a chairman chosen by the
majority of the voting shares represented in person or by proxy, shall act as
Chairman. The Secretary of the Corporation or a person designated by the
Chairman shall act as Secretary of the meeting. Unless otherwise approved by the
Chairman, attendance at the stockholders' meeting is restricted to stockholders
of record, persons authorized in accordance with Section 8 of these Bylaws to
act by proxy, and officers of the Corporation.
Section 1.6 Conduct of Business. The Chairman shall call the meeting
-----------------------------------
to order, establish the agenda, and conduct the business of the meeting in
accordance therewith or, at the Chairman's discretion, it may be conducted
otherwise in accordance with the wishes of the stockholders in attendance. The
date and time of the opening and closing of the polls for each matter upon which
the stockholders will vote at the meeting shall be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly manner, rule on
the precedence of and procedure on, motions and other procedural matters, and
exercise discretion with respect to such procedural matters with fairness and
good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 1.6 and
Section
<PAGE>
1.7, below. The Chairman of a meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section 1.6 and Section 1.7, and
if he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
Section 1.7 Notice of Stockholder Business. At an annual or special
----------------------------------------------
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before a
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors or
the Chairman of the Board, (b) properly brought before the meeting by or at the
direction of the Board of Directors or the Chairman of the Board, or (c)
properly brought before an annual meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder proposal to be presented at an annual meeting shall
be received at the Corporation's principal executive offices not less than 120
calendar days in advance of the date that the Corporation's (or the
Corporation's predecessor's) proxy statement was released to stockholders in
connection with the previous year's annual meeting of stockholders. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business, (c) the class and number of shares of the Corporation which are
beneficially owned by the stockholder, and (d) any material interest of the
stockholder in such business.
Section 1.8 Proxies and Voting. At any meeting of the stockholders,
----------------------------------
every stockholder entitled to vote may vote in person or by proxy authorized by
an instrument in writing or by a transmission permitted by law filed in
accordance with the procedure established for the meeting. No stockholder may
authorize more than one proxy for his shares.
Each stockholder shall have one vote for every share of stock entitled to
vote which is registered in his or her name on the record date for the meeting,
except as otherwise provided herein or required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast.
<PAGE>
Section 1.9 Stock List. A complete list of stockholders entitled to
--------------------------
vote at any meeting of stockholders, arranged in alphabetical order for each
class of stock and showing the address of each such stockholder and the number
of shares registered in his or her name, shall be open to the examination of any
such stockholder, for any purpose germane to the meeting, during ordinary
business hours for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or if not so specified, at the
place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
ARTICLE II
----------
BOARD OF DIRECTORS
------------------
Section 2.1 Number and Term of Office. The number of directors shall
-----------------------------------------
initially be five (5) and, thereafter, shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption). All directors shall hold
office until the expiration of the term for which they were elected and until
their respective successors are elected, except in the case of the death,
resignation or removal of any director.
Section 2.2 Vacancies and Newly Created Directorships. Newly created
---------------------------------------------------------
directorships resulting from directors or any vacancies in the Board of
Directors resulting from death, resignation, retirement, disqualification or
other cause (other than removal from office by a vote of the stockholders) may
be filled only by a majority vote of the directors then in office, though less
than a quorum. When the Board of Directors increases the number of directors by
creating new directorships, the Board of Directors shall specify the class of
directors to which each new directorship is assigned. A director appointed by
the Board of Directors to a newly created directorship (as opposed to a director
appointed to fill a vacancy from resignation or removal) shall hold office until
the next annual meeting of stockholders at which directors of the class of
directors to which the new directorship has been assigned are to be elected. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
Section 2.3 Removal. Subject to the rights of holders of any series
-----------------------
of Preferred Stock then outstanding, any directors, or the entire Board of
Directors may be removed from office for cause only, by the affirmative vote of
the holders of at least a majority of the voting power of all of the then
outstanding shares of capital stock of the
<PAGE>
Corporation entitled to vote generally in the election of directors, voting
together as a single class. Vacancies in the Board of Directors resulting from
such removal may be filled by a majority of the directors then in office, though
less than a quorum, as provided in Article II, Section 2.2 above or by the
stockholders. Directors so chosen shall hold office for a term expiring at the
next annual meeting of stockholders.
Section 2.4 Regular Meetings. Regular meetings of the Board of
--------------------------------
Directors shall be held at such place or places, on such date or dates, and at
such time or times as shall have been established by the Board of Directors and
publicized among all directors. A notice of each regular meeting shall not be
required.
Section 2.5 Special Meetings. Special meetings of the Board of
--------------------------------
Directors may be called by one-third of the directors then in office (rounded up
to the nearest whole number) or by the chief executive officer and shall be held
at such place, on such date, and at such time as they or he or she shall fix.
Notice of the place, date, and time of each such special meeting shall be given
each director by whom it is not waived by mailing written notice not fewer than
five (5) days before the meeting or by telegraphing or personally delivering the
same not fewer than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 2.6 Quorum. At any meeting of the Board of Directors, a
----------------------
majority of the total number of authorized directors shall constitute a quorum
for all purposes. If a quorum shall fail to attend any meeting, a majority of
those present may adjourn the meeting to another place, date, or time, without
further notice or waiver thereof.
Section 2.7 Participation in Meetings by Conference Telephone.
-----------------------------------------------------------------
Members of the Board of Directors, or of any committee thereof, may participate
in a meeting of such Board or committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other and such participation shall constitute presence
in person at such meeting.
Section 2.8 Conduct of Business. At any meeting of the Board of
-----------------------------------
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
required by law. Action may be taken by the Board of Directors without a meeting
if all members thereof consent thereto in writing, and the writing or writings
are filed with the minutes of proceedings of the Board of Directors.
Section 2.9 Powers. The Board of Directors may, except as otherwise
----------------------
required by law, exercise all such powers and do all such acts and things as may
be
<PAGE>
exercised or done by the Corporation, including, without limiting the generality
of the foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or privileges on
such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it may
determine, of written obligations of every kind, negotiable or non-negotiable,
secured or unsecured, and to do all things necessary in connection therewith;
(4) To remove any officer of the Corporation with or without cause, and from
time to time to devolve the powers and duties of any officer upon any other
person for the time being;
(5) To confer upon any officer of the Corporation the power to appoint,
remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase, bonus or
other compensation plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other benefit
plans for directors, officers, employees and agents of the Corporation and its
subsidiaries as it may determine; and
(8) To adopt from time to time regulations, not inconsistent with these
bylaws, for the management of the Corporation's business and affairs.
Section 2.10 Compensation of Directors. Directors, as such, may
-----------------------------------------
receive, pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
Section 2.11 Nomination of Director Candidates. Subject to the rights
-------------------------------------------------
of holders of any class or series of Preferred Stock then outstanding,
nominations for the election of directors may be made by the Board of Directors
or by a committee appointed by the Board of Directors or by any stockholder
entitled to vote in the election of directors generally. However, any
stockholder entitled to vote in the election of directors generally may nominate
one or more persons for election as directors at a meeting only if timely notice
of such stockholder's intent to make such nomination or nominations has been
given in writing to the Secretary of the Corporation. To be timely, a
stockholder nomination for a director to be elected at an annual meeting shall
be received at the Corporation's principal executive offices not less than 120
calendar days in advance of the date that the Corporation's (or the
Corporation's Predecessor's) proxy statement was
<PAGE>
released to stockholders in connection with the previous year's annual meeting
of stockholders or in the event of a nomination for director to be elected at a
special meeting at which directors are to be elected pursuant to the
Corporation's notice of special meeting, notice by the stockholders to be timely
must be received not later than the close of business on the tenth day following
the day on which such notice of the date of the special meeting was mailed. Each
such notice shall set forth: (a) the name and address of the stockholder who
intends to make the nomination and of the person or persons to be nominated; (b)
a representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote for the election of directors on the date of such
notice and intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; (d) such other
information regarding each nominee proposed by such stockholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission, had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (e) the consent of each
nominee to serve as a director of the Corporation if so elected.
In the event that a person is validly designated as a nominee in accordance
with this Section 2.11 and shall thereafter become unable or unwilling to stand
for election to the Board of Directors, the Board of Directors or the
stockholder who proposed such nominee, as the case may be, may designate a
substitute nominee upon delivery, not fewer than five days prior to the date of
the meeting for the election of such nominee, of a written notice to the
Secretary setting forth such information regarding such substitute nominee as
would have been required to be delivered to the Secretary pursuant to this
Section 2.11 had such substitute nominee been initially proposed as a nominee.
Such notice shall include a signed consent to serve as a director of the
Corporation, if elected, of each such substitute nominee.
If the chairman of the meeting for the election of Directors determines
that a nomination of any candidate for election as a Director at such meeting
was not made in accordance with the applicable provisions of this Section 2.11,
such nomination shall be void; provided, however, that nothing in this Section
2.11 shall be deemed to limit any voting rights upon the occurrence of dividend
arrearages provided to holders of Preferred Stock pursuant to the Preferred
Stock designation for any series of Preferred Stock.
ARTICLE III
-----------
COMMITTEES
----------
Section 3.1 Committees of the Board of Directors. The Board of
----------------------------------------------------
Directors, by a vote of a majority of the whole Board, may from time to time
designate committees of the Board, with such lawfully delegable powers and
duties as it thereby confers, to serve at the pleasure of the Board and shall,
for those committees and any
<PAGE>
others provided for herein, elect a director or directors to serve as the member
or members, designating, if it desires, other directors as alternate members who
may replace any absent or disqualified member at any meeting of the committee.
Any committee so designated may exercise the power and authority of the Board of
Directors to declare a dividend, to authorize the issuance of stock or to adopt
a certificate of ownership and merger pursuant to Section 253 of the Delaware
General Corporation Law if the resolution which designates the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his place, the member or members of the committee present at the
meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
Section 3.2 Conduct of Business. Each committee may determine the
-----------------------------------
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings; one-
third of the authorized members shall constitute a quorum unless the committee
shall consist of one or two members, in which event one member shall constitute
a quorum; and all matters shall be determined by a majority vote of the members
present. Action may be taken by any committee without a meeting if all members
thereof consent thereto in writing, and the writing or writings are filed with
the minutes of the proceedings of such committee.
ARTICLE IV
----------
OFFICERS
--------
Section 4.1 Generally. The officers of the Corporation shall
-------------------------
consist of a President, one or more Vice Presidents, a Secretary and a
Treasurer. The Corporation may also have, at the discretion of the Board of
Directors, a Chairman of the Board and such other officers as may from time to
time be appointed by the Board of Directors. Officers shall be elected by the
Board of Directors, which shall consider that subject at its first meeting after
every annual meeting of stockholders. Each officer shall hold office until his
or her successor is elected and qualified or until his or her earlier
resignation or removal. The Chairman of the Board, if there shall be such an
officer, and the President shall each be members of the Board of Directors. Any
number of offices may be held by the same person.
Section 4.2 Chairman of the Board. The Chairman of the Board, if
-------------------------------------
there shall be such an officer, shall, if present, preside at all meetings of
the Board of Directors, and exercise and perform such other powers and duties as
may be from time to time assigned to him by the Board of Directors or prescribed
by these bylaws.
Section 4.3 President. The President shall be the chief executive
-------------------------
officer of the Corporation. Subject to the provisions of these bylaws and to the
direction of the
<PAGE>
Board of Directors, he or she shall have the responsibility for the general
management and control of the business and affairs of the Corporation and shall
perform all duties and have all powers which are commonly incident to the office
of chief executive or which are delegated to him or her by the Board of
Directors. He or she shall have power to sign all stock certificates, contracts
and other instruments of the Corporation which are authorized and shall have
general supervision and direction of all of the other officers, employees and
agents of the Corporation.
Section 4.4 Vice President. Each Vice President shall have such
------------------------------
powers and duties as may be delegated to him or her by the Board of Directors.
One Vice President shall be designated by the Board to perform the duties and
exercise the powers of the President in the event of the President's absence or
disability.
Section 4.5 Treasurer. Unless otherwise designated by the Board of
-------------------------
Directors, the Chief Financial Officer of the Corporation shall be the
Treasurer. The Treasurer shall have the responsibility for maintaining the
financial records of the Corporation and shall have custody of all monies and
securities of the Corporation. He or she shall make such disbursements of the
funds of the Corporation as are authorized and shall render from time to time an
account of all such transactions and of the financial condition of the
Corporation. The Treasurer shall also perform such other duties as the Board of
Directors may from time to time prescribe.
Section 4.6 Secretary. The Secretary shall issue all authorized
-------------------------
notices for, and shall keep, or cause to be kept, minutes of all meetings of the
stockholders, the Board of Directors, and all committees of the Board of
Directors. He or she shall have charge of the corporate books and shall perform
such other duties as the Board of Directors may from time to time prescribe.
Section 4.7 Delegation of Authority. The Board of Directors may from
---------------------------------------
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.
Section 4.8 Removal. Any officer of the Corporation may be removed
-----------------------
at any time, with or without cause, by the Board of Directors.
Section 4.9 Action With Respect to Securities of Other. Unless
----------------------------------------------------------
otherwise directed by the Board of Corporations Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
<PAGE>
ARTICLE V
---------
STOCK
-----
Section 5.1 Certificates of Stock. Each stockholder shall be
-------------------------------------
entitled to a certificate signed by, or in the name of the Corporation by, the
President or a Vice President, and by the Secretary or an Assistant Secretary,
or the Treasurer or an Assistant Treasurer, certifying the number of shares
owned by him or her. Any of or all the signatures on the certificate may be
facsimile.
Section 5.2 Transfers of Stock. Transfers of stock shall be made
----------------------------------
only upon the transfer books of the Corporation kept at an office of the
Corporation or by transfer agents designated to transfer shares of the stock of
the Corporation. Except where a certificate is issued in accordance with Section
4 of Article V of these bylaws, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation before a new certificate
is issued therefor.
Section 5.3 Record Date. The Board of Directors may fix a record
---------------------------
date, which shall not be more than sixty (60) nor fewer than ten (10) days
before the date of any meeting of stockholders, nor more than sixty (60) days
prior to the time for the other action hereinafter described, as of which there
shall be determined the stockholders who are entitled: to notice of or to vote
at any meeting of stockholders or any adjournment thereof; to receive payment of
any dividend or other distribution or allotment of any rights; or to exercise
any rights with respect to any change, conversion or exchange of stock or with
respect to any other lawful action.
Section 5.4 Lost, Stolen or Destroyed Certificates. In the event of
------------------------------------------------------
the loss, theft or destruction of any certificate of stock, another may be
issued in its place pursuant to such regulations as the Board of Directors may
establish concerning proof of such loss, theft or destruction and concerning the
giving of a satisfactory bond or bonds of indemnity.
Section 5.5 Regulations. The issue, transfer, conversion and
---------------------------
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VI
----------
NOTICES
-------
Section 6.1 Notices. Except as otherwise specifically provided
-----------------------
herein or required by law, all notices required to be given to any stockholder,
director, officer, employee or agent shall be in writing and may in every
instance be effectively given by hand delivery to the recipient thereof, by
depositing such notice in the mails, postage paid, or by sending such notice by
prepaid telegram, mailgram, telecopy or commercial
<PAGE>
courier service. Any such notice shall be addressed to such stockholder,
director, officer, employee or agent at his or her last known address as the
same appears on the books of the Corporation. The time when such notice shall be
deemed to be given shall be the time such notice is received by such
stockholder, director, officer, employee or agent, or by any person accepting
such notice on behalf of such person, if hand delivered, or the time such notice
is dispatched, if delivered through the mails or be telegram or mailgram.
Section 6.2 Waivers. A written waiver of any notice, signed by a
-----------------------
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
ARTICLE VII
-----------
MISCELLANEOUS
-------------
Section 7.1 Facsimile Signatures. In addition to the provisions for
------------------------------------
use of facsimile signatures elsewhere specifically authorized in these bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Section 7.2 Corporate Seal. The Board of Directors may provide a
------------------------------
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the
Treasurer or by an Assistant Secretary or Assistant Treasurer.
Section 7.3 Reliance Upon Books, Reports and Records. Each director,
--------------------------------------------------------
each member of any committee designated by the Board of Directors, and each
officer of the Corporation shall, in the performance of his duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation, including reports made to the Corporation by any of its
officers, by an independent certified public accountant, or by an appraiser
selected with reasonable care.
Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be
---------------------------
as fixed by the Board of Directors.
Section 7.5 Time Periods. In applying any provision of these bylaws
----------------------------
which require that an act be done or not done a specified number of days prior
to an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
<PAGE>
Section 7.6 Execution of Corporate Contracts and Instruments. The
----------------------------------------------------------------
Board of Directors may authorize any officer or officers, agent or agents, to
enter into any contract or execute any instrument in the name of and on behalf
of the Corporation, and such authority may be general or confined to specific
instances. Unless so authorized by the Board of Directors or by these Bylaws, no
officer, agent or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose.
Section 7.7 Checks, Drafts, Etc. All checks, drafts or other orders
-----------------------------------
for payment of money, notes or other evidence of indebtedness, issued in the
name of or payable to the Company, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the Board of Directors.
ARTICLE VIII
------------
INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
Section 8.1 Right to Indemnification. Each person who was or is made
----------------------------------------
a party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative, is or was a director, officer or employee of
the Corporation or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, or of a Partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer or employee or in any other capacity
while serving as a director, officer or employee, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by Delaware Law, as
the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said Law permitted the Corporation
to provide prior to such amendment) against all expenses, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties,
amounts paid or to be paid in settlement and amounts expended in seeking
indemnification granted to such person under applicable law, this bylaw or any
agreement with the Corporation) reasonably incurred or suffered by such person
in connection therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer or employee and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
that, except as provided in Section 8.2 of this Article VIII, the Corporation
shall indemnify any such person seeking indemnity in connection with an action,
suit or proceeding (or part thereof) initiated by such person only if (a) such
indemnification is expressly required to be made by law, (b) the action, suit or
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation, (c) such indemnification is provided by the Corporation, in its
sole discretion, pursuant to the powers vested in the Corporation under the
Delaware General
<PAGE>
Corporation Law, or (d) the action, suit or proceeding (or part thereof) is
brought to establish or enforce a right to indemnification under an indemnity
agreement or any other statute or law or otherwise as required under Section 145
of the Delaware General Corporation Law. Such right shall be a contract right
and shall include the right to be paid by the Corporation expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, unless the Delaware General Corporation Law then so prohibits,
the payment of such expenses incurred by a director or officer of the
Corporation in his or her capacity as a director or officer (and not in any
other capacity in which service was or is tendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of such proceeding, shall be
made only upon delivery to the Corporation of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it should be
determined ultimately that such director or officer is not entitled to be
indemnified under this Section or otherwise.
Section 8.2 Right of Claimant to Bring Suit. If a claim under
-----------------------------------------------
Section 1 of this Article VIII is not paid in full by the Corporation within
ninety (90) days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if such suit is not frivolous or
brought in bad faith, the claimant shall be entitled to be paid also the expense
of prosecuting such claim. The burden of proving such claim shall be on the
claimant. It shall be a defense to any such action (other then an action brought
to enforce a claim for expenses incurred in defending any proceeding in advance
of its final disposition where the required undertaking, if any, has been
tendered to this Corporation) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation Law for
the Corporation to indemnify the claimant for the amount claimed. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the Delaware General Corporation Law, nor an actual determination
by the Corporation (including its Board of Directors, independent legal counsel,
or its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
Section 8.3 Non-Exclusivity of Rights. The rights conferred on any
-----------------------------------------
person in Sections 1 and 2 shall not be exclusive of any other right which such
persons may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 8.4 Indemnification Contracts. The Board of Directors is
-----------------------------------------
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request of the
Corporation as a director, officer,
<PAGE>
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, including employee benefit plans, providing for
indemnification rights equivalent to or, if the Board of Directors so
determines, greater than, those provided for in this Article VIII.
Section 8.5 Insurance. The Corporation shall maintain insurance to
-------------------------
the extent reasonably available, at its expense, to protect itself and any such
director, officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the Delaware
General Corporation law.
Section 8.6 Effect of Amendment. Any amendment, repeal or
-----------------------------------
modification of any provision of this Article VIII by the stockholders and the
directors of the Corporation shall not adversely affect any right or protection
of a director or officer of the Corporation existing at the time of such
amendment, repeal or modification.
ARTICLE IX
----------
AMENDMENTS
----------
Section 9.1 Amendment of Bylaws. The Board of Directors is expressly
-----------------------------------
empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption,
amendment or repeal of the Bylaws of the Corporation by the Board of Directors
shall require the approval of a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any resolution providing for adoption, amendment or
repeal is presented to the Board). Any adoption, amendment or repeal of the
Bylaws of the Corporation by the stockholders of the Corporation shall require
the approval of the holders of not less than 80% of all shares of the
Corporation entitled to vote, voting together as a single class.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 31,471
<SECURITIES> 0
<RECEIVABLES> 86,219
<ALLOWANCES> 3,503
<INVENTORY> 0
<CURRENT-ASSETS> 123,311
<PP&E> 101,023
<DEPRECIATION> 15,205
<TOTAL-ASSETS> 217,479
<CURRENT-LIABILITIES> 123,293
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 94,184
<TOTAL-LIABILITY-AND-EQUITY> 217,479
<SALES> 339,877
<TOTAL-REVENUES> 339,877
<CGS> 286,836
<TOTAL-COSTS> 286,836
<OTHER-EXPENSES> (1,118)
<LOSS-PROVISION> 620
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,078
<INCOME-TAX> 8,165
<INCOME-CONTINUING> 14,913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,913
<EPS-PRIMARY> $0.78
<EPS-DILUTED> $0.75
</TABLE>
