PACIFIC GATEWAY EXCHANGE INC
10-Q, 2000-05-22
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<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 March 31, 2000

                      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 May 8, 2000, the number of the registrant's Common Shares of $.0001 par value
outstanding was 20,003,085.
<PAGE>

                        PACIFIC GATEWAY EXCHANGE, INC.

                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<S>                                                             <C>

                                                              Page
                                                              ----

Part I -  FINANCIAL INFORMATION

Item 1: Financial Statements (unaudited)

        Condensed consolidated balance sheets as of
        March 31, 2000, and December 31, 1999                   1

        Condensed consolidated statements of operations
        for the three-month periods ended
        March 31 , 2000 and 1999                                2

        Condensed consolidated statements of cash flows
        for the three-month periods ended
        March 31 , 2000 and 1999                                3

        Notes to condensed consolidated financial statements    4

Item 2: Management's discussion and analysis
        of financial condition and results
        of operations                                           10


Part II - OTHER INFORMATION

Item 1:  Legal Proceedings                                      19

Item 2:  Changes in Securities and Use of Proceeds              19

Item 3:  Defaults upon Senior Securities                        19

Item 4:  Submission of matters to a vote of security holders    19

Item 5:  Other information                                      19

Item 6:  Exhibits and reports on Form 8-K                       20

</TABLE>
<PAGE>


                        PACIFIC GATEWAY EXCHANGE, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                      March 31,       December 31,
                                                                        2000             1999
                                                                   --------------     -------------
<S>                                                                <C>                <C>
                              ASSETS                                 (Unaudited)
Current Assets:
Cash and cash equivalents                                                $ 27,725          $ 27,189
Accounts receivable, net of allowance for doubtful accounts
      of $10,700 and $7,846, respectively                                 155,214           133,998
Prepaid expenses                                                            1,070             1,065
Deferred income tax                                                         2,790             3,701
Other current assets                                                        6,995             6,455
                                                                   --------------     -------------
      Total current assets                                                193,794           172,408
Property and equipment, net                                               184,944           169,187
Intangible assets, net                                                     27,006            17,830
Deferred income tax                                                         2,090             2,227
Deposits and other assets                                                   9,871            13,153
                                                                   --------------     -------------
      Total assets                                                      $ 417,705         $ 374,805
                                                                   ==============     =============


                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable                                                        $ 200,670         $ 154,601
Line of credit                                                             75,400            54,100
Accrued liabilities                                                         9,466            13,156
Income taxes payable                                                        2,938             4,279
Equipment financing                                                         3,333                 -
Vendor financing                                                            2,700                 -
Other current liabilities                                                  15,678               660
                                                                   --------------     -------------
      Total current liabilities                                           310,185           226,796

Equipment financing                                                         6,119            10,000
Deferred income tax                                                         5,666             5,850
Other liabilities                                                           2,153            17,140
                                                                   --------------     -------------
      Total liabilities                                                   324,123           259,786
                                                                   --------------     -------------

Stockholders' Equity:
Common stock and additional paid-in capital                                84,824            76,534
Deferred compensation-restricted stock                                     (6,676)           (8,065)
Foreign currency translation                                               (1,714)           (1,285)
Retained earnings                                                          17,548            48,235
Common stock held in treasury, at cost                                       (400)             (400)
                                                                   --------------     -------------
      Total stockholders' equity                                           93,582           115,019
                                                                   --------------     -------------
      Total liabilities and stockholders' equity                        $ 417,705         $ 374,805
                                                                   ==============     =============
</TABLE>
     See accompanying Notes to Condensed Consolidated Financial Statements

                                       1
<PAGE>

                        PACIFIC GATEWAY EXCHANGE, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                  (in thousands, except net income per share)
<TABLE>
<CAPTION>
                                                                 Three Months
                                                                Ended March 31,
                                                           ------------------------
                                                              2000          1999
                                                           ----------    ----------
<S>                                                        <C>           <C>
                                                                   (Unaudited)

 Revenues                                                    $126,549      $140,529
 Cost of services and capacity sold                           113,854       121,435
                                                           ----------    ----------
      Gross profit                                             12,695        19,094
 Selling, general, and administrative expenses                 24,704        10,392
 Bad debt expense                                               4,300           777
 Depreciation and amortization                                  5,809         2,781
                                                           ----------    ----------
      Total operating expenses                                 34,813        13,950
                                                           ----------    ----------
      Operating income (loss)                                 (22,118)        5,144
 Acquisition and investment losses                              8,957             -
 Interest income, net                                            (216)         (218)
 Other income, net                                               (293)         (223)
                                                           ----------    ----------
      Income (loss) before income taxes                       (30,566)        5,585
 Provision for income taxes                                       121         1,955
                                                           ----------    ----------
      Net income (loss)                                     $ (30,687)      $ 3,630
                                                           ==========    ==========
      Net income (loss) per share - basic                     $ (1.57)       $ 0.19
                                                           ==========    ==========
      Net income (loss) per share - diluted                   $ (1.57)       $ 0.18
                                                           ==========    ==========
      Weighted-average number of common shares
        outstanding - basic                                    19,516        19,155
                                                           ==========    ==========
      Weighted-average number of common shares
        outstanding - diluted                                  19,516        19,631
                                                           ==========    ==========
</TABLE>
    See accompanying Notes to Condensed Consolidated Financial Statements.

                                       2
<PAGE>

                        PACIFIC GATEWAY EXCHANGE, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                       Three Months
                                                                      Ended March 31,
                                                                 -------------------------
                                                                     2000          1999
                                                                 ---------       ---------
<S>                                                              <C>             <C>
Operating Activities:
Net income (loss)                                                $ (30,687)        $ 3,630
Adjustments to net income:
     Depreciation and amortization                                   5,809           2,781
     Stock compensation expense                                        332             152
     Bad debt expense                                                4,300             777
     Acquisition and investment losses                               8,957               -
     Equity in earnings of affiliated companies, net                  (316)            397
     Changes in operating assets and liabilities:
        Accounts receivable                                        (25,207)          2,047
        Prepaid expenses                                                (5)           (818)
        Income taxes receivable                                          -           1,358
        Deferred tax asset                                           1,048             (79)
        Other current assets                                          (540)            (73)
        Deposits and other assets                                    3,240          (2,300)
        Accounts payable                                            46,443          (7,854)
        Accrued liabilities                                         (3,690)            586
        Income taxes payable (recoverable)                          (1,341)          3,871
        Deferred tax liability                                        (184)              -
        Other liabilities                                             (517)           (911)
                                                                 ---------       ---------
     Net cash provided by operating activities                       7,642           3,564
                                                                 ---------       ---------

Investing Activities:
     Purchase of property and equipment                            (21,566)        (12,542)
     Investments in subsidiaries and affiliates                     (9,551)              -
                                                                 ---------       ---------
     Net cash used in investing activities                         (31,117)        (12,542)
                                                                 ---------       ---------

Financing Activities:
     Borrowings on revolving line of credit                         21,300           4,000
     Vendor financing                                                2,700               -
     Exercise of stock options                                          11             334
                                                                 ---------       ---------
     Net cash provided by financing activities                      24,011           4,334
                                                                 ---------       ---------

Net increase (decrease) in cash and cash equivalents                   536          (4,644)
Cash and cash equivalents at beginning of the period                27,189          30,041
                                                                 ---------       ---------
Cash and cash equivalents at end of the period                    $ 27,725        $ 25,397
                                                                 =========       =========
Supplemental data:
Common stock issued for acquisitions                               $ 9,336             $ -
Interest paid                                                      $ 1,840           $ 233
</TABLE>
    See accompanying Notes to Condensed Consolidated Financial Statements.

                                       3
<PAGE>

               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
(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, 1999.  The results for the three months ended
March 31, 2000, 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 2000
financial statement presentation.


(2)  EARNINGS PER SHARE
- -----------------------

<TABLE>
<CAPTION>
                                                         Income                             Per Share
(in thousands, except per share amounts)                 (loss)              Shares           Amount
                                                      -------------      ------------     ------------
<S>                                                     <C>                <C>              <C>
    Three Months Ended March 31, 2000
Basic EPS                                                 ($30,687 )           19,516         ($ 1.57 )
Effect of dilutive stock options and restricted stock             -                 -                -
                                                      -------------      ------------     ------------
Diluted EPS                                                ($30,687)           19,516         ($ 1.57 )
                                                      =============      ============     ============

    Three Months Ended March 31, 1999
Basic EPS                                                $    3,630            19,155        $    0.19
Effect of dilutive stock options and restricted stock             -               476            (0.01)
                                                      -------------      ------------     ------------
Diluted EPS                                              $    3,630            19,631        $    0.18
                                                      =============      ============     ============
</TABLE>


(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. Total comprehensive
income (loss) was ($31.1) million and $2.7 million for the three months ended
March 31, 2000 and 1999, respectively.

                                       4
<PAGE>

               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

(4)  PROPERTY AND EQUIPMENT
- ---------------------------

    The Company has expanded its communications network.  Costs associated
directly with the construction are capitalized and depreciated over their useful
lives.

    Property and Equipment consisted of:
<TABLE>
<CAPTION>
                                            Depreciable         March 31,        December 31,
(dollars in thousands)                     Lives (Years)          1999              1999
                                         ---------------    ---------------   ---------------

<S>                                        <C>                <C>               <C>
Fiber optic cables                                    20           $ 37,281          $ 37,531
Long distance communications equipment               5-7             85,421            84,433
Computers and office equipment                       4-7             18,245            16,725
Leasehold improvements                     Term of lease              8,224             8,332
Construction in progress                               -             13,008            12,605
Cable construction in progress                         -             57,739            40,782
                                                            ---------------   ---------------
                                                                    219,918           200,408
                                                            ---------------   ---------------
Less: accumulated depreciation                                       34,974            31,221
                                                            ---------------   ---------------
  Total property and equipment, net                                $184,944          $169,187
                                                            ===============   ===============
</TABLE>


(5)  ACQUISITIONS AND INVESTMENTS
- ---------------------------------

     In July 1999, the Company acquired a retail customer base for $7.0 million
in cash.  In March 2000, the Company paid an additional $1.6 million based on
earnings of the acquired business.  Under purchase accounting, the excess of the
aggregate purchase price over the net assets acquired resulted in total
intangible assets and goodwill of $8.6 million, which will be amortized over
periods ranging from three to 10 years.

     In November 1999, the Company acquired a retail customer base for $4.2
million in cash and 60,000 shares of the Company's common stock.  In the three
months ended March 31, 2000, the Company made the final cash payments of $2.8
million and issued the 60,000 shares of its common stock valued at $0.9 million
on the issue date. Under purchase accounting, the excess of the aggregate
purchase price over the net assets acquired resulted in total goodwill of $5.1
million, which will be amortized over periods ranging from three to 10 years.

     Also in November 1999, the Company acquired a retail customer base for $3.4
million.  The agreement stipulated that the Company pledge $5.4 million of its
common stock as collateral for a $2.7 million cash payment due in 2000.  In
March 2000, the Company did not meet its cash payment obligation for this
acquisition and instead issued 330,000 of its common shares with a value of $5.4
million at issuance.  The Company believes that the $5.4 was impaired by $2.7
million.  As a result, the Company has recorded an expense of $2.7 million in
the three months ended March 31, 2000.  The Company has recorded the remaining
aggregate purchase price of $3.4 million as goodwill and will amortize the
intangible asset over three to 10 years.

      In December 1999, the Company agreed to purchase the international retail
division of NOSVA Limited Partnership for $40.2 million.  The purchase price was
comprised of $21.0 million in cash and $19.2 million of the Company's common
stock.  In January 2000, the Company paid $3.0 million in cash and issued
154,887 of its common shares with a value of $3.0 million at issuance.  The
aggregate consideration of $6.0 million represented a non-refundable deposit.
The Company does not believe that it will complete the acquisition; therefore,
it expensed the $6.0 million deposit in the three months ended March 31, 2000.

      In February 2000, the Company acquired a retail customer base for $0.2
million and the forgiveness of $0.3 million owed to the Company by the seller.
Pending consummation of the purchase, the Company has recorded the $0.5 million
in deposits and other assets.

                                       5
<PAGE>

               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

(6)  SEGMENT INFORMATION
- ------------------------

     The Company is organized on the basis of products and services.  Based on
management's perspective, the Company's reportable segments are: (1)
telecommunication services, which includes wholesale, offshore, and retail; (2)
Internet services, representing the Company's acquisition of Onyx Internet in
the third quarter of 1999 and its increased focus on the provision of services
to the Internet industry; and (3) bandwidth services representing the Company's
interests in high capacity fiber optic networks.  The Company has announced the
sale of its fiber optic cable capacity on both the TAT-14 and Japan-U.S. Cable
Networks.  This sale will significantly reduce the Company's bandwidth services
operations.

     Telecommunication services includes U.S. and offshore wholesale and retail
services.  U.S. wholesale provides international telecommunications services to:
(1) U.S.-based carriers that originate international traffic, but do not have
operating agreements with foreign carriers; (2) existing international carriers
who terminate their overflow telecommunications traffic on its system; and (3)
customers with smaller traffic volumes.  Revenues from the Company's offshore
wholesale operations is 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, Australia, Japan, and New Zealand.  The Company
provides retail international long distance services to the Filipino, Japanese,
Chinese, Vietnamese, Russian, Korean, and Romanian communities in the United
States.

     The Company has sold excess bandwidth capacity on its global network. The
Company also exchanged bandwidth capacity for additional network facilities,
which it will record as fixed assets.

     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.

     The results of operations for the Company's operating segments for the
three months ended March 31, 2000 and 1999, were:
<TABLE>
<CAPTION>

                                  Telecommunication          Internet          Bandwidth          Corp./
(in thousands)                         Services              Services          Services           Other             Total
                                --------------------       ------------      --------------    --------------   ---------------
<S>                               <C>                      <C>               <C>               <C>              <C>
    Three Months Ended
      March 31, 2000
Total sales                               $  146,626            $   670           $    92      $          -        $  147,388
Inter-company                                (20,839)                 -                 -                 -           (20,839)
                                --------------------    --------------     --------------    --------------   ---------------
Revenues                                  $  125,787            $   670           $    92      $          -        $  126,549
                                ====================    ===============    ==============    ==============   ===============
Depreciation                              $    5,627            $   182           $   -        $          -        $    5,809
                                ====================    ===============    ==============    ==============   ===============
Operating income (loss)                   $  (13,677)           $(8,375)          $   (66)     $          -         $ (22,118)
                                ====================    ===============    ==============    ==============   ===============

    Three Months Ended
      March 31, 1999
Total sales                               $  169,836       $          -      $          -      $          -        $  169,836
Inter-company                                (29,307)                 -                 -                 -           (29,307)
                                --------------------    ---------------    --------------    --------------   ---------------
Revenues                                  $  140,529       $          -      $          -      $          -        $  140,529
                                ====================    ===============    ==============    ==============   ===============
Depreciation                              $    2,781       $          -      $          -      $          -        $    2,781
                                ====================    ===============    ==============    ==============   ===============
Operating income                          $    5,144       $          -      $          -      $          -        $    5,144
                                ====================    ===============    ==============    ==============   ===============
Total assets at
March 31, 2000                            $  300,528            $ 9,398           $64,535           $43,244        $  417,705
                                ====================    ===============    ==============    ==============   ===============

Total assets at
December 31, 1999                         $  261,381            $ 8,998           $53,054           $51,372        $  374,805
                                ====================    ===============    ==============    ==============   ===============
</TABLE>

                                       6
<PAGE>

               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

(7) DEBT
- --------

 Line of Credit

     In November 1999, the Company obtained a $100 million credit facility from
Deutsche Bank Securities Inc. and Bank of America Securities LLC. At March 31,
2000, the Company had $75.4 million in borrowings under this credit facility. At
March 31, 2000, due the Company's default on certain of its covenants, the
facility was reduced to $75.4 million.

     At May 15, 2000, the Company was in default of certain provisions of its
bank credit facility, including a payment default.  The banks agreed to waive
these defaults through May 22, 2000, to permit the orderly re-negotiation of its
credit facility.  The Company is actively negotiating with its banks to amend
the terms of the bank credit facility and to receive a further waiver of its
existing defaults as well as an extension of its May 15, 2000, repayment
obligation.  The Company is seeking to retain a portion of the approximately
$52.0 million in cash proceeds that it expects to receive from the sale of its
interests in the Japan-U.S. and TAT-14 Cable Networks.

 Equipment Financing

     In December 1999, the Company obtained $10.0 million in equipment financing
from GE Capital CEF (GECC), to be used to finance its expansion and to meet its
working capital needs.  The Company used certain of its switching equipment as
collateral for the 3 year financing arrangement.  At March 31, 2000, the balance
was $3.3 million and $6.1 million of current and non-current debt, respectively.
There are no defaults under this financing arrangement.

 Vendor Financing

     In December 1999, the Company obtained a $15.0 million vendor financing
facility from Cisco Systems Capital Corporation. The facility may be used to
finance the purchase of Cisco Internet routers and related hardware and
software. At March 31, 2000, the Company had $2.7 million outstanding under this
facility. The Company's default under its bank credit agreement also resulted in
a cross default under its Cisco financing arrangement, therefore, it may not
utilize any additional credit under this facility until it remedies its default
status. The Company is seeking a waiver from Cisco to retain the facility.

 Security Interest

     In April 2000, the Company agreed to pledge certain of its assets to MCI
WorldCom, Inc. ("MCI WorldCom") due to its inability to meet its obligation for
telecommunication services. The Company pledged the security interest to avoid
termination of services from MCI, one of its most significant vendors. The
Company also made a cash payment to MCI WorldCom and agreed to make weekly
payments until the account is current.

                                       7
<PAGE>

               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

(8) Other Liabilities

The Company's other current liabilities consisted of:

<TABLE>
<CAPTION>
(dollars in thousands)                          March 31,       December 31,
                                                  1999              1999
                                            ---------------   ---------------

<S>                                           <C>               <C>
Bandwidth Commitment (1)                            $ 7,532              $  -
Deferred Revenue                                      5,611                 -
Other                                                 2,535               660
                                            ---------------   ---------------
  Other liabilities                                 $15,678              $660
                                            ===============   ===============
</TABLE>

(1) The Company will settle this liability in kind with the delivery of
bandwidth capacity to third parties.


The Company's other (non-current) liabilities consisted of:

<TABLE>
<CAPTION>
(dollars in thousands)                          March 31,       December 31,
                                                  1999              1999
                                            ---------------   ---------------

<S>                                           <C>            <C>
Bandwidth Commitment (1)                             $    -           $ 7,532
Deferred Revenue                                          -             7,057
Other                                                 2,153             2,551
  Other liabilities                                  $2,153           $17,140
                                            ===============   ===============
</TABLE>

(1) The Company will settle this liability in kind with the delivery of
bandwidth capacity to third parties.

(9)  RELATED PARTY TRANSACTIONS
- -------------------------------

     The Company is provided services by a legal firm in which one of the
Company's directors is a partner. The Company recorded legal expenses of $0.9
million and $0.4 million in the three months ended March 31, 2000 and 1999,
respectively. At March 31, 2000 and 1999, the Company owed the firm $0.9 million
and $0.3 million, respectively.

                                       8
<PAGE>

               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

(10)  CONTINGENCIES
- -------------------

     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.

     In addition, on April 7, 2000, a complaint was filed naming certain
officers of the Company.  The complaint purports to be a securities class action
on behalf of persons who purchased publicly traded securities of the Company
between May 13, 1999, and March 31, 2000.  The complaint alleges that between
May 13, 1999, and March 31, 2000, material false and misleading statements were
made about the Company's financial results and condition.  The complaint seeks
monetary damages, interest, and costs, as well as other relief that may be
proper.  After the filing of this complaint, other complaints were filed in the
United States District Court for the Northern District of California, making
similar allegations.  The Company anticipates that all of these actions will be
consolidated into a single action.  While management denies liability and
intends to vigorously defend these actions, there can be no assurance that an
adverse result or settlement with regards to these lawsuits would not have a
material adverse impact on the Company's financial condition or results of
operations.

     In March 2000, a leading developer of Internet infrastructure software
agreed to make an equity investment of up to $8.0 million in Onyx Networks, the
Company's Internet subsidiary, conditioned upon other investments of an equal
amount. In addition, Onyx committed to purchase approximately $28.0 million of
software from the investor. The $28.0 million is payable monthly over 15 to 24
months, beginning June 1, 2000. The Company has guaranteed these payments.


(11)  SUBSEQUENT EVENT
- ----------------------

     In May 2000, the Company announced the sale of its fiber optic cable
capacity on both the TAT-14 and the Japan-U.S. Cable Networks and two of its
related Japanese subsidiaries to Metromedia Fiber Network, Inc. ("MFN").

     Under the terms of the sale, the Company will receive approximately $52
million in net cash proceeds from the sale and MFN will assume the Company's
future payment obligations of approximately $105 million to the cable
consortiums that own and operate them.  The Company intends to use the cash
proceeds to immediately reduce its indebtedness.  Additionally, the Company will
retain the right to purchase cable capacity to meet its existing customer
capacity obligations and for its growing Internet operations.  Under the terms
of the sale, the Company is purchasing capacity on the Japan-U.S. and TAT-14
Cable Networks at the in-service dates and upon expansion for approximately
$74.0 million. The Company will not be required to purchase capacity in the
event of customer cancellation prior to the applicable in-service date. The
Company expects the Japan-U.S. Cable Network in-service date will be November
2000 and the expansion date will be July 2001. It also expects that the TAT-14
Cable Network in-service date will be in February 2001.

     The Company expects that the Japan-U.S. transaction will close by the end
of May 2000 and that the TAT-14 transaction will close by mid-August 2000.  The
TAT-14 agreement is subject to the approval of the management committee of the
TAT-14 Cable Network.

                                       9
<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 and Internet industries.  They also relate to the Company's
ongoing negotiations with its lenders and the outcome of pending litigation.  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 forward looking statements in this Quarterly Report are subject to
risks and uncertainties and could differ materially from those projected in the
forward-looking statements as a result of numerous factors, including the
following:

1.  availability of financing on acceptable terms and conditions in the credit
    market;
2.  actions and positions taken by the Company's lenders;
3.  the availability of additional bandwidth for the Company's capacity
    obligations;
4.  uncertainties in the development and growth of the Company's new business
    lines, such as the Company's Internet operations, including uncertainties
    about the difficulty of hiring appropriate personnel and competitive
    conditions;
5.  the termination of operating agreements with other carriers or the inability
    to enter into additional operating agreements;
6.  inaccuracies in the Company's forecasts of traffic;
7.  changes in the availability of transmission facilities such as domestic,
    international, and undersea fiber optic cable facilities or in the
    feasibility, timing, or expense of building or leasing such facilities;
8.  loss of the services of key officers;
9.  loss of a customer that provides significant revenues to the Company;
10. problems arising from recent acquisitions of other companies or facilities;
11. changes in the ratios between the amount of telephone traffic that the
    Company delivers and the amount that it receives and changes in expected
    future revenue from delayed proportional return traffic from foreign
    partners under the Company's operating agreements;
12. Internet growth at slower rates than expected;
13. consolidation of the Company's competitors within the telecommunications or
    Internet industries;
14. vendor responses to potential payment delays or defaults;
15. higher than anticipated costs;
16. the uncertainties inherent in litigation;
17. finding buyers for its possible, selected asset sales or delays in closing
    its agreed upon asset sales; or
18. other risk factors included in the Company's Report on Form 10-K, on file
    with the Securities and Exchange Commission.

     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.

                                      10
<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 five strategic
initiatives in response to regulatory and technological developments: (1) as
foreign countries deregulated their telecommunications markets, the Company
started offshore wholesale operations; (2) in response to technological
innovation and consumer demand, the Company entered the market for retail
services; (3) to participate in the growth of the Internet, the Company recently
began its own Internet operations providing connectivity services and it plans
to provide co-location and other Internet services to the global Internet
community; (4) to take advantage of the Internet as a medium of telephony, the
Company recently began providing VoIP services to telecommunications carriers,
ISPs, and other value-added service providers; and (5) to meet the growing
global demand for high bandwidth fiber optic capacity, the Company acquired
interests in strategic state-of-the-art undersea and land-based cable systems.

     Two major developments have caused the Company to re-focus its business
operations.  First, the Company's business has changed because margins in its
international wholesale long-distance traffic have generally decreased as a
result of competition.  In addition, the Company has recently experienced a
liquidity shortage.  In response to these developments, the Company has taken
the following steps:

     1) The Company has begun selling non-strategic assets.  In May, 2000, the
Company agreed to sell its fiber optic cable capacity on both the TAT-14 and the
Japan-U.S. Cable Networks and two of its related Japanese subsidiaries to
Metromedia Fiber Network, Inc. ("MFN").  Under the terms of the sale, the
Company will receive approximately $52 million in net cash proceeds from the
sale and will be relieved of the $105 million of cash payment obligations that
would have been due in 2000.  Under the MFN agreement, MFN will assume the
Company's future payment obligations to the cable consortiums that own and
operate them.  The Company intends to use a portion of the cash proceeds to
immediately reduce a substantial portion of its indebtedness. Additionally, the
Company will retain the right to purchase cable capacity to meet its existing
customer capacity obligations and for its growing Internet operations. The
Company expects that the Japan-U.S. transaction will close by the end of May
2000 and that the TAT-14 transaction will close by mid-August 2000. The TAT-14
agreement is subject to the approval of the management committee of the TAT-14
Cable Network. Upon closing these sales, the Company will significantly reduce
its bandwidth services.

     2) The Company is negotiating with its bankers to restructure its credit
facility so that the bank covenants are suitable for its future operations and
to provide the Company with working capital. At May 15, 2000, the Company was in
default of certain provisions of its bank credit facility, including a payment
default. The banks agreed to waive these defaults through May 22, 2000, to
permit the orderly re-negotiation of its credit facility. The Company is
actively negotiating with its banks to amend the terms of the bank credit
facility and to receive a further waiver of its existing defaults as well as an
extension of its May 15, 2000, repayment obligation. The Company is seeking to
retain a portion of the approximately $52.0 million in cash proceeds that it
expects to receive from the sale of its interests in the Japan-U.S. and TAT-14
Cable Networks. Although no assurances are possible, the Company expects that
these discussions will quickly result in the consummation of a definitive
agreement with terms beneficial to the Company. The Company is also seeking a
waiver from Cisco Systems Capital Corporation of a cross-default under its $15.0
million vendor financing arrangement caused by the Company's default under its
bank credit facility. In addition, the Company is engaged in negotiations with
other possible lenders.

                                      11
<PAGE>
     3) The Company has begun to aggressively reduce costs in non-strategic
areas of the Company's business.  As a result of employee turnover and through
targeted staff reductions, the Company has reduced the number of its employees
from 386 at December 31, 1999, to 323 at May 19, 2000.  The Company is also
exploring other cost saving measures, including reducing its use of consultants
in selected areas of the business.

     4) The Company also has reduced its planned expenditures by allowing its
agreement to acquire the retail division of NOSVA Limited Partnership to
terminate. As a result, the Company no longer is obligated to pay $18.0 million
in cash or to issue $16.2 million of its common stock at or subsequent to
closing.

     5) The Company has reinforced its financial and cash management executive
functions by retaining the services of Caye Hursey as its Acting Chief Financial
Officer and Deanna Lord, a CPA previously with PricewaterhouseCoopers LLP, as
its Acting Controller. Ms. Hursey and Ms. Lord bring 20 years and 8 years,
respectively, of finance and accounting experience to the Company.

     6) Finally, the Company is considering retaining the services of a
management consulting firm to sell assets that are not essential to the
Company's future operations.  The Company is considering a sale of certain of
its voice operations, including its offshore subsidiaries or its retail
subsidiary.

     The Company believes that these measures, plus others that may be
implemented in the future, will position the Company to meet the challenges now
posed by the changing telecommunications marketplace and its liquidity
situation.  The Company expects its strategy to have a number of effects on its
future results of operations.  In particular, the Company expects to: (1)
generate losses from its Internet services business as a result of substantial
start-up costs; (2) incur increased interest expense attributable to
indebtedness; and (3) incur increased administrative expenses as it pursues
strategic and financing alternatives to address liquidity.  The Company is
increasingly focusing on its Internet operations and is de-emphasizing its
wholesale selling efforts.

     The Company has been deriving its revenues from three operating segments:
telecommunications, Internet, and bandwidth services.  The Company's
telecommunications revenues are based upon the number of minutes billable and
recorded upon completion of a call.  The Company generally prices its services
at a lower cost than the major carriers operating in its global markets.  The
Company derives telecommunication revenues from carrying a mix of wholesale and
retail long distance traffic in the U.S. and offshore.

                                      12
<PAGE>

     Prices in the long distance industry have declined in recent years and, as
competition continues to increase, the Company believes that prices are likely
to continue to decrease.  In addition, as deregulation accelerates and
competition increases in offshore markets, the Company's revenues per minute
could be adversely impacted.

     Cost of telecommunications revenue is comprised primarily of costs incurred
from other domestic and foreign telecommunications carriers to originate,
transport, and terminate calls.  The majority of the Company's cost of
telecommunication revenue is variable, based upon the number of minutes of use,
with transmission and termination costs being its most significant expense.  As
the Company increases the portion of traffic transmitted over its owned or
leased facilities, the cost of telecommunication revenue will be increasingly
comprised of fixed costs.  The Company seeks to lower its cost of
telecommunication revenue by:

     .  optimizing the routing of calls over the lowest cost route;
     .  increasing volumes on its owned lines to the extent possible; and
     .  negotiating lower variable usage based costs with domestic and foreign
        service providers and negotiating additional and lower cost foreign
        carrier agreements with the foreign incumbent carriers and others.

     The Company generally realizes a higher average price per minute and gross
margin on its international calls as compared to its domestic long distance
services and a higher average price per minute and gross margin on its retail
services as compared to its wholesale services.  Although wholesale services
generate a lower gross margin than retail services, they are an important part
of the Company's business because the high traffic volume of its wholesale
customers improves the utilization of the network and allows for greater
flexibility in negotiating rates from suppliers.  The Company's overall average
price per minute and gross margin may fluctuate based on its relative volume of
international versus domestic long distance services, wholesale services versus
retail services, and the proportion of traffic carried on its owned network
versus resale of other carrier services.

        In the third quarter of 1999, the Company began generating Internet
service revenues.  Internet revenues include service provider fees and web
design revenue.  In the first quarter of 2000, Internet service revenues
accounted for 1% of the Company's total revenues.

     In 1999, the Company entered into agreements to sell or lease bandwidth
capacity. Upon completion of the sale of its fiber optic cable capacity on the
TAT-14 and Japan-U.S. Cable Networks to MFN, the Company will retain purchase
rights to meet its capacity obligations under these agreements; however, the MFN
sale will significantly reduce the Comapny's future bandwidth services
operations.

     The Company's selling, general, and administrative expenses are comprised
primarily of salaries, commissions, occupancy costs, sales and marketing
expenses, advertising expenses, administrative costs, and sales allowances.
These expenses have been increasing consistently with the expansion of the
Company's operations into retail and Internet services.  The expansion of its
Internet operations will require additional personnel, which likely will affect
our operating results.  In addition, the Company's current financial condition
has resulted in increased administrative expenses for professional services.
However, the Company is also reducing it workforce and expects that the
resulting cost savings will partially offset its other expenditures that are
expected to increase.

                                      13
<PAGE>

     The Company expects its capital investment activity to affect its operating
results in the near term. Depreciation expense will increase when the Company's
remaining bandwidth interests, related backhaul, and Internet service equipment
are placed in-service.  In addition, interest expense will increase in
connection with borrowings to fund such expenditures.  These costs will be
incurred in advance of the expected improvements in operating results from such
investments.

     Although the Company's functional currency is the United States dollar, a
significant portion of its revenues are derived from sales and operations
outside the United States.  In the future, the Company expects to continue to
derive a portion of its revenues and incur operating costs from its operations
outside the United States and therefore changes in exchange rates may have an
effect on its results of operations.  The Company historically has not engaged
in hedging transactions and does not currently contemplate engaging in hedging
transactions to mitigate foreign exchange risks.


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 March 31,
                                         ----------------------------
<S>                                        <C>              <C>
                                                2000             1999
                                          -----------      -----------
Total revenues                                 100.0%           100.0%
Cost of services and capacity sold              90.0%            86.4%
                                          -----------      -----------
    Gross profit                                10.0%            13.6%
Selling, general, and administrative
 expenses                                       19.5%             7.4%
                                          -----------      -----------
Bad debt expense                                 3.4%             0.5%
Depreciation and amortization                    4.6%             2.0%
                                          -----------      -----------
    Total operating expenses                    27.5%             9.9%
                                          -----------      -----------
    Operating income (loss)                    -17.5%             3.7%
Acquisition and investment loss                  7.1%             0.0%
Interest (income) expense, net                  -0.2%            -0.1%
Other (income) expense, net                     -0.2%            -0.2%
                                          -----------      -----------
    Income before income taxes                 -24.2%             4.0%
Provision for income taxes                       0.1%             1.4%
                                          -----------      -----------
    Net income (loss)                          -24.1%             2.6%
                                         ===========      ===========
</TABLE>

                                      14
<PAGE>

Three Months Ended March 31, 2000, Compared to the Three Months Ended March 31,
1999

Revenues: Total revenues for the three-month period ended March 31, 2000,
decreased 10.5% to $126.4 million from $140.5 million. Telecommunications
revenues decreased 10.0% to $125.8 million in the three months ended March 31,
2000, from $140.5 million in the same period in 1999. The decrease in revenue
was primarily due to the Company's shift to higher margin operations and the
loss of key customers because of the Company's liquidity shortage, which it is
working to remedy. Although the Company's minutes of use increased to 610
million from 511 million, the average price per minute charged to customers
decreased to $0.21 in the three months ended March 31, 2000, compared to $0.28
for the same period in 1999. The decrease was a result of increased competition.
Partially offsetting the decrease in the per minute price was an increase in the
Company's retail volume. Internet revenue for the current three months was $0.7
million, reflecting the commencement of the Company's Internet services in
September 1999.

Gross profit:   Gross profit decreased 34% to $12.7 million in the three months
ended March 31, 2000, from $19.1 million in the same period in 1999.  Gross
margin decreased to 10.0% for the three months ended March 31, 2000, from 13.6%
in the same period in 1999.  Telecommunication gross profit decreased to $12.1
million in the three months ended March 31, 2000, from $19.1 million in the same
period in 1999.  Increased competition continues to drive wholesale
telecommunication prices downward resulting in decreased wholesale
telecommunication gross margins.  This decrease was partially offset by higher
gross profit generated from the Company's retail operations.  Internet service
gross profit was $0.5 million for the three months ended March 31, 2000.

Selling, general, and administrative expenses ("SG&A"): SG&A expenses increased
138% to $24.7 million in the three months ended March 31, 2000, from $10.4
million in the same period in 1999. As a percentage of revenues, SG&A expenses
were 19.5% in the three months ended March 31, 2000, up from 7.4% in the same
period in 1999. This increase was due primarily to increased personnel expenses,
legal and professional expenses, and start-up and related costs for the
Company's Internet operations. At March 31, 2000, the Company employed 406
people, up from 203 at March 31, 1999. In the near term, the Company expects to
incur additional start-up costs to provide Internet services. However, the
Company has reduced its number of employees to 323 at May 19, 2000, and expects
that the cost savings will partially offset increased SG&A costs associated with
its Internet services' expansion.

Bad debt expense:   Bad debt expense increased to $4.3 million in the three
months ended March 31, 2000, up from $0.8 million in the same period in 1999.
During the period, the Company expensed $2.3 million in bad debts in addition to
its budgeted expense for bad debts. The increase is due primarily to a
deterioration in the aging of the Company's wholesale receivables and increased
retail receivables as a result of the acquisition of several retail businesses
in the second half of 1999. In the three months ended March 31, 2000, the
Company also experienced write-offs related to the integration of receivables
acquired as part of the Company's retail acquisitions completed in 1999.
Although there can be no guarantees, the Company expects that future bad debt
expense will decrease as the Company's acquisitions and current financial
position stabilize.

                                      15
<PAGE>

Acquisition and investment losses:   In the three months ended March 31, 2000,
the Company expensed approximately $9.0 million related to its acquisitions and
investments.  In March 2000, the Company expensed $6.0 million in non-refundable
deposits related to planned acquisition of NOSVA Limited Partnership, as the
Company believes that it will not complete the acquisition.   Also in March
2000, the Company issued 330,000 of its common shares to satisfy a $2.7 million
cash payment obligation for the purchase of a retail customer business.  At
issuance, the shares were worth $5.4 million as stipulated in the asset purchase
agreement.  The Company expensed the excess value of the shares or $2.7 million
related to this acquisition.  In addition, the Company's equity investment in a
Belgian company required a letter of credit payment of $0.2 million, which it
also expensed during the period.  The Belgian company is no longer in business
and the Company had previously fully written-down its equity investment as it
incurred losses.

Depreciation and amortization:   Depreciation and amortization increased 109% to
$5.8 million in the three months ended March 31, 2000, from $2.8 million in the
same period in 1999.  Depreciation as a percentage of revenues was 4.6% for the
three months ended March 31, 2000, and 2.0% for the same period in 1999.  The
increase was primarily due to depreciation of additional U.S. wholesale and
offshore fiber optic cables and communications equipment acquired since March
31, 1999.  In addition, the Company recorded amortization expense of $1.7
million related to its intangible assets recorded as a result of its retail
acquisitions.

Interest:   Interest income remained unchanged at $0.2 million for the three
months ended March 31, 2000, from $0.2 million in the same period in 1999.  In
addition, the Company has capitalized 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 94% to $0.1 million in the three months
ended March 31, 2000, from $2.0 million in the same period in 1999, due to
decreased operating income.  The Company recorded a full valuation allowance
against the deferred tax asset related to its net operating loss for the
quarter.  The Company recorded the valuation allowance due to the uncertainty of
its ability to offset its current period losses with future profits.  The
effective tax rate was 35% in the quarter ended March 31, 1999.

                                      16
<PAGE>

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 increased to $7.4 million for the
three-month period ended March 31, 2000, from $3.6 million for the same period
in 1999.  This increase in cash provided by operating activities was due
primarily to the Company's delayed payments to its vendors resulting in its
increased accounts payable balance at March 31, 2000, an increase in bad debt
expense, and an increase in depreciation and amortization, partially offset by
increase in accounts receivable.

     Net cash used in investing activities was $31.0 million for the three-month
period ended March 31, 2000, from $12.5 million for the same period in 1999.
Capital expenditures for the three-month period ended March 31, 2000, were $21.6
million, compared to $12.5 million in the same period in 1999.  The capital
expenditures in both 2000 and 1999 were primarily for undersea fiber optic cable
and offshore transmission equipment.  In addition, the Company invested $9.3
million in the acquisition of several retail customer businesses and a wholesale
network acquired from another carrier.

     Net cash provided by financing activities was $24.0 million for the three-
month period ended March 31, 2000, and $4.3 million for the same period in 1999.
During the period, the Company borrowed an additional $21.3 million under its
existing credit facility and$2.7 million in cash from vendor financing.

     In November 1999, the Company obtained a $100 million credit facility from
Deutsche Bank Securities Inc. and Bank of America Securities LLC. At March 31,
2000, the Company had $75.4 million in borrowings under its existing credit
facility. At March 31, 2000, due to the Company's cash shortage and default on
certain of its covenants, the facility was reduced to $75.4 million.

     At May 15, 2000, the Company was in default of certain provisions of its
bank credit facility, including a payment default. The banks agreed to waive
these defaults through May 22, 2000, to permit the orderly re-negotiation of its
credit facility. The Company is actively negotiating with its banks to amend the
terms of the bank credit facility and expects to receive a further waiver of its
existing defaults as well as an extension of its May 15, 2000, repayment
obligation. The Company is seeking to retain a portion of the approximately
$52.0 million in cash proceeds that it expects to receive from the sale of its
interests in the Japan-U.S. and TAT-14 Cable Networks. Although no assurances
are possible, the Company expects that these discussions will quickly result in
the consummation of a definitive agreement with terms beneficial to the Company.

     In December 1999, the Company obtained $10.0 million in financing from GE
Capital Corporation to finance its expansion and to meet its working capital
needs.  At March 31, 2000, the balance was $3.3 million and $6.1 million of
current and non-current debt, respectively.  There are no defaults under this
financing arrangement.

     Also in December 1999, the Company obtained a $15.0 million vendor
financing facility from Cisco Systems Capital Corporation.  The facility may be
used to finance the purchase of Cisco Internet routers and related hardware and
software.  At March 31, 2000, the Company had $2.7 million outstanding under
this facility.  The Company's default under its bank credit agreement also
resulted in a cross default under its Cisco financing arrangement, therefore, it
may not utilize any additional credit under this facility until it remedies its
default status.  The Company is seeking a waiver from Cisco to retain the
facility.

                                      17
<PAGE>

     At March 31, 2000, the Company had outstanding commitments, due before
December 31, 2000, of approximately $110.0 million, principally for the
acquisition of additional ownership in digital undersea fiber optic cables and
network equipment.  This included the Company's $105.0 million commitment to
purchase undersea fiber optic cable in the Japan-U.S. and in the TAT-14 Cable
Networks.  In May 2000, the Company announced the agreement to sell its capacity
on both Cable Networks, which, upon closing, will relieve it of its $105.0
million cable network purchase commitment.  Under the terms of the sale, the
Company is also purchasing capacity on the Japan-U.S. and TAT-14 Cable Networks
at the in-service dates and upon expansion for approximately $74.0 million. The
Company expects the Japan-U.S. Cable Network in-service date will be in November
2000 and the expansion date will be in July 2001. It also expects that the TAT-
14 Cable Network in-service date will be in February 2001.

     In March 2000, a leading developer of Internet infrastructure software
agreed to make an equity investment of up to $8.0 million in Onyx Networks, the
Company's Internet subsidiary, conditioned upon other investments of an equal
amount.  In addition, Onyx committed to purchase approximately $28.0 million of
software from the investor.  The $28.0 million is payable monthly over 15 to 24
months, beginning June 1, 2000.  The Company has guaranteed these payments.

     The Company has experienced difficulty in making timely payments to its
vendors, which has caused a number of its vendors to terminate service..  In
April 2000, the Company agreed to pledge certain of its assets to MCI WorldCom,
Inc. ("MCI WorldCom") due to its inability to meet its obligation for
telecommunication services.  The Company pledged the security interest to avoid
termination of services from MCI, one of its most significant vendors.  The
Company also made a cash payment to MCI WorldCom and agreed to make weekly
payments until the account is current.

     In 1999, the Company entered into agreements to lease and exchange
bandwidth capacity, including maintenance services.  The Company committed to
sell capacity for $57.5 million to be received over three years and provide
maintenance for $30.0 million to be received over the terms of the contracts,
which is generally 20 years.  Of the capacity exchanged, the Company received
domestic capacity in exchange for future capacity on the TAT-14 Cable Network.
Under the terms of the Cable Network sale to MFN, the Company retained the right
to purchase capacity to meet its obligations under these agreements.

     Additional financing arrangements are necessary for the Company to satisfy
its capital requirements and the failure to obtain such arrangements could have
a material adverse effect on the Company's results of operations and financial
condition.  As a result of the Company's liquidity situation, its auditors
included a going concern explanation in their opinion on the Company's financial
statements as of and for the year ended December 31, 1999.  To fund its planned
capital requirements and operations, the Company is actively exploring several
alternatives to fund or further reduce its capital commitments, including: (1)
asset sales; (2) minority investments in Onyx Networks, its Internet subsidiary;
(3) a sale of one or more of its subsidiaries; and (4) selected asset financing.
The timing and terms of any financing activities will be subject to market
conditions and other factors beyond the Company's control.  There can be no
assurance that such financing arrangements will be consummated.

                                      18
<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.

         In addition, on April 7, 2000, a complaint entitled Jeffrey Winick, on
         Behalf of Himself and All Others Similarly Situated v. Pacific Gateway
         Exchange, Inc., et al., was filed in the United States District Court,
         Northern District of California (Case No. C 00-1211). The complaint
         also names certain officers of the Company. The complaint purports to
         be a securities class action on behalf of persons who purchased
         publicly traded securities of the Company between May 13, 1999, and
         March 31, 2000. The complaint alleges that between May 13, 1999, and
         March 31, 2000, material false and misleading statements were made
         about the Company's financial results and condition in violation of
         Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
         Rule 10b-5 promulgated thereunder. The complaint seeks monetary
         damages, interest, and costs, as well as other relief that may be
         proper. After the filing of this complaint, other complaints were filed
         in the United States District Court for the Northern District of
         California, making similar allegations. It is anticipated that all of
         these actions will be consolidated into a single action. While
         management denies liability and intends to vigorously defend these
         actions, there can be no assurance that an adverse result or settlement
         with regards to these lawsuits would not have a material adverse impact
         on the Company's financial condition 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

                                      19
<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

         (a) The Exhibit filed as part of this report is listed below:

             10.9  First Amendment and Limited Conditional Waiver to First
                   Amended and Restated Credit Agreement among Pacific Gateway
                   Exchange, Inc., Pacific Gateway Exchange (Bermuda) Limited,
                   Bank of America, N.A. and Deutsche Bank Securities Inc. dated
                   March 31, 2000

             27    Financial Data Schedule

         (b) No reports on Form 8-K have been filed during the quarter ended
             March 31, 2000.

                                      20
<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: May 22, 2000

                              By: /s/ Howard A. Neckowitz
                                  -----------------------
                                  Howard A. Neckowitz
                                  President and CEO
                                  (Authorized Signatory)


                              By: /s/ Caye Hursey
                                  ----------------
                                  Caye Hursey
                                  Acting Chief Financial Officer
                                  (Principal Accounting Officer)

                                      21

<PAGE>

                                                                    EXHIBIT 10.9

                FIRST AMENDMENT AND LIMITED CONDITIONAL WAIVER
                                      TO
                  FIRST AMENDED AND RESTATED CREDIT AGREEMENT
                  -------------------------------------------

     THIS FIRST AMENDMENT AND LIMITED CONDITIONAL WAIVER TO THE FIRST AMENDED
AND RESTATED CREDIT AGREEMENT (this "Amendment and Waiver") is dated as of the
31st day of March, 2000, and entered into among Pacific Gateway Exchange, Inc.,
Pacific Gateway Exchange (Bermuda) Limited (collectively, the "Borrowers"), each
of the Guarantors, Bank of America, N.A., as a Lender and as Administrative
Agent (the "Administrative Agent"), and certain other Lenders party thereto.

                                  WITNESSETH:
                                  ----------

     WHEREAS, the Borrowers, the Lenders and the Administrative Agent entered
into that certain $100,000,000 First Amended and Restated Credit Agreement dated
as of November 23, 1999 among the Borrowers, the Guarantors, the Administrative
Agent and the Lenders party thereto (as amended, restated or otherwise modified
from time to time, the "Credit Agreement").

     WHEREAS, the Borrowers have informed Administrative Agent that (a) there
have occurred certain Defaults and Events of Default of various provisions of
the Credit Agreement and (b) there may occur certain Defaults and Events of
Default of various provisions of the Credit Agreement;

     WHEREAS, the Lenders, the Administrative Agent and the Borrowers have
agreed to waive such Defaults and Events of Default, and such potential Defaults
and Events of Default, and to otherwise make certain changes and amendments to
the Credit Agreement, upon the terms and conditions set forth below;

     NOW, THEREFORE, for valuable consideration hereby acknowledged, the
Borrowers, the Lenders, the Guarantors and the Administrative Agent agree as
follows:

     SECTION 1.  Definitions.
                 -----------

     (a)  In general.  Unless specifically defined or redefined below,
          ----------
capitalized terms used herein shall have the meanings ascribed thereto in the
Credit Agreement.

     (b)  Definition of Commitment.  The definition of "Commitment" contained in
          ------------------------
Article I of the Credit Agreement is amended and restated in its entirety as
follows:

          "Commitment" means the Domestic Commitment, the Foreign Commitment and
     the Letter of Credit Commitment, which in the aggregate shall not exceed
     $75,641,927.31 at any time.

<PAGE>

     (c)  Definition of Letter of Credit Commitment.  The definition of "Letter
          -----------------------------------------
of Credit Commitment" contained in Article I of the Credit Agreement is amended
and restated in its entirety as follows:

          "Letter of Credit Commitment" means on any date of determination,
     zero.

     SECTION 2.  Amendment of Section 2.02(a) of the Credit Agreement.
                 ----------------------------------------------------
Section 2.02(a) of the Credit Agreement shall be deleted in its entirety and the
following Section 2.02(a) shall be substituted in its stead:

          2.02.  Making Advances.

                 (a)  Each Borrowing of Advances shall be made upon the written
          notice of the applicable Borrower, received by Administrative Agent
          not later than 12:00 noon on the date of such Borrowing, in the case
          of Advances which are Base Advances.  Notwithstanding any other
          provision contained in this Agreement to the contrary, each Borrower
          agrees that the Borrowers shall not be eligible to request or receive
          LIBOR Advances or Refinancing Advances.  Each such notice of a
          Borrowing (a "Borrowing Notice") shall be by telecopy or telephone,
          promptly confirmed by letter, in substantially the form of Exhibit C
                                                                     ---------
          hereto specifying therein:

                      (i)   the date of such proposed Borrowing, which shall be
          a Business Day;

                      (ii)  the Type of Advances of which the Borrowing is to be
          comprised; and

                      (iii) the amount of such proposed Borrowing which (A) with
          respect to Advances drawn under (I) the Domestic Revolver Loan shall
          not exceed the unused portion of the Domestic Revolver Commitment,
          (II) the Foreign Revolver Loan, shall not exceed the unused portion of
          the Foreign Revolver Commitment less outstanding Letters of Credit and
          reimbursement obligations (or if any Letter of Credit or reimbursement
          obligation shall be in a currency other than Dollars, the Dollar
          equivalent of such currency) and (B) shall in the case of a Borrowing
          of Base Advances, be in an amount of not less than $2,000,000 or an
          integral multiple of $1,000,000 in excess thereof (or any lesser
          amount if such amount is the remaining undrawn portion under the
          Domestic Revolver Commitment or the Foreign Revolver Commitment,
          respectively).

                                       2
<PAGE>

          Administrative Agent shall promptly notify Lenders of each such
     notice. Each Lender shall, before 2:00 p.m. on the date of each Advance
     under the Domestic Revolver Loan or the Foreign Revolver Loan hereunder
     (other than a Refinancing Advance), make available to Administrative Agent,
     at its office at Bank of America Plaza, 901 Main Street, Dallas, Texas
     75202, such Lender's Domestic Revolver Specified Percentage and Foreign
     Revolver Specified Percentage of the aggregate Advances under the Loans, to
     be made on that day in immediately available funds.

     SECTION 3.   Amendment of Section 2.07 of the Credit Agreement. Section
                  -------------------------------------------------
2.07 of the Credit Agreement shall be deleted in its entirety and the following
Section 2.07 shall be substituted in its stead:

          2.07.   Interest.  Subject to Section 2.08 and Section 11.08 hereof,
     each Borrower shall pay interest on the unpaid principal amount of each
     Advance from the date of such Advance until such principal shall be paid in
     full, at the Base Rate in accordance with the provisions hereof and as
     follows:

                  (i)  Base Advances. Base Advances shall bear interest at a
          rate per annum equal to the Base Rate as in effect from time to time.
          If the amount of interest payable in respect of any interest
          computation period is reduced to the Highest Lawful Rate and the
          amount of interest payable in respect of any subsequent interest
          computation period would be less than the Maximum Amount, then the
          amount of interest payable in respect of such subsequent interest
          computation period shall be automatically increased to the Maximum
          Amount; provided that at no time shall the aggregate amount by which
                  --------
          interest paid has been increased pursuant to this sentence exceed the
          aggregate amount by which interest has been reduced pursuant to this
          sentence.

                  (ii) Payment Dates.  Accrued and unpaid interest on Base
          Advances shall be paid monthly in arrears on the first Business Day of
          each subsequent calendar month and on the Maturity Date.

     SECTION 4.   Amendment of Section 2.11(d) of the Credit Agreement.
                  ----------------------------------------------------
Section 2.11(d) of the Credit Agreement shall be deleted in its entirety and the
following Section 2.11(d) shall be substituted in its stead:

          (d)  Mandatory Reduction of Commitment Due to Scheduled Amortization.
     If the Domestic Borrower has failed to (i) raise $150,000,000 in gross
     proceeds from the issuance of High Yield Indebtedness and/or public or
     private equity prior to March 31, 2000 and/or (ii) repay the Loans in
     accordance with the provisions of Section 2.05(b) hereof and/or (iii)
     reduce the Commitment in accordance with Section 2.11(c) hereof, then, on
     May 15, 2000, the Commitment shall immediately

                                       3
<PAGE>

     and automatically reduce to $50,000,000, such reduction to be applied pro
     rata between the Domestic Revolver Commitment and the Foreign Revolver
     Commitment.

     SECTION 5.  Amendment of Section 2.15 of the Credit Agreement. Section 2.15
                 -------------------------------------------------
of the Credit Agreement shall be deleted in its entirety and the following
Section 2.15 shall be substituted in its stead:

          2.15.  Use of Proceeds.  The Advances shall be available (and the
     Borrowers shall use such proceeds) solely in accordance with the current
     pro rata portion of Borrowers' obligations to fund STM-1 measured capacity
     payments demonstrated by invoices from the Japan-US consortium in
     connection with the Japan-US Agreement or TAT-14 consortium in connection
     with the TAT-14 Agreement for such payments.

     SECTION 6.  Amendment of Section 8.01(a)(i) of the Credit Agreement.
                 -------------------------------------------------------
Section 8.01(a)(i) of the Credit Agreement shall be deleted in its entirety and
the following Section 8.01(a)(i) shall be substituted in its stead:

                       (i)  Prior to the issuance of any High Yield
                 Indebtedness, at all times until the Obligations have been
                 repaid in full and the Commitments have been terminated, the
                 Borrowers shall not permit Total Debt to be more than
                 $150,760,000.00.

     SECTION 7.  Amendment of Section 8.01(c) of the Credit Agreement.
                 ----------------------------------------------------
Section 8.01(c) of the Credit Agreement shall be deleted in its entirety and the
following Section 8.01(c) shall be substituted in its stead:

                 (c)   Minimum Operating Cash Flow.  The Borrowers shall not
          permit Operating Cash Flow for the Borrowers and their Subsidiaries on
          a consolidated basis for the following periods of determination to be
          less than the amounts set forth opposite such periods indicated below:

                       Period                    Amount
                       ------                    ------

                 October 1, 1999 through       $ 6,000,000
                 December 31, 1999

                 January 1, 2000 through       $ 1,200,000
                 March 31, 2000

                 April 1, 2000 through         $11,300,000
                 June 30, 2000


                                       4
<PAGE>

                 July 1, 2000 through          $ 9,000,000
                 September 30, 2000

     SECTION 8.  Deletion of Section 8.01(d) of the Credit Agreement.
                 ---------------------------------------------------
Section 8.01(d) of the Credit Agreement shall be deleted in its entirety and the
following Section 8.01(d) shall be substituted in its stead:

          1. INTENTIONALLY OMITTED.

     SECTION 9.  Amendment of Section 8.01(e) of the Credit Agreement.
                 ----------------------------------------------------
Section 8.01(e) of the Credit Agreement shall be deleted in its entirety and the
following Section 8.01(e) shall be substituted in its stead:

                 (e)  Capital Expenditures.  The Borrowers shall not permit
          Capital Expenditures related to non-STM-1 expenses to exceed the
          agreed financial forecasts described below for non-STM-1 payments for
          such fiscal quarter. The Borrowers shall not permit Capital
          Expenditures related to STM-1 payments of the Borrowers and their
          Subsidiaries to exceed the amount demonstrated by invoices from the
          Japan-US or TAT-14 consortiums for such current payments under the
          Japan-US Agreement or the TAT-14 Agreement.

                 Fiscal Quarter Ending        Non STM-1 Amount
                 ---------------------        ----------------

                 December 31, 1999         $14,740,000

                 March 31, 2000            Existing Capital Expenditures
                                           as of March 31, 2000

                 June 30, 2000             $ 8,000,000

                 September 30, 2000        $ 8,000,000

     SECTION 10. Amendment of Section 8.02 of the Credit Agreement. Section 8.02
                 -------------------------------------------------
of the Credit Agreement shall be deleted in its entirety and the following
Section 8.02 shall be substituted in its stead:

          8.02.  Debt for Borrowed Money.  The Borrowers shall not, and shall
     not permit any of their Subsidiaries to, create, assume, incur or otherwise
     become or remain obligated in respect of, or permit to be outstanding, or
     suffer to exist any Debt for Borrowed Money, except:

                                       5
<PAGE>

          (a)    with respect to the Borrowers and their Subsidiaries, Debt for
     Borrowed Money under the Loan Papers; and

          (b)    with respect to the Borrowers and their Subsidiaries, Debt for
     Borrowed Money in existence on March 31, 2000 and not otherwise permitted
     pursuant to the terms of this Section 8.02, in each case only in the
     principal amounts and as such Debt for Borrowed Money exists as of such
     date.

     SECTION 11. Amendment of Section 8.05 of the Credit Agreement.  Section
                 -------------------------------------------------
8.05 of the Credit Agreement shall be deleted in its entirety and the following
Section 8.05 shall be substituted in its stead:

          8.05.  Liquidation, Disposition or Acquisition of Assets, Merger, New
     Subsidiaries.  The Borrowers shall not, and shall not permit any of their
     Subsidiaries to, at any time:

          (a)    liquidate or dissolve itself (or suffer any liquidation or
     dissolution) or otherwise wind up; or sell, lease, abandon, transfer or
     otherwise dispose of all or any part of its assets, Properties or business
     other than (i) Permitted Asset Sales, (ii) any sale, transfer, liquidation
     or dissolution of any Subsidiary, provided the assets of that Subsidiary
     are transferred either to the Foreign Borrower or an Approved Subsidiary,
     (iii) transactions permitted in Sections 8.04(i) and (j), and (iv)
     transactions described in Section 8.18 with respect to the Onyx Entities.

          (b)    except as permitted in Sections 8.04(i) and (j) hereof, acquire
     any assets, Property or business of any other Person, or participate in any
     joint venture, except (i) assets and Property acquired in the ordinary
     course of business, and (ii) provided that the Foreign Borrower and
     Approved Subsidiaries comply fully with Section 6.11  hereof, and upon the
     execution and delivery of the required Loan Papers, Permitted Acquisitions
     may be consummated by the Foreign Borrower and Approved Subsidiaries.

          (c)    enter into any merger, amalgamation, or consolidation, except
     that, so long as there exists no Default or Event of Default and none is
     caused thereby, after delivery of prior written notice to the
     Administrative Agent, the Onyx Entities may enter into the transactions
     described in Section 8.18 hereof.

     SECTION 12. Amendment of Section 8.13 of the Credit Agreement. Section 8.13
                 -------------------------------------------------
of the Credit Agreement shall be deleted in its entirety and the following
Section 8.13 shall be substituted in its stead:

                                       6
<PAGE>

          8.13.  Limitation on Restrictive Agreements. The Borrower shall not,
     and shall not permit any Restricted Subsidiary or Bermuda Corp. to, enter
     into any indenture, agreement, instrument, financing document or other
     arrangement which, directly or indirectly, prohibits or restrains, or has
     the effect of prohibiting or restraining, or imposes materially adverse
     conditions upon the acceptance of a waiver or consent, or the agreement to
     an amendment or change, by either of the Borrowers, with respect to any
     term or provision of this Agreement or any other Loan Paper. Except in
     connection with the issuance of Debt under Section 8.02 hereof, the
                                                ------------
     Borrowers shall not, and shall not permit any of their Subsidiaries to,
     except as otherwise described on Schedule 8.13 hereto, enter into any
                                      -------------
     indenture, agreement, instrument, financing document or other arrangement
     which, directly or indirectly, prohibits or restrains, or has the effect of
     prohibiting or restraining, or imposes conditions (which are no more
     restrictive than those contained herein) upon: (a) the incurrence of
     indebtedness, (b) the granting of Liens, (c) the making or granting of
     Guarantees, (d) the payment of dividends or Distributions, (e) the
     purchase, redemption or retirement of any Capital Stock of such Borrower or
     any Subsidiary of either Borrower, (f) the making of loans or advances, (g)
     transfers or sales of Property or assets (including Capital Stock) by
     either Borrower, or any of their Subsidiaries, (h) the making of
     Investments or (i) any change of control or management.

     SECTION 13. Amendment of Section 8.18 of the Credit Agreement. Section 8.18
                 -------------------------------------------------
of the Credit Agreement shall be deleted in its entirety and the following
Section 8.18 shall be substituted in its stead:

          8.18.  Onyx Transactions.  So long as there exists no Default or Event
     of Default both before and after giving effect to any of the transactions
     otherwise permitted under this Section 8.18, upon adequate written notice
     (as determined Administrative Agent's sole discretion) to the
     Administrative Agent for the Administrative Agent to take such reasonable
     and necessary actions in order to retain perfection on all assets that are
     pledged to the Administrative Agent on behalf of the Lenders as of March
     31, 2000, then notwithstanding anything to the contrary in this Credit
     Agreement or any security agreements, pledge agreements, share charges or
     any other Loan Paper that creates or authorizes a lien, pledge, mortgage,
     charge or debenture on the shares of the Onyx Entities or the assets of the
     Onyx Entities, the following transactions shall be permitted, subject to
     the limitations specifically set forth below, without any further consent
     of the Lenders.

          (a)    Asset Transfers.  Prior to the occurrence any of the other
     transactions set forth in this Section 8.18, shares in or assets of all or
     any of the Onyx Entities may be transferred to another Onyx Entity;
     provided that, except as set forth in subsection (b), the resulting Onyx
     Parent Company must be a direct, wholly-owned Subsidiary of either the
     Domestic Borrower or the Foreign Borrower and its shares

                                       7
<PAGE>

     must be pledged or charged by the Domestic Borrower or the Foreign
     Borrower, as applicable, to secure such Borrower's Obligations under this
     Credit Agreement.

          (b)    Issuance of Equity Securities.  The Onyx Parent Company may
     issue equity securities, in a public or private placement, equal to at
     least 5% but not greater than 35%, of the then outstanding equity interests
     of such entity without making a mandatory prepayment or causing a
     Commitment reduction under Article 2 of this Credit Agreement. Concurrently
     with the closing of any such issuance, the Administrative Agent, on behalf
     of the Lenders, shall:

                 (i)    Release any and all rights the Administrative Agent or
          the Lenders may have under Unlimited Guaranties executed by any Onyx
          Entity;

                 (ii)   Release any and all rights the Administrative Agent or
          the Lenders may have under security agreements, pledge agreements,
          share charges or any other Loan Paper that creates or authorizes a
          lien, pledge, mortgage, charge or debenture on the assets owned by the
          Onyx Entities, including any equity interests in one Onyx Entity held
          by another Onyx Entities;

                 (iii)  Execute any and all releases, termination statements and
          such other documents or instruments as may reasonably be required to
          effectuate the foregoing; provided that, the applicable Borrower or
          the Onyx Parent Company shall pay the Administrative Agent's
          reasonable costs and expenses (including legal counsel) related to
          such releases, and provided further that nothing in this subsection
          (b) shall require Lender to release the pledge of or charge on the
          shares of the Onyx Parent Company.

     SECTION 14. Existing and Potential Defaults and Events of Default and
                 ---------------------------------------------------------
Limited Conditional Waiver.  The Borrowers have informed the Administrative
- --------------------------
Agent that they are seeking a conditional and limited waiver of certain of the
provisions of the Credit Agreement and that there has occurred certain Defaults
and Events of Default, and that there may occur certain Defaults and Events of
Default.  In particular, the Borrowers have informed the Administrative Agent
that:

     (a)  Existing Defaults and Events of Defaults.
          ----------------------------------------

          (i)    Total Leverage Ratio Event of Default.  For the period from
                 -------------------------------------
          January 1, 2000 through March 30, 2000, the Borrowers exceeded the
          Total Leverage Ratio of 3.00 to 1.00 in violation of Section 8.01(a)
          of the Credit Agreement.

          (ii)   Operating Cash Flow. The Borrowers' failed to meet the required
                 -------------------
          minimum Operating Cash Flow covenant for the period ending December
          31, 1999 of $6,000,000 in violation of Section 8.01(c) of the Credit
          Agreement.

                                       8
<PAGE>

          (iii)  Capital Expenditures. The Borrowers' incurred Capital
                 --------------------
          Expenditures during the fiscal quarter ending March 31, 2000 in excess
          of $8,000,000 in violation of Section 8.01(e) of the Credit Agreement.

          (iv)   Debt Incurrence. The Borrowers' incurred Debt for Borrowed
                 ---------------
          Money of (i) $2,700,000 under the Cisco loan agreement and (ii) all
          other Debt for Borrowed Money (including Advances borrowed under the
          Credit Agreement) incurred by the Borrowers after the date of the
          borrowing described in subparagraph (i) above, in each case during the
          existence and continuation of a Default or Event of Default and in
          violation of Sections 8.02(f) and 8.02(g) of the Credit Agreement,
          including, but not limited to, the Inktomi Agreements.

          (v)    Certification.  In connection with each Advance described in
                 -------------
          subparagraph (iv) above, each of the Borrowers certified pursuant to
          the relevant Borrowing Notice that no Default or Event of Default was
          in existence in violation of Section 9.01(b) of the Credit Agreement.

          (vi)   Notification. Each of the Borrowers' failed to promptly to
                 ------------
          notify the Administrative Agent in writing of each Default and Event
          of Default outlined in this paragraph 14 in violation of Section
          7.05(b) of the Credit Agreement.

     (b)  Potential Defaults and Events of Defaults.
          -----------------------------------------

          (i)    Auditor's Opinion.  Borrowers have informed the Administrative
                 -----------------
          Agent that Section 7.02 of the Credit Agreement may be breached by the
          Borrowers as a result of the possibility of a comment of the Auditors
          regarding the Borrowers' viability as a going concern in the opinion
          of the Auditors rendered in connection with the1999 audited financial
          statements of the Borrowers.

          (c)    Limited and Conditional Waiver.  The Administrative Agent and
                 ------------------------------
     the Lenders agree, on a one time only basis, to waive the Defaults and the
     Events of Default, and the potential Defaults and the Potential Events of
     Default outlined in subparagraphs (a) and (b) of paragraph 14 above (the
     "Existing and Potential Defaults and Events of Defaults"), provided that
     the Borrowers and each other party to this Amendment and Waiver meet each
     of the conditions, representations, warranties and covenants contained
     herein and each of the other Loan Papers.

     SECTION 15.  Conditions to Limited Conditional Waiver.  Each of the
                  ----------------------------------------
foregoing waivers to the Existing and Potential Defaults and Events of Default
are hereby expressly subject to the satisfaction of each of the following
conditions.  The Borrowers specifically acknowledge and agree that the failure
by either or both of the Borrowers to satisfy any of the following conditions

                                       9
<PAGE>

and covenants shall cause an immediate and automatic Event of Default under the
Credit agreement and shall cause this Amendment and Waiver to be void ab initio:

     (a)  Operating Cash Flow for the period ending December 31, 1999 shall not
          be less than $4,552,000.

     SECTION 16.  Reservations of the Lenders and the Administrative Agent.
                  --------------------------------------------------------
Notwithstanding (a) the current forbearance of the Administrative Agent and the
Lenders with respect to Existing and Potential Defaults and Events of Defaults
and (b) any action or inaction by the Administrative Agent or any Lender or
otherwise, the Administrative Agent and the Lenders expressly reserve all of
their Rights in connection with the terms of the Credit Agreement and the other
Loan Papers and the administration thereof, including, without limitation, the
Right to accelerate the outstanding Obligations, to file suit for collection
thereof, and to exercise any Rights of the Administrative Agent or the Lenders
with respect to the Collateral, except, so long as no other Default or Event of
Default exists and the Borrowers are each otherwise in compliance with all terms
of this Amendment and Waiver, any action taken as a result of only the Existing
and Potential Defaults and Events of Defaults.  No delay by the Administrative
Agent or the Lenders in exercising any Rights under the Credit Agreement or the
other Loan Papers or Applicable Law and no failure by the Administrative Agent
or any Lender to exercise any such Right shall operate as a waiver of any Rights
the Administrative Agent or the Lenders may have under the Credit Agreement or
any of the other Loan Papers.  The Administrative Agent and the Lenders hereby
reserve their rights to take any action or exercise any Rights available to them
under the Credit Agreement, the Loan Papers and otherwise, now or at any time in
the future except, so long as no other Default or Event of Default exists and
the Borrowers are each otherwise in compliance with all terms of this Amendment
and Waiver, any action taken as a result of only the Existing and Potential
Defaults and Events of Defaults.  Any present or future negotiations or
discussions with any representative of the Administrative Agent or any of the
Lenders regarding the Credit Agreement or the Loan Papers or any documents
executed in connection therewith shall not be binding upon the Administrative
Agent or the Lenders unless and until an agreement is in writing and signed by
authorized representatives of the Administrative Agent or the Lenders, as the
case may be.  Any and all Rights available to the Administrative Agent and the
Lenders shall be cumulative and may be exercised separately, successively or
concurrently at their sole discretion.

     SECTION 17.  Representations and Warranties.  Each of the Borrowers hereby
                  ------------------------------
represent and warrant to the Administrative Agent and the Lenders that no Event
of Default or Default under the Credit Agreement or the Loan Papers exists other
than as waived hereunder.  The Borrowers and Guarantors furthermore acknowledge
that nothing in this Amendment and Waiver shall affect their obligations under
the Credit Agreement or the other Loan Papers executed in connection therewith
(except as specifically provided in this Amendment and Waiver) including, but
not limited to the 75,641,927.31 outstanding under the Credit Agreement and
other Loan Papers as of March 31, 2000, which remain valid, binding and
enforceable, and except as amended hereby, unamended, or shall constitute a
waiver or consent by the undersigned of any of its rights or remedies (except as
specifically provided in this letter), now or at any time in the future, with
respect to any requirement

                                       10
<PAGE>

under the Credit Agreement or the other Loan Papers or with respect to an Event
of Default or Default, occurring now or at any time in the future.

     SECTION 18.  Covenants.  The Borrowers covenant and agree to each of the
                  ---------
items set forth below, and specifically acknowledge and agree that the failure
by either or both of the Borrowers to comply with any of the following covenants
shall cause an immediate and automatic Event of Default under the Credit
agreement and shall cause this Amendment and Waiver to be void ab initio:

     (a)  the Borrowers covenant that they shall deliver to Administrative Agent
within 14 calendar days from the date hereof, (i) audited December 31, 1999
financial statements and (ii) in connection with (i) foregoing, an unqualified
opinion from the Auditors, other than with respect to a comment regarding
Pacific Gateway Exchange, Inc.'s viability as a going concern;

     (b)  the Borrowers shall provide monthly financial statements to the
Administrative Agent within 15 business days after the end of each calendar
month together with a Compliance Certificate calculating each financial covenant
contained in Section 8.01, and commencing with the delivery of the April 2000
financial statements, an officer's certificate certifying as to the accuracy of
its representations and warranties in the Loan Papers, certifying that no
Default or Event of Default has occurred under the terms of the Credit Agreement
or other Loan Papers and certifying as to the accuracy of the information
contained in such financial statements;

     (c)  the Borrowers shall provide weekly cash flow statements to the
Administrative Agent in form and substance acceptable to Administrative Agent
within three calendar days after each Friday of each week;

     (d)  no later than Monday, April 3, 2000, the Borrowers agree to retain
their own financial consultant or chief financial officer, which Person shall be
responsible for, among other things, assuring at all times the dissemination of
timely and accurate financial data to the Administrative Agent;

     (e)  the Borrowers shall cause their financial reporting area to cooperate
with the financial consultant retained by the Administrative Agent to assist the
Lenders in a third party evaluation of the Borrower's financial status;

     (f)  no later than Monday, April 17, 2000, the Borrowers agree to update
the Administrative Agent and the Lenders of the status of the process of raising
equity in Onyx Networks, Inc.;

     (g)  the Borrowers will deliver a new Schedule 8.02 reflecting all Debt for
Borrowed Money as of March 31, 2000 by April 14, 2000; and

     (h)  After the issuance of any Onyx Entity equity to any investor, there
are no intercompany obligations between any Onyx Entity and any Affiliate that
is not an Onyx Entity.

                                       11
<PAGE>

     SECTION 19.  Conditions Precedent to Effectiveness.
                  -------------------------------------

     This Amendment and Waiver shall not be effective until the Administrative
Agent shall have received:

     (a)  executed signature pages from each Borrower, each of the Guarantors,
the Administrative Agent and all Lenders of this Amendment and Waiver;

     (b)  copies of all agreements and documents executed or delivered in
connection with this Amendment and Waiver, and any and all consents obtained in
connection herewith, and copies of the executed Inktomi Agreements;

     (c)  reimbursement by the Borrowers via wire transfer for the
Administrative Agent of its fees and expenses and for Special Counsel's fees and
expenses rendered through the date hereof;

     (d)  receipt by the Administrative Agent of a retainer in the amount of
$150,000 for the Administrative Agent's financial consultant to be applied to
such financial consultant's fees on a monthly basis;

     (e)  receipt by Administrative Agent, on behalf of Special Counsel, via
wire transfer, of a retainer in the amount of $100,000 to reimburse
Administrative Agent for legal fees to be incurred by Special Counsel after the
date hereof, such retainer to be held by Special Counsel and applied to Special
Counsel's fees on a monthly basis;

     (f)  such other documents, instruments, and certificates, in form and
substance satisfactory to the Administrative Agent and Lenders, as the
Administrative Agent and the Lenders shall deem necessary or appropriate in
connection with this Amendment and Waiver and the transactions contemplated
hereby; and

     (g)  receipt by the Administrative Agent for the account of the Lenders an
amendment waiver and restructuring fee of $100,000.

     SECTION 20.  GOVERNING LAW; WAIVER OF JURY TRIAL.

     (a)  THIS AMENDMENT AND WAIVER AND ALL OTHER LOAN PAPERS SHALL BE DEEMED TO
BE CONTRACTS MADE IN NEW YORK, NEW YORK, AND SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (EXCEPT TO THE EXTENT THE
ADMINISTRATIVE AGENT AND THE LENDERS HAVE GREATER RIGHTS OR REMEDIES UNDER
FEDERAL LAW, WHETHER AS NATIONAL BANKS OR OTHERWISE, IN WHICH CASE SUCH CHOICE
OF NEW YORK LAW SHALL NOT BE DEEMED TO DEPRIVE ADMINISTRATIVE AGENT AND LENDERS
OF ANY SUCH RIGHTS AND REMEDIES AS MAY BE AVAILABLE UNDER FEDERAL LAW) AND THE
UNITED STATES OF

                                       12
<PAGE>

AMERICA. WITHOUT EXCLUDING ANY OTHER JURISDICTION, THE BORROWERS AGREE THAT THE
FEDERAL COURTS OF NEW YORK LOCATED IN NEW YORK CITY, NEW YORK WILL HAVE
JURISDICTION OVER PROCEEDINGS IN CONNECTION HEREWITH. TO THE MAXIMUM EXTENT
PERMITTED BY LAW, THE BORROWERS EACH HEREBY WAIVE ANY RIGHT THAT IT MAY HAVE TO
A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR
OTHERWISE) ARISING UNDER OR RELATING TO THIS AMENDMENT AND WAIVER, THE CREDIT
AGREEMENT AND THE OTHER LOAN PAPERS, OR ANY RELATED MATTERS, AND AGREES THAT ANY
SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. EACH OF
BORROWERS, THE ADMINISTRATIVE AGENT AND EACH LENDER REPRESENTS THAT IT HAS
KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AMENDMENT AND
WAIVER OR THE CREDIT AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY
THE COURT.

     (b)  TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE BORROWERS
HEREBY WAIVES PERSONAL SERVICE OF ANY LEGAL PROCESS UPON IT. EACH OF THE
BORROWERS AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL
(RETURN RECEIPT REQUESTED) DIRECTED TO SUCH BORROWER AT ITS ADDRESS DESIGNATED
FOR NOTICE UNDER THE CREDIT AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE
COMPLETED FIVE DAYS AFTER DEPOSIT IN THE UNITED STATES MAIL. NOTHING IN THIS
PARAGRAPH SHALL AFFECT THE RIGHT OF ADMINISTRATIVE AGENT OR ANY LENDER TO SERVE
LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.

     SECTION 21.  RELEASE.  THE BORROWERS EACH HEREBY ACKNOWLEDGE THAT NEITHER
                  -------
OF THE BORROWERS HAS ANY DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM
OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR
ELIMINATE ALL OR ANY PART OF BORROWERS' LIABILITY TO REPAY THE ADMINISTRATIVE
AGENT OR EACH LENDER AS PROVIDED IN THE CREDIT AGREEMENT OR TO SEEK AFFIRMATIVE
RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM THE ADMINISTRATIVE AGENT OR ANY
LENDER.  EACH OF THE BORROWERS HEREBY UNCONDITIONALLY AND IRREVOCABLY REMISES,
ACQUITS, AND FULLY AND FOREVER RELEASES AND DISCHARGES THE ADMINISTRATIVE AGENT
AND EACH LENDER AND ALL AFFILIATES AND SUBSIDIARIES OF THE ADMINISTRATIVE AGENT
AND EACH LENDER, THEIR RESPECTIVE OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS,
PRINCIPALS, DIRECTORS AND SHAREHOLDERS, AND THEIR RESPECTIVE HEIRS, LEGAL
REPRESENTATIVES, SUCCESSORS AND ASSIGNS (COLLECTIVELY, THE "RELEASED LENDER
                                                            ---------------
PARTIES") FROM ANY AND ALL CLAIMS, DEMANDS, CAUSES OF ACTION,
- -------

                                       13
<PAGE>

OBLIGATIONS, REMEDIES, SUITS, DAMAGES AND LIABILITIES (COLLECTIVELY, THE
"BORROWER CLAIMS") OF ANY NATURE WHATSOEVER, WHETHER NOW KNOWN, SUSPECTED OR
 ---------------
CLAIMED, WHETHER ARISING UNDER COMMON LAW, IN EQUITY OR UNDER STATUTE, WHICH THE
BORROWERS EVER HAD OR NOW HAVE AGAINST THE RELEASED LENDER PARTIES WHICH MAY
HAVE ARISEN AT ANY TIME ON OR PRIOR TO THE DATE OF THIS AMENDMENT AND WAIVER AND
WHICH WERE IN ANY MANNER RELATED TO THE CREDIT AGREEMENT OR ANY OTHER LOAN
PAPERS OR THE ENFORCEMENT OR ATTEMPTED ENFORCEMENT BY THE ADMINISTRATIVE AGENT
OR ANY LENDER OF RIGHTS, REMEDIES OR RECOURSES RELATED THERETO. THE BORROWERS
COVENANT AND AGREE NEVER TO COMMENCE, VOLUNTARILY AID IN ANY WAY, PROSECUTE OR
CAUSE TO BE COMMENCED OR PROSECUTED AGAINST ANY OF THE RELEASED LENDER PARTIES
ANY ACTION OR OTHER PROCEEDING BASED UPON ANY OF THE BORROWER CLAIMS WHICH MAY
HAVE ARISEN AT ANY TIME ON OR PRIOR TO THE DATE OF THIS AMENDMENT AND WAIVER AND
WERE IN ANY MANNER RELATED TO THE CREDIT AGREEMENT, ANY OTHER LOAN PAPERS OR THE
TRANSACTIONS ASSOCIATED THEREWITH.

     SECTION 22.  Miscellaneous.
                  -------------

     (a)  This Amendment and Waiver shall be a "Loan Paper" as defined in the
Credit Agreement, and a default under this agreement will result in an Event of
Default under the Credit Agreement.

     (b)  This Amendment and Waiver may be executed in a number of identical
counterparts, each of which shall be deemed an original for all purposes, and
all of which constitute, collectively, one agreement; but in making proof of
this consent letter, it shall not be necessary to produce or account for more
than one such counterpart.  It is not necessary that all parties execute the
same counterpart so long as identical counterparts are executed by each party.
THIS AGREEMENT AND THE OTHER WRITTEN LOAN PAPERS EXECUTED BY THE PARTIES HERETO
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT
BY SUCH PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN SUCH PARTIES.

     (c)  THE CREDIT AGREEMENT AS AMENDED HEREBY AND THE OTHER LOAN PAPERS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.  EXCEPT AS MODIFIED
OR SUPPLEMENTED HEREBY, THE CREDIT AGREEMENT, THE OTHER LOAN PAPERS AND ALL
OTHER DOCUMENTS AND AGREEMENTS EXECUTED IN CONNECTION THEREWITH SHALL CONTINUE
IN FULL FORCE AND EFFECT.

                                       14
<PAGE>

                 --------------------------------------------
                  REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                 --------------------------------------------

                                       15
<PAGE>

     IN WITNESS WHEREOF, this Amendment and Waiver to the Credit Agreement is
executed as of the date first set forth above.

THE BORROWERS:
                                    PACIFIC GATEWAY EXCHANGE, INC.


                                    By:______________________________________
                                    Name:____________________________________
                                    Title:___________________________________



                                    PACIFIC GATEWAY EXCHANGE (BERMUDA) LIMITED


                                    By:______________________________________
                                    Name:____________________________________
                                    Title:___________________________________



THE LENDERS:

                                    BANK OF AMERICA, N.A., as Administrative
                                    Agent and as Lender



                                    By:______________________________________
                                    Name:____________________________________
                                    Its:_____________________________________


                                    BANKERS TRUST COMPANY, individually as a
                                    Lender


                                    By:______________________________________
                                    Name:____________________________________
                                    Its:_____________________________________

                                       16
<PAGE>

ACKNOWLEDGED AND AGREED:


THE GUARANTORS:

                                    PACIFIC GATEWAY EXCHANGE JAPAN BACKHAUL INC.


                                    By:______________________________________
                                    Name:____________________________________
                                    Title:___________________________________


                                    PACIFIC GATEWAY EXCHANGE (HONG KONG) LTD.


                                    By:______________________________________
                                    Name:____________________________________
                                    Title:___________________________________


                                    ONYX NETWORKS INTERNATIONAL LTD.


                                    By:______________________________________
                                    Name:____________________________________
                                    Title:____________________________________


                                    PACIFIC GATEWAY EXCHANGE (TAIWAN) LIMITED


                                    By:________________________________________
                                    Name:______________________________________
                                    Title:_____________________________________

                                       17
<PAGE>

                                    PACIFIC GATEWAY EXCHANGE (HAMILTON) LIMITED


                                    By:________________________________________
                                    Name:______________________________________
                                    Title:_____________________________________


                                    PACIFIC GATEWAY EXCHANGE INTERNATIONAL


                                    By:________________________________________
                                    Name:______________________________________
                                    Title:_____________________________________


                                    PACIFIC GATEWAY EXCHANGE (CANADA) INC.


                                    By:________________________________________
                                    Name:______________________________________
                                    Title:_____________________________________


                                    PACIFIC GATEWAY EXCHANGE (IBERIA) SA


                                    By:________________________________________
                                    Name:______________________________________
                                    Title:_____________________________________


                                    PACIFIC GATEWAY EXCHANGE (CYPRUS) LTD.


                                    By:________________________________________
                                    Name:______________________________________
                                    Title:_____________________________________

                                       18
<PAGE>

                                   ONYX INTERNET LIMITED


                                   By:________________________________________
                                   Name:______________________________________
                                   Title:_____________________________________


                                   PACIFIC GATEWAY EXCHANGE (GERMANY) GMBH


                                   By:________________________________________
                                   Name:______________________________________
                                   Title:_____________________________________


                                   PACIFIC GATEWAY EXCHANGE (U.K.) LIMITED


                                   By:________________________________________
                                   Name:______________________________________
                                   Title:_____________________________________


                                   PACIFIC GATEWAY EXCHANGE (AUSTRALIA) PTY LTD.


                                   By:________________________________________
                                   Name:______________________________________
                                   Title:_____________________________________

                                       19
<PAGE>

                                   PACIFIC GATEWAY EXCHANGE (NEW ZEALAND)
                                   PARTNERSHIP

                                   By:  Pacific Gateway Exchange (Bermuda)
                                        Limited, Its General Partner


                                   By:________________________________________
                                   Name:______________________________________
                                   Title:_____________________________________


                                   By:  Pacific Gateway Exchange New Zealand
                                        Limited, Its General Partner


                                   By:________________________________________
                                   Name:______________________________________
                                   Title:_____________________________________


                                   By:________________________________________
                                   Name:______________________________________
                                   Title:_____________________________________


                                   PACIFIC GATEWAY EXCHANGE (NEW ZEALAND)
                                   LIMITED


                                   By:________________________________________
                                   Name:______________________________________
                                   Title:_____________________________________


                                   By:________________________________________
                                   Name:______________________________________
                                   Title:_____________________________________

                                       20
<PAGE>

                                   PACIFIC GATEWAY EXCHANGE (JAPAN) LIMITED


                                   By:________________________________________
                                   Name:______________________________________
                                   Title:_____________________________________

                                       21
<PAGE>

                                   Exhibit 1

                              Inktomi Agreements
                              ------------------

                                       22

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (AS RESTATED) AS AT AND FOR THE
PERIOD ENDED MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-2000
<PERIOD-START>                             JAN-01-2000
<PERIOD-END>                               MAR-31-2000
<CASH>                                          27,725
<SECURITIES>                                         0
<RECEIVABLES>                                  155,214
<ALLOWANCES>                                    10,700
<INVENTORY>                                          0
<CURRENT-ASSETS>                               193,794
<PP&E>                                         219,918
<DEPRECIATION>                                  34,974
<TOTAL-ASSETS>                                 417,705
<CURRENT-LIABILITIES>                          310,185
<BONDS>                                              0
                                0
                                          0
<COMMON>                                             2
<OTHER-SE>                                      93,582
<TOTAL-LIABILITY-AND-EQUITY>                   417,705
<SALES>                                        126,549
<TOTAL-REVENUES>                               126,549
<CGS>                                          113,854
<TOTAL-COSTS>                                  114,367
<OTHER-EXPENSES>                                 8,664
<LOSS-PROVISION>                                 4,300
<INTEREST-EXPENSE>                               (216)
<INCOME-PRETAX>                               (30,566)
<INCOME-TAX>                                       121
<INCOME-CONTINUING>                           (30,687)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (30,687)
<EPS-BASIC>                                     (1.57)
<EPS-DILUTED>                                   (1.57)


</TABLE>


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