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, 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 May 8, 1998, there were 155,602,006 shares of the
Common Stock of the Company, $.01 par value per share,
outstanding.
I. FINANCIAL INFORMATION
Item 1. Financial Statements
Gateway 2000, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1997 and 1998
(in thousands, except per share amounts)
(Unaudited)
Three Months ended March 31,
1997 1998
Net Sales $ 1,419,336 $ 1,727,927
Cost of goods sold 1,153,543 1,391,433
Gross profit 265,793 336,494
Selling, general and
administrative expenses 170,915 227,293
Operating income 94,878 109,201
Other income, net 8,200 9,347
Income before income taxes 103,078 118,548
Provision for income taxes 35,562 42,677
Net income $ 67,516 $ 75,871
Net income per share:
Basic $ 0.44 $ 0.49
Diluted $ 0.43 $ 0.48
Weighted average shares
outstanding:
Basic 153,557 154,548
Diluted 157,291 157,575
<TABLE>
Gateway 2000, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and March 31, 1998
(in thousands, except per share amounts)
(Unaudited)
<CAPTION>
December 31, March 31,
1997 1998
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 593,601 $ 742,170
Marketable securities 38,648 66,844
Accounts receivable, net 510,679 471,883
Inventory 249,224 185,405
Other 152,531 154,615
Total current assets 1,544,683 1,620,917
Property, plant and equipment, net 336,469 361,072
Internal use software costs, net 39,998 37,546
Intangibles, net 82,590 78,583
Other assets 35,531 44,105
$ 2,039,271 $ 2,142,223
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities
of long-term obligations $ 13,969 $ 10,391
Accounts payable 488,717 462,091
Accrued liabilities 271,250 308,879
Accrued royalties 159,418 150,912
Income taxes payable 26,510 40,326
Other current liabilities 44,042 48,379
Total current liabilities 1,003,906 1,020,978
Long-term obligations, net of current
maturities 7,240 2,768
Warranty and other liabilities 98,081 93,619
Total liabilities 1,109,227 1,117,365
Contingencies (Note 5)
Stockholders' equity:
Preferred Stock, $.01 par value,
10,000 shares authorized; none issued
and outstanding - -
Class A Common Stock, nonvoting, $.01
par value, 2,000 shares authorized;
none issued and outstanding - -
Common Stock, $.01 par value, 440,000
shares authorized; 154,128 shares and
154,997 shares issued and
outstanding, in 1997 and 1998
respectively 1,541 1,550
Additional paid-in capital 299,483 318,481
Retained earnings 634,509 710,381
Accumulated other comprehensive income (5,489) (5,554)
Total stockholders' equity 930,044 1,024,858
$ 2,039,271 $ 2,142,223
</TABLE>
<TABLE>
Gateway 2000, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1997 and 1998
(in thousands)
(Unaudited)
<CAPTION>
Three Months Ended March 31,
1997 1998
<S> <C> <S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 67,516 $ 75,871
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 19,009 23,971
Provision for uncollectible accounts
receivable 1,184 1,412
Deferred income taxes (13,142) (18,205)
Other, net 23 671
Changes in operating assets and liabilities:
Accounts receivable 28,567 37,384
Inventory (42,681) 63,819
Other current assets (38,872) 8,416
Accounts payable 12,802 (27,957)
Accrued liabilities (2,804) 23,719
Accrued royalties 15,101 (8,506)
Income taxes payable 13,603 22,660
Other current liabilities (5,969) (4,234)
Other liabilities 3,761 16,616
Net cash provided by operating activities 58,098 215,637
Cash flows from investing activities:
Capital expenditures (13,451) (38,162)
Internal use software costs (3,744) (3,036)
Purchases of available-for-sale securities (8,985) (34,928)
Proceeds from maturities of available-for-sale
securities - 6,864
Other, net 461 (210)
Net cash (used in) investing activities (25,719) (69,472)
Cash flows from financing activities:
Proceeds from issuance of notes payable 5,000 -
Principal payments on long-term obligations and
notes payable (6,403) (8,239)
Stock options exercised 586 9,563
Net cash provided by (used in) financing
activities (817) 1,324
Foreign exchange effect on cash and cash equivalents (670) 1,080
Net increase in cash and cash equivalents 30,892 148,569
Cash and cash equivalents, beginning of period 516,360 593,601
Cash and cash equivalents, end of period $ 547,252 $ 742,170
1. General:
The accompanying unaudited consolidated financial statements
of Gateway 2000, Inc. (the "Company") as of March 31, 1998 and
for the three months ended March 31, 1997 and 1998 have been
prepared on the same basis as the audited consolidated financial
statements as of and for the year ended December 31, 1997 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. All such adjustments are of a normal, recurring nature.
The results for the interim periods 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
sales 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 gain 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 months ended March 31,
1997 and 1998 was as follows:
Three Months Ended
March 31,
1997 1998
(in thousands)
(Unaudited)
Comprehensive Income:
Net Income $ 67,516 $ 75,871
Foreign Currency Translation (1,402) (252)
Unrealized gain on available-
for-sale securities - 187
Total Comprehensive Income $ 66,114 $ 75,806
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 conform with SFAS
128 requirements.
The following table sets forth a reconciliation of shares
used in the computation of basic and diluted earnings per share.
Three Months ended March 31,
1997 1998
(in thousands)
(Unaudited)
Net income for basic and
diluted earnings per share $ 67,516 $ 75,871
Weighted average shares for
basic earnings per share 153,557 154,548
Dilutive effect of stock
options 3,734 3,027
Weighted average shares for
diluted earnings per share 157,291 157,575
4. Selected Balance Sheet Information:
December 31, March 31,
1997 1998
(in thousands)
(Unaudited)
Accounts receivable, net:
Accounts receivable $ 530,743 $ 488,412
Less allowance for
uncollectible accounts (20,064) (16,529)
$ 510,679 $ 471,883
Inventory:
Components and subassemblies $ 215,318 $ 150,129
Finished goods 33,906 35,276
$ 249,224 $ 185,405
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 will vigorously contest any such claims for payment of
taxes which it believes are without merit. The Company has
favorably resolved these types of tax issues in the past without
any material adverse consequences. However, 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 affect the Company's results of operations or cash
flows in any given reporting period.
The Company currently pays state income taxes in the states
where it has a physical presence. The Company has not paid
income taxes in other states, 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
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. There are many factors that affect
the Company's business and its results of operations, including
the factors discussed below.
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:
Three Months ended March 31,
1997 1998
Net sales 100.0% 100.0%
Cost of goods sold 81.3% 80.5%
Gross profit 18.7% 19.5%
Selling, general and
administrative expenses 12.0% 13.2%
Operating income 6.7% 6.3%
Other income, net 0.6% 0.6%
Income before income taxes 7.3% 6.9%
Provision for income taxes 2.5% 2.5%
Net income 4.8% 4.4%
Sales Sales increased 22% in the first quarter of 1998 to
$1.73 billion from $1.42 billion in the first quarter of 1997.
Sales decreased 13% from the fourth quarter of 1997, which is
generally a seasonally stronger quarter. The increase in sales
for the first quarter over the comparable period of 1997 resulted
primarily from healthy demand in consumer markets and the
expansion of Gateway CountrySM stores.
Sales in the Americas region for the quarter increased to
$1.46 billion, an increase of 26% over the $1.16 billion recorded
in the first quarter of 1997. International sales in the first
quarter of 1998 increased 4% to $266.3 million from $256.2
million in the first quarter of 1997. Sales for the quarter from
the Company's European region were $163.0 million, a decrease of
approximately 8% from the first quarter of the prior year. Sales
in the Company's Asia Pacific region were $103.3 million in the
first quarter of 1998, an increase of 32% over the first quarter
of 1997.
Unit shipments in the first quarter of 1998 increased 38% to
approximately 767,000 from 555,000 in the first quarter of 1997,
but decreased 10% from unit shipments in the fourth quarter of
1997. Shipments of portable products increased 51% over the
first quarter of 1997, and represented 8% of total shipments. In
the Company's Americas region, unit shipments grew 43% over the
first quarter of 1997. Unit shipments in the Company's European
and Asia Pacific regions grew 4% and 47%, respectively, over the
first quarter of 1997.
Weighted average unit prices (AUP) in the first quarter of
1998 were approximately 12% lower than prices in the first
quarter of 1997 and 3% lower than prices in the fourth quarter 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 mitigated 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 unit
prices, resulting in fairly stable unit prices over time. When
the timing of component cost reductions and new technology
introduction is different, AUPs can fluctuate. AUPs throughout
the first half of 1997 were fairly stable, but began to decline
in the third quarter of 1997 as component cost reductions again
outpaced the introduction of new technology. This declining
trend has continued throughout the fourth quarter of 1997 and
into the first quarter of 1998.
Gross Profit Gross profit in the first quarter of 1998
increased 27% from the first quarter of 1997, but decreased 5%
from the fourth quarter of 1997. As a percentage of sales, gross
profit for the first quarter of 1998 increased to 19.5% as
compared to 18.7% and 18.0% in the first and fourth quarters of
1997, respectively. Gross profit for the first quarter of 1998
improved as the Company's direct marketing model benefited from
continuing component cost declines and the improvement of
inventory turns. During the first quarter, the Company
particularly benefited from its suppliers' lower cost of
manufacturing in the troubled Asia/Pacific region and by over-
capacity in some segments of the component industry.
Selling, General and Administrative Expenses Selling,
general and administrative (SG&A) expenses for the first quarter
of 1998 increased approximately 33% over the first quarter of
1997 and 6% over the fourth quarter of 1997. As a percentage of
sales, SG&A was 13.2% for the first quarter, as compared to 12.0%
and 10.9% in the first and fourth quarters of 1997, respectively.
Increases over the comparable period in the prior year are
primarily due to higher personnel and marketing costs, which
reflect the general growth of the business. In comparison to the
fourth quarter of 1997, increases were primarily due to increased
customer support costs, increased payroll taxes caused by stock
option exercises, and higher than normal recruiting expenses.
Operating Income Due to the factors discussed above, the
operating income in the first quarter of 1998 increased 15% to
$109.2 million from $94.9 million in the first quarter of 1997,
but decreased by 22% from $139.6 million during the fourth
quarter of 1997. As a percentage of sales, operating income for
the quarter decreased to 6.3% from 6.7% and 7.1% during the first
and fourth quarters of 1997, respectively.
Other Income, Net 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 $9.3 million from $8.2 million in the first quarter
of 1997 and $7.0 million in the fourth quarter of 1997. The
principal cause of the increase is the availability of additional
cash and marketable securities from the previous year's first and
fourth quarters causing increases in additional interest income.
Income Taxes The Company's annualized effective tax rate
was 36.0% for the quarter, compared to the 34.5% during the first
quarter of 1997. The effective tax rate for 1997, after
eliminating the impact of nonrecurring charges, was 35.5%, with
the increase in the first quarter of 1998 rate reflecting
anticipated shifts in the geographic distribution of earnings.
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, 1998, the Company had cash and
cash equivalents of $742.2 million, marketable securities of
$66.8 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 March 31, 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 $215.6 million in cash from operations
during the first quarter of the year, including $83.7 million of
net income adjusted for non-cash items. Other significant
factors contributing to the increase in available cash include a
decrease in inventory levels and accounts receivable balances
generating $101.2 million. The Company used approximately $41.2
million in cash for facilities, equipment, and software and $28.1
million to purchase investments in marketable securities, net of
proceeds of securities sold.
At March 31, 1998, the Company had long-term indebtedness
and capital lease obligations of approximately $13.2 million.
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
2.00% to 8.87% and have varying maturities through 2000. 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.
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 second 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 quarter of 1998, the Company expensed
incremental costs of approximately $828,000 related to the Year
2000 remediation efforts, and has expensed $1.2 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 codes
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.
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 will vigorously contest any such claims for payment of
taxes which it believes are without merit. The Company has
favorably resolved these types of tax issues in the past without
any material adverse consequences. However, 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 affect the Company's results of operations or cash
flows in any given reporting period.
The Company currently pays state income taxes in the states
where it has a physical presence. The Company has not paid
income taxes in other states, 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.a. 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 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 2. Changes in Securities and Use of Proceeds
On or about January 22, 1998, the Company issued 17,648
shares of Common Stock to Jeff Weitzen as a stock grant in
conjunction with his employment as President and Chief Operating
Officer of the Company. The shares were issued to Mr. Weitzen in
a transaction that was exempt from the registration requirements
of the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Description of Exhibits
No.
10.18 Amendment No. 1 to 1997 Amended and Restated Credit
Agreement, dated as of January 19, 1998, among the
Company, the banks party thereto, Norwest Bank Iowa,
N.A., as Administrative Agent and Bank of America
national Trust and Savings Association as
Documentation Agent, filed herewith.
27.1 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Company during the
quarter ended March 31, 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: May 15, 1998 By:/s/ David J. McKittrick
David J. McKittrick
Senior Vice President,
Chief Financial Officer and
Treasurer (authorized
officer and chief accounting
officer)
</TABLE>
<TABLE> <S> <C>
<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, 1998 AND THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 742,170
<SECURITIES> 66,844
<RECEIVABLES> 488,412
<ALLOWANCES> 16,529
<INVENTORY> 185,405
<CURRENT-ASSETS> 1,620,917
<PP&E> 574,081
<DEPRECIATION> 175,463
<TOTAL-ASSETS> 2,142,223
<CURRENT-LIABILITIES> 1,020,978
<BONDS> 2,768
0
0
<COMMON> 1,550
<OTHER-SE> 1,023,308
<TOTAL-LIABILITY-AND-EQUITY> 2,142,223
<SALES> 1,727,927
<TOTAL-REVENUES> 1,727,927
<CGS> 1,391,433
<TOTAL-COSTS> 1,391,433
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,412
<INTEREST-EXPENSE> 444
<INCOME-PRETAX> 118,548
<INCOME-TAX> 42,677
<INCOME-CONTINUING> 75,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,871
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.48
</TABLE>
AMENDMENT NO.1
TO
1997 AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDMENT NO. 1 TO 1997 AMENDED AND RESTATED CREDIT
AGREEMENT is dated as of January 19, 1998, and is by and among
GATEWAY 2000, INC., a Delaware corporation (the "Company"); the
several financial institutions from time to time party to the
1997 Amended and Restated Credit Agreement entered into as of
September 25, 1997 including those executing this Amendment as a
Bank (collectively, the "Banks" and individually, a "Bank");
Norwest Bank Iowa, National Association, as Issuing Bank and
Administrative Agent; and Bank of America National Trust and
Savings Association, as Documentation Agent for the Banks.
RECITALS:
The parties hereto entered into a 1997 Amended and Restated
Credit Agreement, dated as of September 25, 1997 (as amended, the
"Credit Agreement") and desire to amend the Credit Agreement to
modify the L/C Commitment established thereunder as more
particularly set forth herein.
NOW, THEREFORE, in consideration of the above premises and
other good and valuable consideration, the sum and sufficiency of
which is hereby acknowledged, the parties hereto agree as
follows:
1. Amendment to Credit Agreement. The definition of "L/C
Commitment" set forth in Section 1.01 of the Credit Agreement is
amended to read as follows:
"L/C Commitment" means the commitment of the Issuing
Bank to issue, and the commitment of the Banks
severally to participate in, Letters of Credit
(including the Existing Norwest Letters of Credit)
from time to time Issued or outstanding under Article
III, in an aggregate amount not to exceed on any date
the amount of $75,000,000, as the same shall be
reduced as a result of a reduction in the L/C
Commitment pursuant to Section 2.07; provided that the
LIC Commitment is a part of the combined Commitments,
rather than a separate, independent commitment.
2. References to Agreement Each reference in any Loan
Document to "Agreement" or "Credit Agreement" shall mean the
Credit Agreement as amended by this Amendment.
3. Representations and Warranties. The Company hereby
represents and warrants to the Administrative Agent and the Banks
as follows:
(a) It has the power and authority to execute and perform
this Amendment and each other agreement, document,
instrument, amendment and modification required to be
executed by it in connection with this Amendment.
(b) The execution and delivery of this Amendment and each
other agreement, document, instrument, amendment and
modification required to be executed by it in connection
with this Amendment, have been duly authorized by all
required corporate action.
(c) This Amendment and each other agreement, document,
instrument, amendment and modification required to be
executed by it in connection with this Amendment, constitute
the valid and binding obligations of the Company enforceable
against the Company in accordance with the terms hereof
(d) No Default or Event of Default has occurred and is
continuing.
(e) All the representations and warranties of the Company
contained in the Credit Agreement are true and correct on
and as of the date hereof as though made on and as of such
date, except to the extent such representations and
warranties relate solely to an earlier date.
(f) The Company is entering into this Amendment on the
basis of its own investigation and for its reasons, without
reliance upon the Administrative Agent, the Documentation
Agent, any Bank or any other Person.
4. Loan Documents. The company reaffirms its obligations
under the Credit Agreement, as amended hereby, under each
outstanding Note evidencing the Loans extended by the Banks under
the Credit Agreement, as amended hereby, and under each Loan
Document.
5. Conditions Precedent; Effective Date.
(a) This Amendment shall become effective as of February 6,
1998 (the "Effective Date"), provided that each of the
following conditions precedent is satisfied on or before
such date:
(i) The Documentation Agent shall have received:
(A) A certificate of the Secretary of the Company
certifying (I) that the officer or officers of the Company
executing this Amendment on behalf of the Company are each
an "Authorized Officer" of the Company under the Resolution
of the Company adopted by the Board of Directors of the
Company on December 13, 1995 in connection with the Credit
Agreement, dated as of December 27, 1995 (the "Authorizing
Resolution"), and as such each is authorized to execute and
deliver this Amendment on behalf of the Company, (II) that
the Authorizing Resolution is still in force and effect and
has not been modified or rescinded, (III) the names and true
signatures of the officer or officers executing this
Amendment on behalf of the Company and (IV) no Default or
Event of Default has occurred and is continuing as of the
date of the Secretary's certification.
(B) From the Company, each Bank, the Documentation
Agent, the Administrative Agent and the Issuing Bank, an
execution original (or, if elected by the Documentation
Agent, an executed facsimile copy) of this Amendment, duly
executed by all the parties hereto.
(C) Such other agreements, documents, instruments,
amendments, modifications, opinions and certificates as the
Bank may reasonably request with respect to the matters set
forth herein, all of which shall be in form and substance
satisfactory to the Documentation Agent.
(b) From and alter the Effective Date, the Credit Agreement
is amended as set forth herein.
6. Miscellaneous.
(a) All capitalized terms used and not otherwise defined
herein shall have the same meaning herein as in the Credit
Agreement.
(b) This Amendment may be executed in any number of
counterparts or on telecopy counterparts, each of which
shall be an original and all of which shall constitute one
agreement and it shall not be necessary in making proof of
this Amendment to produce or account for more than one
counterpart.
(c) This Amendment and each of the other agreements,
documents, instruments, amendments and modifications to be
executed by the Company in connection with this Amendment
shall be governed by and construed in accordance with the
law of the State of New York.
(d) All expenses and costs reasonably incurred by the
Administrative Agent or the Documentation Agent with respect
to the preparation, review, negotiation and administration
of this Amendment (including compensation of all attorneys
employed by the Administrative Agent or the Documentation
Agent, including the allocated costs of in-house counsel)
shall be repaid to the Administrative Agent or the
Documentation Agent by the Company on demand.
(e) The Credit Agreement, as amended hereby, shall be
binding upon and inure to the benefit of the parties hereto
and thereto and their respective successors and assigns.
(f) Each Bank executing this Amendment consents to,
concurs, approves, accepts, and is satisfied with, this
Amendment, the Credit Agreement, as amended hereby, and each
document or other written material sent by the
Administrative Agent or the Documentation Agent to such Bank
for consent, concurrence, approval, execution, acceptance or
satisfaction.
(g) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but
such counterparts together shall constitute but one and the
same instrument. Each of the parties hereto understands and
agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the
form of an executed original or an executed original sent by
facsimile transmission to be followed promptly by mailing of
a hard copy original, and that receipt by the Administrative
Agent or the Documentation Agent of a facsimile transmitted
document purportedly bearing the signature of a Bank or of
the Company shall bind such Bank or the Company,
respectively, with the same force and effect as the delivery
of a hard copy executed original. Any failure by the
Administrative Agent or the Documentation Agent to receive
the hard copy executed original of such document shall not
diminish the binding effect of receipt of the facsimile
transmitted executed original of such document of the party
whose hard copy page was not received by the Administrative
Agent or the Documentation Agent.
(h) This Amendment, the Credit Agreement, as amended
hereby, and the other Loan Documents are the result of
negotiations among the parties, have been reviewed by
counsel to the parties and are the product of the parties.
Neither BofA, as Documentation Agent, nor Norwest, as
Issuing Bank or Administrative Agent, shall have any right,
power, obligation, liability, responsibility or duty under
this Amendment, the Credit Agreement, as amended hereby, or
any other Loan Document other than those applicable to all
Banks as such. Without limiting the foregoing, BofA shall
not have or be deemed to have any fiduciary relationship
with the Administrative Agent or any Bank and Norwest shall
not have or be deemed to have any fiduciary relationship
with the Documentation Agent or any Bank. Each Bank
acknowledges that it has not relied, and will not rely, on
BofA or Norwest in deciding to enter into this Amendment or
in taking or not taking action hereunder, the Credit
Agreement, as amended hereby, or any other Loan Document.
7. Acknowledgment. The Company hereby acknowledges
receipt of a copy of this Amendment and each other agreement,
document, instrument and modification at any time executed by a
debtor in connection with this Amendment, the Credit Agreement or
the Indebtedness to the Banks under the Credit Agreement.
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF
THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE
ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO
OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS
WRITTEN CONTRACT MAY BE LEGALLY ENFORCED. YOU MAY
CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER
WRITTEN AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers,
all as of the day and year first above written.
GATEWAY 2000, INC.
By: /s/ David J. McKittrick
Name: David J. McKittrick
Title: Senior VP and Chief
Financial Officer
NORWEST BANK IOWA, NATIONAL
ASSOCIATION,as
Administrative Agent
Issuing Bank and a Bank
By: /s/ John Wagner
Name: John Wagner
Title: Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as
Documentation Agent and a Bank
By:______________________________
Name:_________________________
Title:________________________
THE BANK OF NOVA SCOTIA
By:______________________________
Name:_________________________
Title:________________________
IMPORTANT: READ BEFORE SIGNING. THE TERMS
OF THIS AGREEMENT SHOULD BE READ CAREFULLY
BECAUSE ONLY THOSE TERMS IN WRITING ARE
ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT
CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY
ENFORCED. YOU MAY CHANGE THE TERMS OF THIS
AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers, all as of
the day and year first above written.
GATEWAY 2000, INC.
By:_____________________________________
Name:______________________________
Title:_____________________________
NORWEST BANK IOWA, NATIONAL
ASSOCIATION, as Administrative Agent
Issuing Bank and a Bank
By:_____________________________________
Name:______________________________
Title:_____________________________
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Documentation
Agent and a Bank
By: /s/ Kevin McMahon
Name: Kevin McMahon_
Title: Managing Director
THE BANK OF NOVA SCOTIA
By:_____________________________________
Name:______________________________
Title:_____________________________
