<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED June 30, 1999
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)
500 Airport Blvd, Suite 340, 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 _____
---
At July 29, 1999, the number of the registrant's Common Shares of $.0001 par
value outstanding was 19,488,217.
<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
June 30, 1999, and December 31, 1998 1
Consolidated condensed statements of operations
for the three-month and six-month periods ended
June 30, 1999 and 1998 2
Consolidated condensed statements of cash flows
for the six-month periods ended
June 30, 1999 and 1998 3
Notes to consolidated condensed financial statements 4
Item 2: Management's discussion and analysis
of financial condition and results
of operations 7
Part II - OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 2: Changes in Securities and Use of Proceeds 15
Item 3: Defaults upon Senior Securities 15
Item 4: Submission of matters to a vote of security holders 15
Item 5: Other information 15
Item 6: Exhibits and reports on Form 8-K 15
</TABLE>
<PAGE>
Item 1. Financial Statements
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 16,170 $ 30,041
Accounts receivable, net of allowance for doubtful
accounts of $5,726 in 1999 and $4,312 in 1998 114,503 87,725
Prepaid expenses 1,932 1,244
Income taxes receivable - 1,358
Deferred income tax 2,286 2,207
Other current assets 2,286 1,408
---------- ----------
Total current assets 137,177 123,983
Property and equipment:
Undersea fiber optic cables 36,422 34,663
Long distance communications equipment 68,133 48,710
Computers and office equipment 13,680 9,352
Leasehold improvements 3,654 2,004
Construction in progress 9,861 13,587
Cable construction in progress 21,166 12,066
---------- ----------
152,916 120,382
Less: accumulated depreciation 23,592 17,335
---------- ----------
Total property and equipment, net 129,324 103,047
Deposits and other assets 15,056 8,607
---------- ----------
Total assets $ 281,557 $ 235,637
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 132,026 $ 118,303
Accrued liabilities 5,248 4,193
Income taxes payable 4,623 -
Line of credit 21,700 8,700
Other liabilities 646 1,740
---------- ----------
Total current liabilities 164,243 132,936
Other non-current liabilities 4,898 2,062
---------- ----------
Total liabilities 169,141 134,998
---------- ----------
Stockholders' Equity:
Common stock 2 2
Additional paid in capital 72,467 65,431
Deferred compensation-restricted stock (5,197) (4,618)
Foreign currency translation (1,441) 34
Retained earnings 46,985 40,190
Common stock held in treasury, at cost (400) (400)
---------- ----------
Total stockholders' equity 112,416 100,639
---------- ----------
Total liabilities and stockholders' equity $ 281,557 $ 235,637
========== ==========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except net income per share)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 139,586 $ 109,952 $ 280,115 $ 215,024
Cost of long distance services 121,433 92,951 242,868 182,192
---------- ---------- ---------- ----------
Gross margin 18,153 17,001 37,247 32,832
Selling, general, and administrative expenses 11,630 7,290 21,621 14,852
Depreciation and amortization 3,340 2,146 6,386 4,109
---------- ---------- ---------- ----------
Total operating expenses 14,970 9,436 28,007 18,961
---------- ---------- ---------- ----------
Operating income 3,183 7,565 9,240 13,871
Interest income, net (249) (556) (467) (1,169)
Other (income) expense, net (524) 496 (747) 594
---------- ---------- ---------- ----------
Income before income taxes 3,956 7,625 10,454 14,446
Provision for income taxes 1,385 2,740 3,659 5,185
---------- ---------- ---------- ----------
Net income $ 2,571 $ 4,885 $ 6,795 $ 9,261
========== ========== ========== ==========
Net income per share - basic $ 0.13 $ 0.26 $ 0.35 $ 0.49
========== ========== ========== ==========
Net income per share - diluted $ 0.13 $ 0.25 $ 0.34 $ 0.46
========== ========== ========== ==========
Weighted-average number of common shares
outstanding - basic 19,207 19,060 19,170 19,041
========== ========== ========== ==========
Weighted-average number of common shares
outstanding - diluted 20,342 19,934 20,057 19,931
========== ========== ========== ==========
</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> Six Months
Ended June 30,
--------------------------
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
Operating Activities:
Net income $ 6,795 $ 9,261
Adjustments to net income:
Depreciation and amortization 6,386 4,108
Stock compensation expense 434 304
Bad debt provision 1,383 1,204
Equity in earnings of affiliated companies, net 977 152
Changes in operating assets and liabilities:
Accounts receivable (26,904) (22,110)
Prepaid expenses (688) (361)
Income taxes receivable 1,358 -
Deferred income tax (79) -
Other current assets (878) -
Deposits and other assets (1,573) 953
Accounts payable 11,653 10,807
Accrued liabilities 1,055 241
Income taxes payable 4,623 (554)
Other liabilities 1,742 409
---------- ----------
Net cash provided by operating activities 6,284 4,414
---------- ----------
Investing Activities:
Purchase of property and equipment (32,578) (13,988)
Investments in subsidiaries and affiliates (1,850) (3,314)
---------- ----------
Net cash used in investing activities (34,428) (17,302)
---------- ----------
Financing Activities:
Borrowings on revolving line of credit 13,000 -
Exercise of stock options 1,273 360
Other - (57)
---------- ----------
Net cash provided by financing activities 14,273 303
---------- ----------
Net decrease in cash and cash equivalents (13,871) (12,585)
Cash and cash equivalents at beginning of the period 30,041 43,850
---------- ----------
Cash and cash equivalents at end of the period $ 16,170 $ 31,265
========== ==========
Supplemental data for non-cash investing activities:
Common stock issued to investee $ 4,750 $ 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, 1998. The results for the three- and six-month
periods ended June 30, 1999, are not necessarily indicative of the results that
may be expected for future periods.
Certain prior-year amounts have been reclassified to conform to the 1999
financial statement presentation.
(2) EARNINGS PER SHARE
- -----------------------
<TABLE>
<CAPTION>
Per-
Share
(in thousands, except per share amounts) Income Shares Amount
------------ ------------ ------------
<S> <C> <C> <C>
Three Months Ended June 30, 1999
Basic EPS $2,571 19,207 $ 0.13
Effect of dilutive stock options and restricted stock - 1,135 -
------------ ------------ ------------
Diluted EPS $2,571 20,342 $ 0.13
============ ============ ============
Three Months Ended June 30, 1998
Basic EPS $4,885 19,060 $ 0.26
Effect of dilutive stock options and restricted stock - 874 (0.01)
------------ ------------ ------------
Diluted EPS $4,885 19,934 $ 0.25
============ ============ ============
Six Months Ended June 30, 1999
Basic EPS $6,795 19,170 $ 0.35
Effect of dilutive stock options and restricted stock - 887 (0.01)
------------ ------------ ------------
Diluted EPS $6,795 20,057 $ 0.34
============ ============ ============
Six Months Ended June 30, 1998
Basic EPS $9,261 19,041 $ 0.49
Effect of dilutive stock options and restricted stock - 890 (0.03)
------------ ------------ ------------
Diluted EPS $9,261 19,931 $ 0.46
============ ============ ============
</TABLE>
4
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(3) COMPREHENSIVE INCOME
- -------------------------
Comprehensive income includes all changes in equity (net assets) during a
period from non-owner sources. Comprehensive income includes foreign currency
translation adjustments, which are excluded from net income. In accordance with
the adoption of SFAS No. 130, total comprehensive income was $2.1 million and
$5.3 million for the three- and six-month periods ended June 30, 1999,
respectively. Comprehensive income included foreign currency translation
losses.
(4) ACQUISITIONS AND INVESTMENTS
- ---------------------------------
In June 1999, the Company acquired the retail customers and assets of Robo
Tel, Inc. for $6.6 million, consisting of $1.85 million in cash and $4.75
million in the Company's common stock. The customer base of over 28,000 is
mainly Chinese and Vietnamese-American residences and small businesses. There
were $1.3 million of accounts receivable and $0.6 million of accounts payable;
under purchase accounting the excess of the aggregate purchase price over the
net assets acquired resulted in total goodwill of $5.9 million, which will be
amortized over 20 years.
(5) SEGMENT INFORMATION
- ------------------------
Based primarily on services provided and geographic areas, the Company's
current operating segments are: U.S. wholesale, offshore, and value-added
services. The Company's management regularly reviews the operating results of
these segments; these segment results are integral to management's decision
making process.
U.S. wholesale provides international telecommunications services to U.S.-
based carriers that originate international traffic, but do not have operating
agreements with foreign carriers. U.S. wholesale also provides service to
existing international carriers who terminate their overflow telecommunications
traffic on its system. Additionally, U.S. wholesale provides service to
customers with smaller traffic volumes.
Revenues from the Company's offshore operations are generated from country-
specific, usage-sensitive rates charged to the Company's carrier customers and
from traffic terminated in its international switching facilities. The Company
operates switching facilities in the United Kingdom, Russia, New Zealand, Japan,
and Australia. In addition, the Company earns revenues from traffic originating
in Germany, Switzerland, Italy, and France.
The value-added segment includes a variety of emerging retail and wholesale
services. Through this operating segment, the Company provides international
long distance services to the Filipino, Japanese, Chinese, Vietnamese, Russian,
Korean, and Romanian-American communities.
Corporate and other includes cash, equity investments, and other
miscellaneous current and non-current assets. These assets are not allocated to
the three operating segments.
5
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(5) SEGMENT INFORMATION (Continued)
- ------------------------------------
The results of operations for the Company's operating segments for the
three- and six-month periods ended June 30, 1999, and 1998, were:
<TABLE>
<CAPTION>
U.S. Value- Corporate
(in thousands) Wholesale Offshore Added And Other Total
----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Three Months Ended June 30, 1999
Total sales $131,496 $ 29,039 $ 8,276 $ - $168,811
Sales and transfers between segments (21,415) (7,810) - - (29,225)
----------- ------------ ----------- ----------- -----------
Revenues $110,081 $ 21,229 $ 8,276 $ - $139,586
Depreciation and amortization $ 2,601 $ 705 $ 34 $ - $ 3,340
----------- ------------ ----------- ----------- -----------
Operating income $ 613 $ 1,054 $ 1,516 $ - $ 3,183
=========== ============ =========== =========== ===========
Three Months Ended June 30, 1998
Total sales $105,545 $ 16,089 $ 4,653 $ - $126,287
Sales and transfers between segments (12,319) (4,016) - - (16,335)
----------- ------------ ----------- ----------- -----------
Revenues $ 93,226 $ 12,073 $ 4,653 $ - $109,952
Depreciation and amortization $ 1,713 $ 432 $ 1 $ - $ 2,146
----------- ------------ ----------- ----------- -----------
Operating income $ 4,917 $ 1,273 $ 1,375 $ - $ 7,565
=========== ============ =========== =========== ===========
Six Months Ended June 30, 1999
Total sales $263,539 $ 60,508 $14,600 $ - $338,647
Sales and transfers between segments (42,383) (16,149) - - (58,532)
----------- ------------ ----------- ----------- -----------
Revenues $221,156 $ 44,359 $14,600 $ - $280,115
Depreciation and amortization $ 5,063 $ 1,284 $ 39 $ - $ 6,386
----------- ------------ ----------- ----------- -----------
Operating income $ 3,338 $ 3,523 $ 2,379 $ - $ 9,240
=========== ============ =========== =========== ===========
Six Months Ended June 30, 1998
Total sales $207,129 $ 32,961 $ 7,697 $ - $247,787
Sales and transfers between segments (23,409) (9,354) - - (32,763)
----------- ------------ ----------- ----------- -----------
Revenues $183,720 $ 23,607 $ 7,697 $ - $215,024
Depreciation and amortization $ 3,320 $ 788 $ 1 $ - $ 4,109
----------- ------------ ----------- ----------- -----------
Operating income $ 9,518 $ 2,818 $ 1,535 $ - $ 13,871
=========== ============ =========== =========== ===========
Total assets at June 30, 1999 $198,925 $ 42,952 $ 9,167 $30,513 $281,557
----------- ------------ ----------- ----------- -----------
Total assets at December 31, 1998 $151,491 $ 34,831 $ 5,857 $43,458 $235,637
----------- ------------ ----------- ----------- -----------
</TABLE>
6
<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. 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," "expects,"
"estimates," or other similar expressions. 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:
1. changes in the ratios between outgoing and incoming traffic and changes in
expected future revenue from delayed proportional return traffic from
foreign partners pursuant to operating agreements;
2. foreign currency fluctuations;
3. the termination of operating agreements or the inability to enter into
additional agreements;
4. inaccuracies in the Company's forecasts of traffic or changes in rates;
5. changes in or developments under domestic or foreign laws, regulations,
licensing requirements, or telecommunications standards;
6. foreign political or economic instability;
7. changes in the availability of transmission facilities such as domestic,
international, and undersea fiber optic cable or in the feasibility and
expense of building or leasing such facilities;
8. loss of the services of key officers, such as:
Howard A. Neckowitz, Chairman of the Board, President and Chief Executive
Officer, Gail E. Granton, Chief Operating Officer, Global Marketing and
Offshore Development, Thomas J. Murphy, Chief Operating Officer, Network
Development and IP Services, or Sandra D. Grey, Chief Financial Officer and
Vice President, Finance;
9. loss of a customer that provides significant revenues to the Company;
10. highly competitive market conditions in the industry and rapid technological
change;
11. future management decisions regarding acquisitions, capital expenditures, or
financing;
12. concentration of credit risk;
13. natural disasters and catastrophic events;
14. network outages, failures, or computer viruses;
15. opportunities or problems relating to the acquisition of other companies or
facilities;
16. difficulties that may be encountered in the development of bandwidth
services, including construction delays, regulatory obstacles, and the
availability of opportunities for additional bandwidth purchases;
17. uncertainties in the development of ethnic marketing programs and new or
expanded business lines, such as the Company's commencement of Internet
operations and sales to switchless resellers relating to competitive
conditions and the difficulty of hiring appropriate personnel;
18. Internet growth at slower rates than expected due to market conditions; or
19. any failure of our computer systems or the computer systems of third parties
that are material to our operations (such as computer systems of service
providers, suppliers, and brokers) to process information after December 31,
1999.
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.
7
<PAGE>
Overview
Pacific Gateway Exchange was founded in August 1991 to capitalize on the
significant growth opportunities in the international telecommunications
services market. Since then, the Company has undertaken four strategic
initiatives in response to regulatory and technological developments: (1) as
foreign countries deregulated their telecommunications markets, the Company
started foreign wholesale operations; (2) in response to technological
innovation and consumer demand, the Company entered the market for retail
services; (3) through strategic capital investments, the Company has become a
global player in the burgeoning market for high bandwidth capacity so that it
will be positioned to meet the emerging demand for higher bandwidth services
created by the advent of the Internet and future technological developments; and
(4) the Company will begin providing Internet Protocol ("IP") and data services
in 1999 and plans to provide connectivity, co-location, and managed services to
the Internet community. To accelerate the growth of all of its business lines,
the Company may consider acquisition possibilities.
The Company expects its telecommunication services, bandwidth sales, and
Internet services to increase revenues. The Company is increasing its customer
base and developing low-cost termination arrangements to increase its
telecommunication services revenues. In addition, the Company expects to
generate revenues from bandwidth sales and Internet services later in 1999 and
beyond.
The Company expects that telecommunication services prices will continue to
decrease as a result of increased competition and deregulation and that
bandwidth capacity prices will decrease due to technological advances and
increased cable network construction.
The Company has experienced decreasing telecommunication services gross margins
as a result of decreasing prices. These decreases have been partially offset by
lower costs of providing services, which the Company expects to continue to
decrease due to deregulation and technological advances. In 2000, the Company
expects bandwidth sales to contribute substantially to its gross margin.
Thereafter, as the Company invests in new cable systems and sells bandwidth
capacity, it expects bandwidth sales to further contribute to its gross margin.
After incurring initial losses due to start-up costs, the Company expects
Internet services to contribute to its gross margin beginning in the fourth
quarter of 2000.
The Company currently derives revenues from three operating segments: U.S.
wholesale, offshore, and retail and value-added services. U.S. wholesale and
offshore revenues are derived from country-specific, usage-sensitive rates
charged to carrier customers and traffic sent by our foreign partners. The
retail and value-added segment primarily provides international long distance
services to targeted ethnic markets. The Company plans to expand into new
ethnic markets in the U.S. and offshore where its wholesale operations provide
it a competitive cost base.
The majority of the Company's costs are variable and consist of:
(1) payments to foreign partners for the termination of traffic;
(2) payments to other providers of long distance transmission services;
(3) payment to domestic carriers for the termination of overseas-originated
traffic in the U.S. where the Company does not have its own network; and
(4) payments to local exchange companies for access charges for originating and
terminating international and domestic traffic.
Additionally, the Company has begun to sell bandwidth capacity on its global
network and in 1999 and beyond, expects to provide Internet services. The
Company expects that bandwidth sales and Internet services will constitute two
new operating segments. As of July 22, 1999, the Company has agreed to sell
over $73 million in bandwidth capacity pursuant to sales agreements and non-
binding memoranda of understanding. The Company will recognize these sales as
revenue when it delivers the bandwidth capacity to its customers and it will
include construction and related costs for such capacity as a cost of good sold.
In certain instances, when the Company sells bandwidth capacity, it will use the
proceeds to purchase additional network facilities, which it will record as
fixed assets. Additionally, the Company expects to generate Internet service
revenues, including connectivity and co-location services, beginning in the
fourth quarter of 1999.
8
<PAGE>
Results of Operations
The following table sets forth statements of operations data
as a percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of long distance services 87.0% 84.5% 86.7% 84.7%
---------- ---------- ---------- ----------
Gross margin 13.0% 15.5% 13.3% 15.3%
Selling, general, and administrative expenses 8.3% 6.6% 7.7% 6.9%
Depreciation and amortization 2.4% 2.0% 2.3% 1.9%
---------- ---------- ---------- ----------
Total operating expenses 10.7% 8.6% 10.0% 8.8%
---------- ---------- ---------- ----------
Operating income 2.3% 6.9% 3.3% 6.5%
Interest income, net -0.1% -0.5% -0.1% -0.5%
Other (income) expense, net -0.4% 0.5% -0.3% 0.3%
---------- ---------- ---------- ----------
Income before income taxes 2.8% 6.9% 3.7% 6.7%
Provision for income taxes 1.0% 2.5% 1.3% 2.4%
---------- ---------- ---------- ----------
Net income 1.8% 4.4% 2.4% 4.3%
========== ========== ========== ==========
</TABLE>
The Three-Month Periods Ended June 30, 1999 and 1998
Revenues: Total revenues for the three-month period ended June 30, 1999,
increased 27% to $140 million from $110 million. This increase resulted from an
increase in the number of the Company's wholesale-carrier customers to 210 at
June 30, 1999, from 153 at June 30, 1998. Additionally, the Company's retail
business grew significantly, resulting in retail revenues of $8.3 million for
the three-month period ended June 30, 1999, compared to $4.7 million for the
three-month period ended June 30, 1998. As a result of these factors, total
minutes for the three-month period ended June 30, 1999, increased 49.0% from the
three-month period ended June 30, 1998, while the average price per minute
charged to customers decreased to $0.24 in the three-month period ended June
30, 1999, 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.
Gross Margin: Gross margin increased 7% to $18.2 million in the three-month
period ended June 30, 1999, from $17.0 million in the same period in 1998. As a
percentage of revenues, gross margin was 13.0% for the three-month period ended
June 30, 1999, a decrease from 15.5% in the same period in 1998. Increased
competition continues to drive prices downward resulting in decreased gross
margin. The cost of long distance service increased to $121 million in the
three-month period ended June 30, 1999, from $93 million in the three-month
period ended June 30, 1998. This increase in costs represents continued growth
in outbound traffic on new and existing routes.
9
<PAGE>
Selling, General, and Administrative Expenses ("SG&A"): SG&A expenses
increased 58% to $11.6 million in the three-month period ended June 30, 1999,
from $7.3 million in the three-month period ended June 30, 1998. As a percentage
of revenues, SG&A expenses were 8.3% in the three-month period ended June 30,
1999, up from 6.6% in the same period in 1998. This increase was due primarily
to greater 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 275 at June 30, 1999, from 129 at June
30, 1998. In 1999, the Company hired additional retail and Internet services
personnel to support and grow its business. The Company also hired retail back-
office and telemarketing personnel to expand its ethnic marketing programs. The
Company plans to continue expanding these functions to increase future revenues;
and it expects to incur start-up costs in the near term to provide Internet
services. The increase in sales commission expenses was due to increased
revenues.
Depreciation: Depreciation and amortization increased 56% to $3.3 million in
the three-month period ended June 30, 1999, from $2.1 million in the same period
in 1998. Depreciation as a percentage of revenues was 2.4% of revenue for the
three-month period ended June 30, 1999, and 2.0% for the same period in 1998.
The increase was primarily due to depreciation of additional U.S. wholesale and
offshore fiber optic cables and communications equipment acquired since June 30,
1998. Depreciation will continue to increase as the Japan-U.S. and TAT-14 cable
systems and related backhaul facilities and Internet services equipment are
placed in-service.
Interest: Interest income decreased to $0.2 million in the three months ended
June 30, 1999, from $0.6 million in the three-month period ended June 30, 1998,
due to decreased average cash balances. The Company had $20.6 million in average
cash balances during the three months ended June 30, 1999, compared to $31.3 in
the same period in 1998. If the Company incurs additional debt (See Liquidity
and Capital Resources, below), then interest expense will significantly
increase. In the near term, the Company would invest the excess cash from a
financing arrangement, thereby partially offsetting interest expense with
interest income. In addition, the Company will capitalize the interest costs
that relate to network and facility construction per SFAS No. 34,
"Capitalization of Interest Cost." The Company will depreciate the capitalized
interest over the related asset's life.
Income Tax: Income taxes decreased 48% to $1.4 million in the three-month
period ended June 30, 1999, from $2.7 million in the three-month period ended
June 30, 1998, primarily due to decreased operating income. The effective tax
rate was 35% in the quarter ended June 30, 1999, and 36% in the quarter ended
June 30, 1998.
The Six-Month Periods Ended June 30, 1999 and 1998
Revenues: Total revenues for the six month period ended June 30, 1999,
increased 30% to $280 million from $215 million in the same period in 1998. This
increase resulted from an increase in the number of the Company's wholesale-
carrier customers to 210 at June 30, 1999, from 153 at June 30, 1998.
Additionally, the Company's retail business grew significantly, resulting in
retail revenues of $14.6 million for the six-month period ended June 30, 1999,
compared to $7.7 million for the six-month period ended June 30, 1998. As a
result of these factors, total minutes for the six-month period ended June 30,
1999, increased 48.0% from the six-month period ended June 30, 1998, while the
average price per minute charged to customers decreased to $0.26 in the six-
month period ended June 30, 1999, compared to $0.29 in the same period in 1998.
While U.S wholesale and offshore prices decreased, the Company's higher-margin
retail and value-added services operations grew, partially offsetting the lower
wholesale price's impact on gross margin.
10
<PAGE>
Gross Margin: Gross margin increased 13% to $37.2 million in the six-month
period ended June 30, 1999, from $32.8 million in the same period in 1998. As a
percentage of revenues, gross margin was 13.3% in the current six-month period,
a decrease from 15.3% in the same period in 1998. Increased competition
continues to drive prices downward resulting in decreased gross margins. The
cost of long distance service increased to $242.9 million in the six-month
period ended June 30, 1999, from $182.2 million in the same period in 1998.
This increase in costs represents continued growth in outbound traffic on new
and existing routes.
Selling, General, and Administrative Expenses ("SG&A"): SG&A expenses
increased 44% to $21.6 million in the six-month period ended June 30, 1999, from
$14.9 million in the same period in 1998. As a percentage of revenues, SG&A
expenses were 7.7% in the six-month period ended June 30, 1999, an increase from
6.9% in the same period in 1998. This increase was due primarily to greater
personnel, sales commission, and advertising 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 275 at June 30, 1999,
from 129 at June 30, 1998. In 1999, the Company hired additional retail and
Internet services personnel to support and grow its business. The Company also
hired retail back-office and telemarketing personnel to expand its ethnic
marketing programs. The Company plans to continue expanding these functions to
increase future revenues; and it expects to incur start-up costs in the near
term to provide Internet services. The increase in sales commission expenses was
due to increased revenues.
Depreciation: Depreciation and amortization increased 56% to $6.4 million in
the six-month period ended June 30, 1999, from $4.1 million in the same period
in 1998. Depreciation as a percentage of revenues was 2.3% for the six-month
period ended June 30, 1999, and 1.9% for the same period in 1998. The increase
was primarily due to depreciation of additional U.S. wholesale and offshore
fiber optic cables and communications equipment acquired since June 30, 1998.
Depreciation will continue to increase as the Japan-U.S. and TAT-14 cable
systems and related backhaul facilities and Internet services equipment are
placed in-service.
Interest: Interest income decreased to $0.5 million in the six-month period
ended June 30, 1999, from $1.2 million in the same period in 1998 due to
decreased average cash balances. The Company had $23.4 million in average cash
balances during the six months ended June 30, 1999, compared to $35.5 in the
same period in 1998. If the Company incurs additional debt (See Liquidity and
Capital Resources, below), then interest expense will significantly increase. In
the near term, the Company would invest the excess cash from a financing
arrangement, thereby partially offsetting interest expense with interest income.
In addition, the Company will capitalize the interest costs that relate to
network and facility construction per SFAS No. 34, "Capitalization of Interest
Cost." The Company will depreciate the capitalized interest over the related
asset's life.
Income Tax: Income taxes decreased 28% to $3.7 million in the six-month period
ended June 30, 1999, from $5.2 million in the six-month period ended June 30,
1998, primarily due to decreased operating income. The effective tax rate was
35% for the six-month period ended June 30, 1999, and 36% for the six-month
period ended June 30, 1998.
Liquidity and Capital Resources
The Company uses its existing cash balances, cash provided by operating
activities, existing lines of credit, and debt commitments to finance its
operations.
Net cash provided by operating activities was $6.3 million for the six-
month period ended June 30, 1999, compared to $4.4 million for the six-month
period ended June 30, 1998. This increase in cash provided by operating
activities was primarily due to greater revenues and increases in income taxes
payable and other liabilities. 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
11
<PAGE>
accounts payable with foreign partners, which generally have 180 day terms as a
result of the six-month lag in the international settlement process.
Net cash used in investing activities was $34.4 million for the six-month
period ended June 30, 1999, compared to $17.3 million for the six-month period
ended June 30, 1998. Capital expenditures for the six-month period ended June
30, 1999, were $32.6 million, which included $9.1 million for undersea fiber
optic cables in the Japan-U.S. and TAT-14 cable systems. Additional
expenditures in the period were for offshore transmission equipment. Capital
expenditures for the six month period ended June 30, 1998, totaled $14 million
and were primarily for domestic switches. In addition, in the second quarter of
1999, the Company acquired Robo Tel, Inc., an international long-distance
company, for $1.85 million in cash and $4.75 million in Pacific Gateway's common
stock. 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 $14.3 million for the six-
month period ended June 30, 1999, and $0.3 million for the same period in 1998.
In 1999, the Company borrowed an additional $13.0 million under its line of
credit (discussed below). The remainder of these cash inflows was from the
exercise of stock options.
In December 1998, the Company obtained a one-year, $30 million credit
facility with Bank of America, NT&SA, and NationsBancMontgomery LLC. The
Company uses this credit facility to fund its purchase commitments, letters of
credit, working capital, and for general corporate purposes. At June 30, 1999,
the Company held $21.7 million in borrowings under this credit facility.
At June 30, 1999, the Company had outstanding commitments of $160 million,
principally 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 $71
million and in the TAT-14 cable system for $67 million. The Company's
outstanding commitments also include the purchase of Internet routers and
switches from Cisco Systems, Inc. and other equipment for its global Internet
facilities. As part of its global network expansion, the Company plans to invest
substantially in backhaul facilities in Europe, Japan, and the U.S.
As of July 22, 1999, the Company had sold over $73 million of bandwidth
capacity pursuant to sales agreements and non-binding memoranda of
understanding. Of the $73 million in sales, the Company will use $54 million to
expand its global network. Included in those sales and network expansions are
the Company's transactions with Williams Communications Group, Inc. In April
1999, the Company agreed to purchase $30 million of capacity from Williams and
Williams agreed to purchase $30 million of capacity on the Company's trans-
Atlantic city center network.
To fund its capital commitments and planned capital expenditures, the
Company is exploring financing alternatives, including public or private sales
of debt securities or obtaining a new credit facility to replace its $200
million commitment letter that lapsed in July 1999. The timing and terms of any
financing activities will be subject to market conditions.
The Company believes that its existing cash balances, cash provided by
operating activities, existing lines of credit, and the proceeds from its
anticipated financing activities will be sufficient to meet its outstanding
capital commitments, current capital expenditures, and working capital needs in
the foreseeable future.
12
<PAGE>
Year 2000 Readiness
The "Year 2000" issue is the risk that the Company's internal computer
systems, network elements, software applications, and other business systems 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 Company views its Year 2000 risks to be: 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 ready. These systems, including the
Company's billing system, have been tested in a simulated Year 2000 environment
and were determined to be Year 2000 ready. The costs associated with testing
Year 2000 readiness were not material.
Non-financial software. The Company has assessed the Year 2000 impact on
its other internal systems, primarily its telecommunications switching equipment
in the U.S. in Dallas, Los Angeles, and New York and offshore in the UK, New
Zealand, Russia, Japan, and Australia and has conducted tests on such systems.
The Company is installing software and hardware upgrades for all switching
equipment as indicated by the test results. The costs associated with testing
and upgrading equipment as a result of the Year 2000 issue are not expected to
be material to the Company's business, financial condition, or results of
operations. The Company also has identified and is evaluating other operational
systems and applications, which the Company believes are not mission critical,
such as building operations and individual personal computers used by Company
personnel.
Vendors and customer systems. The Company is evaluating its significant
vendors and customer's Year 2000 readiness with respect to information systems
used by those entities that could impact business with the Company. To the
extent that the Company is not satisfied that a vendor is highly likely to be
Year 2000 ready, the Company may seek alternate or new vendors. There is no
assurance, however, that such third parties will achieve full Year 2000
readiness or that the Company will receive assurances from such third parties.
In the event that any of the Company's significant vendors and customers do not
successfully and timely achieve Year 2000 readiness and the Company is unable to
replace them with new or alternative vendors and customers, the Company's
business or operations could be adversely affected.
As part of the Company's Year 2000 risk program, the Company is evaluating
scenarios that may occur as a result of the century change. The Company
anticipates completing its contingency and business continuity plans designed to
mitigate the effects of any significant Year 2000 disruptions by October 1999.
13
<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: August 16, 1999
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)
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal proceedings
The Company is party to various legal proceedings in the ordinary
course of business. Although the ultimate resolution of these
proceedings cannot be ascertained, management does not expect that they
will have a material adverse impact on the Company's financial position
or results of operations.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The Exhibit filed as part of this report is listed below:
10.1 1997 Long-Term Incentive Plan
10.2 Supplemental Incentive Plan
10.3 Restricted Stock Agreement dated December 30, 1997, between
Howard A. Neckowitz and Pacific Gateway Exchange, Inc.
10.4 Restricted Stock Agreement dated July 21, 1998, between
Thomas J. Murphy and Pacific Gateway Exchange, Inc.
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter ended
June 30, 1999.
15
<PAGE>
EXHIBIT 10.1
PACIFIC GATEWAY EXCHANGE, INC.
1997 LONG-TERM INCENTIVE PLAN
-----------------------------
AS AMENDED
<PAGE>
TABLE OF CONTENTS
-----------------
SECTION 1......................................................... 1
GENERAL................................................... 1
1.1. Purpose..................................... 1
1.2. Participation............................... 1
SECTION 2......................................................... 2
OPTIONS................................................... 2
2.1. Definition.................................. 2
2.2. Eligibility................................. 2
2.3. Price....................................... 2
2.4. Exercise.................................... 3
2.5. Post-Exercise Limitations................... 3
2.6. Expiration Date............................. 4
2.7. Reload Provision............................ 4
SECTION 3......................................................... 5
STOCK APPRECIATION RIGHTS................................. 5
3.1. Definition.................................. 5
3.2. Eligibility................................. 5
3.3. Exercise.................................... 5
3.4. Settlement of Award......................... 5
3.5. Post-Exercise Limitations................... 6
3.6. Expiration Date............................. 6
SECTION 4......................................................... 6
STOCK AWARDS.............................................. 6
4.1. Definition.................................. 6
4.2. Eligibility................................. 7
4.3. Terms and Conditions of Awards.............. 7
SECTION 5......................................................... 7
STOCK PURCHASE PROGRAM.................................... 7
5.1. Purchase of Stock........................... 8
5.2. Matching Shares............................. 8
5.3. Restrictions on Shares...................... 8
SECTION 6......................................................... 8
PERFORMANCE UNITS......................................... 8
6.1. Definition.................................. 8
6.2. Eligibility................................. 8
(i)
<PAGE>
6.3. Terms and Conditions of Awards.............. 8
6.4. Settlement.................................. 9
6.5. Termination during Performance Period....... 9
SECTION 7......................................................... 9
OPERATION AND ADMINISTRATION.............................. 10
7.1. Effective Date.............................. 10
7.2. Shares Subject to Plan...................... 10
7.3. Individual Limits on Awards................. 10
7.4. Adjustments to Shares....................... 10
7.5. Limit on Distribution....................... 12
7.6. Liability for Cash Payments................. 13
7.7. Performance-Based Compensation.............. 13
7.8. Withholding................................. 13
7.9. Transferability............................. 14
7.10. Notices..................................... 14
7.11. Form and Time of Elections.................. 14
7.12. Agreement With Company...................... 14
7.13. Limitation of Implied Rights................ 14
7.14. Evidence.................................... 15
7.15. Action by Company or Related Company........ 15
7.16. Gender and Number........................... 15
SECTION 8......................................................... 15
COMMITTEE................................................. 15
8.1. Administration.............................. 15
8.2. Selection of Committee...................... 15
8.3. Powers of Committee......................... 15
8.4. Delegation by Committee..................... 16
8.5. Information to be Furnished to Committee.... 16
8.6. Liability and Indemnification of Committee.. 16
SECTION 9
CHANGE IN CONTROL......................................... 17
SECTION 10........................................................ 18
AMENDMENT AND TERMINATION................................. 18
APPENDIX A
AWARDS TO NONEMPLOYEE DIRECTORS........................... 19
(ii)
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
1997 LONG-TERM INCENTIVE PLAN
-----------------------------
AS AMENDED
----------
SECTION 1
---------
GENERAL
-------
1.1 Purpose. The Pacific Gateway Exchange, Inc. 1997 Long-Term Incentive
-------
Plan (the "Plan") has been established by Pacific Gateway Exchange, Inc. (the
"Company") to:
(a) attract and retain employees and other persons providing services to
the Company and the Related Companies (as defined below);
(b) motivate Participants, by means of appropriate incentives, to achieve
long-range goals;
(c) provide incentive compensation opportunities that are competitive with
those of other major corporations; and
(d) further identify Participants' interests with those of the Company's
other stockholders through compensation that is based on the Company's
common stock;
and thereby promote the long-term financial interest of the Company and the
Related Companies, including the growth in value of the Company's equity and
enhancement of long-term stockholder return. The term "Related Company" means
any company during any period in which it is a "subsidiary corporation" (as that
term is defined in Code section 424(f)) with respect to the Company.
1.2 Participation. Subject to the terms and conditions of the Plan, the
-------------
Committee (as described in Section 8) shall determine and designate, from time
to time, from among the Eligible
<PAGE>
Individuals, those persons who will be granted one or more awards under Sections
2, 3, 4, 5 or 6 of the Plan (an "Award"), and thereby become "Participants" in
the Plan. In the discretion of the Committee, and subject to the terms of the
Plan, a Participant may be granted any Award permitted under the provisions of
the Plan, and more than one Award may be granted to a Participant. Except as
otherwise agreed by the Company and the Participant, or except as otherwise
provided in the Plan, an Award under the Plan shall not affect any previous
Award under the Plan or an award under any other plan maintained by the Company
or the Related Companies. For purposes of the Plan, the term "Eligible
Individual" shall mean any employee of the Company or a Related Company, any
director and any other person providing material services to the Company or a
Related Company.
SECTION 2
---------
OPTIONS
-------
2.1 Definitions. The grant of an "Option" under this Section 2 entitles
-----------
the Participant to purchase shares of common stock of the Company ("Stock") at a
price fixed at the time the Option is granted, subject to the terms of this
Section. Options granted under this Section may be either Incentive Stock
Options or Non-Qualified Stock Options, as determined in the discretion of the
Committee. An "Incentive Stock Option" is an Option that is intended to satisfy
the requirements applicable to an "incentive stock option" described in section
422 of the Internal Revenue Code of 1986, as amended (the "Code"). A "Non-
Qualified Stock Option" is an Option that is not intended to be an Incentive
Stock Option.
2.2 Eligibility. The Committee shall designate the Participants to whom
-----------
Options are to be granted under this Section and shall determine the number of
shares of Stock subject to each such Option. To the extent that the aggregate
fair market value of Stock with respect to which Incentive Stock Options are
exercisable for the first time by any individual during any calendar year (under
all plans of the Company and all Related Companies) exceeds $100,000, such
options shall be treated as Non-Qualified Stock Options, to the extent required
by section 422 of the Code.
2.3 Price. The determination and payment of the purchase price of a
-----
share of Stock under each Option granted under this Section shall be subject to
the following:
(a) The purchase price shall be established by the Committee at the time
the Option is granted; provided, however, that in no event shall such
price be less than the par value of a share of Stock on such date;
further, provided, in no event shall the purchase price of a share of
Stock under an Incentive Stock Option be less than the Fair Market
Value (defined below) of a share of stock at the time the Option is
granted.
2
<PAGE>
(b) Subject to the following provisions of this subsection, the full
purchase price of each share of Stock purchased upon the exercise of
any Option shall be paid at the time of such exercise and, as soon as
practicable thereafter, a certificate representing the shares so
purchased shall be delivered to the person entitled thereto.
(c) The purchase price shall be payable in cash or in shares of Stock
(valued at Fair Market Value as of the day of exercise) that have been
held by the Participant at least six months, or in any combination
thereof, as determined by the Committee.
(d) A Participant may elect to pay the purchase price upon the exercise of
an Option through a cashless exercise arrangement to the extent
provided by the Committee.
(e) The "Fair Market Value" of a share of Stock of the Company as of any
date shall be the closing price per share of Stock (or the mean of the
closing bid and asked prices of a share, if the Stock is so reported)
on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), the NASDAQ National Market System or other national
or regional securities exchange or market system on which the Stock is
primarily traded, or, if there shall have been no such sale so
reported on that date, on the last preceding date on which such a sale
was so reported.
(f) Except for adjustments pursuant to paragraph 7.4(b) (relating to the
adjustment of shares), the purchase price for a share of Stock under
any outstanding Option granted under the Plan may not be decreased
after the date of grant nor may an outstanding Option granted under
the Plan be surrendered to the Company as consideration for the grant
of a new Option with a lower exercise price.
2.4 Exercise. Except as otherwise expressly provided in the Plan, an
--------
Option granted under this Section shall be exercisable in accordance with the
following terms of this subsection:
(a) The terms and conditions relating to exercise of an Option shall be
established by the Committee, and may include, without limitation,
conditions relating to completion of a specified period of service
(subject to paragraph (b) below), achievement of performance standards
prior to exercise of the Option or achievement of Stock ownership
objectives by the Participant. The Committee, in its sole discretion,
may accelerate the vesting of any Option under circumstances
designated by it at the time the Option is granted or thereafter.
(b) No Option may be exercised by a Participant after the Expiration Date
(as defined in subsection 2.6) applicable to that Option.
(c) The exercise of an Option will result in the surrender of the
corresponding rights under a tandem Stock Appreciation Right (as
described in Section 3), if any.
3
<PAGE>
2.5 Post-Exercise Limitations. The Committee, in its discretion, may
-------------------------
impose such restrictions on shares of Stock acquired pursuant to the exercise of
an Option (including stock acquired pursuant to the exercise of a tandem Stock
Appreciation Right) as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, Stock ownership by the Participant
and such other factors as the Committee determines to be appropriate.
2.6 Expiration Date. The "Expiration Date" with respect to an Option
---------------
means the date established as the Expiration Date by the Committee at the time
of the grant; provided, however, that the Expiration Date with respect to any
Option shall not be later than the earliest to occur of:
(a) the ten-year anniversary of the date on which the Option is granted;
(b) if the Participant's Date of Termination occurs by reason of death or
Disability, the one-year anniversary of such Date of Termination;
(c) if the Participant's Date of Termination occurs by reason of
Retirement, the three-year anniversary of such Date of Termination; or
(d) if the Participant's Date of Termination occurs for reasons other than
Retirement, death or Disability, the three-month anniversary of such
Date of Termination.
For purposes of the Plan, a Participant's "Date of Termination" shall be the
date on which he both ceases to be an employee of the Company and the Related
Companies and ceases to perform material services for the Company and the
Related Companies, regardless of the reason for the cessation; provided that a
"Date of Termination" shall not be considered to have occurred during the period
in which the reason for the cessation of services is a leave of absence approved
by the Company or the Related Company which was the recipient of the
Participant's services. Except as otherwise provided by the Committee, a
Participant shall be considered to have a "Disability" during the period in
which he is unable, by reason of a medically determinable physical or mental
impairment, to engage in any substantial gainful activity, which condition, in
the opinion of a physician selected by the Committee, is expected to have a
duration of not less than 120 days. "Retirement" of a Participant shall mean the
occurrence of a Participant's Date of Termination after providing at least five
years of service to the Company or the Related Companies and attaining age 65.
2.7 Reload Provision. In the event the Participant exercises an Option
----------------
and pays all or a portion of the purchase price in Stock in the manner permitted
by subsection 2.3, or satisfies withholding obligations in Stock if permitted
under subsection 7.8, such Participant (either pursuant to the terms of the
Option Award, or pursuant to the exercise of Committee discretion at the time
the Option is exercised) may be issued a new Option to purchase additional
shares of Stock equal to the number of shares of Stock surrendered to the
Company in such payment. Such new Option shall have an exercise price equal to
the Fair Market Value per share on the date such new
4
<PAGE>
Option is granted, shall first be exercisable six months from the date of grant
of the new Option and shall have an Expiration Date on the same date as the
Expiration Date of the original Option so exercised by payment of the purchase
price or withholding in shares of Stock.
SECTION 3
---------
STOCK APPRECIATION RIGHTS
-------------------------
3.1 Definition. Subject to the terms of this Section, a "Stock
----------
Appreciation Right" granted under the Plan entitles the Participant to receive,
in cash or Stock (as determined in accordance with subsection 3.4), value equal
to all or a portion of the excess of: (a) the Fair Market Value of a specified
number of shares of Stock at the time of exercise over (b) a specified price
designated at the time the Stock Appreciation Right is granted or, if granted in
tandem with an Option, the exercise price with respect to shares under the
tandem Option.
3.2 Eligibility. Subject to the provisions of the Plan, the Committee
-----------
shall designate the Participants to whom Stock Appreciation Rights are to be
granted under the Plan, shall determine the exercise price or a method by which
the price shall be established with respect to each such Stock Appreciation
Right and shall determine the number of shares of Stock on which each Stock
Appreciation Right is based. A Stock Appreciation Right may be granted in
connection with all or any portion of a previously or contemporaneously-granted
Option or not in connection with an Option. If a Stock Appreciation Right is
granted in connection with an Option then, in the discretion of the Committee,
the Stock Appreciation Right may, but need not, be granted in tandem with the
Option.
3.3 Exercise. The exercise of Stock Appreciation Rights shall be subject
--------
to the following:
(a) If a Stock Appreciation Right is not in tandem with an Option, then
the Stock Appreciation Right shall be exercisable in accordance with
the terms established by the Committee in connection with such rights;
and may include, without limitation, conditions relating to completion
of a specified period of service, achievement of performance standards
prior to exercise of the Stock Appreciation Rights or achievement of
objectives relating to Stock ownership by the Participant. The
Committee, in its sole discretion, may accelerate the vesting of any
Stock Appreciation Right under circumstances designated by it at the
time the Stock Appreciation Right is granted or thereafter. No Stock
Appreciation Right subject to this paragraph may be exercised by a
Participant after the Expiration Date (as defined in subsection 3.6)
applicable to that Stock Appreciation Right.
(b) If a Stock Appreciation Right is in tandem with an Option, then the
Stock Appreciation Right shall be exercisable at the time the tandem
Option is exercisable.
5
<PAGE>
The exercise of a Stock Appreciation Right will result in the
surrender of the corresponding rights under the tandem Option.
3.4 Settlement of Award. Upon the exercise of a Stock Appreciation
-------------------
Right, the value to be distributed to the Participant, in accordance with
subsection 3.1, shall be distributed in shares of Stock (valued at their Fair
Market Value at the time of exercise), in cash or in a combination thereof, in
the discretion of the Committee.
3.5 Post-Exercise Limitations. The Committee, in its discretion, may
-------------------------
impose such restrictions on shares of Stock acquired pursuant to the exercise of
a Stock Appreciation Right as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, ownership of Stock by the
Participant and such other factors as the Committee determines to be
appropriate.
3.6 Expiration Date. If a Stock Appreciation Right is in tandem with an
---------------
Option, then the "Expiration Date" for the Stock Appreciation Right shall be the
Expiration Date for the related Option. If a Stock Appreciation Right is not in
tandem with an Option, then the "Expiration Date" for the Stock Appreciation
Right shall be the date established as the Expiration Date by the Committee;
provided, however, that subject to the following provisions of this subsection,
the Expiration Date with respect to any Stock Appreciation Right shall not be
later than the earliest to occur of:
(a) the ten-year anniversary of the date on which the Stock Appreciation
Right is granted;
(b) if the Participant's Date of Termination occurs by reason of death or
Disability, the one-year anniversary of such Date of Termination; or
(c) if the Participant's Date of Termination occurs by reason of
Retirement, the three-year anniversary of such Date of Termination; or
(d) if the Participant's Date of Termination occurs by reason other than
Retirement, death or Disability, the three-month anniversary of such
Date of Termination.
SECTION 4
---------
STOCK AWARDS
------------
4.1 Definition. Subject to the terms of this Section, a Stock Award
----------
under the Plan is a grant of shares of Stock to a Participant, the earning,
vesting or distribution of which is subject to one or more conditions
established by the Committee. Such conditions may relate to events (such as
performance or continued employment) occurring before or after the date the
Stock Award is granted, or the date the Stock is
6
<PAGE>
earned by, vested in or delivered to the Participant. If the vesting of Stock
Awards is subject to conditions occurring after the date of grant, the period
beginning on the date of grant of a Stock Award and ending on the vesting or
forfeiture of such Stock (as applicable) is referred to as the "Restricted
Period". Stock Awards may provide for delivery of the shares of Stock at the
time of grant or may provide for a deferred delivery date. A Stock Award may,
but need not, be made in conjunction with a cash-based incentive compensation
program maintained by the Company and may, but need not, be in lieu of cash
otherwise awardable under such program.
4.2 Eligibility. The Committee shall designate the Participants to whom
-----------
Stock Awards are to be granted and the number of shares of Stock that are
subject to each such Award.
4.3 Terms and Conditions of Awards. Stock Awards granted to Participants
------------------------------
under the Plan shall be subject to the following terms and conditions:
(a) Beginning on the date of grant (or, if later, the date of
distribution) of shares of Stock comprising a Stock Award, and
including any applicable Restricted Period, the Participant as owner
of such shares shall have the right to vote such shares.
(b) Payment of dividends with respect to Stock Awards shall be subject to
the following:
(i) On and after date that a Participant has a fully earned and
vested right to the shares comprising a Stock Award, and the
shares have been distributed to the Participant, the Participant
shall have all dividend rights (and other rights) of a
stockholder with respect to such shares.
(ii) Prior to the date that a Participant has a fully earned and
vested right to the shares comprising a Stock Award, the
Committee, in its sole discretion, may award Dividend Rights
with respect to such shares.
(iii) On and after the date that a Participant has a fully earned and
vested right to the shares comprising a Stock Award, but before
the shares have been distributed to the Participant, the
Participant shall be entitled to Dividend Rights with respect to
such shares, at the time and in the form determined by the
Committee.
(iv) A "Dividend Right" with respect to shares comprising a Stock
Award shall entitle the Participant, as of each dividend payment
date, to an amount equal to the dividends payable with respect
to a share of Stock multiplied by the number of such shares.
Dividend Rights shall be settled in cash or in shares of Stock,
as determined by the Committee, shall be payable at the time and
in the form determined by the Committee and shall be subject to
such other terms and conditions as the Committee may determine.
7
<PAGE>
SECTION 5
---------
STOCK PURCHASE PROGRAM
----------------------
5.1 Purchase of Stock. The Committee may, from time to time, establish
-----------------
one or more programs under which Participants will be permitted to purchase
shares of Stock under the Plan and shall designate the Participants eligible to
participate under such Stock purchase programs. The purchase price for shares of
Stock available under such programs, and other terms and conditions of such
programs, shall be established by the Committee; provided, however, that with
respect to shares of Stock purchased under a program that does not result in an
award of matching shares (as provided in subsection 5.2), the purchase price may
not be less than 50% of the Fair Market Value of the Stock at the time of
purchase (or, in the Committee's discretion, the average stock value over a
period determined by the Committee), and further provided that the purchase
price may not be less than par value.
5.2 Matching Shares. Except as otherwise provided in subsection 5.1, any
---------------
Stock purchase program established by the Committee under this Section may
provide for the award of matching shares of Stock.
5.3 Restrictions on Shares. The Committee may impose such restrictions
----------------------
with respect to shares purchased under subsection 5.1, or matching shares
awarded pursuant to subsection 5.2, as the Committee determines to be
appropriate. Such restrictions may include, without limitation, restrictions of
the type that may be imposed with respect to Stock Awards under Section 4.
SECTION 6
---------
PERFORMANCE UNITS
-----------------
6.1 Definition. Subject to the terms of this Section, the Award of
----------
Performance Units under the Plan entitles the Participant to receive value for
the units at the end of a Performance Period to the extent provided under the
Award. The number of units earned, and the value received for them, will be
contingent on the degree to which the performance measures established at the
time of grant of the Award are met. For purposes of the Plan, the "Performance
Period" with respect to the award of any Performance Units shall be the period
over which the applicable performance is to be measured.
6.2 Eligibility. The Committee shall designate the Participants to whom
-----------
Performance Units are to be granted and the number of units subject to each such
Award.
6.3 Terms and Conditions of Awards. For each Participant, the Committee
------------------------------
will determine the value of units, which may be stated either in cash or in
units representing shares of Stock; the
8
<PAGE>
performance measures used for determining whether the Performance Units are
earned; the Performance Period during which the performance measures will apply;
the relationship between the level of achievement of the performance measures
and the degree to which Performance Units are earned; whether, during or after
the Performance Period, any revision to the performance measures or Performance
Period should be made to reflect significant events or changes that occur during
the Performance Period; and the number of earned Performance Units that will be
paid in cash and the number of earned Performance Units to be paid in shares of
Stock.
6.4 Settlement. Settlement of Performance Units shall be subject to the
----------
following:
(a) The Committee will compare the actual performance to the performance
measures established for the Performance Period and determine the
number of units as to which settlement is to be made, and the value of
such units.
(b) Settlement of units earned shall be wholly in cash, wholly in Stock or
in a combination of the two and distributed in a lump sum or
installments, as determined by the Committee.
(i) For Performance Units stated in units representing shares of
Stock when granted, either one share of Stock will be
distributed for each unit earned or cash will be distributed for
each unit earned equal to either (A) the Fair Market Value of a
share of Stock at the end of the Performance Period or (B) the
average Stock value over a period determined by the Committee.
(ii) For Performance Units stated in cash when granted, the value of
each unit earned will be distributed in its initial cash value
or shares of Stock will be distributed based on the cash value
of the units earned divided by (A) the Fair Market Value of a
share of Stock at the end of the Performance Period or (B) the
average Stock value over a period determined by the Committee.
(c) Shares of Stock distributed in settlement of the units shall be
subject to such vesting requirements and other conditions, if any, as
the Committee shall determine. Such vesting restrictions may include,
without limitation, restrictions of the type that may be imposed with
respect to Stock Awards under Section 4.
6.5 Termination during Performance Period. If a Participant's Date of
-------------------------------------
Termination occurs during a Performance Period with respect to any Performance
Units granted to him, the Committee may determine that the Participant will be
entitled to settlement of all or any portion of the Performance Units as to
which he would otherwise be eligible and may accelerate the
9
<PAGE>
determination of the value and settlement of such Performance Units or make such
other adjustments as the Committee, in its sole discretion, deems desirable.
SECTION 7
---------
OPERATION AND ADMINISTRATION
----------------------------
7.1 Effective Date. The Plan shall be effective as of the date it is
--------------
adopted by the Board of Directors of the Company (the "Board"); provided,
however, that Awards granted under the Plan prior to its approval by
stockholders will be contingent on approval of the Plan by the Company's
stockholders. The Plan shall be unlimited in duration and, in the event of Plan
termination, shall remain in effect as long as any shares of Stock awarded under
it are outstanding and not fully vested; provided, however, that no new Awards
shall be made under the Plan on or after the tenth anniversary of the date on
which the Plan is adopted by the Board.
7.2 Shares Subject to Plan. The shares of Stock with respect to which
----------------------
Awards may be made under the Plan shall be shares currently authorized but
unissued or currently held or subsequently acquired by the Company as treasury
shares, including shares purchased in the open market or in private
transactions. Subject to the provisions of subsection 7.4, the number of shares
of Stock which may be issued with respect to Awards under the Plan shall not
exceed 4,500,000 shares in the aggregate. Except as otherwise provided herein,
any shares subject to an Award which for any reason expires or is terminated
without issuance of shares (whether or not cash or other consideration is paid
to a Participant in respect of such shares) shall again be available under the
Plan.
7.3 Individual Limits on Awards. Notwithstanding any other provision of
---------------------------
the Plan to the contrary, no Participant shall receive any Award of an Option or
Stock Appreciation Right under the Plan that is intended to constitute
"performance-based compensation" (as that term is used in section 162(m) of the
Code) to the extent that the sum of:
(a) the number of shares of Stock subject to such Award;
(b) the number of shares of Stock subject to all other prior Awards of
Options and Stock Appreciation Rights under the Plan during the one-year period
ending on the date of the Award; and
(c) the number of shares of Stock subject to all other prior stock options
and stock appreciation rights granted to the Participant under other plans or
arrangements of the Company and Related Companies during the one-year period
ending on the date of the Award;
would exceed the Participant's Individual Limit under the Plan. The
determination made under the foregoing provisions of this subsection shall be
based on the shares subject to the awards at the
10
<PAGE>
time of grant, regardless of when the awards become exercisable. Subject to the
provisions of subsection 7.4, a Participant's "Individual Limit" shall be
500,000 shares. Options and Stock Appreciation Rights that are not intended to
constitute "performance-based compensation" shall not be subject to the limit
otherwise imposed by this subsection 7.3.
7.4 Adjustments to Shares.
---------------------
(a) If the Company shall effect any subdivision or consolidation of shares
of Stock or other capital readjustment, payment of stock dividend, stock split,
combination of shares or recapitalization or other increase or reduction of the
number of shares of Stock outstanding without receiving compensation therefor in
money, services or property, then the Committee shall adjust (i) the number of
shares of Stock available under the Plan; (ii) the number of shares available
under any individual or other limits; (iii) the number of shares of Stock
subject to outstanding Awards; and (iv) the per-share price under any
outstanding Award to the extent that the Participant is required to pay a
purchase price per share with respect to the Award.
(b) If the Company is reorganized, merged or consolidated or is party to a
plan of exchange with another corporation, pursuant to which reorganization,
merger, consolidation or plan of exchange, the stockholders of the Company
receive any shares of stock or other securities or property, or the Company
shall distribute securities of another corporation to its stockholders, there
shall be substituted for the shares subject to outstanding Awards an appropriate
number of shares of each class of stock or amount of other securities or
property which were distributed to the stockholders of the Company in respect of
such shares, subject to the following:
(i) If the Committee determines that the substitution described in
accordance with the foregoing provisions of this paragraph would not be
fully consistent with the purposes of the Plan or the purposes of the
outstanding Awards under the Plan, the Committee may make such other
adjustments to the Awards to the extent that the Committee determines such
adjustments are consistent with the purposes of the Plan and of the
affected Awards.
(ii) All or any of the Awards may be cancelled by the Committee on or
immediately prior to the effective date of the applicable transaction, but
only if the Committee gives reasonable advance notice of the cancellation
to each affected Participant, and only if either: (A) the Participant is
permitted to exercise the Award for a reasonable period prior to the
effective date of the cancellation; or (B) the Participant receives payment
or other benefits that the Committee determines to be reasonable
compensation for the value of the cancelled Awards.
(iii) Upon the occurrence of a reorganization of the Company or any
other event described in this paragraph (b), any successor to the Company
shall be substituted for the Company to the extent that the Company and the
successor agree to such substitution.
11
<PAGE>
(c) Upon (or, in the discretion of the Committee, immediately prior to)
the sale to (or exchange with) a third party unrelated to the Company of all or
substantially all of the assets of the Company, all Awards shall be cancelled.
If Awards are cancelled under this paragraph, then, with respect to any affected
Participant, either:
(i) the Participant shall be provided with reasonable advance notice
of the cancellation, and the Participant shall be permitted to exercise the
Award for a reasonable period prior to the effective date of the
cancellation; or
(ii) the Participant shall receive payment or other benefits that the
Committee determines to be reasonable compensation for the value of the
cancelled Awards.
The foregoing provisions of this paragraph shall also apply to the sale of
all or substantially all of the assets of the Company to a related party, if the
Committee determines such application is appropriate.
(d) In determining what action, if any, is necessary or appropriate under
the foregoing provisions of this subsection, the Committee shall act in a manner
that it determines to be consistent with the purposes of the Plan and of the
affected Awards and, where applicable or otherwise appropriate, in a manner that
it determines to be necessary to preserve the benefits and potential benefits of
the affected Awards for the Participants and the Company.
(e) The existence of this Plan and the Awards granted hereunder shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of bonds, debentures, preferred or prior
preference stocks ahead of or affecting the Company's Stock or the rights
thereof, the dissolution or liquidation of the Company, any sale or transfer of
all or any part of its assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.
(f) Except as expressly provided by the terms of this Plan, the issue by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, for cash or property or for labor or services,
either upon direct sale, upon the exercise of rights or warrants to subscribe
therefor or upon conversion of shares or obligations of the Company convertible
into such shares or other securities, shall not affect, and no adjustment by
reason thereof, shall be made with respect to Awards then outstanding hereunder.
(g) Awards under the Plan are subject to adjustment under this subsection
only during the period in which they are considered to be outstanding under the
Plan. For purposes of this subsection, an Award is considered "outstanding" on
any date if the Participant's ability to obtain all benefits with respect to the
Award is subject to limits imposed by the Plan (including any limits imposed by
the Agreement reflecting the Award). The determination of whether an Award is
outstanding shall be made by the Committee.
12
<PAGE>
7.5 Limit on Distribution. Distribution of shares of Stock or other
---------------------
amounts under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall
have no liability to deliver any shares of Stock under the Plan or make any
other distribution of benefits under the Plan unless such delivery or
distribution would comply with all applicable laws and the applicable
requirements of any securities exchange or similar entity.
(b) In the case of a Participant who is subject to Section 16(a) and 16(b)
of the Securities Exchange Act of 1934, the Committee may, at any time, add such
conditions and limitations to any Award to such Participant, or any feature of
any such Award, as the Committee, in its sole discretion, deems necessary or
desirable to comply with Section 16(a) or 16(b) and the rules and regulations
thereunder or to obtain any exemption therefrom.
(c) To the extent that the Plan provides for issuance of certificates to
reflect the transfer of shares of Stock, the transfer of such shares may be
effected on a non-certificated basis, to the extent not prohibited by applicable
law or the rules of any stock exchange.
7.6 Liability for Cash Payments. Subject to the provisions of this
---------------------------
Section, each Related Company shall be liable for payment of cash due under the
Plan with respect to any Participant to the extent that such benefits are
attributable to the service rendered for that Related Company by the
Participant. Any disputes relating to liability of a Related Company for cash
payments shall be resolved by the Committee.
7.7 Performance-Based Compensation. To the extent that the Committee
------------------------------
determines that it is necessary or desirable to conform any Awards under the
Plan with the requirements applicable to "Performance-Based Compensation", as
that term is used in Code section 162(m)(4)(C), it may, at or prior to the time
an Award is granted, take such steps and impose such restrictions with respect
to such Award as it determines to be necessary to satisfy such requirements
including, without limitation:
(a) The establishment of performance goals that must be satisfied prior to
the payment or distribution of benefits under such Awards.
(b) The submission of such Awards and performance goals to the Company's
stockholders for approval and making the receipt of benefits under such Awards
contingent on receipt of such approval.
(c) Providing that no payment or distribution be made under such Awards
unless the Committee certifies that the goals and the applicable terms of the
Plan and Agreement reflecting the Awards have been satisfied.
13
<PAGE>
To the extent that the Committee determines that the foregoing requirements
relating to Performance-Based Compensation do not apply to Awards under the Plan
because the Awards constitute Options or Stock Appreciation Rights, the
Committee may, at the time the Award is granted, conform the Awards to
alternative methods of satisfying the requirements applicable to Performance-
Based Compensation.
7.8 Withholding. All Awards and other payments under the Plan are
-----------
subject to withholding of all applicable taxes, which withholding obligations
may be satisfied, with the consent of the Committee, through the surrender of
shares of Stock which the Participant already owns or to which a Participant is
otherwise entitled under the Plan.
7.9 Transferability. Awards under the Plan are not transferable except
---------------
as designated by the Participant by will or by the laws of descent and
distribution. To the extent that the Participant who receives an Award under
the Plan has the right to exercise such Award, the Award may be exercised during
the lifetime of the Participant only by the Participant. Notwithstanding the
foregoing provisions of this subsection, the Committee may permit Awards under
the Plan to be transferred to or for the benefit of the Participant's family
(including, without limitation, to a trust for the benefit of a Participant's
family), subject to such limits as the Committee may establish. In no event
shall an Incentive Stock Option be transferable to the extent that such
transferability would violate the requirements applicable to such option under
Code section 422.
7.10 Notices. Any notice or document required to be filed with the
-------
Committee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Committee, in care of the Company, at
its principal executive offices. The Committee may, by advance written notice
to affected persons, revise such notice procedure from time to time. Any notice
required under the Plan (other than a notice of election) may be waived by the
person entitled to notice.
7.11 Form and Time of Elections. Unless otherwise specified herein, each
--------------------------
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification or
revocation thereof, shall be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations, not inconsistent
with the terms of the Plan, as the Committee shall require.
7.12 Agreement With Company. At the time of an Award to a Participant
----------------------
under the Plan, the Committee may require a Participant to enter into an
agreement with the Company (the "Agreement") in a form specified by the
Committee, agreeing to the terms and conditions of the Plan and to such
additional terms and conditions, not inconsistent with the Plan, as the
Committee may, in its sole discretion, prescribe.
7.13 Limitation of Implied Rights.
----------------------------
14
<PAGE>
(a) Neither a Participant nor any other person shall, by reason of the
Plan, acquire any right in or title to any assets, funds or property of the
Company or any Related Company whatsoever, including, without limitation, any
specific funds, assets, or other property which the Company or any Related
Company, in its sole discretion, may set aside in anticipation of a liability
under the Plan. A Participant shall have only a contractual right to the
amounts, if any, payable under the Plan, unsecured by any assets of the Company
and any Related Company. Nothing contained in the Plan shall constitute a
guarantee by the Company or any Related Company that the assets of such
companies shall be sufficient to pay any benefits to any person.
(b) The Plan does not constitute a contract of employment, and selection
as a Participant will not give any employee the right to be retained in the
employ of the Company or any Related Company, nor any right or claim to any
benefit under the Plan, unless such right or claim has specifically accrued
under the terms of the Plan. Except as otherwise provided in the Plan, no Award
under the Plan shall confer upon the holder thereof any right as a stockholder
of the Company prior to the date on which he fulfills all service requirements
and other conditions for receipt of such rights and shares of Stock are
registered in his name.
7.14 Evidence. Evidence required of anyone under the Plan may be by
--------
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.
7.15 Action by Company or Related Company. Any action required or
------------------------------------
permitted to be taken by the Company or any Related Company shall be by
resolution of its board of directors, or by action of one or more members of the
board (including a committee of the board) who are duly authorized to act for
the board or (except to the extent prohibited by applicable law or the rules of
any stock exchange) by a duly authorized officer of the company.
7.16 Gender and Number. Where the context admits, words in any gender
-----------------
shall include any other gender, words in the singular shall include the plural
and the plural shall include the singular.
SECTION 8
---------
COMMITTEE
---------
8.1 Administration. The authority to control and manage the operation
--------------
and administration of the Plan shall be vested in a committee (the "Committee")
in accordance with this Section 8.
8.2 Selection of Committee. The Committee shall be selected by the
----------------------
Board, and shall consist of not fewer than two members of the Board or such
greater number as may be required for compliance with Rule 16b-3 issued under
the Securities Exchange Act of 1934.
15
<PAGE>
8.3 Powers of Committee. The authority to manage and control the
-------------------
operation and administration of the Plan shall be vested in the Committee,
subject to the following:
(a) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select employees to receive Awards, to determine the
time or times of receipt, to determine the types of Awards and the number of
shares covered by the Awards, to establish the terms, conditions, performance
criteria, restrictions, and other provisions of such Awards, and to cancel or
suspend Awards. In making such Award determinations, the Committee may take
into account the nature of services rendered by the respective employee, his
present and potential contribution to the Company's success and such other
factors as the Committee deems relevant.
(b) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to determine the extent to which Awards under the Plan
will be structured to conform to the requirements applicable to Performance-
Based Compensation, and to take such action, establish such procedures, and
impose such restrictions at the time such Awards are granted as the Committee
determines to be necessary or appropriate to conform to such requirements.
(c) The Committee will have the authority and discretion to interpret the
Plan, to establish, amend and rescind any rules and regulations relating to the
Plan, to determine the terms and provisions of any agreements made pursuant to
the Plan and to make all other determinations that may be necessary or advisable
for the administration of the Plan.
(d) Any interpretation of the Plan by the Committee and any decision made
by it under the Plan is final and binding on all persons.
(e) Except as otherwise expressly provided in the Plan, where the
Committee is authorized to make a determination with respect to any Award.
8.4 Delegation by Committee. Except to the extent prohibited by
-----------------------
applicable law or the rules of any stock exchange, the Committee may allocate
all or any portion of its responsibilities and powers to any one or more of its
members and may delegate all or any part of its responsibilities and powers to
any person or persons selected by it. Any such allocation or delegation may be
revoked by the Committee at any time.
8.5 Information to be Furnished to Committee. The Company and Related
----------------------------------------
Companies shall furnish the Committee with such data and information as may be
required for it to discharge its duties. The records of the Company and Related
Companies as to an employee's or Participant's employment (or other provision of
services), termination of employment (or cessation of the provision of
services), leave of absence, reemployment and compensation shall be conclusive
on all persons unless determined to be incorrect. Participants and other
persons entitled to benefits under the Plan must furnish the Committee such
evidence, data or information as the Committee considers desirable to carry out
the terms of the Plan.
16
<PAGE>
8.6 Liability and Indemnification of Committee. No member or authorized
------------------------------------------
delegate of the Committee shall be liable to any person for any action taken or
omitted in connection with the administration of the Plan unless attributable to
his own fraud or willful misconduct; nor shall the Company or any Related
Company be liable to any person for any such action unless attributable to fraud
or willful misconduct on the part of a director or employee of the Company or
Related Company. The Committee, the individual members thereof, and persons
acting as the authorized delegates of the Committee under the Plan, shall be
indemnified by the Company against any and all liabilities, losses, costs and
expenses (including legal fees and expenses) of whatsoever kind and nature which
may be imposed on, incurred by or asserted against the Committee or its members
or authorized delegates by reason of the performance of a Committee function if
the Committee or its members or authorized delegates did not act dishonestly or
in willful violation of the law or regulation under which such liability, loss,
cost or expense arises. This indemnification shall not duplicate but may
supplement any coverage available under any applicable insurance.
SECTION 9
---------
CHANGE IN CONTROL
-----------------
Except as otherwise provided in the Plan or in the agreement reflecting
the applicable Award, ten days prior to the occurrence of a Change in Control
(i) all outstanding Options and Stock Appreciation Rights shall become
immediately exercisable, (ii) all shares of Restricted Stock and Performance
Stock shall become fully vested, (iii) all vesting restrictions imposed under
subsection 6.3 (relating to restrictions on shares purchased by Participants and
matching shares) shall cease to apply, and (iv) Performance Units may be paid
out in such manner and amounts as determined by the Committee; provided,
however, such vesting, lapse of restrictions and payments shall be contingent
upon the consummation of the Change in Control. For purposes of the Plan, a
"Change in Control" shall be deemed to occur on the earliest of the existence of
one of the following events:
(a) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 50% or more of either the then
outstanding shares of common stock of the Company entitled to vote generally in
the election of directors, but excluding, for this purpose, any such acquisition
by the Company or any of its subsidiaries, or any employee benefit plan (or
related trust) of the Corporation, or any corporation with respect to which,
following such acquisition, more than 50% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the common stock and voting securities
of the Company immediately prior to such acquisition in substantially the same
proportion as their ownership, immediately prior to such acquisition, of the
then outstanding shares of common stock of the Company or the combined voting
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors, as the case may be;
17
<PAGE>
(b) individuals who, as of the date hereof, constitute the Board (as of the
date hereof the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office is in connection
with an actual or threatened "election contest" relating to the election of the
directors of the Company (as such term is used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act); or
(c) approval by the Company's shareholders of a reorganization, merger or
consolidation of the Company, in each case, with respect to which all or
substantially all of the individuals and entities who were the respective
beneficial owners of the common stock and voting securities of the Company
immediately prior to such reorganization, merger or consolidation do not,
following such reorganization, merger or consolidation, beneficially own,
directly and indirectly, more than 50% of, respectively, the then outstanding
shares of common stock or the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such reorganization, merger
or consolidation, or of a complete liquidation or dissolution of the Company or
of the sale or other disposition of all or substantially all of the assets of
the Company.
SECTION 10
----------
AMENDMENT AND TERMINATION
-------------------------
The Board may, at any time, amend or terminate the Plan, provided that,
subject to subsection 7.4 (relating to certain adjustments to shares), no
amendment or termination may materially adversely affect the rights of any
Participant or beneficiary under any Award made under the Plan prior to the date
such amendment is adopted by the Board; and further provided that the provisions
of paragraph 2.3(f) (relating to Option repricing) cannot be amended unless the
amendment is approved by the Company's stockholders.
18
<PAGE>
APPENDIX A
----------
AWARDS TO NONEMPLOYEE DIRECTORS
-------------------------------
1. Eligible Directors. Each director of the Company who is not an employee of
------------------
the Company or Related Company and who does not own stock possessing more than
3% of the total combined voting power of all classes of stock of the Company (a
"Nonemployee Director") shall be eligible for awards under this Appendix A.
2. Option Award. Each individual who is a Nonemployee Director upon his or
------------
her initial election or appointment to the Board shall be awarded an Option to
purchase 20,000 shares of Stock upon such initial election or appointment (an
"Initial Option"). Thereafter, on each subsequent anniversary of such election
or appointment, if the Nonemployee Director is then a member of the Board, the
Nonemployee Director shall be awarded an Option to purchase 10,000 shares of
Stock (an "Annual Option"). Nonemployee Directors who were first appointed to
the Board prior to the effective date of this Plan and received an Initial
Option under the Pacific Gateway Exchange, Inc. 1995 Stock Option Plan (the
"1995 Plan") shall be eligible for Annual Options under this Plan on the
anniversary of the Initial Option awarded under the 1995 Plan, to the extent
that the Company determines that Annual Awards will no longer be made under the
1995 Plan.
3. Exercise Price. The exercise price per share with respect to an Option
--------------
awarded under this Appendix A shall be the Fair Market Value of a share of Stock
on the date such Option is awarded.
4. Vesting. Each Option granted under this Appendix A shall become
-------
exercisable: (i) with respect to 1/4 of the shares awarded, on the first
anniversary of the grant date (the "Initial Vesting Date"); and (ii) with
respect to an additional 1/16 of the shares awarded, on each subsequent 3-month
anniversary of the Initial Vesting Date until such time as this Option is fully
exercisable.
5. Expiration. The Expiration Date with respect to any Option awarded under
----------
this Appendix A shall be the earliest to occur of:
(a) the ten-year anniversary of the date on which the Option is granted;
(b) if the Nonemployee Director's service on the Board terminates by reason
of death or Disability, the one-year anniversary of such termination of service;
(c) if the Nonemployee Director's service on the Board terminates for any
reason other than death or Disability, the three-month anniversary of such
termination of service.
6. Other Terms and Conditions. Except as provided in this Appendix A, the
--------------------------
Option shall be subject to all of the terms and conditions of the Plan.
19
<PAGE>
EXHIBIT 10.2
PACIFIC GATEWAY EXCHANGE, INC.
1997 SUPPLEMENTAL LONG-TERM INCENTIVE PLAN
------------------------------------------
<PAGE>
TABLE OF CONTENTS
SECTION 1 GENERAL......................................................... 1
1.1. Purpose...................................................... 1
1.2. Participation................................................ 1
SECTION 2 OPTIONS......................................................... 2
2.1. Definition................................................... 2
2.2. Eligibility.................................................. 2
2.3. Price........................................................ 2
2.4. Exercise..................................................... 3
2.5. Post-Exercise Limitations.................................... 3
2.6. Expiration Date.............................................. 3
2.7. Reload Provision............................................. 4
SECTION 3 STOCK APPRECIATION RIGHTS....................................... 4
3.1. Definition................................................... 4
3.2. Eligibility.................................................. 4
3.3. Exercise..................................................... 5
3.4. Settlement of Award.......................................... 5
3.5. Post-Exercise Limitations.................................... 5
3.6. Expiration Date.............................................. 5
SECTION 4 STOCK AWARDS.................................................... 6
4.1. Definition................................................... 6
4.2. Eligibility.................................................. 6
4.3. Terms and Conditions of Awards............................... 6
SECTION 5 STOCK PURCHASE PROGRAM.......................................... 7
5.1. Purchase of Stock............................................ 7
5.2. Matching Shares.............................................. 7
5.3. Restrictions on Shares....................................... 7
SECTION 6 PERFORMANCE UNITS............................................... 8
6.1. Definition................................................... 8
6.2. Eligibility.................................................. 8
6.3. Terms and Conditions of Awards............................... 8
6.4. Settlement................................................... 8
6.5. Termination during Performance Period........................ 9
(i)
<PAGE>
SECTION 7 OPERATION AND ADMINISTRATION.................................... 9
7.1. Effective Date............................................... 9
7.2. Shares Subject to Plan....................................... 9
7.3. Adjustments to Shares........................................ 9
7.4. Limit on Distribution........................................ 12
7.5. Liability for Cash Payments.................................. 12
7.6. Withholding.................................................. 12
7.7. Transferability.............................................. 12
7.8. Notices...................................................... 12
7.9. Form and Time of Elections................................... 13
7.10. Agreement With Company....................................... 13
7.11. Limitation of Implied Rights................................. 13
7.12. Evidence..................................................... 13
7.13. Action by Company or Related Company......................... 14
7.14. Gender and Number............................................ 14
SECTION 8 COMMITTEE....................................................... 14
8.1. Administration............................................... 14
8.2. Selection of Committee....................................... 14
8.3. Powers of Committee.......................................... 14
8.4. Delegation by Committee...................................... 15
8.5. Information to be Furnished to Committee..................... 15
8.6. Liability and Indemnification of Committee................... 15
SECTION 9 CHANGE IN CONTROL............................................... 15
SECTION 10 AMENDMENT AND TERMINATION...................................... 17
(ii)
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
1997 SUPPLEMENTAL LONG-TERM INCENTIVE PLAN
------------------------------------------
SECTION 1
---------
GENERAL
-------
1.1 Purpose. The Pacific Gateway Exchange, Inc. 1997 Supplemental Long-
-------
Term Incentive Plan (the "Plan") has been established by Pacific Gateway
Exchange, Inc. (the "Company") to:
(a) attract and retain employees and other persons providing services to the
Company and the Related Companies (as defined below);
(b) motivate Participants, by means of appropriate incentives, to achieve long-
range goals;
(c) provide incentive compensation opportunities that are competitive with
those of other major corporations; and
(d) further identify Participants' interests with those of the Company's other
stockholders through compensation that is based on the Company's common
stock;
and thereby promote the long-term financial interest of the Company and the
Related Companies, including the growth in value of the Company's equity and
enhancement of long-term stockholder return. The term "Related Company" means
any company during any period in which it is a "subsidiary corporation" (as that
term is defined in Code section 424(f)) with respect to the Company.
1.2 Participation. Subject to the terms and conditions of the Plan, the
-------------
Committee (as described in Section 8) shall determine and designate, from time
to time, from among the Eligible Individuals, those persons who will be granted
one or more awards under Sections 2, 3, 4, 5 or 6 of the Plan (an "Award"), and
thereby become "Participants" in the Plan. In the discretion of the Committee,
and subject to the terms of the Plan, a Participant may be granted any Award
permitted under the provisions of the Plan, and more than one Award may be
granted to a Participant. Except as otherwise agreed by the Company and the
Participant, or except as otherwise provided in the Plan, an Award under the
Plan shall not affect any previous Award under the Plan or an award under any
other plan maintained by the Company or the Related Companies. For purposes of
the Plan, the term "Eligible Individual" shall mean any employee of the Company
or a Related Company any other person providing material services to the Company
or a Related Company. However, in no event shall any individual be eligible for
the grant of any Award under the Plan to the extent that such eligibility would
not comply with the applicable stock exchange requirements.
<PAGE>
SECTION 2
---------
OPTIONS
-------
2.1 Definitions. The grant of an "Option" under this Section 2 entitles
-----------
the Participant to purchase shares of common stock of the Company ("Stock") at a
price fixed at the time the Option is granted, subject to the terms of this
Section. Options granted under this Section are not intended to be incentive
stock options.
2.2 Eligibility. The Committee shall designate the Participants to whom
-----------
Options are to be granted under this Section and shall determine the number of
shares of Stock subject to each such Option.
2.3 Price. The determination and payment of the purchase price of a
-----
share of Stock under each Option granted under this Section shall be subject to
the following:
(a) The purchase price shall be established by the Committee at the time the
Option is granted; provided, however, that in no event shall such price be
less than the par value of a share of Stock on such date.
(b) Subject to the following provisions of this subsection, the full purchase
price of each share of Stock purchased upon the exercise of any Option
shall be paid at the time of such exercise and, as soon as practicable
thereafter, a certificate representing the shares so purchased shall be
delivered to the person entitled thereto.
(c) The purchase price shall be payable in cash or in shares of Stock (valued
at Fair Market Value, as defined below, as of the day of exercise) that
have been held by the Participant at least six months, or in any
combination thereof, as determined by the Committee.
(d) A Participant may elect to pay the purchase price upon the exercise of an
Option through a cashless exercise arrangement to the extent provided by
the Committee.
(e) The "Fair Market Value" of a share of Stock of the Company as of any date
shall be the closing price per share of Stock (or the mean of the closing
bid and asked prices of a share, if the Stock is so reported) on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"), the NASDAQ National Market System or other national or regional
securities exchange or market system on which the Stock is primarily
traded, or, if there shall have been no such sale so reported on that date,
on the last preceding date on which such a sale was so reported.
2
<PAGE>
2.4 Exercise. Except as otherwise expressly provided in the Plan, an
--------
Option granted under this Section shall be exercisable in accordance with the
following terms of this subsection:
(a) The terms and conditions relating to exercise of an Option shall be
established by the Committee, and may include, without limitation,
conditions relating to completion of a specified period of service (subject
to paragraph (b) below), achievement of performance standards prior to
exercise of the Option or achievement of Stock ownership objectives by the
Participant. The Committee, in its sole discretion, may accelerate the
vesting of any Option under circumstances designated by it at the time the
Option is granted or thereafter.
(b) No Option may be exercised by a Participant after the Expiration Date (as
defined in subsection 2.6) applicable to that Option.
(c) The exercise of an Option will result in the surrender of the corresponding
rights under a tandem Stock Appreciation Right (as described in Section 3),
if any.
2.5 Post-Exercise Limitations. The Committee, in its discretion, may
-------------------------
impose such restrictions on shares of Stock acquired pursuant to the exercise of
an Option (including stock acquired pursuant to the exercise of a tandem Stock
Appreciation Right) as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, Stock ownership by the Participant
and such other factors as the Committee determines to be appropriate.
2.6 Expiration Date. The "Expiration Date" with respect to an Option
---------------
means the date established as the Expiration Date by the Committee at the time
of the grant; provided, however, that the Expiration Date with respect to any
Option shall not be later than the earliest to occur of:
(a) the ten-year anniversary of the date on which the Option is granted;
(b) if the Participant's Date of Termination occurs by reason of death or
Disability, the one-year anniversary of such Date of Termination;
(c) if the Participant's Date of Termination occurs by reason of Retirement,
the three-year anniversary of such Date of Termination; or
(d) if the Participant's Date of Termination occurs for reasons other than
Retirement, death or Disability, the three-month anniversary of such Date
of Termination.
For purposes of the Plan, a Participant's "Date of Termination" shall be the
date on which he both ceases to be an employee of the Company and the Related
Companies and ceases to perform material services for the Company and the
Related Companies, regardless of the reason for the
3
<PAGE>
cessation; provided that a "Date of Termination" shall not be considered to have
occurred during the period in which the reason for the cessation of services is
a leave of absence approved by the Company or the Related Company which was the
recipient of the Participant's services. Except as otherwise provided by the
Committee, a Participant shall be considered to have a "Disability" during the
period in which he is unable, by reason of a medically determinable physical or
mental impairment, to engage in any substantial gainful activity, which
condition, in the opinion of a physician selected by the Committee, is expected
to have a duration of not less than 120 days. "Retirement" of a Participant
shall mean the occurrence of a Participant's Date of Termination after providing
at least five years of service to the Company or the Related Companies and
attaining age 65.
2.7 Reload Provision. In the event the Participant exercises an Option
----------------
and pays all or a portion of the purchase price in Stock in the manner permitted
by subsection 2.3, or satisfies withholding obligations in Stock if permitted
under subsection 7.8, such Participant (either pursuant to the terms of the
Option Award, or pursuant to the exercise of Committee discretion at the time
the Option is exercised) may be issued a new Option to purchase additional
shares of Stock equal to the number of shares of Stock surrendered to the
Company in such payment. Such new Option shall have an exercise price equal to
the Fair Market Value per share on the date such new Option is granted, shall
first be exercisable six months from the date of grant of the new Option and
shall have an Expiration Date on the same date as the Expiration Date of the
original Option so exercised by payment of the purchase price or withholding in
shares of Stock.
SECTION 3
---------
STOCK APPRECIATION RIGHTS
-------------------------
3.1 Definition. Subject to the terms of this Section, a "Stock
----------
Appreciation Right" granted under the Plan entitles the Participant to receive,
in cash or Stock (as determined in accordance with subsection 3.4), value equal
to all or a portion of the excess of: (a) the Fair Market Value of a specified
number of shares of Stock at the time of exercise over (b) a specified price
designated at the time the Stock Appreciation Right is granted or, if granted in
tandem with an Option, the exercise price with respect to shares under the
tandem Option.
3.2 Eligibility. Subject to the provisions of the Plan, the Committee
-----------
shall designate the Participants to whom Stock Appreciation Rights are to be
granted under the Plan, shall determine the exercise price or a method by which
the price shall be established with respect to each such Stock Appreciation
Right and shall determine the number of shares of Stock on which each Stock
Appreciation Right is based. A Stock Appreciation Right may be granted in
connection with all or any portion of a previously or contemporaneously-granted
Option or not in connection with an Option. If a Stock Appreciation Right is
granted in connection with an Option then, in the discretion of the Committee,
the Stock Appreciation Right may, but need not, be granted in tandem with the
Option.
4
<PAGE>
3.3 Exercise. The exercise of Stock Appreciation Rights shall be subject
--------
to the following:
(a) If a Stock Appreciation Right is not in tandem with an Option, then the
Stock Appreciation Right shall be exercisable in accordance with the terms
established by the Committee in connection with such rights; and may
include, without limitation, conditions relating to completion of a
specified period of service, achievement of performance standards prior to
exercise of the Stock Appreciation Rights or achievement of objectives
relating to Stock ownership by the Participant. The Committee, in its sole
discretion, may accelerate the vesting of any Stock Appreciation Right
under circumstances designated by it at the time the Stock Appreciation
Right is granted or thereafter. No Stock Appreciation Right subject to
this paragraph may be exercised by a Participant after the Expiration Date
(as defined in subsection 3.6) applicable to that Stock Appreciation Right.
(b) If a Stock Appreciation Right is in tandem with an Option, then the Stock
Appreciation Right shall be exercisable at the time the tandem Option is
exercisable. The exercise of a Stock Appreciation Right will result in the
surrender of the corresponding rights under the tandem Option.
3.4 Settlement of Award. Upon the exercise of a Stock Appreciation
-------------------
Right, the value to be distributed to the Participant, in accordance with
subsection 3.1, shall be distributed in shares of Stock (valued at their Fair
Market Value at the time of exercise), in cash or in a combination thereof, in
the discretion of the Committee.
3.5 Post-Exercise Limitations. The Committee, in its discretion, may
-------------------------
impose such restrictions on shares of Stock acquired pursuant to the exercise of
a Stock Appreciation Right as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, ownership of Stock by the
Participant and such other factors as the Committee determines to be
appropriate.
3.6 Expiration Date. If a Stock Appreciation Right is in tandem with an
---------------
Option, then the "Expiration Date" for the Stock Appreciation Right shall be the
Expiration Date for the related Option. If a Stock Appreciation Right is not in
tandem with an Option, then the "Expiration Date" for the Stock Appreciation
Right shall be the date established as the Expiration Date by the Committee;
provided, however, that subject to the following provisions of this subsection,
the Expiration Date with respect to any Stock Appreciation Right shall not be
later than the earliest to occur of:
(a) the ten-year anniversary of the date on which the Stock Appreciation Right
is granted;
5
<PAGE>
(b) if the Participant's Date of Termination occurs by reason of death or
Disability, the one-year anniversary of such Date of Termination; or
(c) if the Participant's Date of Termination occurs by reason of Retirement,
the three-year anniversary of such Date of Termination; or
(d) if the Participant's Date of Termination occurs by reason other than
Retirement, death or Disability, the three-month anniversary of such Date
of Termination.
SECTION 4
---------
STOCK AWARDS
------------
4.1 Definition. Subject to the terms of this Section, a Stock Award
----------
under the Plan is a grant of shares of Stock to a Participant, the earning,
vesting or distribution of which is subject to one or more conditions
established by the Committee. Such conditions may relate to events (such as
performance or continued employment) occurring before or after the date the
Stock Award is granted, or the date the Stock is earned by, vested in or
delivered to the Participant. If the vesting of Stock Awards is subject to
conditions occurring after the date of grant, the period beginning on the date
of grant of a Stock Award and ending on the vesting or forfeiture of such Stock
(as applicable) is referred to as the "Restricted Period". Stock Awards may
provide for delivery of the shares of Stock at the time of grant or may provide
for a deferred delivery date. A Stock Award may, but need not, be made in
conjunction with a cash-based incentive compensation program maintained by the
Company and may, but need not, be in lieu of cash otherwise awardable under such
program.
4.2 Eligibility. The Committee shall designate the Participants to whom
-----------
Stock Awards are to be granted and the number of shares of Stock that are
subject to each such Award.
4.3 Terms and Conditions of Awards. Stock Awards granted to Participants
------------------------------
under the Plan shall be subject to the following terms and conditions:
(a) Beginning on the date of grant (or, if later, the date of distribution) of
shares of Stock comprising a Stock Award, and including any applicable
Restricted Period, the Participant as owner of such shares shall have the
right to vote such shares.
(b) Payment of dividends with respect to Stock Awards shall be subject to the
following:
(i) On and after date that a Participant has a fully earned and vested
right to the shares comprising a Stock Award, and the shares have been
distributed to the Participant, the Participant shall have all
dividend rights (and other rights) of a stockholder with respect to
such shares.
6
<PAGE>
(ii) Prior to the date that a Participant has a fully earned and vested
right to the shares comprising a Stock Award, the Committee, in its
sole discretion, may award Dividend Rights with respect to such
shares.
(iii) On and after the date that a Participant has a fully earned and
vested right to the shares comprising a Stock Award, but before the
shares have been distributed to the Participant, the Participant
shall be entitled to Dividend Rights with respect to such shares, at
the time and in the form determined by the Committee.
(iv) A "Dividend Right" with respect to shares comprising a Stock Award
shall entitle the Participant, as of each dividend payment date, to
an amount equal to the dividends payable with respect to a share of
Stock multiplied by the number of such shares. Dividend Rights shall
be settled in cash or in shares of Stock, as determined by the
Committee, shall be payable at the time and in the form determined by
the Committee and shall be subject to such other terms and conditions
as the Committee may determine.
SECTION 5
---------
STOCK PURCHASE PROGRAM
----------------------
5.1 Purchase of Stock. The Committee may, from time to time, establish
-----------------
one or more programs under which Participants will be permitted to purchase
shares of Stock under the Plan and shall designate the Participants eligible to
participate under such Stock purchase programs. The purchase price for shares
of Stock available under such programs, and other terms and conditions of such
programs, shall be established by the Committee; provided, however, that with
respect to shares of Stock purchased under a program that does not result in an
award of matching shares (as provided in subsection 5.2), the purchase price may
not be less than 50% of the Fair Market Value of the Stock at the time of
purchase (or, in the Committee's discretion, the average stock value over a
period determined by the Committee), and further provided that the purchase
price may not be less than par value.
5.2 Matching Shares. Except as otherwise provided in subsection 5.1, any
---------------
Stock purchase program established by the Committee under this Section may
provide for the award of matching shares of Stock.
5.3 Restrictions on Shares. The Committee may impose such restrictions
----------------------
with respect to shares purchased under subsection 5.1, or matching shares
awarded pursuant to subsection 5.2, as the Committee determines to be
appropriate. Such restrictions may include, without limitation, restrictions of
the type that may be imposed with respect to Stock Awards under Section 4.
7
<PAGE>
SECTION 6
---------
PERFORMANCE UNITS
-----------------
6.1 Definition. Subject to the terms of this Section, the Award of
----------
Performance Units under the Plan entitles the Participant to receive value for
the units at the end of a Performance Period to the extent provided under the
Award. The number of units earned, and the value received for them, will be
contingent on the degree to which the performance measures established at the
time of grant of the Award are met. For purposes of the Plan, the "Performance
Period" with respect to the award of any Performance Units shall be the period
over which the applicable performance is to be measured.
6.2 Eligibility. The Committee shall designate the Participants to whom
-----------
Performance Units are to be granted and the number of units subject to each such
Award.
6.3 Terms and Conditions of Awards. For each Participant, the Committee
------------------------------
will determine the value of units, which may be stated either in cash or in
units representing shares of Stock; the performance measures used for
determining whether the Performance Units are earned; the Performance Period
during which the performance measures will apply; the relationship between the
level of achievement of the performance measures and the degree to which
Performance Units are earned; whether, during or after the Performance Period,
any revision to the performance measures or Performance Period should be made to
reflect significant events or changes that occur during the Performance Period;
and the number of earned Performance Units that will be paid in cash and the
number of earned Performance Units to be paid in shares of Stock.
6.4 Settlement. Settlement of Performance Units shall be subject to the
----------
following:
(a) The Committee will compare the actual performance to the performance
measures established for the Performance Period and determine the number of
units as to which settlement is to be made, and the value of such units.
(b) Settlement of units earned shall be wholly in cash, wholly in Stock or in a
combination of the two and distributed in a lump sum or installments, as
determined by the Committee.
(i) For Performance Units stated in units representing shares of Stock
when granted, either one share of Stock will be distributed for each
unit earned or cash will be distributed for each unit earned equal to
either (A) the Fair Market Value of a share of Stock at the end of the
Performance Period or (B) the average Stock value over a period
determined by the Committee.
8
<PAGE>
(ii) For Performance Units stated in cash when granted, the value of each
unit earned will be distributed in its initial cash value or shares of
Stock will be distributed based on the cash value of the units earned
divided by (A) the Fair Market Value of a share of Stock at the end of
the Performance Period or (B) the average Stock value over a period
determined by the Committee.
(c) Shares of Stock distributed in settlement of the units shall be subject to
such vesting requirements and other conditions, if any, as the Committee
shall determine. Such vesting restrictions may include, without
limitation, restrictions of the type that may be imposed with respect to
Stock Awards under Section 4.
6.5 Termination during Performance Period. If a Participant's Date of
-------------------------------------
Termination occurs during a Performance Period with respect to any Performance
Units granted to him, the Committee may determine that the Participant will be
entitled to settlement of all or any portion of the Performance Units as to
which he would otherwise be eligible and may accelerate the determination of the
value and settlement of such Performance Units or make such other adjustments as
the Committee, in its sole discretion, deems desirable.
SECTION 7
---------
OPERATION AND ADMINISTRATION
----------------------------
7.1 Effective Date. The Plan shall be effective as of January 1, 1997.
--------------
The Plan shall be unlimited in duration and, in the event of Plan termination,
shall remain in effect as long as any shares of Stock awarded under it are
outstanding and not fully vested.
7.2 Shares Subject to Plan. The shares of Stock with respect to which
----------------------
Awards may be made under the Plan shall be shares currently authorized but
unissued or currently held or subsequently acquired by the Company as treasury
shares, including shares purchased in the open market or in private
transactions. Subject to the provisions of subsection 7.4, the number of shares
of Stock which may be issued with respect to Awards under the Plan shall not
exceed 2,500,000 shares in the aggregate. Except as otherwise provided herein,
any shares subject to an Award which for any reason expires or is terminated
without issuance of shares (whether or not cash or other consideration is paid
to a Participant in respect of such shares) shall again be available under the
Plan.
7.3 Adjustments to Shares.
---------------------
(a) If the Company shall effect any subdivision or consolidation of shares of
Stock or other capital readjustment, payment of stock dividend, stock
split, combination of shares or recapitalization or other increase or
reduction of the number of shares of Stock outstanding without receiving
compensation therefor in money, services or property, then
9
<PAGE>
the Committee shall adjust (i) the number of shares of Stock available
under the Plan; (ii) the number of shares available under any individual or
other limits; (iii) the number of shares of Stock subject to outstanding
Awards; and (iv) the per-share price under any outstanding Award to the
extent that the Participant is required to pay a purchase price per share
with respect to the Award.
(b) If the Company is reorganized, merged or consolidated or is party to a plan
of exchange with another corporation, pursuant to which reorganization,
merger, consolidation or plan of exchange, the stockholders of the Company
receive any shares of stock or other securities or property, or the Company
shall distribute securities of another corporation to its stockholders,
there shall be substituted for the shares subject to outstanding Awards an
appropriate number of shares of each class of stock or amount of other
securities or property which were distributed to the stockholders of the
Company in respect of such shares, subject to the following:
(i) If the Committee determines that the substitution described in
accordance with the foregoing provisions of this paragraph would not
be fully consistent with the purposes of the Plan or the purposes of
the outstanding Awards under the Plan, the Committee may make such
other adjustments to the Awards to the extent that the Committee
determines such adjustments are consistent with the purposes of the
Plan and of the affected Awards.
(ii) All or any of the Awards may be cancelled by the Committee on or
immediately prior to the effective date of the applicable
transaction, but only if the Committee gives reasonable advance
notice of the cancellation to each affected Participant, and only if
either: (A) the Participant is permitted to exercise the Award for a
reasonable period prior to the effective date of the cancellation; or
(B) the Participant receives payment or other benefits that the
Committee determines to be reasonable compensation for the value of
the cancelled Awards.
(iii) Upon the occurrence of a reorganization of the Company or any other
event described in this paragraph (b), any successor to the Company
shall be substituted for the Company to the extent that the Company
and the successor agree to such substitution.
(c) Upon (or, in the discretion of the Committee, immediately prior to) the
sale to (or exchange with) a third party unrelated to the Company of all or
substantially all of the assets of the Company, all Awards shall be
cancelled. If Awards are cancelled under this paragraph, then, with
respect to any affected Participant, either:
10
<PAGE>
(i) the Participant shall be provided with reasonable advance notice of
the cancellation, and the Participant shall be permitted to exercise
the Award for a reasonable period prior to the effective date of the
cancellation; or
(ii) the Participant shall receive payment or other benefits that the
Committee determines to be reasonable compensation for the value of
the cancelled Awards.
The foregoing provisions of this paragraph shall also apply to the sale of
all or substantially all of the assets of the Company to a related party,
if the Committee determines such application is appropriate.
(d) In determining what action, if any, is necessary or appropriate under the
foregoing provisions of this subsection, the Committee shall act in a
manner that it determines to be consistent with the purposes of the Plan
and of the affected Awards and, where applicable or otherwise appropriate,
in a manner that it determines to be necessary to preserve the benefits and
potential benefits of the affected Awards for the Participants and the
Company.
(e) The existence of this Plan and the Awards granted hereunder shall not
affect in any way the right or power of the Company or its stockholders to
make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, any merger or consolidation of the Company, any issue of bonds,
debentures, preferred or prior preference stocks ahead of or affecting the
Company's Stock or the rights thereof, the dissolution or liquidation of
the Company, any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
(f) Except as expressly provided by the terms of this Plan, the issue by the
Company of shares of stock of any class, or securities convertible into
shares of stock of any class, for cash or property or for labor or
services, either upon direct sale, upon the exercise of rights or warrants
to subscribe therefor or upon conversion of shares or obligations of the
Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof, shall be made with respect to Awards
then outstanding hereunder.
(g) Awards under the Plan are subject to adjustment under this subsection only
during the period in which they are considered to be outstanding under the
Plan. For purposes of this subsection, an Award is considered
"outstanding" on any date if the Participant's ability to obtain all
benefits with respect to the Award is subject to limits imposed by the Plan
(including any limits imposed by the Agreement reflecting the Award). The
determination of whether an Award is outstanding shall be made by the
Committee.
11
<PAGE>
7.4 Limit on Distribution. Distribution of shares of Stock or other
---------------------
amounts under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall have no
liability to deliver any shares of Stock under the Plan or make any other
distribution of benefits under the Plan unless such delivery or
distribution would comply with all applicable laws and the applicable
requirements of any securities exchange or similar entity.
(b) In the case of a Participant who is subject to Section 16(a) and 16(b) of
the Securities Exchange Act of 1934, the Committee may, at any time, add
such conditions and limitations to any Award to such Participant, or any
feature of any such Award, as the Committee, in its sole discretion, deems
necessary or desirable to comply with Section 16(a) or 16(b) and the rules
and regulations thereunder or to obtain any exemption therefrom.
(c) To the extent that the Plan provides for issuance of certificates to
reflect the transfer of shares of Stock, the transfer of such shares may be
effected on a non-certificated basis, to the extent not prohibited by
applicable law or the rules of any stock exchange.
7.5 Liability for Cash Payments. Subject to the provisions of this
---------------------------
Section, each Related Company shall be liable for payment of cash due under the
Plan with respect to any Participant to the extent that such benefits are
attributable to the service rendered for that Related Company by the
Participant. Any disputes relating to liability of a Related Company for cash
payments shall be resolved by the Committee.
7.6 Withholding. All Awards and other payments under the Plan are
-----------
subject to withholding of all applicable taxes, which withholding obligations
may be satisfied, with the consent of the Committee, through the surrender of
shares of Stock which the Participant already owns or to which a Participant is
otherwise entitled under the Plan.
7.7 Transferability. Awards under the Plan are not transferable except
---------------
as designated by the Participant by will or by the laws of descent and
distribution. To the extent that the Participant who receives an Award under
the Plan has the right to exercise such Award, the Award may be exercised during
the lifetime of the Participant only by the Participant. Notwithstanding the
foregoing provisions of this subsection, the Committee may permit Awards under
the Plan to be transferred to or for the benefit of the Participant's family
(including, without limitation, to a trust for the benefit of a Participant's
family), subject to such limits as the Committee may establish.
7.8 Notices. Any notice or document required to be filed with the
-------
Committee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Committee, in care of the Company, at
its principal executive offices. The Committee may, by
12
<PAGE>
advance written notice to affected persons, revise such notice procedure from
time to time. Any notice required under the Plan (other than a notice of
election) may be waived by the person entitled to notice.
7.9 Form and Time of Elections. Unless otherwise specified herein, each
--------------------------
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification or
revocation thereof, shall be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations, not inconsistent
with the terms of the Plan, as the Committee shall require.
7.10 Agreement With Company. At the time of an Award to a Participant
----------------------
under the Plan, the Committee may require a Participant to enter into an
agreement with the Company (the "Agreement") in a form specified by the
Committee, agreeing to the terms and conditions of the Plan and to such
additional terms and conditions, not inconsistent with the Plan, as the
Committee may, in its sole discretion, prescribe.
7.11 Limitation of Implied Rights.
----------------------------
(a) Neither a Participant nor any other person shall, by reason of the Plan,
acquire any right in or title to any assets, funds or property of the
Company or any Related Company whatsoever, including, without limitation,
any specific funds, assets, or other property which the Company or any
Related Company, in its sole discretion, may set aside in anticipation of a
liability under the Plan. A Participant shall have only a contractual
right to the amounts, if any, payable under the Plan, unsecured by any
assets of the Company and any Related Company. Nothing contained in the
Plan shall constitute a guarantee by the Company or any Related Company
that the assets of such companies shall be sufficient to pay any benefits
to any person.
(b) The Plan does not constitute a contract of employment, and selection as a
Participant will not give any employee the right to be retained in the
employ of the Company or any Related Company, nor any right or claim to any
benefit under the Plan, unless such right or claim has specifically accrued
under the terms of the Plan. Except as otherwise provided in the Plan, no
Award under the Plan shall confer upon the holder thereof any right as a
stockholder of the Company prior to the date on which he fulfills all
service requirements and other conditions for receipt of such rights and
shares of Stock are registered in his name.
7.12 Evidence. Evidence required of anyone under the Plan may be by
--------
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.
13
<PAGE>
7.13 Action by Company or Related Company. Any action required or
------------------------------------
permitted to be taken by the Company or any Related Company shall be by
resolution of its board of directors, or by action of one or more members of the
board (including a committee of the board) who are duly authorized to act for
the board or (except to the extent prohibited by applicable law or the rules of
any stock exchange) by a duly authorized officer of the company.
7.14 Gender and Number. Where the context admits, words in any gender
-----------------
shall include any other gender, words in the singular shall include the plural
and the plural shall include the singular.
SECTION 8
---------
COMMITTEE
---------
8.1 Administration. The authority to control and manage the operation
--------------
and administration of the Plan shall be vested in a committee (the "Committee")
in accordance with this Section 8.
8.2 Selection of Committee. The Committee shall be selected by the Board
----------------------
of Directors of the Company (the "Board"), and shall consist of not fewer than
two members of the Board.
8.3 Powers of Committee. The authority to manage and control the
-------------------
operation and administration of the Plan shall be vested in the Committee,
subject to the following:
(a) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select employees to receive Awards, to
determine the time or times of receipt, to determine the types of Awards
and the number of shares covered by the Awards, to establish the terms,
conditions, performance criteria, restrictions, and other provisions of
such Awards, and to cancel or suspend Awards. In making such Award
determinations, the Committee may take into account the nature of services
rendered by the respective employee, his present and potential contribution
to the Company's success and such other factors as the Committee deems
relevant.
(b) The Committee will have the authority and discretion to interpret the Plan,
to establish, amend and rescind any rules and regulations relating to the
Plan, to determine the terms and provisions of any agreements made pursuant
to the Plan and to make all other determinations that may be necessary or
advisable for the administration of the Plan.
(c) Any interpretation of the Plan by the Committee and any decision made by it
under the Plan is final and binding on all persons.
14
<PAGE>
(d) Except as otherwise expressly provided in the Plan, where the Committee is
authorized to make a determination with respect to any Award.
8.4 Delegation by Committee. Except to the extent prohibited by
-----------------------
applicable law or the rules of any stock exchange, the Committee may allocate
all or any portion of its responsibilities and powers to any one or more of its
members and may delegate all or any part of its responsibilities and powers to
any person or persons selected by it. Any such allocation or delegation may be
revoked by the Committee at any time.
8.5 Information to be Furnished to Committee. The Company and Related
----------------------------------------
Companies shall furnish the Committee with such data and information as may be
required for it to discharge its duties. The records of the Company and Related
Companies as to an employee's or Participant's employment (or other provision of
services), termination of employment (or cessation of the provision of
services), leave of absence, reemployment and compensation shall be conclusive
on all persons unless determined to be incorrect. Participants and other persons
entitled to benefits under the Plan must furnish the Committee such evidence,
data or information as the Committee considers desirable to carry out the terms
of the Plan.
8.6 Liability and Indemnification of Committee. No member or authorized
------------------------------------------
delegate of the Committee shall be liable to any person for any action taken or
omitted in connection with the administration of the Plan unless attributable to
his own fraud or willful misconduct; nor shall the Company or any Related
Company be liable to any person for any such action unless attributable to fraud
or willful misconduct on the part of a director or employee of the Company or
Related Company. The Committee, the individual members thereof, and persons
acting as the authorized delegates of the Committee under the Plan, shall be
indemnified by the Company against any and all liabilities, losses, costs and
expenses (including legal fees and expenses) of whatsoever kind and nature which
may be imposed on, incurred by or asserted against the Committee or its members
or authorized delegates by reason of the performance of a Committee function if
the Committee or its members or authorized delegates did not act dishonestly or
in willful violation of the law or regulation under which such liability, loss,
cost or expense arises. This indemnification shall not duplicate but may
supplement any coverage available under any applicable insurance.
SECTION 9
---------
CHANGE IN CONTROL
-----------------
Except as otherwise provided in the Plan or in the agreement reflecting the
applicable Award, ten days prior to the occurrence of a Change in Control (i)
all outstanding Options and Stock Appreciation Rights shall become immediately
exercisable, (ii) all shares of Restricted Stock and Performance Stock shall
become fully vested, (iii) all vesting restrictions imposed under subsection 6.3
(relating to restrictions on shares purchased by Participants and matching
shares)
15
<PAGE>
shall cease to apply, and (iv) Performance Units may be paid out in such
manner and amounts as determined by the Committee; provided, however, such
vesting, lapse of restrictions and payments shall be contingent upon the
consummation of the Change in Control. For purposes of the Plan, a "Change in
Control" shall be deemed to occur on the earliest of the existence of one of the
following events:
(a) the acquisition, other than from the Company, by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange
Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 50% or more of either the then outstanding
shares of common stock of the Company entitled to vote generally in the
election of directors, but excluding, for this purpose, any such
acquisition by the Company or any of its subsidiaries, or any employee
benefit plan (or related trust) of the Corporation, or any corporation with
respect to which, following such acquisition, more than 50% of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the common stock and voting securities of the
Company immediately prior to such acquisition in substantially the same
proportion as their ownership, immediately prior to such acquisition, of
the then outstanding shares of common stock of the Company or the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors, as the case may
be;
(b) individuals who, as of the date hereof, constitute the Board (as of the
date hereof the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board, provided that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial
assumption of office is in connection with an actual or threatened
"election contest" relating to the election of the directors of the Company
(as such term is used in Rule 14a-11 of Regulation 14A promulgated under
the Exchange Act); or
(c) approval by the Company's shareholders of a reorganization, merger or
consolidation of the Company, in each case, with respect to which all or
substantially all of the individuals and entities who were the respective
beneficial owners of the common stock and voting securities of the Company
immediately prior to such reorganization, merger or consolidation do not,
following such reorganization, merger or consolidation, beneficially own,
directly and indirectly, more than 50% of, respectively, the then
outstanding shares of common stock or the combined voting power of the then
outstanding voting securities
16
<PAGE>
entitled to vote generally in the election of directors, as the case may
be, of the corporation resulting from such reorganization, merger or
consolidation, or of a complete liquidation or dissolution of the Company
or of the sale or other disposition of all or substantially all of the
assets of the Company.
SECTION 10
----------
AMENDMENT AND TERMINATION
-------------------------
The Board may, at any time, amend or terminate the Plan, provided that,
subject to subsection 7.4 (relating to certain adjustments to shares), no
amendment or termination may materially adversely affect the rights of any
Participant or beneficiary under any Award made under the Plan prior to the date
such amendment is adopted by the Board.
17
<PAGE>
EXHIBIT 10.3
PACIFIC GATEWAY EXCHANGE, INC.
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT, dated as of the 30th day of December, 1997 (the "Award
Date") and entered into by and between Pacific Gateway Exchange, Inc. (the
"Company") and Howard Neckowitz (the "Employee"),
WITNESSETH THAT:
---------------
WHEREAS, the Company maintains the Pacific Gateway Exchange, Inc. 1997
Long-Term Incentive Plan (the "Plan");
WHEREAS, the Compensation Committee has awarded the Employee shares of
Restricted Stock under the Plan;
WHEREAS, the Employee and the Company entered into an employment agreement
dated December 30, 1997 (the employment agreement, without regard to amendments
after such date, is referred to as the "Employment Agreement");
NOW, THEREFORE, IT IS AGREED between the Company and the Employee as
follows:
1. Restricted Stock. Subject to the terms of this Agreement, the Company
----------------
hereby awards the Employee 75,000 shares of Restricted Stock under the Plan.
2. Restrictions on Stock. During the Restricted Period (as defined in
---------------------
paragraph 4) with respect to any shares of Restricted Stock:
(a) the shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered;
(b) the certificate representing such shares of Restricted Stock shall be
registered in the name of the Employee and shall be deposited with the
Company, together with a stock power (in such form as the Company may
determine); and
(c) the Employee shall be treated as a shareholder with respect to the
Restricted Stock, including the right to vote such Restricted Stock
and all dividend rights associated with such Restricted Stock.
3. Transfers at Termination of Restricted Period. Unless forfeited
---------------------------------------------
earlier under paragraph 5, at the end of the Restricted Period with respect to
any shares of Restricted Stock,
<PAGE>
the certificate representing such Stock shall be transferred to the Employee (or
the Employee's legal representative or heir) free of all restrictions.
4. Restricted Period. The "Restricted Period" with respect to any shares
-----------------
of Restricted Stock shall be the period commencing on the Award Date and ending
on the date the Participant is vested in the shares. Subject to the provisions
of this Agreement, the Employee shall vest in the Restricted Stock at the rate
of 10% per year until the earlier of his termination of employment with the
Company or the tenth anniversary of the Award Date.
In the event of the death or total disability of the Employee while
employed by the Company, in the event of the Employee's termination by the
Company for reasons other than Cause (as that term is defined in the Employment
Agreement) or in the event that the Employee terminates his employment with the
Company for Good Reason (as that term is defined in the Employment Agreement),
the Employee shall become 100% vested in the Restricted Stock as of such date.
5. Forfeiture of Restricted Stock. Except as provided otherwise in
------------------------------
paragraph 4 above, if the Employee's employment with the Company and Related
Companies terminates for any reason prior to the end of the Restricted Period
with respect to any shares of Restricted Stock, such shares of Restricted Stock
shall be forfeited and the Employee shall have no further rights with respect to
such shares.
6. Withholding. This Award is subject to withholding of all applicable
-----------
taxes.
7. Change in Control. Ten days prior to the occurrence of a Change in
-----------------
Control (as that term is defined in the Employment Agreement), the Employee
shall become vested in all outstanding shares of Restricted Stock.
8. Agreement Not Contract of Employment. This Agreement does not
------------------------------------
constitute a contract of employment, and does not give the Employee the right to
be retained in the employ of the Company or an affiliate or the right to
continue as a director of the Company.
9. Definitions. Except where the context clearly implies or indicates the
-----------
contrary, a word, term, or phrase used in the Plan is similarly used in this
Agreement.
10. Administration. The authority to manage and control the operation and
--------------
administration of the Plan and this Agreement shall be vested in the Committee
designated under the Plan, and such Committee shall have all the powers with
respect to this Agreement as it has with respect to the Plan. Any
interpretation of the Agreement by the Committee and any decision made by it
with respect to the Agreement is final and binding on all persons.
2
<PAGE>
11. Plan Governs. The terms of this Agreement shall be subject to the
------------
terms of the Plan, a copy of which may be obtained by the Employee from the
office of the Secretary of the Company.
IN WITNESS WHEREOF, the Employee has hereunto set his hand and the Company
has caused these presents to be executed in its name and on its behalf, all as
of the date first above written.
/s/ Howard A. Neckowitz
------------------------------
Employee
PACIFIC GATEWAY EXCHANGE, INC.
By /s/ Sandra Grey
---------------------------
Its Chief Financial Officer
------------------------
3
<PAGE>
EXHIBIT 10.4
PACIFIC GATEWAY EXCHANGE, INC.
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT, dated as of the 21st day of July, 1998 (the "Award Date")
and entered into by and between Pacific Gateway Exchange, Inc. (the "Company")
and Thomas Murphy (the "Employee"),
WITNESSETH THAT:
---------------
WHEREAS, the Company maintains the Pacific Gateway Exchange, Inc. 1997
Long-Term Incentive Plan (the "Plan");
WHEREAS, the Compensation Committee has awarded the Employee shares of
Restricted Stock under the Plan;
WHEREAS, the Employee and the Company entered into an employment agreement
dated July 21, 1998 (the employment agreement, without regard to amendments
after such date, is referred to as the "Employment Agreement");
NOW, THEREFORE, IT IS AGREED between the Company and the Employee as
follows:
1. Restricted Stock. Subject to the terms of this Agreement, the Company
----------------
hereby awards the Employee 15,000 shares of Restricted Stock under the Plan.
2. Restrictions on Stock. During the Restricted Period (as defined in
---------------------
paragraph 4) with respect to any shares of Restricted Stock:
(a) the shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered;
(b) the certificate representing such shares of Restricted Stock shall be
registered in the name of the Employee and shall be deposited with the
Company, together with a stock power (in such form as the Company may
determine); and
(c) the Employee shall be treated as a shareholder with respect to the
Restricted Stock, including the right to vote such Restricted Stock
and all dividend rights associated with such Restricted Stock.
3. Transfers at Termination of Restricted Period. Unless forfeited
---------------------------------------------
earlier under paragraph 5, at the end of the Restricted Period with respect to
any shares of Restricted Stock,
<PAGE>
the certificate representing such Stock shall be transferred to the Employee (or
the Employee's legal representative or heir) free of all restrictions.
4. Restricted Period. The "Restricted Period" with respect to any shares
-----------------
of Restricted Stock shall be the period commencing on the Award Date and ending
on the date the Participant is vested in the shares. The Employee shall vest in
the Restricted Stock at the rate of 20% per year until the earlier of his
termination of employment with the Company or the fifth anniversary of the Award
Date.
In the event of the death or total disability of the Employee while
employed by the Company, in the event of the Employee's termination by the
Company for reasons other than Cause (as that term is defined in the Employment
Agreement) or in the event that the Employee terminates his employment with the
Company for Good Reason (as that term is defined in the Employment Agreement),
the Employee shall become 100% vested in the Restricted Stock as of such date.
In addition, in the event that the Company chooses not to extend the
Employment Period (as defined in the Employment Agreement) beyond the third
anniversary of the Effective Date the Employee shall become fully vested in an
additional 3,000 shares of Restricted Stock, but only to the extent that the
employee is not 100% vested in all the shares of Restricted stock granted under
this Agreement.
5. Forfeiture of Restricted Stock. Except as provided otherwise in
------------------------------
paragraph 4 above, if the Employee's employment with the Company and Related
Companies terminates for any reason prior to the end of the Restricted Period
with respect to any shares of Restricted Stock, such shares of Restricted Stock
shall be forfeited and the Employee shall have no further rights with respect to
such shares.
6. Withholding. This Award is subject to withholding of all applicable
-----------
taxes.
7. Change in Control. Ten days prior to the occurrence of a Change in
-----------------
Control (as that term is defined in the Employment Agreement), the Employee
shall become vested in all outstanding shares of Restricted Stock.
8. Agreement Not Contract of Employment. This Agreement does not
------------------------------------
constitute a contract of employment, and does not give the Employee the right to
be retained in the employ of the Company or an affiliate or the right to
continue as a director of the Company.
9. Definitions. Except where the context clearly implies or indicates the
-----------
contrary, a word, term, or phrase used in the Plan is similarly used in this
Agreement.
2
<PAGE>
10. Administration. The authority to manage and control the operation and
--------------
administration of the Plan and this Agreement shall be vested in the Committee
designated under the Plan, and such Committee shall have all the powers with
respect to this Agreement as it has with respect to the Plan. Any
interpretation of the Agreement by the Committee and any decision made by it
with respect to the Agreement is final and binding on all persons.
11. Plan Governs. The terms of this Agreement shall be subject to the
------------
terms of the Plan, a copy of which may be obtained by the Employee from the
office of the Secretary of the Company.
3
<PAGE>
IN WITNESS WHEREOF, the Employee has hereunto set his hand and the Company
has caused these presents to be executed in its name and on its behalf, all as
of the date first above written.
/s/ Thomas J. Murphy
______________________________
Employee
PACIFIC GATEWAY EXCHANGE, INC.
By /s/ Howard A. Neckowitz
---------------------------
Its President and CEO
--------------------------
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED JUNE
30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 16,170
<SECURITIES> 0
<RECEIVABLES> 120,229
<ALLOWANCES> 5,726
<INVENTORY> 0
<CURRENT-ASSETS> 137,177
<PP&E> 152,916
<DEPRECIATION> 23,592
<TOTAL-ASSETS> 281,557
<CURRENT-LIABILITIES> 164,243
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 112,414
<TOTAL-LIABILITY-AND-EQUITY> 281,557
<SALES> 139,586
<TOTAL-REVENUES> 139,586
<CGS> 121,433
<TOTAL-COSTS> 136,403
<OTHER-EXPENSES> (524)
<LOSS-PROVISION> 606
<INTEREST-EXPENSE> (249)
<INCOME-PRETAX> 3,956
<INCOME-TAX> 1,385
<INCOME-CONTINUING> 2,571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,571
<EPS-BASIC> $0.13
<EPS-DILUTED> $0.13
</TABLE>
