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 June 30, 1998
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 August 11, 1998, there were 155,768,360 shares of the
Common Stock of the Company, $.01 par value per share,
outstanding. As of August 11, 1998, there were no shares of the
Company's Class A Common Stock, $.01 par value per share,
outstanding.
<TABLE>
I. FINANCIAL INFORMATION
Item 1. Financial Statements
Gateway 2000, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 1997 and 1998
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
<CAPTION>
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net Sales $ 1,392,658 $ 1,618,909 $ 2,811,994 $ 3,346,837
Cost of goods sold 1,132,300 1,285,221 2,285,843 2,676,655
Gross profit 260,358 333,688 526,151 670,182
Selling, general and 180,507 249,699 351,422 476,992
administrative expenses
Operating income 79,851 83,989 174,729 193,190
Other income, net 6,382 10,917 14,583 20,265
Income before income taxes 86,233 94,906 189,312 213,455
Provision for income taxes 29,750 34,166 65,313 76,844
Net income $ 56,483 $ 60,740 $ 123,999 $ 136,611
Share and per share information:
Net income per share:
Basic $ 0.37 $ 0.39 $ 0.81 $ 0.88
Diluted $ 0.36 $ 0.38 $ 0.79 $ 0.86
Weighted average shares
outstanding:
Basic 153,740 155,427 153,649 154,990
Diluted 156,231 158,887 156,101 158,231
</TABLE>
<TABLE>
Gateway 2000, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and June 30, 1998
(In thousands, except share and per share amounts)
<CAPTION>
December 31, June 30,
1997 1998
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 593,601 $ 799,608
Marketable securities 38,648 92,243
Accounts receivable, net 510,679 528,340
Inventory 249,224 154,823
Other 152,531 168,336
Total current assets 1,544,683 1,743,350
Property, plant and equipment, net 336,469 378,354
Internal use software costs, net 39,998 36,457
Intangibles, net 82,590 74,174
Other assets 35,531 44,051
$ 2,039,271 $ 2,276,386
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long- $ 13,969 $ 15,122
term obligations
Accounts payable 488,717 523,074
Accrued liabilities 271,250 321,137
Accrued royalties payable 159,418 161,226
Other current liabilities 70,552 56,062
Total current liabilities 1,003,906 1,076,621
Long-term obligations, net of current maturities 7,240 1,793
Warranty and other liabilities 98,081 95,845
Total liabilities 1,109,227 1,174,259
Contingencies (Note 5)
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000 shares
authorized; none issued and outstanding - -
Class A Common Stock, nonvoting, $.01 par value
1,000 shares authorized; non issued and out-
standing - -
Common Stock, $.01 par value, 220,000 shares
authorized; 154,128 shares and 155,643 shares
issued and outstanding, in 1997 and 1998
respectively 1,541 1,556
Additional paid-in capital 299,483 336,659
Retained Earnings 634,509 771,120
Accumulated other comprehensive income (5,489) (7,208)
Total stockholders' equity 930,044 1,102,127
$ 2,039,271 $ 2,276,386
</TABLE>
<TABLE>
Gateway 2000, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1997 and 1998
(in thousands)
(Unaudited)
<CAPTION>
Six Months Ended June 30,
1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 123,999 $ 136,611
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 39,041 49,652
Provision for uncollectible accounts receivable 2,910 1,923
Deferred income taxes (25,314) (26,412)
Other, net 307 695
Changes in operating assets and liabilities:
Accounts receivable (25,014) (19,584)
Inventory (185,119) 94,400
Other assets (43,281) 1,045
Accounts payable 116,312 33,942
Accrued liabilities (13,577) 50,329
Accrued royalties 40,789 1,809
Other current liabilities (42,200) 3,182
Other liabilities 17,197 (1,492)
Net cash provided by operating activities 6,050 326,100
Cash flows from investing activities:
Capital expenditures (43,757) (74,377)
Internal use software costs (5,786) (4,253)
Purchases of available-for-sale securities (29,066) (99,248)
Proceeds from maturity of held-to-maturity
securities 8,985 11,864
Proceeds from sales of available-for-sale
securities - 33,898
Purchase of other assets (3,376) (1,145)
Net cash used in investing activities (73,000) (133,261)
Cash flows from financing activities:
Proceeds from issuance of notes payable 5,000 -
Principal payments on long-term obligations and
notes payable (7,531) (4,294)
Stock options exercised 3,058 18,918
Net cash provided by financing activities 527 14,624
Foreign exchange effect on cash and cash
equivalents (218) (1,456)
Net increase in cash and cash equivalents (66,641) 206,007
Cash and cash equivalents, beginning of period 516,360 593,601
Cash and cash equivalents, end of period $ 449,719 $ 799,608
</TABLE>
Notes to Consolidated Financial Statements
1. General:
The accompanying unaudited consolidated financial statements
of Gateway 2000, Inc. (the "Company") as of June 30, 1998 and for
the three and six months ended June 30, 1997 and 1998 have been
prepared on the same basis as the audited consolidated financial
statements for the year ended December 31, 1997 and, in the
opinion of management, reflect all adjustments (consisting of
normal recurring adjustments) necessary to fairly state the
consolidated financial position, and the consolidated results of
operations and cash flows for the interim period. 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, 1997, which are included
in the Company's 1997 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. Comprehensive Income:
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS 130 establishes new rules for the
reporting of comprehensive income and its components; however the
adoption of this statement had no impact on the Company's current
or previously reported net income or shareholders' equity. SFAS
130 requires the display and reporting of comprehensive income,
which includes all changes in shareholders' equity with the
exception of additional investments by shareholders or
distributions to shareholders. Comprehensive income for the
Company includes net income, foreign currency translation
effects, and unrealized gains or losses on available-for-sale
securities which are charged or credited to the accumulated other
comprehensive income account within shareholders' equity.
Comprehensive income for the three and six month periods
ended June 30, 1997 and 1998 was as follows:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
<CAPTION>
1997 1998 1997 1998
(in thousands)
(unaudited)
Comprehensive Income:
<S> <C> <C> <C> <C>
Net income $ 56,483 $ 60,740 $ 123,999 $ 136,611
Foreign currency translation 3,219 (1,621) 1,817 (1,873)
Unrealized gain (loss) on
available-for-sale securities - (34) - 154
Total Comprehensive Income $ 59,702 $ 59,085 $ 125,816 $ 134,892
</TABLE>
3. Share and Per Share Information:
In 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard No. 128,
"Earnings per Share" which replaced the calculation of primary
and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effect of options,
warrants and convertible securities. Earnings per share amounts
for all periods presented have been restated to SFAS 128
requirements.
The following table sets forth a reconciliation of shares
used in the computation of basic and diluted earnings per share.
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
<CAPTION>
1997 1998 1997 1998
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Net income for basic and diluted
earnings per share $ 56,483 $ 60,740 $ 123,999 $ 136,611
Weighted average shares for basic
earnings per share 153,740 155,427 153,649 154,990
Dilutive effect of stock options 2,491 3,460 2,452 3,241
Weighted average shares for
diluted earnings per share 156,231 158,887 156,101 158,231
</TABLE>
4. Selected Balance Sheet Information:
December 31, June 30,
1997 1998
(unaudited)
(in thousands)
Accounts receivable, net:
Accounts receivable $ 530,743 $ 541,793
Less allowance for un-
collectibe accounts (20,064) (13,453)
$ 510,679 $ 528,340
Inventory:
Components and subassem-
blies $ 226,588 $140,423
Finished goods 22,636 14,400
$ 249,224 $ 154,823
5. 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.
Over the past several years, state tax authorities have made
inquiries as to whether or not the Company's alleged contacts
with those states might require the collection of sales and use
taxes from customers and/or the payment of income tax in those
states. The Company evaluates such inquiries on a case-by-case
basis, and has favorably resolved these tax issues in the past
without any material adverse consequences. Based on recent
favorable resolution of certain of these issues, management
believes that the amount of any state sales and use tax or 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.
6. Reclassifications
Certain reclassifications have been made to prior years'
financial statements to conform to current year presentation.
These reclassifications had no impact on previously reported net
income or stockholder's equity.
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>
Three Months Ended Six Months Ended
June 30, June 30,
<CAPTION>
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 81.3% 79.4% 81.3% 80.0%
Gross profit 18.7% 20.6% 18.7% 20.0%
Selling, general and
administrative expenses 13.0% 15.4% 12.5% 14.2%
Operating income 5.7% 5.2% 6.2% 5.8%
Other income, net 0.5% 0.7% 0.5% 0.6%
Income before income taxes 6.2% 5.9% 6.7% 6.4%
Provision for income taxes 2.1% 2.1% 2.3% 2.3%
Net income 4.1% 3.8% 4.4% 4.1%
</TABLE>
Second Quarter 1998 Compared to Second Quarter 1997 and First
Quarter 1998
Sales increased 16% in the second quarter of 1998 to $1.62
billion from $1.39 billion in the second quarter of 1997. The
increase from the second quarter of 1997 is primarily due to
strong consumer demand for the Company's products and continued
growth in sales of the Company's portable products. Portable
products sales were 14% of total sales for the second quarter of
1998, an increase of 32% versus the comparable period of 1997.
Unit shipments in the second quarter of 1998 increased 33% to
736,000 from 554,000 in the second quarter of 1997. Weighted
average unit prices (AUP) were approximately 12% lower in the
second quarter of 1998 versus the comparable period of 1997.
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 the impact of these declines in
component costs by adding or improving product features and by
introducing new products based on newer technology at higher
prices, resulting in fairly stable unit prices over time. When
the timing of component cost reductions and new technology
introduction is different, AUP's can fluctuate. Sales in the
Americas region for the second quarter of 1998 increased to $1.37
billion, an increase of 20% versus the $1.14 billion recorded in
the second quarter of 1997 and unit shipments grew 36%. Sales in
the European region in the second quarter of 1998 were $130.7
million, down approximately 22% compared to the second quarter of
1997 while unit shipments in the region decreased 7%. Sales in
the Asia Pacific region grew to $116.9 million, an increase of
33% versus the comparable period of 1997 while unit shipments for
the second quarter of 1998 in the Asia Pacific region grew 70%
over the second quarter of 1997.
Sales and units shipped in the second quarter of 1998
decreased 6% and 4%, respectively, from the first quarter of
1998. AUP's in the second quarter of 1998 decreased 2% versus
the first quarter of 1998 primarily due to product mix changes
within the desktop product line. Sales in the Americas region in
the second quarter of 1998 decreased 6% from the first quarter of
1998 while units shipped decreased 4% from the first quarter of
1998. In the European region, sales and units shipped decreased
22% and 13%, respectively, from the first quarter of 1998. Sales
in the Asia Pacific region in the second quarter of 1998
increased 13% from the first quarter of 1998. Unit shipments in
the Asia Pacific region for the second quarter of 1998 increased
18% from units shipped in the first quarter of 1998.
Gross profit in the second quarter of 1998 increased to
$333.7 million, an increase of approximately 28% from the second
quarter of 1997. As a percentage of sales, gross profit for the
second quarter of 1998 increased to 20.6% from 18.7% and 19.5%,
respectively, in the second quarter of 1997 and the first quarter
of 1998. The gross profit improvements were primarily
attributable to tactical product pricing decisions intended to
offset high marketing costs incurred during the quarter. In
addition, gross profits were impacted favorably by new product
initiatives, improved product mix, some greater than normal
declines in component costs and reductions in overall royalty and
warranty costs.
Selling, general and administrative (SG&A) expenses for the
second quarter of 1998 increased approximately 38% and 10%,
respectively, versus the second quarter of 1997 and first quarter
of 1998. The increase from the first quarter of 1997 was
primarily due to increases in personnel and marketing. The
increase from the first quarter of 1998 results primarily from
increased marketing investments and new product initiatives. As
a percentage of sales, SG&A increased in the second quarter of
1998 to approximately 15.4% from 13.0% and 13.2%, respectively,
in the comparable period of 1997 and the first quarter of 1998.
Due to the factors discussed above, operating income in the
second quarter of 1998 increased by 5% to $84.0 million from
$79.9 million in the second quarter of 1997 but decreased 23%
from the first quarter of 1998. As a percentage of sales,
operating income for the second quarter of 1998 decreased to 5.2%
from 5.7% in the second quarter of 1997 and 6.3% in the first
quarter of 1998.
Other income, net includes other income net of expenses,
such as interest income and expense and foreign exchange
transaction gains and losses. Other income, net increased to
$10.9 million from $6.4 million and $9.3 million, respectively, in
the second quarter of 1997 and first quarter of 1998, primarily
due to the additional interest income generated by increases in
cash balances and marketable securities.
The Company's annualized effective tax rate was 36% for the
second quarter of 1998, an increase from the 34.5% rate for the
second quarter of 1997. The increase from 1997 is due to shifts
in the geographical distribution of the Company's earnings.
First Six Months of 1998 Compared to First Six Months of 1997
For the first half of 1998, sales increased 19% to $3.35
billion from $2.81 billion in the comparable period of 1997. The
increase is primarily due to strong consumer demand for the
Company's products and the continued growth in sales of the
Company's portable products. Unit shipments for the first half
of 1998 increased 36% to 1,503,000 units from 1,114,000 units in
the first half of 1997. AUP's were approximately 12% lower in
the first half of 1998 versus the comparable period of 1997.
Sales in the Americas region for the first half of 1998 grew 23%
versus the comparable period of 1997 to $2.83 billion and unit
shipments increased 39%. Sales for the first half of 1998 for
the European region were $293.7 million, a decrease of 14% versus
the first half of 1997 while unit shipments remained comparable.
Sales in the Asia Pacific region grew to $220.3 million in the
first six months of 1998, an increase of 33% versus the first
half of 1997 and unit shipments increased 59%.
Gross profit in the first half of 1998 increased to $670.2
million from $526.2 million in the first half of 1997. As a
percentage of sales, gross profit for the first half of 1998 was
20.0%, up from 18.7% in the comparable period of 1997. Gross
profit percentages were impacted favorably by improved product
mix, declines in component costs and reductions in overall
royalty and warranty costs.
SG&A expenses in the first half of 1998 increased 36% to
$477.0 million from $351.4 million in the first half of 1997. As
a percentage of sales, SG&A increased to 14.2% during the first
half of 1998 from 12.5% in the comparable period of 1997. The
increase in SG&A represents increases in personnel expenses
reflecting the general growth of the business and marketing
expenses attributable to an investment in the Company's brand and
new product initiatives.
Due to the factors discussed above, operating income for the
first half of 1998 increased 11% to $193.2 million from $174.7
million in the first half of 1997. As a percentage of sales,
operating income decreased to 5.8% in the first half of 1998 from
6.2% in the comparable period of 1997.
Other income, net increased in the first half of 1998 to
$20.3 million from $14.6 million during the comparable period of
1997. The increase results from additional interest income
generated by increased cash balances and marketable securities.
The Company's annualized effective tax rate was 36.0% for
the first half of 1998 compared to 34.5% recorded in the first
half of 1997. The increase in the effective tax rate is due to
shifts in the geographic distribution of the Company's earnings.
Liquidity and Capital Resources
At June 30, 1998, the Company had cash and cash equivalents
of $799.6 million, marketable securities of $92.2 million and an
unsecured committed credit facility with certain banks
aggregating $225 million, consisting of a revolving line of
credit facility and a sub-facility for letters of credit. At
June 30, 1998, no amounts were outstanding under the revolving
line of credit. Approximately $3.5 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 at least the next 12 months.
The Company generated $326.1 million in cash from operations
during the first six months of the year, including $162.5 million
of net income adjusted for non-cash items. Other significant
factors increasing available cash include a decrease in inventory
levels of $94.4 million and an increase of accounts payable and
other liabilities of $87.7 million, partially offset by an
increase in accounts receivable. The Company used approximately
$78.6 million for the construction of new facilities, information
systems and equipment and $53.5 million to purchase investments
in marketable securities, net of proceeds of securities sold.
At June 30, 1998, the Company had long-term indebtedness and
capital lease obligations of approximately $16.9 million. These
obligations relate to the Company's investments in equipment and
facilities.
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.
New Accounting Pronouncements
In June of 1998 the Financial Standards Board issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133) which is effective for fiscal years
beginning after June 15, 1999. The objective of the statement is
to establish accounting and reporting standards for derivative
instruments and hedging activities. The Company uses foreign
currency forward contracts, a derivative instrument, to hedge
foreign currency transactions and anticipated foreign currency
transactions. The adoption of this new accounting pronouncement
is not expected to be material to the Company's financial
position or results of operations.
Year 2000
The Company recognizes the need to ensure that its
operations will not be adversely impacted by Year 2000 software
failures. Software failures due to processing errors potentially
arising from calculations using the Year 2000 date are a known
risk.
In 1997, the Company created a corporate-wide Year 2000
project team representing all business units of the Company. The
Company's Year 2000 remediation efforts include the
implementation of upgrades to existing system applications as
well as the addition and implementation of new system
applications.
The Company anticipates the implementation phase of this
project to begin no later than the third quarter of 1998 and to
be completed by the second quarter of 1999. If the necessary
modifications and implementations are not made on a timely basis,
the Year 2000 issue could have a material, adverse effect on the
business, consolidated financial position, results of operations
or cash flows of the Company.
In addition to internal Year 2000 software and equipment
implementation activities, the Company is in contact with its
suppliers to assess their compliance. There can be no assurance
that there will not be a material adverse effect on the Company
if third parties do not convert their systems in a timely manner
and in a way that is compatible with the Company's systems. The
Company believes that its actions with suppliers will minimize
these risks.
During the first half of 1998, the Company expensed
incremental costs of approximately $1.4 million related to the
Year 2000 remediation efforts, and has expensed $1.7 million on a
life-to-date basis. The current total estimated cost to complete
the Year 2000 remediation efforts is from $10 to $15 million,
exclusive of upgrades to existing applications and implementation
of new systems. Internal and external costs specifically
associated with modifying internal-use software for the Year 2000
will be charged to expense as incurred. All of these costs are
being funded through operating cash flows.
The Company's current estimates of the amount of time and
costs necessary to implement and test its computer systems are
based on the facts and circumstances existing at this time. The
estimates were derived utilizing multiple assumptions of future
events including the continued availability of certain resources,
implementation success and other factors. New developments may
occur that could affect the Company's estimates for the Year 2000
compliance. These developments include, but are not limited to:
(a) the availability and cost of personnel trained in this area,
(b) the ability to locate and correct all relevant computer code
and equipment, and (c) the planning and modification success
needed to achieve full implementation. In addition, since there
is no uniform definition of Year 2000 "compliance" and not all
customer situations can be anticipated, the Company may
experience an increase in warranty and other claims as a result
of the Year 2000 transition.
Factors That May Affect Future Results
Factors that could cause future results to differ from the
Company's 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; changes in the product, customer or
geographic sales mix in any particular period; the outcome of
pending and future litigation; access to necessary intellectual
property rights; changes in government regulation; foreign
currency fluctuations; risks of acquired businesses; 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 consolidated
financial position, results of operations or cash flows, and
could cause future results to differ materially from those
expressed in any forward looking statement made by, or on behalf
of the Company.
The Company has experienced, and may continue to experience,
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. 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 or the right to
use 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.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
There has not been a material change in the Company's
exposure to foreign currency risks since December 31, 1997.
II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May
21, 1998. At the meeting, stockholders voted on (i) the election
of two Class II directors of the Company to hold office until the
annual meeting of stockholders of the Company to be held in 2001
and until a successor is duly elected and qualified, and (ii)
approval of an amendment to the Gateway 2000, Inc. 1996 Long-Term
Incentive Equity Plan.
<TABLE>
<CAPTION>
Votes Votes Withheld/ Broker
For Against Abstentions Non-Votes
<S> <C> <C> <C> <C>
1. Election of Directors
Jeffrey Weitzen 142,684,124 -- 236,184 --
Douglas L. Lacey 142,686,270 -- 234,038 --
2. Approval of amendment
to 1996 Long-Term
Incentive Equity Plan 103,889,983 15,624,007 340,743 23,065,575
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Description of Exhibits
No.
10.19 Gateway 2000, Inc. 1996 Long-Term Incentive Equity
Plan As Amended
10.20 Gateway 2000, Inc. 1996 Non-Employee Directors
Stock Option Plan
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1998.
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: August 14, 1998 By: /s/ David J. McKittrick
David J. McKittrick
Senior Vice President, Chief
Financial Officer and
Treasurer (authorized officer
and chief accounting
officer)
Exhibit INDEX TO EXHIBITS
No.
10.19 Gateway 2000, Inc. 1996 Long-Term Incentive Equity Plan
As Amended
10.20 Gateway 2000, Inc. 1996 Non-Employee Directors Stock
Option Plan As Amended
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GATEWAY 2000,
INC.'S CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,
1998 AND THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 799,608
<SECURITIES> 92,243
<RECEIVABLES> 541,793
<ALLOWANCES> 13,453
<INVENTORY> 154,823
<CURRENT-ASSETS> 1,743,350
<PP&E> 607,398
<DEPRECIATION> 192,587
<TOTAL-ASSETS> 2,276,386
<CURRENT-LIABILITIES> 1,076,621
<BONDS> 1,793
0
0
<COMMON> 1,556
<OTHER-SE> 1,100,571
<TOTAL-LIABILITY-AND-EQUITY> 2,276,386
<SALES> 3,346,837
<TOTAL-REVENUES> 3,346,837
<CGS> 2,676,655
<TOTAL-COSTS> 2,676,655
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,923
<INTEREST-EXPENSE> 460
<INCOME-PRETAX> 213,455
<INCOME-TAX> 76,844
<INCOME-CONTINUING> 136,611
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136,611
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.86
</TABLE>
Exhibit No. 10.19
Gateway 2000, Inc.
1996 Long-Term Incentive Equity Plan
As Amended
1. Purpose. The 1996 Long-Term Incentive Equity Plan (the
"Plan") is intended to promote the long-term success of Gateway
2000, Inc. (the "Company") and its stockholders by strengthening
the Company's ability to attract and retain highly competent
managers and other selected employees and to provide a means to
encourage stock ownership and proprietary interest in the
Company.
2. Term. The Plan shall become effective upon its
ratification and approval by the affirmative vote of the holders
of a majority of the securities of the Company present or
represented, and entitled to vote at, a meeting of stockholders
of the Company, and shall terminate at the close of business on
the fifth anniversary of such approval date unless terminated
earlier by the compensation Committee (as defined in Section 3).
After termination of the Plan, no future awards may be granted,
but previously granted awards shall remain outstanding in
accordance with their applicable terms and conditions and the
terms and conditions of the Plan.
3. Plan Administration. A committee (the "Compensation
Committee") appointed by the Board of Directors of the Company
(the "Board") shall be responsible for administering the Plan.
The Compensation Committee shall be comprised of two or more non-
employee members of the Board who shall qualify as disinterested
persons to administer the Plan as contemplated by (1) Rule 16b-3
under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), or any successor rules; and (2) Section 162(m)
of the Internal Revenue Code of 1986, as amended (the "Code").
The Compensation Committee shall have full and exclusive power to
interpret the Plan and to adopt such rules, regulations and
guidelines for carrying out the Plan as it may deem necessary or
proper, and such power shall be executed in the best interests of
the company and in keeping with the objectives of the Plan. This
power includes but is not limited to selecting award recipients,
establishing all award terms and conditions and adopting
modifications, amendments and procedures, as well as rules and
regulations governing awards under the Plan. The interpretation
and construction of any provision of the Plan or any option or
right granted hereunder and all determinations by the
Compensation Committee in each case shall be final, binding and
conclusive with respect to all interested parties.
4. Eligibility. Any employee of the Company shall be
eligible to receive one or more awards under the Plan. "Company"
includes any entity that is directly or indirectly controlled by
the Company or any entity in which the Company has a significant
equity interest, as determined by the Compensation Committee.
5. Shares of Common Stock Subject to the Plan. Subject to
the provisions of Section 6 of the Plan, the aggregate number of
shares of Common Stock, $.01 par value, of the Company ("Shares")
which may be transferred to participants under the Plan shall be
12,800,000. The aggregate number of Shares that may be issued
under awards pursuant to Section 8.3 of the Plan shall not exceed
6,400,000 Shares, and the aggregate number of Shares that may be
covered by awards granted to any single individual under the Plan
shall not exceed 1,000,000 Shares per fiscal year of the Company.
Any or all of the Shares may be granted in the form of incentive
stock options ("ISOs") intended to comply with Section 422 of the
Code.
Shares subject to awards under the Plan which expire,
terminate, or are canceled prior to exercise or, in the case of
awards granted under Section 8.3, do not vest, shall thereafter
be available for the granting of other awards. Shares which have
been exchanged by a participant as full or partial payment to the
Company in connection with any award under the Plan, also shall
thereafter be available for the granting of other awards. In
instances where a stock appreciation right ("SAR") or other award
is settled in cash, the Shares covered by such award shall remain
available for issuance under the Plan. Likewise, the payment of
cash dividends and dividend equivalents paid in cash in
conjunction with outstanding awards shall not be counted against
the Shares available for issuance. Any Shares that are issued by
the company, and any awards that are granted through the
assumption of, or in substitution for, outstanding awards
previously granted by acquired entity shall not be counted
against the Shares available for issuance under the Plan.
Any Shares issued under the Plan may consist in whole or in
part of authorized and unissued Shares or of treasury Shares, and
no fractional Shares be issued under the Plan. Cash may be paid
in lieu of any fractional Shares in settlements of awards under
the Plan.
6. Adjustments. In the event of any stock dividend, stock
split, combination or exchange of Shares, merger, consolidation,
spin-off, recapitalization or other distribution (other than
normal cash dividends) of Company assets to stockholders, or any
other change affecting Shares or Share price, such proportionate
adjustments, if any, as the Compensation Committee in its
discretion may deem appropriate to reflect such change shall be
made with respect to (1) the aggregate number of Shares that may
be issued under the Plan, the aggregate number of Shares that may
be issued pursuant to Section 8.3 of the Plan, and the aggregate
number of Shares that may be granted to any single individual
under the Plan; (2) each outstanding award made under the Plan;
and (3) the exercise price per Share for any outstanding stock
options, SARs or similar awards under the Plan.
7. Fair Market Value. "Fair Market Value," for all
purposes under the Plan, shall mean the closing price of a Share
as reported daily in The Wall Street Journal or similar, readily
available public source for the date in question. If no sales of
Shares were made on such date, the closing price of a Share as
reported for the preceding day on which a sale of Shares occurred
shall be used.
8. Awards. The Compensation Committee shall determine the
type or types of award(s) to be made to each participant. Awards
may be granted singly, in combination or in tandem. Awards also
may be made in combination or in tandem with, in replacement of,
as alternatives to or as the payment form for grants or rights
under any other compensation plan or individual contract or
agreement of the Company including those of any acquired entity.
The types of awards that may be granted under the Plan are:
8.1. Stock Options. A stock option is a right to
purchase a specified number of Shares during a specified period
as determined by the Compensation Committee. The purchase price
per Share for each stock option shall be not less than 100% of
Fair Market Value on the date of grant, except if a stock option
is granted retroactively in tandem with or as a substitution for
a SAR, the exercise price may be no lower than the Fair Market
Value of a Share as set forth in award agreements for such tandem
or replaced SAR. A stock option may be in the form of an ISO
which, in addition to being subject to applicable terms,
conditions and limitations established by the Compensation
Committee, complies with Section 422 of the Code. The price at
which Shares may be purchased under a stock option shall be paid
in full by the optionee at the time of the exercise in cash or
such other method permitted by the Compensation Committee,
including (1) tendering Shares (with prior approval of the Chief
Executive Officer if Shares are owned less than six months); (2)
authorizing a third party to sell the Shares (or a sufficient
portion thereof) acquired upon exercise of a stock option and
assigning the delivery to the Company of a sufficient amount of
the sale proceeds to pay for all the Shares acquired through such
exercise; or (3) any combination of the above.
8.2. SARs. A SAR is a right to receive a payment, in
cash and/or Shares, equal to the excess of the Fair Market Value
of a specified number of Shares on the date the SAR is exercised
over the Fair Market Value on the date the SAR was granted as set
forth in the applicable award agreement; except that if a SAR is
granted retroactively in tandem with or in substitution for a
stock option, the designated Fair Market Value set forth in the
award agreement shall be no lower than the Fair Market Value of a
Share for such tandem or replaced stock option.
8.3. Stock Awards. A stock award is a grant made or
denominated in Shares or units equivalent in value to Shares.
All or part of any stock award may be subject to conditions and
restrictions established by the Compensation Committee, as set
forth in the applicable award agreement, which may include, but
are not limited to, continuous service with the Company and/or
the achievement of performance goals. The performance criteria
that may be used by the Compensation Committee in granting a
stock award contingent on performance goals shall consist of
earnings, earnings per share, revenues, profit growth, profit-
related return ratios, cash flow or total stockholder return.
The Compensation Committee may select one criterion or multiple
criteria for measuring performance, and the measurement may be
stated in absolute terms or relative to comparable companies.
Notwithstanding anything to the contrary contained in the
Plan, the Compensation Committee may grant a stock award which is
not contingent on performance goals or which is contingent on
performance goals other than those specified in this Section 8.3,
provided the Compensation Committee shall have determined that
such award is not required to satisfy the requirements for
"qualified performance-based compensation" within the meaning of
Section 162(m) of the Code.
9. Dividends and Dividend Equivalents. The Compensation
Committee may provide that any awards under the Plan earn
dividends or dividend equivalents. Such dividends or dividend
equivalents may be paid currently or may be credited to a
participant's account. Any crediting of dividends or dividend
equivalents may be subject to such restrictions and conditions as
the Compensation Committee may establish, including reinvestment
in additional Shares or Share equivalents.
10. Deferrals and Settlements. Payment of awards may be in
the form of cash, stock, other awards or combinations thereof as
the Compensation Committee shall determine at the time of grant,
and with such restrictions as it may impose. The Compensation
Committee also may require or permit participants to elect to
defer the issuance of Shares or the settlement of awards in cash
under such rules and procedures as it may establish under the
Plan. It also may provide that deferred settlements include the
payment or crediting of interest on the deferral amounts, or the
payment or crediting of dividend equivalents where the deferral
amounts are denominated in Shares.
11. Transferability and Exercisability. Awards granted
under the Plan shall not be transferable or assignable other than
(1) by will or the laws of descent and distribution; (2) by gift
or other transfer of an award to any trust or estate in which the
original award recipient or such recipient's spouse or other
immediate relative has a substantial beneficial interest, or to a
spouse or other immediate relative, provided that any such
transfer is permitted by Rule 16B-3 under the Exchange Act as in
effect when such transfer occurs and the Board does not rescind
this provision prior to such transfer; or (3) pursuant to a
qualified domestic relations order (as defined by the Code).
However, any award so transferred shall continue to be subject to
all the terms and conditions contained in the instrument
evidencing such award.
In the event that a participant terminates employment with
the Company to assume a position with a governmental, charitable,
educational or other non-profit institution, the Compensation
Committee may subsequently authorize a third party, including but
not limited to a "blind" trust, to act on behalf of and for the
benefit of such participant regarding any outstanding awards held
by the participant subsequent to such termination of employment.
If so permitted by the Compensation Committee, a participant may
designate a beneficiary or beneficiaries to exercise the rights
of the participant and receive any distribution under the Plan
upon the death of the participant.
12. Award Agreements. Awards under the Plan shall be
evidenced by agreements as approved by the Compensation Committee
that set forth the terms, conditions and limitations for each
award, which may include the term of an award (except that in no
event shall the term of any ISO exceed a period of ten years from
the date of its grant), the provisions applicable in the event
the participant's employment terminates, and the Compensation
Committee's authority to unilaterally or bilaterally amend,
modify, suspend, cancel or rescind any award. The Compensation
Committee need not require the execution of any such agreement,
in which case acceptance of the award by the participant shall
constitute agreement to the terms of the award.
13. Foreign Participation. In order to assure the
viability of awards granted to participants employed in foreign
countries, the Compensation Committee may provide for such
special terms as it may consider necessary or appropriate to
accommodate differences in local law, tax policy or custom.
Moreover, the Compensation Committee may approve such supplements
to, or amendments, restatements or alternative versions of the
Plan as it may consider necessary or appropriate for such
purposes without thereby affecting the terms of the Plan as in
effect for any other purposes; provided that, no such
supplements, amendments, restatements or alternative versions
shall increase the Share limitations contained in Section 5 of
the Plan.
14. Acceleration and Settlement of Awards. The
Compensation Committee shall have the discretion, exercisable at
any time before a sale, merger, consolidation, reorganization,
liquidation or change of control of the Company, as defined by
the Compensation Committee, to provide for the acceleration of
vesting and for settlement, including cash payment of an award
granted under the Plan, upon or immediately before the
effectiveness of such event. However, the granting of awards
under the Plan shall in no way affect the right of the Company to
adjust, reclassify, reorganize or otherwise change its capital or
business structure, or to merge, consolidate, dissolve,
liquidate, sell or transfer all or any portion of its businesses
or assets.
14A. Change of Control
14A.1. Additional Option Grant; Substituted Options. In
the event of a Change of Control as defined in Section 14A.2(a):
(a) All employees who received a grant of options under this
Plan in the twelve months preceding the effective date of such
Change in Control shall receive a grant of options, effective as
of the day preceding such Change in Control, equal to the
aggregate number of options granted to such employee in such
twelve-month period, provided that any such grant shall comply
with Section 162 (m) of the Code. All such options shall vest
100% twenty-four months from the date of grant unless vesting is
accelerated as provided below.
(b) All outstanding options that are not exercisable on the
date of a Change in Control, including any options granted
pursuant to paragraph (a) above, shall immediately become
exercisable in full upon such Change in Control unless, in the
case of a Change in Control described in Section 14A.2 (a) (i) or
(iii), the acquiring company has agreed in writing to assume the
option obligation by substituting options of its own which are
comparable in all respects to the outstanding options under the
Plan (including the provisions of paragraph (a) (iii) below),
with each such substituted option appropriately adjusted to apply
to the number and class of securities which would have been
issuable to the holder thereof had the option been exercised
immediately prior to such Change in Control (including
adjustments to the number and exercise price of such options).
(iii) Notwithstanding anything to the contrary in the
foregoing or elsewhere in the Plan, in the event of a
participant's Involuntary Termination within eighteen (18) months
of the effective date of a Change in Control described in Section
14A.2 (a) (i) or (iii), such termination shall be treated as
approved by the Compensation Committee for purposes of all of
such participant's option award agreements, and all of such
participant's then outstanding nonexercisable options shall
become exercisable in full as of midnight of the day before such
termination.
14A.2 Definitions. (a) For purposes hereof, the term "Change
in Control" shall mean (i) the acquisition, directly or
indirectly by any person or related group of persons (other than
the Company or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Company), of
beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent (50%)
of the total combined voting power of Company's outstanding
securities pursuant to a tender or exchange offer made directly
to the Company's stockholders, or (ii) a change in the
composition of the board over a period of thirty-six (36)
consecutive months or less such that a majority of the Board
members ceases to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such
period or (B) have been initially elected or nominated for
election as Board members during such period by at least a
majority of the board members described in clauses (A) and (B)
who were still in office at the time such election or nomination
was approved by the Board, (iii) a merger or consolidation in
which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from
the persons holding those securities immediately prior to such
transaction, or (iv) the sale, transfer or other disposition of
all or substantially all of the Company's assets or the complete
liquidation or dissolution of the Company.
(b) For purposes hereof, the term "Involuntary Termination"
shall mean any of the following changes in the terms and
conditions of an employee's employment:
(i) an involuntary termination of employment for any reason
other than death, entitlement to benefits under the Company's
long-term disability plan or Cause;
(ii) a reduction in his or her level of compensation
(including base salary), fringe benefits and participation in
corporate performance based bonus or incentive programs;
(iii) a change in his or her position with the Company which
materially reduces his or her level of job responsibility and/or
authority; or
(iv) without the employee's consent, the relocation of the
employee's regular assigned workplace by more than 50 additional
miles from his or her residence.
(c) For purposes hereof, the term "Cause" shall mean: (i)
the willful and continued failure of an employee to perform
substantially the employee's duties with the Company or an
affiliate (other than a failure resulting from an incapacity due
to physical or mental illness), after written notice specifically
identifying any such failures has been delivered to the employee
and the employee has been given an opportunity to cure such
failures; (ii) the willful engaging by the employee in illegal
conduct or gross misconduct which is materially and demonstrably
injurious to the Company; (iii) the commission of any act of
fraud, embezzlement or dishonesty by the participant; or (iv) any
unauthorized use or disclosure by such person of confidential
information or trade secrets of the Company or any subsidiary of
the Company.
14A.3 Parachute Payments. In the event that the
aggregate present value of payments to a participant under this
Plan and/or under any other plan, program, or arrangement
maintained by the Company constitutes an "excess parachute
payment" (within the meaning of Code Section 280G(b) (1)) and the
excise tax on such payment would cause the net parachute payments
(after taking into account federal and state income and excise
taxes) to which such participant would otherwise be entitled to
be less than what such participant would have netted (after
taking into account federal and state income taxes) had the
present value of such participant's total parachute payments
equaled $1.00 less than three times his or her "base amount"
(within the meaning of Code Section 280G (b) (3) (A)), unless the
Company and the affected individual(s) otherwise have agreed by
separate contract or award, his or her total "parachute payments"
(within the meaning of Code Section 280G (b) (2) (A)) shall be
reduced (but by the minimum possible amount) so that their
aggregate present value equals $1.00 less than three times such
base amount. For purposes of this calculation, it shall be
assumed that such participant's tax rate will be the maximum
marginal federal and state income tax rate on earned income, with
such maximum federal rate to be computed with regard to Code
Section 1(g), if applicable. In the event that the participant
and the Company are unable to agree as to the amount of the
reduction described above, if any, the participant shall select a
law firm or accounting firm from among those regularly consulted
(during the twelve-month period immediately prior to the relevant
change of control) by the Company regarding federal income tax
matters, and such law firm or accounting firm shall determine the
amount of such reduction and such determination shall be final
and binding upon the participant and the Company.
15. Plan Amendment. The Plan may be amended by the
Compensation Committee as it deems necessary or appropriate to
better achieve the purposes of the Plan, except that no such
amendment shall be made without the approval of the Company's
stockholders which would increase the number of Shares available
for issuance in accordance with Sections 5 and 6 of the Plan, or
cause the Plan not to comply with Rule 16b-3 (or any successor
rule) under the Exchange Act or Section 162(m) of the Code. The
Board may suspend the Plan or terminate the Plan at any time;
provided that, that no such action adversely affects any
outstanding benefit. Any Shares authorized under Section 5 (or
any amendment thereof) with respect to which no Award is granted
prior to termination of the Plan, or with respect to which an
Award is terminated, forfeited or canceled after termination of
the Plan, shall automatically be transferred to any subsequent
long-term incentive equity plan for employees of the Company.
16. Tax Withholding. The Company shall have the right to
deduct from any settlement of an award made under the Plan,
including the delivery or vesting of Shares, a sufficient amount
to cover withholding of any federal, state or local taxes
required by law, or to take such other action as may be necessary
to satisfy any such withholding obligations. The Compensation
Committee may, in its discretion and subject to such rules as it
may adopt, permit participants to use Shares to satisfy required
tax withholding (with prior approval of the Chief Executive
Officer if Shares are owned less than six months) and such Shares
shall be valued at the Fair Market Value as of the settlement
date of the applicable award.
17. Registration of Shares. Notwithstanding any other
provision of the Plan, the Company shall not be obligated to
offer or sell any Shares unless such Shares are at that time
effectively registered or exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act") and the
offer and sale of such Shares are otherwise in compliance with
all applicable federal and state securities laws and the
requirements of any stock exchange or similar agency on which the
Company's securities may then be listed or quoted. The Company
shall have no obligation to register the Shares under the federal
securities laws or take any other steps as may be necessary to
enable the Shares to be offered and sold under federal or other
securities laws. Prior to receiving Shares, a Plan participant
may be required to furnish representations or undertakings deemed
appropriate by the Company to enable the offer and sale of the
Shares or subsequent transfers of any interest in such Shares to
comply with the Securities Act and other applicable securities
laws. Certificates evidencing Shares shall bear any legend
required by, or useful for the purposes of compliance with,
applicable securities laws, this Plan or award agreements.
18. Other Benefit and Compensation Programs. Unless
otherwise specifically determined by the compensation Committee,
settlements of awards received by participants under the Plan
shall not be deemed a part of a participant's regular, recurring
compensation for purposes of calculating payments or benefits
from any Company benefit plan, severance program or the severance
pay law of any country. Further, the Company may adopt other
compensation programs, plans or arrangements as it deems
appropriate or necessary.
19. Unfunded Plan. Unless otherwise determined by the
Compensation Committee, the Plan shall be unfunded and shall not
create (or be construed to create) a trust or a separate fund or
funds. The Plan shall not establish any fiduciary relationship
between the Company and any participant or other person. To the
extent any person holds any rights by virtue of an award granted
under the Plan, such rights shall be no greater than the rights
of an unsecured general creditor of the Company.
20. Use of Proceeds. The cash proceeds received by the
Company from the issuance of Shares pursuant to awards under the
Plan shall constitute general funds of the Company.
21. Regulatory Approvals. The implementation of the Plan,
the granting of any award under the Plan, and the issuance of
Shares upon the exercise or settlement of any award shall be
subject to the Company's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the
Plan, the awards granted under it or the Shares issued pursuant
to it.
22. Employment Rights. The Plan does not constitute a
contract of employment, and participation in the Plan will not
give a participant the right to continue in the employ of the
Company on a full-time, part-time or any other basis.
Participation in the Plan will not give any participant any right
or claim to any benefit under the Plan, unless such right or
claim has specifically accrued under the terms of the Plan.
23. Governing Law. The validity, construction and effect
of the Plan and any actions taken or relating to the Plan shall
be determined in accordance with the laws of the State of South
Dakota and applicable federal law.
24. Successors and Assigns. The Plan shall be binding on
all successors and assigns of a participant, including, without
limitation, the estate of such participant and the executor,
administrator or trustee of such estate, or any receiver or
trustee in bankruptcy or representative of the participant's
creditors.
Exhibit No. 10.20
Gateway 2000, Inc.
1996 Non-Employee Directors Stock Option Plan
As Amended
1. Purpose. The purpose of the 1996 Non-Employee Directors
Stock Option Plan (the "Plan") is to attract and retain highly
qualified people who are not employees of Gateway 2000, Inc.
(the "Company") or any of its subsidiaries to serve as Non-
Employee Directors of the Company, and to encourage Non-Employee
Directors to own shares of the Company's Common Stock, $.01 par
value (the "Common Stock").
2. Administration. Grants of Options under the Plan shall
be automatic as provided in Section 5.1 below. All questions of
interpretation of the Plan or of any options issued hereunder
shall be determined by a committee (the "Compensation Committee")
consisting of two or more members appointed by the Board of
Directors of the Company (the "Board").
3. Eligibility. Only a member of the Board who is not an
employee of the Company or any of its subsidiaries (a "Non-
Employee Director") shall be eligible to participate in the Plan.
4. Shares Available for Options.
4.1. Available Shares. "Option" shall mean an option
granted under the provisions of Section 5 of this Plan to
purchase Common Stock. "Date of Grant" shall mean the date of
grant of an Option. The Company intends that Options shall
constitute non-qualified stock options [and not incentive stock
options within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code")]. Subject to adjustment
under Section 4.2 below, Options may be granted under the Plan in
respect of a maximum of 600,000 shares of Common Stock. Shares
subject to an Option that expires or terminates unexercised shall
again be available for Options hereunder to the extent of such
expiration or termination. Shares issued under the Plan may
consist in whole or in part of authorized but unissued shares or
treasury shares.
4.2. Adjustments. In the event of any stock dividend,
stock split, recapitalization, reorganization, merger,
consolidation, combination or exchange of shares, or any other
similar change affecting the Common Stock, an appropriate
adjustment to reflect any such change shall be made in the total
number and class of shares for which Options may be granted, the
number and class of shares and the price per share of any Option
theretofore granted to the extent unexercised and the number and
class of shares for which Options shall be granted to Non-
Employee Directors pursuant to Section 5.1.1.
5. Stock Options. Each Option granted under the Plan shall
be evidenced by a written agreement in such form as the
Compensation Committee shall approve and shall be subject to
Section 4 and the following terms and conditions:
5.1. Automatic Awards. Awards of Options shall be
made automatically to Non-Employee Directors as follows:
5.1.1. Initial Awards. Each individual who was a
Non-Employee Director on December 31, 1995 shall, on the
effective date, be granted an Option for the purchase of 24,000
shares of Common Stock. Each individual who was not a Non-Em
ployee Director on December 31, 1995 but who is a Non-Employee
Director on the day preceding the effective date shall, on the
effective date, be granted an Option for the purchase of 12,000
shares of Common Stock.
5.1.2. Annual Awards. Each Non-Employee Director
shall be granted an Option for the purchase of 12,000 shares of
Common Stock immediately following each annual meeting following
the effective date, provided the individual is a Non-Employee
Director on the Date of Grant.
5.2. Apportionment of Shares. The automatic awards
specified in Section 5.1 shall be made in the amounts specified
in Section 5.1 only if the number of shares of Common Stock
available to be issued, transferred or exercised pursuant to
awards under the Plan as calculated in Section 4.1 is sufficient
to make all automatic awards required to be made by Section 5.1
on the respective Dates of Grant. If the number of shares of
Common Stock available to be issued or transferred pursuant to
awards under the Plan on any Date of Grant of one or more
automatic awards is insufficient to permit the grant of all such
awards, the Common Stock available under the Plan shall be
proportionally allocated between such awards, and the number of
shares so allocated to each award shall be the number of shares
granted.
5.3. Terms and Conditions of Automatic Award. The
following terms and conditions shall apply to automatic awards
made pursuant to Section 5.1:
5.3.1. Initial Awards. With respect to Option
awards granted pursuant Section 5.1.1: (1) the exercise price for
each share of Common Stock subject to the Option shall be the
Fair Market Value of a share of Common Stock on the Date of Grant
of such Option; (2) the Option shall become 100% vested and
exercisable at midnight, Central Time, of the day before the
first anniversary of the Date of Grant of such Option so long as
the Non-Employee Director remains a director of the Company after
the Date of Grant through such time; and (3) the Option shall
terminate on the earliest of (i) midnight, Central Time, of the
day before the tenth anniversary of the Date of Grant,
(ii) midnight, Central Time, on the ninetieth day after the date
on which the Holder ceases to be a Non-Employee Director for any
reason other than the reasons specified in the following clause
(iii), or (iii) midnight, Central Time, of the day before the
first anniversary of the date the Holder ceases to be a Non-
Employee Director because of death or permanent disability.
5.3.2. Annual Awards. With respect to Option
awards granted pursuant to Section 5.1.2: (1) the exercise price
for each share of Common Stock subject to the Option shall be the
Fair Market Value of a share of Common Stock on the Date of Grant
of such Option; (2) the Option shall become vested and
exercisable with respect to one-third of the number of shares
subject thereto (provided, that any fractional share shall be
rounded up to a whole share) at midnight, Central Time, of the
day before each of the first three anniversaries of the Date of
Grant so long as the Non-Employee Director remains a Non-Employee
Director of the Company after the Date of Grant through such
times; and (3) the Option shall terminate on the earliest of
(i) midnight, Central Time, of the day before the tenth
anniversary of the Date of Grant, (ii) midnight, Central Time, on
the ninetieth day after the date on which the Holder ceases to be
a director for any reason other than the reasons specified in the
following clause (iii), or (iii) midnight, Central Time, of the
day before the first anniversary of the date the Holder ceases to
be a director because of death or permanent disability.
5.4. Exercise of Options. An option, or portion
thereof, shall be exercised by delivery of a written notice of
exercise to the Secretary of the Company and payment of the full
purchase price (the "Exercise Price") for the shares being
purchased pursuant to the Option. The Exercise Price may be paid
in cash, in shares of Common Stock already owned for at least six
months (or for less than six months if approved by the Chief
Executive Officer of the Company) by the Non-Employee Director
who is granted an Option (including any other person entitled to
exercise the Option, the "Optionee") and to which the Optionee
has good title, free and clear of all liens and encumbrances, or
partly in cash and partly in such shares of Common Stock;
provided that, the method of paying the Exercise Price shall be
in compliance with Section 16 of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and the rules and
regulations thereunder. The value of shares delivered in payment
of the Exercise Price shall be their Fair Market Value as of the
date of exercise of the Option. Payments in cash may be made by
the delivery of a check payable to the order of the Company.
Subject to Section 6, below, upon receipt of notice and payment,
the Company shall promptly issue and deliver to the Optionee (or
other person entitled to exercise the Option) a certificate or
certificates for the number of shares as to which the exercise is
made. An Option may not be exercised for fractional shares of
Common Stock.
5.5. Termination of Service. Each Option terminates
ten years from the date of grant or, if earlier, (1) three years
after the initial grantee of the Option (the "Grantee") ceases
service as a Director for any reason other than death or
disability, if the Grantee served for six years or more; (2) 90
days after the Grantee ceases service as a Director for any
reason other than death or disability, if the Grantee did not
serve for six years or more; or (3) one year after the Grantee
ceases service as a Director as a result of death or disability.
The rights of the Grantee may be exercised by the Grantee's
guardian or legal representative in the case of disability or
death.
5.6. Fair Market Value. "Fair Market Value," for
all purposes under the Plan, shall mean the
closing price of a share of Common Stock as reported daily in The
Wall Street Journal or similar, readily available public source
for the date in question. If no sales of shares of Common Stock
were made on such date, the closing price of a share of Common
Stock as reported for the preceding day on which a sale of shares
of Common Stock occurred shall be used.
5.7 Acceleration and Settlement of Awards.
Notwithstanding anything herein to the contrary, in
the event of a Change in Control (as described below), effective
with such Change in Control, outstanding options that are not
exercisable on the date preceding such Change in Control shall
become exercisable in full. Upon a Change of Control described
in (iii) below, all outstanding options shall represent a right
to receive the consideration and shall terminate and cease to be
outstanding (unless assumed by the acquiror as described above).
For purposes hereof, the term "Change in Control" shall mean
(i) the acquisition, directly or indirectly by
any person or related group of persons (other than the Company or
a person that directly or indirectly controls, controlled by, or
is under common control with, the Company), of beneficial
ownership (within the meaning of Rule 13D-3 of the 1934 Act) of
securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer made directly to the
Company's stockholders of (ii) a change in the composition of the
board over a period of thirty-six (36) consecutive months or less
such that a majority of the Board members ceases to be comprised
of individuals who either (A) have been Board members
continuously since the beginning of such period or (B) have been
elected or nominated for election as Board members during such
period by at least a majority of the Board members described in
clause (A) who were still in office at the time such election or
nomination was approved by the Board, (iii) a merger or
consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Company's
outstanding securities are transferred to a person or persons
different from the person holding those securities immediately
prior to such transaction, or (iv) the sale, transfer or other
disposition of all or substantially all of the Company's assets
or the complete liquidation or dissolution of the Company.
6. Tax Withholding. The Company shall be entitled, if
necessary or desirable, to withhold from any Optionee from any
amounts due and payable by the Company to such Optionee (or
secure payment from such Optionee in lieu of withholding) the
amount of any withholding or other tax due from the Optionee with
respect to any shares of Common Stock issuable under the Plan.
The Optionee may satisfy any withholding tax obligation by (1) a
cash payment to the Company; or (2) delivery of previously-owned
shares of Common Stock which the Optionee has held for at least
six months (or less than six months with the permission of the
Chief Executive Officer) and to which the Optionee has good
title, free and clear of all liens and encumbrances.
7. Transferability and Exercisability. Options granted
under the Plan shall not be transferable or assignable other than
(1) by will or the laws of descent and distribution; (2) by gift
or other transfer to any trust or estate in which the original
option recipient or such recipient's spouse or other immediate
relative has a substantial beneficial interest, or to a spouse or
other immediate relative, provided that any such transfer is
permitted by Rule 16b-3 of the Exchange Act as in effect when
such transfer occurs and the Board does not rescind this
provision prior to such transfer; or (3) pursuant to a qualified
domestic relations order (as defined by the Code). However, any
Option so transferred shall continue to be subject to all the
terms and conditions contained in the instrument evidencing such
Option.
If so permitted by the Compensation Committee, an Optionee
may designate a beneficiary or beneficiaries to exercise the
rights of the Optionee and receive any distribution under the
Plan upon the death of the Optionee.
8. Legal Requirements. Notwithstanding any other provision
of the Plan, the Company shall not be obligated to offer or sell
any shares of Common Stock upon exercise of an Option unless the
shares to be issued upon such exercise are at that time
effectively registered or exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act") and the
offer and sale of such shares are otherwise in compliance with
all applicable federal and state securities laws and the
requirements of any stock exchange or similar agency on which the
Company?s securities may then be listed or quoted. The Company
shall have no obligation to register the securities covered by
this Plan under the federal securities laws or take any other
steps as may be necessary to enable the securities covered by
this Plan to be offered and sold under federal or other
securities laws. Upon exercising all or any portion of an
Option, an Optionee may be required to furnish representations or
undertakings deemed appropriate by the Company to enable the
offer and sale of the shares of Common Stock upon exercise of the
Option or subsequent transfers of any interest in such shares to
comply with the Securities Act and other applicable securities
laws. Certificates evidencing shares of Common Stock issued
pursuant to Options shall bear any legend required by, or useful
for the purposes of compliance with, applicable securities laws,
this Plan or the agreements evidencing the Options.
It is the intention of the Company that the Plan comply in
all respects with Rule 16b-3 promulgated under Section 16(b) of
the Exchange Act, that eligible directors remain disinterested
persons for purposes of administering other employee benefit
plans of the Company and that such other plans be exempt from
Section 16(b) of the Exchange Act. Therefore, if any Plan
provision should be found not to be in compliance with Rule 16b-3
or if any Plan provision would disqualify eligible directors from
remaining disinterested persons, that provision shall be deemed
null and void, and in all events the Plan shall be construed in
favor of its meeting the requirements of Rule 16b-3.
9. Effective Date; Duration; Suspension and Amendment. The
Plan shall become effective upon ratification and approval by the
affirmative vote of the holders of a majority of the securities
of the Company present or represented, and entitled to vote at, a
meeting of stockholders of the Company. The Plan shall terminate
automatically on the tenth anniversary of the effective date
unless terminated earlier by the Board. The Board may suspend
the Plan at any time. The Board may amend the Plan at any time;
provided that, no amendment may be made without the approval of
the stockholders of the Company (in the same manner as initial
approval of the Plan) if such amendment would (1) increase the
total number of shares for which Options may be granted;
(2) change the manner of determining the purchase price of shares
of Common Stock under the Plan; (3) change the class of persons
eligible to receive Options under the Plan; (4) change the
provisions relating to the administration of the Plan; or (5) in
any other manner cause the Plan to fail to comply with Rule 16b-3
under the Exchange Act or any other requirement of applicable law
or regulation. Notwithstanding any other provision of the Plan,
in no event shall the provisions of this Plan be amended more
frequently than once every six months other than to comply with
changes in the Code or the rules thereunder. The Board may
terminate the Plan at any time, but such termination shall not
affect Options already granted and such Options shall remain in
full force and effect as if the Plan had not been terminated. No
shares of Common Stock shall be issued or sold under this Plan
after the termination of the Plan, except upon exercise of
Options granted before termination. Any shares of Common Stock
authorized under Section 4 of the Plan (or any amendment thereof)
with respect to which an Option is not granted prior to
termination of the Plan, or with respect to which an Option is
terminated, forfeited or canceled after termination of the Plan,
shall automatically be transferred to any subsequent stock option
plan for Non-Employee Directors of the Company.
10. Limitation of Rights. Neither the Plan nor the
granting of any Option hereunder shall constitute an agreement or
understanding that the Company will retain a Non-Employee
Director for any period of time or at any particular rate of
compensation. The holder of an Option shall not thereby have any
rights as a stockholder until the holder receives shares of
Common Stock upon exercise of such Option.
11. Unfunded Plan. Unless otherwise determined by the
Compensation Committee, the Plan shall be unfunded and shall not
create (or be construed to create) a trust or a separate fund or
funds. The Plan shall not establish any fiduciary relationship
between the Company and any Optionee or other person. To the
extent any person holds any rights by virtue of an Option granted
under the Plan, such rights shall be no greater than the rights
of an unsecured general creditor of the Company.
12. Governing Law. The validity, construction and effect
of the Plan and any actions taken or relating to the Plan shall
be determined in accordance with the laws of the State of South
Dakota and applicable federal law.
