<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-22784
-------
--------------------------
GATEWAY 2000, INC.
(Exact name of registrant as specified in its charter)
Delaware 42-1249184
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
610 Gateway Drive
P.O. Box 2000
North Sioux City, South Dakota 57049
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (605) 232-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---.
As of May 7, 1997, there were 76,843,912 shares of the Common Stock of the
Company, $.01 par value per share, outstanding. As of May 7, 1997, there were
no shares of the Company's Class A Common Stock, $.01 par value per share,
outstanding.
<PAGE>
I. FINANCIAL INFORMATION
Item 1. Financial Statements
GATEWAY 2000, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
<S> <C> <C>
1996 1997
---------- -----------
Net sales $1,142,202 $1,419,336
Cost of goods sold 929,871 1,153,543
---------- -----------
Gross profit 212,331 265,793
Selling, general and administrative expenses 141,829 170,915
---------- -----------
Operating income 70,502 94,878
Other income, net 5,994 8,200
---------- -----------
Income before income taxes 76,496 103,078
Provision for income taxes 26,009 35,562
---------- -----------
Net income $ 50,487 $ 67,516
========== ===========
Share and per share information:
Net income per share $0.65 $0.86
========== ===========
Weighted average shares and share equivalents
outstanding 77,866 78,645
========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
GATEWAY 2000, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1997
(in thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 516,360 $ 547,252
Marketable securities -- 8,985
Accounts receivable, net 449,723 419,972
Inventory 278,043 314,954
Other 74,216 106,481
---------- ----------
Total current assets 1,318,342 1,397,644
Property, plant and equipment, net 242,365 249,623
Software costs, net 77,073 75,447
Other assets 35,631 53,076
---------- ----------
$1,673,411 $1,775,790
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term obligations $ 15,041 $ 14,490
Accounts payable 411,788 425,323
Accrued liabilities 190,762 186,647
Accrued royalties payable 125,270 140,371
Customer prepayments 16,574 10,605
Income taxes payable 40,334 53,104
---------- ----------
Total current liabilities 799,769 830,540
Long-term obligations, net of current maturities 7,244 6,599
Warranty and other liabilities 50,857 55,577
---------- ----------
Total liabilities 857,870 892,716
---------- ----------
Contingencies (Note 4)
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized; none
issued and outstanding -- --
Class A Common Stock, nonvoting, $.01 par value, 1,000,000 shares
authorized; none issued and outstanding -- --
Common Stock, $.01 par value, 220,000,000 shares authorized;
76,755,984 shares and 76,803,784 shares issued and outstanding,
respectively 768 768
Additional paid-in capital 289,512 290,931
Cumulative translation adjustment 549 (853)
Retained earnings 524,712 592,228
---------- ----------
Total stockholders' equity 815,541 883,074
---------- ----------
$1,673,411 $1,775,790
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
GATEWAY 2000, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1996 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 50,487 $ 67,516
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 12,170 19,009
Provision for uncollectible accounts receivable 4,687 1,184
Deferred income taxes 11,382 (13,142)
Other, net 187 23
Changes in operating assets and liabilities:
Accounts receivable 31,179 28,567
Inventory 9,068 (42,681)
Other assets 2,448 (38,872)
Accounts payable 41,175 12,802
Accrued liabilities (9,919) (3,975)
Accrued royalties 3,151 15,101
Customer prepayments 1,736 (5,969)
Income taxes payable 145 13,603
Other liabilities 5,233 4,932
---------- ----------
Net cash provided by operating activities 163,129 58,098
---------- ----------
Cash flows from investing activities:
Capital expenditures (14,586) (13,451)
Software costs (7,999) (3,744)
Purchases of available-for-sale securities -- (8,985)
Other, net (2,433) 461
---------- ----------
Net cash used in investing activities (25,018) (25,719)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable 5,000 5,000
Principal payments on long-term obligations and notes payable (1,123) (6,403)
Stock options exercised 155 586
---------- ----------
Net cash provided by (used in) financing activities 4,032 (817)
Foreign exchange effect on cash and cash equivalents (324) (670)
---------- ----------
Net increase in cash and cash equivalents 141,819 30,892
Cash and cash equivalents, beginning of period 166,397 516,360
---------- ----------
Cash and cash equivalents, end of period $ 308,216 $ 547,252
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
1. GENERAL:
The accompanying unaudited consolidated financial statements of Gateway
2000, Inc. (the "Company") as of March 31, 1997 have been prepared on the same
basis as the audited consolidated financial statements for the year ended
December 31, 1996, except as follows, and, in the opinion of management, reflect
all adjustments necessary to fairly state the consolidated financial position,
and the consolidated results of operations and cash flows for the interim
period. Beginning in 1997, certain expenses related to the fulfillment of parts
warranties have been reclassified from selling, general and administrative
(SG&A) expenses to cost of goods sold. Prior year amounts have been restated to
conform with this reclassification. All adjustments are of a normal, recurring
nature. The results for the interim period are not necessarily indicative of
results to be expected for any other interim period or the entire year. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended December
31, 1996, which are included in the Company's 1996 Annual Report to the
Securities and Exchange Commission on Form 10-K. The preparation of the
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities, and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
2. SHARE AND PER SHARE INFORMATION
Net income per share has been computed using net income for the three
months ended March 31, 1996 and 1997 and the weighted average number of common
shares and common share equivalents (if dilutive) outstanding during the period.
Common share equivalents considered outstanding relate to stock options and have
been calculated using the treasury stock method for all periods presented.
3. SELECTED BALANCE SHEET INFORMATION:
<TABLE>
December 31, March 31,
1996 1997
------------- ------------
<S> <C> <C>
(Unaudited)
(In thousands)
Accounts receivable, net:
Accounts receivable $ 468,691 $ 442,979
Less allowance for uncollectible accounts (18,968) (23,007)
------------- ------------
$ 449,723 $ 419,972
============= ============
Inventory:
Components and subassemblies $ 269,959 $ 302,021
Finished goods 8,084 12,933
------------- ------------
$ 278,043 $ 314,954
============= ============
</TABLE>
5
<PAGE>
4. CONTINGENCIES
The Company is a party to various lawsuits and administrative proceedings
arising in the ordinary course of its business. The Company evaluates such
lawsuits and proceedings on a case-by-case basis, and its policy is to
vigorously contest any such claims which it believes are without merit. The
Company's management believes that the ultimate resolution of such pending
matters will not materially adversely affect the Company's business, financial
position, results of operations or cash flows.
The Company is party to agreements with numerous state tax authorities
pursuant to which it collects and remits applicable sales or use taxes in such
states. The Company entered into these agreements in response to inquiries of
taxing authorities in those states concerning whether the Company's alleged
contacts required the collection of sales and use taxes from customers in those
states. These agreements generally limit the liability of the Company for non-
collection of sales taxes prior to such agreements' effective dates. These
agreements do not address incomes taxes. Taxing authorities in other states have
made similar inquiries concerning the Company's alleged contacts with those
states and, in the future, could make specific assessments. The Company has not
collected or remitted any sales or use taxes in such states for any prior
periods, nor has it established significant reserves for the payment of such
taxes. There can be no assurance that the amount of any sales or use taxes the
Company might ultimately be required to pay for prior periods would not
materially and adversely affect the Company's business, consolidated financial
position, results of operations or cash flows.
The Company currently pays state income taxes in the few states where it
has a physical presence. The Company has not paid incomes taxes in any other
state, nor has it established significant reserves for the payment of such
taxes. Management believes that the amount of any income tax the Company might
ultimately be required to pay for prior periods would not materially and
adversely affect the Company's business, consolidated financial position,
results of operations or cash flows.
ITEM 2. Management's Discussion and Analysis Of Financial Condition and
Results Of Operations
Results of Operations
The following table sets forth, for the periods indicated, certain data
derived from the Company's consolidated statements of operations, expressed as a
percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1997
------------ -------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 81.4% 81.3%
------------ -------------
Gross profit 18.6% 18.7%
Selling, general and administrative expenses 12.4% 12.0%
------------ -------------
Operating income 6.2% 6.7%
Other income, net 0.5% 0.6%
------------ -------------
Income before income taxes 6.7% 7.3%
Provision for income taxes 2.3% 2.5%
------------ -------------
Net income 4.4% 4.8%
============ =============
</TABLE>
6
<PAGE>
Sales. Sales increased 24% in the first quarter of 1997 to $1.42 billion
from $1.14 billion in the first quarter of 1996. Sales in the first quarter of
1997 decreased 8.6% from sales in the seasonally strong fourth quarter of 1996.
The increase in sales for the first quarter over the comparable period of 1996
resulted from continued demand growth in all of the Company's markets, and
accelerated growth in sales of the Company's portable products.
Unit shipments in the quarter increased 39% to approximately 555,000 from
399,000 in the first quarter of 1996. Unit shipments in the Company's Americas
region grew 34% over the first quarter of 1996, while unit shipments in the
Company's European and Asia Pacific regions grew 41% and 155%, respectively.
Unit shipments for the first quarter decreased 56,000 or 9.1% from unit
shipments in the fourth quarter of 1996.
Average unit selling prices were 10.5% lower than prices in the first
quarter of 1996 but essentially the same as prices in the fourth quarter of
1996. Generally, unit prices for specific PC products have decreased over time
reflecting the effects of competition and reduced component costs associated
with advances in technology. The Company has generally offset such decreasing
unit prices by adding or improving product features and by introducing new
products based on newer technology at higher unit prices. In 1995, significant
new technology was introduced, outpacing the normal rate of component cost
declines, and as a result, prices gradually increased throughout the year.
Average unit selling prices maintained these abnormally high levels through the
first quarter of 1996. Beginning in the second quarter of 1996, in addition to
the normal component cost declines, significant cost declines were experienced
in Dynamic Random Access Memory (DRAM) prices. These declines in component
costs were generally passed on to customers through price decreases. In
addition, the rate of new technology introduced in 1996 slowed, and was not
substantial enough to offset the declines in component prices, also contributing
to the decline in average unit prices. Average unit price declines in the
Company's international operations have been more significant than the declines
experienced in the Company's Americas region resulting in revenue growth at a
rate less than the growth in unit shipments.
Sales in the Americas region for the quarter increased to $1.16 billion,
an increase of 22% over the $952 million recorded in the first quarter of 1996
but a decrease of 11% from the fourth quarter of 1996. Sales from international
operations in the first quarter of 1997 increased 35% to $256.2 million from
$190.0 million in the first quarter of 1996, and increased 4.8% over the fourth
quarter of 1996. Sales in the quarter from the Company's European region were
$177.7 million, an increase of approximately 20% from the first quarter of 1996
and an increase of 4% from the fourth quarter of 1996. Sales in the Company's
Asia Pacific region were $78.5 million in the quarter, an increase of 89% over
the first quarter of 1996, and 8% over the fourth quarter of 1996.
Sales of the Company's Solo (TM) line of portable products accounted for
almost 9% of total company revenues, up from approximately 7% in the first
quarter of 1996.
Gross Profit. Gross profit in the first quarter of 1997 increased 25% over
the first quarter of 1996. As a percentage of sales, gross profit for the first
quarter increased to 18.7% from 18.6% in the first quarter of 1996, but
decreased from 19.0% in the fourth quarter of 1996. Costs for the fulfillment
of certain parts warranties are now being recorded as cost of goods sold.
Previously these amounts had been recorded as SG&A expense. The impact of the
classification change in the quarter was approximately $10.1 million. Prior
year amounts have been restated to reflect this classification change. The
impact to the first and fourth quarters of 1996 was approximately $6.3 million
and $8.8 million, respectively.
7
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses for the first quarter of 1997 increased
approximately 21% over the first quarter of 1996. Significant factors
contributing to the increase were higher personnel costs and increased
depreciation and amortization. Personnel-related costs increased faster than the
growth of sales during the first quarter of 1997 as a result of increased
expenditures to expand customer support capacity, and general building of the
Company's internal infrastructure and systems. Depreciation and amortization
expense increased due to the Company's continued investments in facilities and
software applications including the Company's new manufacturing facility in
Hampton, Virginia and other projects which were not placed into service until
after the first quarter of 1996. The Company expects to continue to make the
necessary expenditures and infrastructure investments to manage its growth. As a
percent of sales, SG&A expenses decreased to 12.0% from 12.4% in the first
quarter of 1996, an indication that the Company is beginning to leverage the
significant infrastructure investments made over the last 18 months.
Operating Income. Due to the factors discussed above, operating income in
the first quarter of 1997 increased by 35% to $94.9 million from $70.5 million
in the first quarter of 1996. As a percentage of sales, operating income for the
quarter increased to 6.7% from 6.2% in the first quarter of 1996.
Other Income, Net. Other income, net includes other income net of
expenses, such as interest income and expense, discounts on trade payables,
lease financing commissions, referral fees for on-line services and foreign
exchange transaction gains and losses. Other income, net increased to $8.2
million from $6.0 million in the first quarter of 1996. The principal cause of
the increase was the generation of additional interest income as a result of
the availability of additional cash and marketable securities compared to 1996.
Income Taxes. The Company's effective tax rate was 34.5% for the quarter,
up from the 34.0% rate recorded in the first quarter of 1996, but consistent
with the 34.5% recorded for the year ended December 31, 1996.
Liquidity and Capital Resources
The Company has financed its operating and capital expenditure requirements
to date principally through cash flow from its operations. At March 31, 1997,
the Company had cash and cash equivalents of $547.2 million, and an unsecured
committed credit facility with certain banks of $225 million, consisting of a
revolving line of credit facility and a sub-facility for letters of credit. At
March 31, 1997, no amounts were outstanding under the revolving line of credit.
Approximately $4.4 million was committed to support outstanding standby letters
of credit. Management believes the Company's current sources of working
capital, including amounts available under existing credit facilities, will
provide adequate flexibility for the Company's financial needs for the
foreseeable future.
The Company generated $58.1 million of cash from operations during the
quarter, including $87.7 million of net income adjusted for non-cash charges.
An increase in inventory levels consumed approximately $42.7 million in cash,
net of inventory transfers to property, plant and equipment, but was partially
offset by an increase in accounts payable of $12.8 million. Collection of
seasonally high fourth quarter accounts receivable netted against advance
payments from customers generated $22.6 million in cash. An increase in other
assets consumed $38.9 million in cash primarily due to the timing of cash flows
for various royalty and cooperative advertising agreements the Company has with
its suppliers. The Company used approximately $25.7 million in cash for
investing activities, as a result of the Company's continued investment in
facilities and information systems.
8
<PAGE>
At March 31, 1997, the Company had long-term indebtedness of approximately
$21.1 million, inclusive of capital lease obligations, to various parties.
These obligations relate primarily to the Company's expansion of international
operations and its investments in equipment and facilities. Borrowings,
exclusive of capital lease obligations, bear fixed and variable rates of
interest currently ranging from interest free (for certain incentive funds from
the Industrial Development Authority of the City of Hampton, Virginia) to 8.87%
and have varying maturities through 2001. The Company's capital lease
obligations relate principally to its computer and telephone system equipment.
The Company anticipates that it will retain all earnings in the foreseeable
future for development of its business and will not distribute earnings to its
stockholders as dividends.
Factors That May Affect Future Results
This Report includes forward-looking statements made in good faith based on
current management expectations pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. These statements are not
guarantees of future performance and actual outcomes may differ materially from
what is expressed or forecasted.
Factors that could cause future results to differ from these expectations
include the following: growth in the personal computer industry; competitive
factors and pricing pressures; component supply shortages; inventory risks due
to shifts in market demand; the outcome of pending and future litigation;
foreign currency fluctuations; and general domestic and international economic
conditions.
In addition to other information contained in this Report, the following
factors, among others, sometimes have affected, and in the future could affect,
the Company's actual results, and could cause future results to differ
materially from those expressed in any forward looking statement made by, or on
behalf of the Company.
Management of rapid growth of the Company including problems with respect
to the size of its work force and production facilities and the adequacy of its
management information and other systems, purchasing and inventory controls, and
the forecasting of component part needs have the potential to affect results.
These problems can result in high backlog of product orders, delays in customer
support response times and increased expense levels.
Short product life cycles characterize the PC industry, resulting from
rapid changes in technology and consumer preferences and declining product
prices. The Company's in-house engineering personnel work closely with PC
component suppliers and other technology developers to evaluate the latest
developments in PC-related technology. There can be no assurance that the
Company will continue to have access to new technology or will be successful in
incorporating such new technology in its products or features in a timely
manner.
Certain key management employees, particularly Ted Waitt, Chairman and
Chief Executive Officer and a founder of the Company, have been instrumental in
the success of the Company. The Company has not entered into an employment
agreement with Ted Waitt. The loss of Ted Waitt's services could materially and
adversely affect the Company.
The Company is party to agreements with numerous state tax authorities
pursuant to which it collects and remits applicable sales or use tax in such
states. The Company entered into these agreements in response to inquires of
taxing authorities in those states concerning whether the Company's
9
<PAGE>
alleged contacts required the collection of sales and use tax from customers in
those states. These agreements generally limit the liability of the Company for
non-collection of sales taxes prior to such agreements' effective dates. These
agreements do not address income taxes. Taxing authorities in other states have
made similar inquires concerning the Company's alleged contacts with those
states and, in the future, could make specific assessments. The Company has not
collected or remitted any sales or use taxes in such states for any prior
periods, nor has it established significant reserves for the payment of such
taxes. There can be no assurance that the amount of any sales or use taxes the
Company might ultimately be required to pay for prior periods would not
materially and adversely affect the Company's business, consolidated financial
position, results of operations or cash flows.
10
<PAGE>
II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various lawsuits and administrative proceedings
arising in the ordinary course of its business. The Company evaluates such
lawsuits and proceedings on a case by case basis, and its policy is to
vigorously contest any such claims which it believes are without merit. The
Company's management believes that the ultimate resolution of such pending
matters will not materially and adversely affect the Company's business,
consolidated financial position, results of operations or cash flows.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits:
<S> <C>
Exhibit Description of Exhibits
No. ---------------------------------------------------
---
10.1 Registration Agreement dated February 22, 1991
between Gateway 2000, Inc., Theodore W. Waitt and
Norman W. Waitt, Jr. as the sole trustee and sole
beneficiary of the Norman W. Waitt, Jr. S Corp.
Trust, together with Amendment No. 1 to the
Registration Agreement dated as of October 19, 1993
(incorporated by reference to Exhibit 10.11 to Form
S-1 Registration Statement No. 33-70618 filed
October 21, 1993).
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None.
11
<PAGE>
SIGNATURE
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.
GATEWAY 2000, INC.
Date: May 14, 1997 By: /s/ David J. McKittrick
-------------------------------------
David J. McKittrick
Senior Vice President, Chief Financial
Officer and Treasurer (authorized
officer and chief accounting officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GATEWAY 2000, INC.'S CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 547,252
<SECURITIES> 8,985
<RECEIVABLES> 442,978
<ALLOWANCES> 23,006
<INVENTORY> 314,954
<CURRENT-ASSETS> 1,397,644
<PP&E> 450,781
<DEPRECIATION> 125,711
<TOTAL-ASSETS> 1,775,790
<CURRENT-LIABILITIES> 830,540
<BONDS> 6,599
0
0
<COMMON> 768
<OTHER-SE> 882,306
<TOTAL-LIABILITY-AND-EQUITY> 1,775,790
<SALES> 1,419,336
<TOTAL-REVENUES> 1,419,336
<CGS> 1,153,543
<TOTAL-COSTS> 1,153,543
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,184
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> 103,078
<INCOME-TAX> 35,562
<INCOME-CONTINUING> 67,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,516
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0
</TABLE>
