SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission file number 0-22784
GATEWAY 2000, INC.
A Delaware Corporation I.R.S. Employer Number
42-1249184
610 Gateway Drive, North Sioux City, South Dakota 57049-2000
Telephone number: (605) 232-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par New York Stock Exchange
value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
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 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 ___.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-
affiliates of the registrant on March 13, 1998 (based on the last
sale price of $42 per share for the registrant's Common Stock on
the New York Stock Exchange as of such date) was $3,644,782,344.
At such date, there were 154,857,480 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Gateway's definitive proxy statement relating to
its 1998 annual meeting of stockholders to be filed with the
Securities and Exchange Commission not later than 120 days after
the end of the fiscal year to which this Report relates, are
incorporated by reference in Part III of this Form 10-K.
PART I
Item 1. Business
General
Gateway 2000, Inc. and its subsidiaries (collectively
"Gateway" or the "Company") is a leading direct marketer of
personal computers ("PCs") and related products and services.
Gateway develops, manufactures, markets, and supports a broad
line of desktop and portable PCs, digital media (convergence)
PCs, servers, workstations and PC-related products used by
individuals, families, businesses, government agencies and
educational institutions. In November 1997, Gateway became the
first major PC manufacturer to offer nationwide Internet provider
service directly to its customers through gateway.netSM internet
services. The Company believes it is one of the leading
suppliers of PCs to the U.S. consumer market, with a market share
of approximately 12% in the 1997 fourth quarter. Gateway's
strategy is to deliver the best value to it's customers by
offering quality, high-performance PCs and other products
employing the latest technology at competitive prices and by
providing outstanding service and support. Internet users can
access information about Gateway and its products and services at
http://www.gateway.com.
Gateway was incorporated in Iowa on August 15, 1986, merged
into a South Dakota corporation of the same name effective
December 29, 1989, and merged into a Delaware corporation of the
same name effective February 20, 1991. In December 1993, Gateway
completed its initial public offering of Common Stock and was
listed on NASDAQ. On May 22, 1997, Gateway moved to the New York
Stock Exchange, and began trading under the symbol GTW.
Strategy
Gateway's strategy is comprised of the following:
Direct Marketing. Gateway markets its products directly to
PC customers, primarily by placing advertisements in computer
trade magazines, newspapers, selected family-oriented business
and travel publications and its internet website,
http://www.gateway.com. Gateway also conducts a national
consumer-oriented television advertising campaign. The Company
has expanded its marketing operations through the opening of
Gateway CountrySM stores including 22 stores opened in the fourth
quarter of 1997. The Gateway Country store concept allows
customers to operate and evaluate the entire line of Gateway
products. Unlike traditional retail channels, these locations
maintain no inventory of finished systems. At December 31, 1997,
Gateway operated 37 Gateway Country stores.
As compared with more traditional channels of distribution,
the direct approach to the PC marketplace provides several
advantages. First, Gateway believes it can consistently maintain
competitive product pricing by avoiding the additional markups
and the inventory and occupancy costs associated with traditional
retail channels. Second, by avoiding the higher levels of
inventory required in traditional retail channels, Gateway
attempts to reduce its exposure to the risk of product
obsolescence and improve its flexibility in offering new products
to customers on a timely basis. Third, Gateway believes that
working directly with PC customers promotes customer loyalty and
brand awareness. For example, Gateway believes that over one-
half of its business is attributable to repeat or referral
customers.
Quality Products. Gateway believes that as PC customers
have gained greater knowledge and sophistication in their
purchasing decisions, quality and reliability have become
increasingly important decision-making factors. Gateway works
closely with its suppliers to develop high-quality components,
manufactured to Gateway's specifications. In addition, every
Gateway 2000 PC undergoes extensive quality control testing.
Latest Technology. Gateway works directly with a wide range
of suppliers to evaluate the latest developments in PC-related
technology. Gateway believes that these relationships, together
with market information obtained from its direct customer
relationships, have enabled it to bring to the market on a timely
basis products with broad market demand. The flexibility of
build-to-order manufacturing, low inventory and short production
lead times allow Gateway to rapidly introduce and deliver
appealing new products and software.
Gateway is generally one of the earliest PC manufacturers to
incorporate Intel Corporation's latest PC microprocessors into
its product line, most recently including the Pentium IIr. At
the end of the fourth quarter of 1997, Gateway was an industry
leader in shipments of Pentium IIr based PCs.
In July 1997, Gateway acquired Advanced Logic Research, Inc.
(ALR). ALR designs and manufactures multiprocessor servers,
computer workstations and desktop PCs. ALR operates as a wholly-
owned subsidiary of Gateway and continues to market its products
under the ALR brand through its established worldwide network of
resellers, system integrators, dealers and distributors and
selected original equipment manufacturers. As a result of the
technology acquired with the ALR acquisition, Gateway has
introduced a number of server and high-end desktop products under
its own brand. Gateway's server products utilize ALR's four-way
and six-way symmetrical multiprocessing technology.
For a discussion of certain risks associated with Gateway's
operations, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors That May
Affect Future Results" beginning on page 15 of this Report.
Quality Service and Support. Gateway believes that
customers judge quality by evaluating the performance and
reliability of a company's products, as well as a company's
ability to provide comprehensive service and support for its PCs.
To provide superior service and support to its customers, Gateway
utilizes more than 4,700 customer and technical support
representatives specifically trained to assist customers with the
resolution of technical questions relating to Gateway's products.
Gateway maintains separate technical support organizations in the
United States, Europe, Japan, Australia, and Malaysia.
Competitive Pricing. Gateway offers its products at
competitive prices. To profitably deliver quality products at
competitive prices, Gateway seeks to maintain a low-cost
operating structure. First, in addition to the cost advantages
of marketing its products directly to end users, Gateway
endeavors to minimize overhead expenses. For example, by virtue
of its locations in South Dakota, Virginia, Ireland and Malaysia,
Gateway believes that it has been able to lower expenses because
of the relatively lower costs associated with the facilities,
work forces and taxes in these locations. Second, Gateway's in-
house engineering personnel work closely with component suppliers
in developing and implementing new technology, reducing the
investment usually associated with a traditional, in-house
research and development group. Finally, Gateway believes its
large volume of business affords it certain purchasing powers and
economies of scale which lower its unit costs and contribute to
operating efficiencies.
Growth Initiatives. The growth in Gateway's net sales and
earnings to date has resulted primarily from the sale of desktop
PCs to individuals, small businesses and corporate, governmental
and institutional customers in the U.S. market. Also, growth in
net sales of Gateway's portable products has continued from
previous years. Gateway has continued to expand its product
line, including the NS-Series servers being introduced in
Gateway's product line for the first time in 1997. Gateway
believes that most of its continued growth will come from four
areas: the domestic consumer market, including the developing
market for family-use PCs; the small to medium-size business; the
further development of major account relationships (generally,
Fortune 1000 companies, governmental entities and educational
institutions); and the continued expansion of its international
operations. Also, Gateway has continued its efforts to reach
these markets through its development of the Gateway CountrySM
stores, allowing direct interaction with retail customers, and
the enhancement of its outside sales force which serves
businesses, government agencies and educational institutions. By
the end of 1997, Gateway had opened 37 stores. Gateway expects
to more than double the total number of stores by the end of
1998.
Geographic Areas of Operation
Gateway has organized its global operations into three
operating regions. The Americas region principally includes the
United States, Canada, and South America, and is managed from
North Sioux City, South Dakota. The Europe region which is
managed from Dublin, Ireland includes the European countries and
certain countries in the Middle East and in Africa. The Asia
Pacific region includes operations in Japan, Australia,
Singapore, Malaysia and Hong Kong. A summary of operating
results for Gateway's industry segment, broken down by geographic
area, is incorporated herein by reference to Note 12 of the
consolidated financial statements included on page 34 of this
Report.
Products
Gateway offers a broad line of desktop and portable PCs,
digital media (convergence) PCs, servers, workstations, and
access to the Internet, as well as peripheral products, third
party software, and service and support programs. GatewayTM PCs
are custom-configured with a choice of microprocessors of varying
clock speeds, memory and storage capacities, as well as other
options, all as specified by the customer. Additionally, PCs are
available with a wide variety of operating and application
software.
Desktop PCs. Gateway has three lines of desktop PCs. The
Gateway G-Series of desktop PCs is primarily designed for home
users and typically includes CD-ROM, graphics, and audio systems.
The E-Series and GP-Series lines of desktop PCs are designed for
businesses of all sizes, including those with networked
environments. All desktop PCs utilize Intel Pentiumr processors
and are available with MMX technology. During the last quarter
of 1997, Pentium II processor - based desktop systems accounted
for 43% of desk-top shipments.
Portable PCs. Gateway Solo portable PCs provide portable
computing capabilities for users who operate in both a mobile and
networked environment. The systems can be designed for either
home or business use and are available with docking stations and
various multimedia applications. Portable systems also utilize
Intel Pentium processors and are available with MMX technology.
Portables are a fast growing segment of the business,
representing approximately 11% of sales in 1997.
Digital Media (Convergence) PCs. Digital media
(convergence) PCs combine home entertainment or business
conference room and personal computing capabilities into a single
product. These systems typically can include large color
monitors, wireless keyboard and pointing devices, CD and digital
video disc (DVD) ROM drives, a TV/VGA video card, a high fidelity
audio card, and a communication center with a high speed internet
connection. Gateway is a market leader in this product line.
Servers. The NS-Series of network servers can meet a
variety of server applications within a networked computing
environment and can be designed with up to six Pentium Pror
processors in a rack mountable or free standing configuration.
The NS Rack Mount provides centralized computing in a single,
space-saving location that offers ease of serviceability. The NS-
Series of products also includes the NS-Data Station line of
external storage sub-systems, and a series of rack options such
as Rack Cabinets, Quick Hot Swap drawers, and Tape Backup Unit
drawers.
gateway.netSM Internet service. In November 1997, Gateway
became the first major PC manufacturer to offer nationwide
Internet provider service directly to its customers. gateway.net
Internet service offers electronic mail, Internet access, and an
array of news, entertainment, family-oriented topics, weather,
sports, Internet tips and tutorials.
Peripheral Products and Software. Gateway also offers a
variety of additional products including monitors, printers,
fax/modems, CD-ROM drives, external storage devices, and popular
third party software titles.
Product Development
Gateway's expenditures on research, development and
engineering in each of the last three years were less than 1% of
net sales. Gateway maintains close and cooperative relationships
with many of its suppliers and with other technology developers.
These relationships and Gateway's own engineering staff have
enabled Gateway to evaluate the latest developments in PC
technology and to quickly introduce new products and new product
features to the market. Gateway believes that its strong
relationships with its suppliers will continue to give Gateway
access to new technology and enhance its ability to bring the
latest technology to market on a timely basis. In addition, ALR
maintains a research and development staff. Direct relationships
with its customers also enable Gateway to obtain valuable market
information, which it uses to assist in developing its offerings
of new products and product features.
Manufacturing and Materials
Gateway has designed its manufacturing process to provide
products custom-configured to conform to customer specifications.
Gateway uses production teams to assemble its desktop PCs with
each member of a production team trained to do several tasks,
increasing flexibility and efficiency. Third-party suppliers
manufacture the base configuration for portable PCs and Gateway
completes final configuration. Gateway's production teams
perform quality control tests on each PC, and Gateway's quality
assurance staff inspects samples of completed PCs to ensure that
the PCs meet Gateway's quality specifications and applicable
regulatory requirements. Each PC is shipped from Gateway's
manufacturing facilities ready-for-use, with certain application
software already installed. Replacement parts are also generally
shipped directly from Gateway to its customers.
Although Gateway designs and contracts for the manufacture
of components according to Gateway's specifications, Gateway does
not itself manufacture any components used in its PCs. Gateway
attempts to use parts and components available from, and cross-
compatible between, multiple suppliers. In some circumstances,
however, Gateway maintains single-source supplier relationships
due to technology, availability, price, quality or other
considerations.
Gateway's desktop and portable computer manufacturing
operations in North Sioux City, South Dakota, Hampton, Virginia,
Singapore and Malacca, Malaysia have been assessed and certified
as meeting the requirements of the International Organization for
Standardization (ISO) 9002. ISO 9002 certification recognizes
Gateway's compliance with international standards for quality
assurance.
In general, Gateway does not enter into long-term contracts
for the supply of components used in the manufacture of GatewayTM
PCs. Gateway believes that short-term supply arrangements
generally allow it to respond more effectively to rapid
technological change and consumer preferences. In the future,
Gateway may enter into long-term supply arrangements when
management believes it is prudent.
Occasional disruptions to Gateway's normal production
schedules have been, and may continue to be, experienced because
of suppliers' failures to meet component delivery schedules.
These disruptions can result in manufacturing inefficiencies and
may temporarily increase Gateway's backlog. Gateway tries to
reduce such disruptions by regularly evaluating supplier
performance and seeking alternate or additional suppliers as
necessary.
Gateway requires a high volume of quality components for the
manufacture of its products. The computer industry periodically
experiences shortages of certain components, such as memory, CD-
ROM drives or video cards. An industry shortage or other
constraint of any key component could adversely affect Gateway's
ability to deliver products on schedule or to realize expected
gross margins.
Marketing and Sales
Gateway is among the industry leaders in PC sales to home
users and small and medium businesses. In 1997, approximately
35% of total Gateway sales were to U.S. home users, 30% to U.S.
businesses, 20% to U.S. educational institutions and government,
and 15% of total sales were international.
Gateway markets its products directly to PC customers,
primarily by placing advertisements in computer trade magazines,
newspapers, selected family-oriented business and travel
publications and its internet website, http://www.gateway.com.
These advertisements include product information and Gateway's
toll-free telephone numbers. Gateway also conducts national
consumer-oriented television advertising campaigns. Gateway
believes its creative marketing, including use of its famous
trademarked "BLACK AND WHITE SPOT" Design on product packaging,
has helped generate significant brand awareness and a loyal
customer base.
As of December 31, 1997, a sales force of approximately
2,400 Company employees sold Company products directly to
customers over the telephone. Customers can order products over
the telephone up to fifteen hours a day and seven days a week in
the U.S. and six days a week elsewhere in the world. As of
December 31, 1997, Gateway utilized over 4,700 customer and
technical support representatives providing comprehensive service
and support. Gateway's sales force and customer service staff
have continued to expand to meet increased demand for Gateway
products and support services. For example, Gateway has
increased its major accounts sales force in support of its
Fortune 1000 customer base. Gateway has also expanded its
Gateway CountrySM stores to 37 stores throughout 20 states,
allowing customers direct interaction with sales representatives.
In April 1996, Gateway became the first major PC
manufacturer to provide consumers the ability to custom
configure, order and pay for a personal computer via the world
wide web. During the peak fourth quarter holiday season in 1997,
sales over the Company's web site exceeded $4.0 million per day.
Over 50% of Gateway's business is believed to be
attributable to either previous buyers of GatewayTM PCs or new
customers referred by previous buyers. Gateway has sold over 8.3
million PCs to date, and maintains a database of its customers.
To capitalize on this customer database, Gateway has introduced
innovative means of marketing and communication. These include
the Gateway Moola Mastercardr credit card that gives consumers a
rebate applicable toward future Gateway purchases and the
quarterly GW2k: Gateway Magazine. In October 1995, Gateway
opened a web site on the Internet, at the address
http://www.gateway.com. The web site and the GW2k: Gateway
Magazine offer information on Company events, new product
offerings and technical support advice. In addition, regular
surveys of Gateway's customers also give Gateway valuable
marketing, service and product information.
Product Warranties and Technical Support
Gateway believes its product warranties and support are
essential to achieving customer satisfaction and maintaining
Gateway's image. The key elements of Gateway's product
warranties and technical support program, including the Gateway
GoldSM service and support program, are as follows:
30-Day Limited Money-Back Guarantee. In general, Gateway
provides a 30-day money-back guarantee for customer returns.
Shipping charges to and from the customer are non-refundable.
Limited Warranty. Gateway provides a three-year limited
warranty for desktop PCs, and a one-year limited warranty for
portable PCs. The warranty period begins at the delivery date of
the product and covers repairs or replacements for any defect in
either workmanship or components. Gateway will test and ship a
new or remanufactured replacement part, which the customer can
then install. Technicians are specifically trained to assist
customers in the installation of replacement parts via telephone
support.
On-Board Diagnostic Tools. During 1998, Gateway expects to
launch the HelpSpotTM software tools, which will provide customers
with a suite of diagnostic tools to diagnose system problems. The
HelpSpot software tools also include tutorial information to assist
customers with system operations.
Toll-Free Telephone Technical Support. Gateway offers its
customers telephone access to technical support services (toll-
free in the U.S., Australia, Austria, Belgium, France, Germany,
Ireland, Japan, Luxembourg, Switzerland, the United Kingdom,
Sweden, Malaysia and the Netherlands). Gateway's technicians are
specifically trained to assist customers with the resolution of
technical questions related to Gateway's products. Gateway
provides 24 hours per day, seven days per week telephone support
in the U.S. and in Japan. In addition, technicians have access
to a technical laboratory which allows them to replicate and
attempt to solve specific customer problems. Each technician
initially receives 160 hours of classroom diagnostic training and
receives additional classroom training as new products are
introduced. Gateway also employs a more experienced technical
staff whose primary purpose is to assist the technicians on the
telephone, answer complex questions and provide on-the-job
training. Gateway utilizes an interactive response system to
provide recorded answers to the questions most frequently asked
by customers.
Technical Support Via E-Mail and Fax. In addition to the
toll-free telephone support, Gateway's customers may send
questions regarding Gateway's products via e-mail or fax and
receive assistance from Gateway's technicians. Customers may
also use a touch tone telephone to obtain automatic fax delivery
of any of approximately 150 documents containing various
technical information with regard to Gateway's products.
Web Site: Bulletin Board Support. Gateway has a website on
the Internet which, among other things, allows users to access
technical support information with regard to Gateway's products.
Gateway also offers its customers free membership to its
electronic bulletin board service. This service may be used to
obtain technical advice, and the website and the electronic
bulletin board service permit users to correspond with other
Gateway PC users and download selected software. In addition,
Gateway's technicians are responsible for supporting customers on
various other websites and bulletin board systems.
On-Site Repair Service. On-site repair service is available
at Gateway's discretion through independent contractors in
Gateway's principal markets for desktop PCs.
Gateway Service Options. Gateway offers several fee-based
service options to give customers the flexibility to customize
our services to their needs. Gateway GoldSM Premium service and
support provides two additional years of onsite service as well
as priority access to technical support professionals for desktop
PCs. For portable PCs, the extended service option provides an
additional two years of parts replacement coverage as well as
priority access to technical support professionals. Custom
Integration Services (CIS) allows customers to custom configure
their systems with non-Gateway standard components, software, and
services. In addition, software tutorial services are available
through an independent supplier.
Patents, Trademarks and Licenses
The Company holds several U.S. and foreign patents and has
various U.S. and foreign patent applications pending. In
addition, Gateway works closely with PC component suppliers and
other technology developers to stay abreast of the latest
developments in PC technology. Where necessary, Gateway has
obtained patent licenses for certain technologies, some of which
require significant royalty payments. Beginning in 1995, Gateway
began to emphasize in-house patent generation and strategic
acquisition of patents. While Gateway does not believe that its
continued success will depend upon technology patented or
acquired by Gateway, there can be no assurance that Gateway will
continue to have access to existing or new third-party technology
for use in its products. If Gateway or its suppliers were unable
to obtain licenses necessary to use protected technology in
Gateway's products on commercially reasonable terms, Gateway may
be forced to market products without certain desirable
technological features. Gateway could also incur substantial
costs to redesign its products around other parties' protected
technology or to defend patent or copyright infringement actions
against Gateway.
Gateway owns and uses a number of trademarks on or in
connection with its products, including AnyKey, "BLACK AND WHITE
SPOT" Design, CrystalScan, Destination, Family PC, Gateway 2000,
Gateway Gold, "G" Design, Telepath, Gateway Solo, Vivitron and
"You've Got a Friend in the Business", among others. Many of
these trademarks are registered. Gateway believes the GATEWAY
2000 and the famous "BLACK AND WHITE SPOT" design trademarks have
strong brand name recognition in the United States marketplace
and plans to develop similar recognition internationally.
Because software used on Company-manufactured PCs may not be
Company-owned, Gateway has entered into software licensing or
cross-licensing arrangements with a number of software
developers, including Microsoft Corporation. For example,
Gateway has licenses with Microsoft Corporation for Windows 95,
Windows, MS-DOS and Microsoft Office software products, among
others.
Competition
The PC industry is highly competitive, especially with
respect to pricing and the introduction of new products and
product features. Gateway competes primarily by adding new
performance features to products while minimizing corresponding
price increases. Timely introduction of new products or product
features by Gateway cannot be guaranteed. Likewise, no assurance
can be given that Gateway will continue to compete successfully
by adding new features to its products without corresponding
price increases. In recent years Gateway and many of its
competitors have regularly lowered prices, and Gateway expects
these pricing pressures to continue. If cost reductions or
changes in product mix do not mitigate these pricing pressures,
these competitive price pressures could substantially reduce
profits.
Gateway competes with companies who sell their products
primarily through direct marketing channels, such as Dell
Computer Corporation and Micron Electronics, Inc. In addition,
Gateway competes directly and indirectly with PC manufacturers,
such as International Business Machines Corporation, Compaq
Computer Corporation, Packard Bell Electronics, Inc., Hewlett-
Packard Company and Apple Computer, Inc. In addition to
utilizing their own direct sales forces, these competitors market
their products through national and regional distributors and
dealers; distribution channels in which Gateway generally has not
participated other than through its ALR subsidiary.
Competitive factors in Gateway's markets include price,
availability of new technology, variety of products and features
offered, availability of peripheral products and software,
marketing and sales capability, service and support. Gateway
believes it competes favorably with respect to each of these
factors.
Seasonality
The computer industry generally has been subject to
seasonality and to significant quarterly and annual fluctuations
in operating results, and Gateway's operating results have been
subject to such fluctuations. Fluctuations can result from a
wide variety of factors affecting Gateway and its competitors.
These factors include new product developments or introductions,
availability of components, changes in product mix and pricing
and product reviews and other media coverage. Gateway's business
is also sensitive to the spending patterns of its customers,
which in turn are subject to prevailing economic conditions.
Historically, Gateway's sales have increased in the third and
fourth quarters due, in part, to back-to-school and holiday
spending.
International Operations
Through its wholly owned subsidiaries, Gateway 2000 Ireland
Limited and Gateway 2000 Europe (collectively, "Gateway
Ireland"), Gateway opened a sales, service and production
facility in Dublin, Ireland on October 1, 1993. Since then,
Gateway has expanded its operations and facilities into other
European countries and currently has showrooms in London, Paris,
Munich, Cologne, Stockholm and Amsterdam and sales and support
facilities in Germany and the United Kingdom. In the last half
of 1995, Gateway entered the Asia Pacific region with sales and
support facilities in Japan, showrooms in Tokyo, Melbourne,
Brisbane and Sydney, a manufacturing facility in Malacca,
Malaysia and the acquisition of the business and substantially
all of the assets of Osborne Computer Corporation, an Australian
PC maker. During 1997, showrooms were opened in Perth,
Australia; Auckland, New Zealand; and Kuala Lumpur, Malaysia.
Gateway also expanded in Kuala Lumpur with a new call center to
handle the direct sales activities of Malaysia, Singapore and
Hong Kong as well as customer support activities. A Gateway
Country SM store was introduced in Osaka, Japan during 1997, with
another store in Nagoya to become functional in June 1998.
Gateway uses either direct selling or distributors to market
PCs in foreign countries, depending on each country's
infrastructure, consumer preferences, language and culture.
While Gateway's international operations have increased market
share to date, there can be no assurance that Gateway's expansion
into international markets will be successful. Failure of
Gateway to achieve or maintain successful international
operations could materially and adversely affect Gateway's
business, consolidated financial position or results of
operations.
In addition to the challenges to Gateway of managing the
potential growth of its international operations, international
expansion involves additional business risks such as foreign
currency fluctuation, government regulation, liability for
foreign taxes and product sales, and delivery and support
logistics. There can be no assurance that Gateway will
effectively manage these additional risks.
Government Regulation
Gateway's PCs must meet standards established by the Federal
Communications Commission, and similar agencies in other
countries, for radio frequency emissions and must receive
appropriate certification prior to being shipped. A delay or
inability to obtain certification may delay or prevent Gateway
from introducing new products or features and therefore could
materially and adversely affect Gateway's business, consolidated
financial position, results of operations or cash flows.
In addition, Gateway's advertising, shipping and other
operations are subject to state regulations, regulations of the
Federal Trade Commission and the U.S. Department of Commerce in
the U.S., and similar foreign agencies in foreign jurisdictions.
Even inadvertent or sporadic failure to comply with such
regulations can result in significant fines, penalties and forced
rebates levied against Gateway or special restrictions placed on
Gateway's ability to ship product overseas. While Gateway has
not been subject to any significant enforcement penalties to
date, and while Gateway continues to use its best efforts to
comply with all applicable foreign and domestic governmental
regulations, Gateway does have matters pending before these
agencies and accordingly, there can be no assurance that
significant penalties will not be levied against Gateway in the
future.
Employees
As of December 31, 1997, Gateway had approximately 13,300
full-time employees, of which 10,600 were in the U.S., 1,600 were
in Europe and 1,100 were in other foreign countries. No employee
of Gateway is represented by a labor union. Gateway believes
employee relations are generally good.
Backlog
As of December 31, 1997, backlog was approximately $135
million, compared with backlog of approximately $110 million at
the end of fiscal 1996. The Company does not believe that
backlog is a meaningful indicator of sales that can be expected
for any period, and there can be no assurance that the backlog at
any point in time will translate into sales in any subsequent
period, particularly in light of the Company's policy of allowing
customers to cancel or reschedule orders under certain
circumstances.
Customers
No customer accounted for 10% or more of Gateway's sales in
1997.
Item 2. Properties
Gateway owns 111 acres of land and facilities with a total
of 856,800 square feet of space in North Sioux City, South
Dakota. These facilities house Gateway's headquarters, a
production facility, a customer sales and support center, a
training center and warehouse space. Gateway also leases
facilities with a total of 82,000 square feet of space in North
Sioux City, South Dakota which are used for manufacturing and
warehouse space. Gateway leases 162,700 square feet in
Vermillion, South Dakota used for customer service and warehouse
space.
Gateway owns facilities with a total of 218,000 square feet
of space in Sioux Falls, South Dakota. These facilities serve as
a base for the sale and fulfillment of orders for add-on PC
components, the receipt of returned merchandise and the
fulfillment of orders for customer replacement parts. Gateway
leases 182,000 square feet in Sioux Falls for remanufacturing
operations.
Gateway owns a facility with 208,400 square feet of space in
Kansas City, Missouri and Kansas City, Kansas. The facility is
used for a customer sales and support center.
Gateway owns facilities with a total of 424,000 square feet
of space in Hampton, Virginia. These facilities are used for
manufacturing, customer support, and warehouse space. Gateway
leases facilities in Irvine, California totaling 115,000 square
feet. The facilities are used for manufacturing, sales,
warehouse, and office space. Gateway also leases Gateway
CountrySM store space in 37 cities located in 20 states, totaling
377,900 square feet.
Gateway has purchased 35 acres of land in Salt Lake City,
Utah and is currently constructing a facility to house another
manufacturing plant. Gateway has also purchased 9 acres of land
and a 50,000 square foot facility in Rio Rancho, New Mexico to be
used as a customer support center. In Colorado Springs,
Colorado, Gateway has leased a 50,000 square foot facility to be
used as a customer support center.
Gateway's European operations are based in Dublin, Ireland,
where Gateway owns a 310,000 square foot facility. The facility
houses Gateway's European headquarters, production facility,
customer sales and support center and warehouse space. In
Liederbach, Germany, Gateway leases a facility used for office
and warehouse space. Gateway also leases showroom space in
London, Paris, Munich, Cologne, Stockholm, and Amsterdam.
In Malacca, Malaysia, Gateway owns a 187,200 square foot
manufacturing facility which was opened to serve Gateway's
markets in the Asia Pacific region. Gateway also leases a
showroom and call center space in Kuala Lumpur. In Australia,
Gateway leases a 57,000 square-foot sales and distribution
facility in Sydney. Additionally, Gateway leases showroom space
in Brisbane, Melbourne and Sydney. In Japan, Gateway leases
facilities with 80,900 square feet in Yokohama and Tokyo used for
a customer sales and support center and warehouse space.
Gateway also leases showroom space in Tokyo and Osaka. In
Singapore, Gateway leases a total of 32,900 square feet of
facilities for office, manufacturing, and warehouse space.
Item 3. Legal Proceedings
Gateway is a party to various lawsuits and administrative
proceedings arising in the ordinary course of its business.
Gateway 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. Gateway's management
believes that the ultimate resolution of such pending matters
will not materially and adversely affect Gateway's business,
consolidated financial position, results of operations or cash
flows.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market Information
As of May 22, 1997, the Common Stock was quoted on the New
York Stock Exchange under the trading symbol "GTW". Prior to
May 22, 1997, the Common Stock was quoted on the NASDAQ National
Market under the trading symbol "GATE". The following table sets
forth the quarterly high and low price per share information for
the Common Stock as quoted at the close of trading on such date
in 1996 and 1997 and as adjusted for a two-for-one stock split on
June 16, 1997:
High Low
1996:
1st quarter $ 16.13 $ 9.00
2nd quarter $ 20.75 $ 13.63
3rd quarter $ 25.07 $ 13.88
4th quarter $ 33.13 $ 22.32
1997:
1st quarter $ 32.63 $ 23.81
2nd quarter $ 37.38 $ 26.19
3rd quarter $ 44.75 $ 31.50
4th quarter $ 36.13 $ 25.13
Holders of Record
As of March 13, 1998, there were 4,543 holders of record of
the Common Stock. There were no issued and outstanding shares of
the Class A Common Stock as of such date. The Class A Common
Stock is non-voting except on matters for which the General
Corporation Law of the State of Delaware requires class voting.
Dividends
Gateway management believes the best use of retained
earnings is to fund internal growth. As a result, Gateway has
not declared any cash dividends on Common Stock since it was
first publicly registered and does not anticipate paying any cash
dividends in the foreseeable future.
Item 6. Selected Consolidated Financial Data
The following historical data were derived from the
Company's consolidated financial statements, which have been
audited by Coopers & Lybrand L.L.P., independent accountants.
This financial data should be read in conjunction with the
consolidated financial statements and notes thereto beginning on
page 19 of this Report and in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 11 of this Report. The information
below is not necessarily indicative of the results of future
operations.
<TABLE>
Year Ended December 31,
<CAPTION>
1993 1994 1995 1996 1997
(in thousands, except per share data)
Consolidated Statements of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales $1,731,664 $2,701,200 $3,676,328 $5,035,228 $6,293,680
Cost of goods sold 1,460,842 2,343,698 3,070,234 4,099,073 5,217,239
Gross profit 270,822 357,502 606,094 936,155 1,076,441
Selling, general and
administrative 357,086 580,061 786,168
expenses 121,682 216,505
Nonrecurring 113,842
expenses - - - -
Operating income 149,140 140,997 249,008 356,094 176,431
Other income, net 4,848 5,106 13,085 26,622 27,189
Income before
income taxes 153,988 146,103 262,093 382,716 203,620
Provision for actual
and pro forma 132,037
income taxes 53,896 50,130 89,112 93,823
Net income and pro
forma net income $ 100,092 $ 95,973 $ 172,981 $ 250,679 $ 109,797
Net income and pro
forma Net income
per share:
Basic $ .82 $ .66 $ 1.19 $ 1.64 $ .71
Diluted $ .71 $ .61 $ 1.09 $ 1.60 $ .70
Weighted average
shares outstanding:
Basic 122,504 144,768 145,256 152,745 153,840
Diluted 141,907 157,313 157,988 156,237 156,201
</TABLE>
<TABLE>
<CAPTION>
December 31,
1993 1994 1995 1996
1997
(in thousands)
Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Current assets $ 500,520 $ 654,160 $ 866,189 $1,318,342 $ 1,544,683
Total assets $ 564,281 $ 770,579 $1,124,011 $1,673,411 $ 2,039,271
Current liabilities $ 254,844 $ 348,875 $ 525,291 $ 799,769 $ 1,003,906
Long-term
obligations,
net of current $ 29,145 $ 27,131 $ 10,805 $ 7,244 $ 7,240
maturities
Stockholders' equity $ 280,292 $ 376,035 $ 555,519 $ 815,541 $ 930,044
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report includes forward-looking statements made 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:
1995 1996 1997
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 83.5% 81.4% 82.9%
Gross profit 16.5% 18.6% 17.1%
Selling, general and
administrative expenses 9.7% 11.5% 12.5%
Nonrecurring expenses - - 1.8%
Operating income 6.8% 7.1% 2.8%
Other income, net 0.3% 0.5% 0.4%
Income before income taxes 7.1% 7.6% 3.2%
Provision for income taxes 2.4% 2.6% 1.5%
Net income 4.7% 5.0% 1.7%
Sales. Sales in 1997 increased 25% to $6.29 billion from
$5.04 billion in 1996. The increase in sales resulted from
continued demand growth in the Americas and Asia Pacific markets,
the acquisition of Advanced Logic Research, Inc. (ALR) on July
23, 1997, and the continued growth in sales of the Company's
portable products.
Sales in the Americas region grew 25% over 1996 levels to
$5.30 billion. International sales increased 25% to $989.8
million over the prior year. Sales in the Company's European
region were $634.6 million, an increase of approximately 15% over
the comparable period of 1996 despite a decrease in sales from
the level in the second quarter of 1997. Sales for 1997 in the
Company's Asia Pacific region totaled $355.2 million, an increase
of 50% over 1996.
Unit shipments in 1997 increased 35% to approximately
2,580,000 from 1,909,000 in 1996. Unit shipments in the
Company's Americas region grew 35% over 1996. In the Company's
European region, unit shipments grew 20% over 1996, and unit
shipments in the Company's Asia Pacific region grew 84% over
1996.
Sales from Pentium MMX-based and Pentium II-based desktop
products accounted for approximately 32% and 24%, respectively,
of the Company's total sales in 1997. Throughout 1997, sales
from Pentium MMX-based and Pentium II-based products increased
each quarter, to approximately 35% and 49%, respectively, in the
fourth quarter. Portable products accounted for approximately
11% of total sales in 1997, versus approximately 9% in 1996.
Portable products sales increased 56% and convergence product
sales increased 55% over the prior year.
Weighted average unit prices (AUP) declined approximately 8%
during 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 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. The reduction in
1997 AUPs from 1996 levels is partially due to abnormally high
AUPs experienced in the first four months of 1996. Beginning in
the second quarter of 1996, in addition to normal component cost
declines, the Company experienced significant declines in Dynamic
Random Access Memory (DRAM) costs. AUPs throughout the second
half of 1996 and 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.
Sales in 1996 increased 37% to $5.04 billion from $3.68
billion in 1995. The increase resulted from continued demand
growth in the Americas and European markets, expansion into the
Asia Pacific region and accelerated growth in sales of the
Company's portable products. Unit shipments in 1996 increased
43% to approximately 1,909,000 from 1,338,000 in 1995. Average
unit prices declined approximately 4% during 1996, reflecting the
normal rate of component cost declines, significant cost declines
in DRAM and a slowing of new technology during 1996.
Gross Profit. Gross profit in 1997 increased approximately
15% to $1.076 billion from $936.2 million in 1996, but as a
percentage of sales, gross profit decreased to 17.1% from 18.6%
in 1996. The decline in gross profit as a percentage of sales
was due to the effects of excess inventories during the third
quarter of 1997. During this time period, there were significant
declines in the market value of many inventory components. In
order to promptly mitigate the impact of these excess
inventories, the Company sold product with profit margins below
targeted levels. In addition, reserves were recorded against
excess and obsolete inventories still on hand at the end of the
third quarter.
Gross profit in 1996 increased approximately 54% from $606.1
million in 1995. As a percentage of sales, gross profit
increased to 18.6% from 16.5% in 1995. Gross profit improved
during 1996 principally due to improvements in meeting product
sales mix forecasts associated with the introduction of new
products, a decrease in DRAM prices and decreases in aggregate
royalty cost per unit. Gross margin as a percent of sales also
increased due to the timing of component cost decreases being
passed on to customers through price declines.
Selling, General and Administrative Expenses. Selling,
general and administrative (SG&A) expenses in 1997 increased by
approximately 36% to $786.2 million from $580.1 million in 1996.
As a percentage of sales, these expenses increased to
approximately 12.5% in 1997 from approximately 11.5% in 1996.
The increase is primarily the result of increases in personnel,
marketing, depreciation and amortization and the inclusion of the
operating expenses of ALR. Beginning in 1997, certain expenses
relating to the fulfillment of parts warranties have been
reclassed from selling, general and administrative expenses to
cost of goods sold.
Personnel-related costs increased approximately 33% in 1997
compared with 1996, as a result of the continued building of the
Company's infrastructure and increased expenditures to expand the
sales force and technical support. The Company expects to
continue to make the necessary personnel-related expenditures and
investments to manage the growth of the Company.
Marketing expenses increased approximately 52% in 1997 as
compared to 1996. The increase represents the Company's
continued efforts to target broader market bases, including the
novice user. Also, marketing efforts were increased to support
the expansion of the Gateway CountrySM stores.
Depreciation and amortization expenses increased
approximately 41% in 1997 compared to 1996, as a result of the
Company's continued investments in facilities and software
applications. Amortization expense increased due to intangible
assets obtained in the acquisition of ALR during 1997.
Selling, general and administrative expenses in 1996
increased 62% to $580.1 million from $357.1 million in 1995. As
a percentage of sales, these expenses increased to 11.5% in 1996
from 9.7% in 1995. Significant factors contributing to this net
increase included: higher personnel costs, additional marketing
programs and overhead expenses associated with the Asia Pacific
region.
Nonrecurring Expenses. The Company recorded several
nonrecurring pretax charges totaling $113.8 million in the third
quarter of 1997. Of the nonrecurring charges, $59.7 million was
for the write-off of in-process research and development acquired
with the purchase of ALR and certain assets of Amiga
Technologies. Also included in the nonrecurring charges was a
non-cash write-off of $45.2 million resulting from the
abandonment of a capitalized internal-use software project and
certain computer equipment. In addition, $8.6 million was
recorded for severance of employees and the closing of a foreign
office.
Operating Income. Due to the nonrecurring expenses
incurred during the third quarter of 1997, a declining percentage
of gross profit and the increase in operating expenses, operating
income in 1997 decreased by 50% to $176.4 million from $356.1
million in 1996. Operating income, excluding nonrecurring items
in 1997, decreased 18% from 1996 to $290.3 million. As a
percentage of sales, operating income decreased to 2.8% in 1997
(4.6% excluding nonrecurring items) from 7.1% in 1996. In 1996,
operating income increased 43% from $249.0 million in 1995, and
remained relatively constant as a percentage of sales.
Other Income, Net. Other income, net includes other income
net of expenses, such as interest income and expense, lease
financing commissions, referral fees for on-line services and
foreign exchange transaction gains and losses. Other income, net
increased to $27.2 million in 1997 from $26.6 million in 1996.
The principal cause of this increase was the generation of
additional interest income as a result of the availability of
additional cash and marketable securities in 1997 compared to
1996.
Other income, net in 1996 increased to $26.6 million from
$13.1 million in 1995 primarily due to additional interest income
generated as a result of the availability of additional cash and
marketable securities as compared to 1995, and the generation of
commissions from referrals for on-line services.
Income Taxes. The Company's effective tax rate was 46.1%,
34.5%, and 34.0% in 1997, 1996 and 1995, respectively. The
increase in the 1997 effective tax rate was primarily due to the
impact of nonrecurring expenses relating to the write-off of in-
process research and development arising in connection with the
acquisitions of ALR and certain assets of Amiga Technologies
which were nondeductible for income tax purposes. The effective
tax rate for 1997 excluding the nonrecurring items was
approximately 35.5%. The change from 1996 is attributed to
shifts in the geographic distribution of the Company's earnings,
which also impacted the change in the 1996 rate versus the 1995
rate.
Liquidity and Capital Resources
The Company has financed its operating and capital
expenditure requirements to date principally through cash flow
from its operations. At December 31, 1997, the Company had cash
and cash equivalents of $593.6 million, marketable securities of
$38.6 million and an unsecured committed credit facility with
certain banks of $225 million, consisting of a revolving line of
credit facility and a sub-facility for letters of credit. At
December 31, 1997, 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 or future
credit facilities, will provide adequate flexibility for the
Company's financial needs for at least the next 12 months.
The Company generated approximately $442.8 million of cash
from operations during 1997. Increases in accounts receivable
and other current assets consumed approximately $96.5 million
offset by decreases in inventory levels of $59.5 million. Also,
increases in accounts payable, accrued liabilities and other
liabilities contributed $156.9 million. The Company used
approximately $360.7 million in cash for investing activities as
a result of the Company's continued investment in facilities, a
$38.6 million net investment in marketable securities, and the
$142.3 million purchase of ALR, net of cash acquired. Of the
purchase price, $58.6 million was allocated to in-process
research and development projects. The Company expects ALR to
continue to develop these projects into commercially viable
products in the normal course of business over the next 1 to 5
years.
At December 31, 1997, the Company had long-term indebtedness
and capital lease obligations of approximately $21.2 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
interest free (for certain incentive funds from the Industrial
Development Authority of the City of Hampton, Virginia) to 8.87%
and have varying maturities through the year 2001. The Company's
capital lease obligations relate principally to its computer and
telephone system equipment.
The Company anticipates that it will retain all earnings in
the foreseeable future for development of its business and will
not distribute earnings to its stockholders as dividends.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 131 - Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 requires publicly-held companies to report
financial and other information about key revenue-producing
segments of the entity for which such information is available
and is utilized by management. Specific information to be
reported for individual segments includes profit or loss, certain
revenue and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the
financial statements is also to be provided. SFAS No. 131 is
effective for the Company in 1998. Based on current internal
reporting, the Company does not expect this new accounting
pronouncement to have a significant impact on its segment
reporting.
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 absolute
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.
Through 1997, the Company had expensed incremental costs of
approximately $350,000 related to the Year 2000 remediation
efforts. 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 these
expectations include the following: growth in the personal
computer industry; competitive factors and pricing pressures;
component supply shortages; inventory risks due to shifts in
market demand; 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 results, and
could cause future results to differ materially from those
expressed in any forward-looking statement made by, or on behalf
of, the Company.
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 7A. Quantitative and Qualitative Disclosures About Market
Risk
The results of the Company's foreign operations are affected
by changes in exchange rates between certain foreign currencies
and the United States dollar. The functional currency for most
of the Company's foreign operations is the U.S. dollar. The
functional currency for the remaining operations is the local
currency in which the subsidiaries operate. Sales made in
foreign currencies translate into higher or lower sales in U.S.
dollars as the U.S. dollar strengthens or weakens against other
currencies. Therefore, changes in exchange rates may negatively
affect the Company's consolidated net sales (as expressed in U.S.
dollars) and gross margins from foreign operations. The majority
of the Company's component purchases are denominated in U.S.
dollars.
The Company uses foreign currency forward contracts to hedge
foreign currency transactions and probable anticipated foreign
currency transactions. These forward contracts are designated as
a hedge of international sales by U.S. dollar functional currency
entities and intercompany purchases by certain foreign
subsidiaries. The principal currencies hedged are the British
Pound, the Japanese Yen, the French Franc and the Deutsche Mark
over periods ranging from one to six months. Forward contracts
are accounted for on a mark-to-market basis, with realized and
unrealized gains or losses recognized currently. Gains or losses
arising from forward contracts which are effective as a hedge are
included in the basis of the designated transactions.
Fluctuations in U.S. dollar currency exchange rates did not have
a significant impact on the Company's consolidated financial
position, results of operations or cash flows in any given
reporting period.
Foreign currency exchange contracts are sensitive to changes
in foreign currency exchange rates. At December 31, 1997, a
hypothetical 10% adverse change in foreign currency exchange
rates underlying the Company's open forward contracts would
result in an unrealized loss of approximately $27 million.
Unrealized gains/losses in foreign currency exchange contracts
represent the difference between the hypothetical rates and the
current market exchange rates. Consistent with the nature of an
economic hedge, such unrealized gains or losses would be offset
by corresponding decreases or increases, respectively, of the
underlying transaction being hedged.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
Financial Statements:
Report of Independent Accountants ....................... 18
Consolidated Statements of Operations for the years
ended December 31, 1995, 1996 and 97 ............... 19
Consolidated Balance Sheets at December 31, 1996 and 1997 20
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1996 and 1997....................21
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997..............22
Notes to Consolidated Financial Statements.................... 23
Financial Statement Schedule:
Schedule II -Valuation and Qualifying Accounts.................36
Report of Independent Accountants
To the Stockholders and Board of Directors
Gateway 2000, Inc.
We have audited the consolidated financial statements and
financial statement schedule of Gateway 2000, Inc. as listed in
the index on page 17 of this Form 10-K. These financial
statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Gateway 2000, Inc. as of
December 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally
accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information
required to be included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
January 22, 1998
<TABLE>
Gateway 2000, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1995, 1996 and 1997
(in thousands, except per share amounts)
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Net sales $ 3,676,328 $ 5,035,228 $ 6,293,680
Cost of goods sold 3,070,234 4,099,073 5,217,239
Gross profit 606,094 936,155 1,076,441
Selling, general and
administrative expenses 357,086 580,061 786,168
Nonrecurring expenses - - 113,842
Operating income 249,008 356,094 176,431
Other income, net 13,085 26,622 27,189
Income before income taxes 262,093 382,716 203,620
Provision for income taxes 89,112 132,037 93,823
Net income $ 172,981 $ 250,679 $ 109,797
Net income per share:
Basic $ 1.19 $ 1.64 $ .71
Diluted $ 1.09 $ 1.60 $ .70
Weighted average shares
outstanding:
Basic 145,256 152,745 153,840
Diluted 157,988 156,237 156,201
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
Gateway 2000, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
(in thousands, except per share amounts)
<CAPTION>
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 516,360 $ 593,601
Marketable securities -- 38,648
Accounts receivable, net 449,723 510,679
Inventory 278,043 249,224
Other 74,216 152,531
Total current assets 1,318,342 1,544,683
Property, plant and equipment, net 242,365 336,469
Internal use software costs, net 77,073 39,998
Intangibles, net 9,869 82,590
Other assets 25,762 35,531
$ 1,673,411 $ 2,039,271
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of
long-term obligations $ 15,041 $ 13,969
Accounts payable 411,788 488,717
Accrued liabilities 190,762 271,250
Accrued royalties 125,270 159,418
Income taxes payable 40,334 26,510
Other current liabilities 16,574 44,042
Total current liabilities 799,769 1,003,906
Long-term obligations, net of current
maturities 7,244 7,240
Warranty and other liabilities 50,857 98,081
Total liabilities 857,870 1,109,227
Commitments and Contingencies (Notes 3 and 4)
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; 153,512 shares and
154,128 shares issued and outstanding,
respectively 1,536 1,541
Additional paid-in capital 288,744 299,483
Retained earnings 524,712 634,509
Other 549 (5,489)
Total stockholders' equity 815,541 930,044
$ 1,673,411 $ 2,039,271
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<TABLE>
Gateway 2000, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995, 1996 and 1997
(in thousands)
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 172,981 $ 250,679 $109,797
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 38,086 61,763 86,774
Provision for uncollectible
accounts receivable 7,779 20,832 5,688
Deferred income taxes (23,778) (13,395) (63,247)
Other, net 520 1,986 42
Nonrecurring expenses -- -- 113,842
Changes in operating assets and
liabilities:
Accounts receivable (157,958) (66,052) (41,950)
Inventory (103,202) (54,261) 59,486
Other current assets (10,847) (13,311) (54,513)
Accounts payable 51,765 176,724 66,253
Accrued liabilities 20,690 51,390 48,405
Accrued royalties 37,567 1,885 34,148
Income taxes payable 50,516 42,880 8,347
Other current liabilities (7,252) 177 27,469
Other liabilities 12,890 22,699 42,256
Net cash provided by 442,797
operating activities 89,757 483,996
Cash flows from investing
activities:
Capital expenditures (95,817) (112,187) (162,010)
Internal use software costs (39,040) (31,559) (13,646)
Purchases of available-for-sale
securities (10,679) -- (49,619)
Purchases of held-to-maturity
securities (1,685) -- --
Proceeds from maturities of
held-to-maturity securities 5,000 -- --
Proceeds from maturities or
sales of available-for-
sale securities 33,023 3,030 10,985
Acquisitions, net of cash
acquired (3,620) -- (142,320)
Other, net (13,152) 2,667 (4,055)
Net cash used in
investing activities (125,970) (138,049) (360,665)
Cash flows from financing
activities:
Proceeds from issuance of notes 10,000
payable 5,000 10,000
Principal payments on long-term
obligations and notes payable (24,600) (14,047) (15,588)
Stock options exercised 5,741
8,107 9,520
Net cash provided by (used 153
in) financing activities (11,493) 5,473
Foreign exchange effect on cash and
cash equivalents 82 (1,457) (5,044)
Net increase (decrease) in cash and 77,241
cash equivalents (47,624) 349,963
Cash and cash equivalents, 214,021 516,360
beginning of year 166,397
Cash and cash equivalents, end of $ 166,397 $ 516,360 $ 593,601
year
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
Gateway 2000, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1995, 1996 and 1997
(in thousands)
<CAPTION>
Common Stock
Additional
Paid-in Retained
Shares Amount Capital Earnings Other Total
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1994 144,792 $ 1,448 $ 273,676 $ 101,052 $ (141) $ 376,035
Net income -- -- -- 172,981 -- 172,981
Stock issuances under
employee plans,
including tax benefit of
$ 23,030 6,541 66 31,071 -- -- 31,137
Stock retirement (2,227) (22) (25,046) -- -- (25,068)
Foreign currency
translation -- -- -- -- 324 324
Other -- -- -- -- 110 110
Balances at December 31,
1995 149,106 1,492 279,701 274,033 293 555,519
Net income -- -- -- 250,679 -- 250,679
Stock issuances under
employee plans,
including tax benefit of
$ 30,451 6,545 66 39,905 -- -- 39,971
Stock retirement (2,139) (22) (30,862) -- -- (30,884)
Foreign currency
translation -- -- -- -- 225 225
Other -- -- -- -- 31 31
Balances at December 31,
1996 153,512 1,536 288,744 524,712 549 815,541
Net income -- -- -- 109,797 -- 109,797
Stock issuances under
employee plans,
including tax benefit of
$ 5,003 616 5 10,739 -- -- 10,744
Foreign currency
translation -- -- -- -- (6,053) (6,053)
Other -- -- -- -- 15 15
Balances at December 31,
1997 154,128 $ 1,541 $299,483 $ 634,509 $ (5,489) $ 930,044
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Gateway 2000, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Gateway 2000, Inc. (the "Company") is a direct marketer of
personal computers ("PCs") and PC-related products. The Company
develops, manufactures, markets and supports a broad line of
desktop and portable PCs, digital media (convergence) PCs,
servers, workstations and PC-related products used by
individuals, families, businesses, government agencies and
educational institutions.
The significant accounting policies used in the preparation
of the consolidated financial statements of Gateway 2000, Inc.
are as follows:
(a) Principles of Consolidation:
The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated.
(b) Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments and
money market funds with an original maturity of three months or
less to be cash equivalents. The carrying amount approximates
fair value because of the short maturities of these instruments.
(c) Marketable Securities:
The carrying amounts of the marketable securities used in
computing unrealized and realized gains and losses are determined
by specific identification. Fair values are determined using
quoted market prices. For available-for-sale securities, net
unrealized holding gains and losses are reported as a separate
component of stockholders' equity, net of tax. Held-to-maturity
securities are recorded at amortized cost. Amortization of
related discounts or premiums is included in the determination of
net income.
Marketable securities at December 31, 1997, consisted of
available-for-sale mutual funds, commercial paper and debt
securities, with a market value of $38,648,000 and an amortized
cost of $38,636,000, with variable maturities through 1999.
Realized and unrealized gains and losses are not material for any
of the periods presented.
(d) Inventory:
Inventory, which is comprised of component parts,
subassemblies and finished goods, is valued at the lower of first-
in, first-out (FIFO) cost or market. On a quarterly basis, the
Company compares on a part by part basis, the amount of the
inventory on hand and under commitment with its latest forecasted
requirements to determine whether write-downs for excess or
obsolete inventory are required.
(e) Property, Plant and Equipment:
Property, plant and equipment are stated at cost.
Depreciation is provided using straight-line and accelerated
methods over the assets' estimated useful lives. Amortization of
leasehold improvements is computed using the shorter of the lease
term or the estimated useful life of the underlying asset. Upon
sale or retirement of property, plant and equipment, the related
costs and accumulated depreciation or amortization are removed
from the accounts and any gain or loss is included in the
determination of net income.
(f) Internal Use Software Costs:
The Company capitalizes costs of purchased software and,
once technological feasibility has been established, costs
incurred in developing software for internal use. Amortization
of software costs begins when the
Gateway 2000, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
software is placed in service and is computed on a straight-line
basis over the estimated useful life of the software, generally
from three to five years.
(g) Intangible Assets:
Intangible assets principally consist of technology, a
customer base and distribution network, an assembled work force
and trade name obtained through acquisition. The cost of
intangible assets is amortized on a straight-line basis over the
estimated periods benefited ranging from three to ten years. The
realizability of intangibles is evaluated periodically as events
or circumstances indicate a possible inability to recover their
carrying amount.
(h) Royalties:
The Company has royalty-bearing license agreements that
allow the Company to sell certain hardware and software which is
protected by patent, copyright or license. Royalty costs are
accrued and included in cost of goods sold when products are
shipped or amortized over the period of benefit when the license
terms are not specifically related to the units shipped.
(i) Warranty and Other Post-Sales Support Programs:
The Company provides currently for the estimated costs that
may be incurred under its warranty and other post-sales support
programs.
(j) Stock Split:
On May 15, 1997, the Board of Directors authorized a two-for-
one stock split which was distributed on or about June 16, 1997,
to shareholders of record on June 2, 1997. All references in the
financial statements to number of shares and per share amounts of
the Company's stock have been retroactively restated to reflect
the increased number of common shares outstanding.
(k) Revenue Recognition:
Sales are recorded when products are shipped. A provision
for estimated sales returns is recorded in the period in which
related sales are recognized. Revenue from separately priced
extended warranty programs is deferred and recognized over the
extended warranty period on a straight-line basis.
(l) Net Income Per Share:
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.
<TABLE>
Gateway 2000, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth a reconciliation of shares used in the
computation of basic and diluted earnings per share.
<CAPTION>
1995 1996 1997
(in thousands)
<S> <C> <C> <C>
Net income for basic and diluted earnings per
share $ 172,981 $ 250,679 $ 109,797
Weighted average shares for basic earnings per
share 145,256 152,745 153,840
Dilutive effect of stock options 12,732 3,492 2,361
Weighted average shares for diluted
earnings per share 157,988 156,237 156,201
</TABLE>
(m) Foreign Currency:
The Company uses the U.S. dollar as its functional
currency for the majority of its international operations.
For subsidiaries where the local currency is the
functional currency, the assets and liabilities are
translated into U.S. dollars at exchange rates in effect
at the balance sheet date. Income and expense items are
translated at the average exchange rates prevailing during
the period. Gains and losses from translation are
included as a component of stockholders' equity. Gains
and losses resulting from remeasuring monetary asset and
liability accounts that are denominated in currencies
other than a subsidiary's functional currency are included
in "Other income, net".
The Company uses foreign currency forward contracts
to hedge foreign currency transactions and probable
anticipated foreign currency transactions. These forward
contracts are designated as a hedge of international sales
by U.S. dollar functional currency entities and
intercompany purchases by certain foreign subsidiaries.
The principal currencies hedged are the British Pound, the
Japanese Yen, the French Franc, and the Deutsche Mark over
periods ranging from one to six months. Forward contracts
are accounted for on a mark-to-market basis, with realized
and unrealized gains or losses recognized currently.
Gains or losses arising from forward contracts which are
effective as a hedge are included in the basis of the
designated transactions. The related receivable or
liability with counterparties to the forward contracts is
recorded in the consolidated balance sheet. Cash flows
from settlements of forward contracts are included in
operating activities in the consolidated statements of
cash flows. Aggregate transaction gains and losses
included in the determination of net income are not
material for any period presented. Forward contracts
designated to hedge foreign currency transaction exposure
of $132,930,000 and $257,051,000 were outstanding at
December 31, 1996 and 1997, respectively. The estimated
fair value of these forward contracts at December 31, 1996
and 1997, was $137,726,000 and $253,519,000, respectively
based on quoted market prices.
The Company continually monitors its positions with,
and the credit quality of, the major international
financial institutions which are counterparties to its
foreign currency forward contracts, and does not
anticipate nonperformance by any of these counterparties.
(n) Use of Estimates and Certain Concentrations:
The preparation of 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 and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain components used by the Company in
manufacturing of PC systems are purchased from a limited
number of suppliers. An industry shortage or other
constraints of any key component could result in delayed
shipments and a possible loss of sales, which could affect
operating results adversely.
Gateway 2000, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(o) 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 stockholders' equity.
2. Financing Arrangements:
(a) Credit Agreement:
The Company is party to an unsecured bank credit agreement
(the "Agreement"), totaling $225 million. The Agreement consists
of (1) a revolving line of credit facility for committed loans
and bid loans; and (2) a sub-facility for letters of credit.
Borrowings under the agreement bear interest at the banks' base
rate or, at the Company's option, borrowing rates based on a
fixed spread over the London Interbank Offered Rate (LIBOR). The
Agreement requires the Company to maintain a minimum tangible net
worth and maximum debt leverage ratio, as well as minimum fixed
charge coverage. There were no borrowings outstanding at the end
of 1996 and 1997.
At December 31, 1996 and 1997, approximately $4,360,000 and
$3,515,000, respectively, was committed to support outstanding
standby letters of credit.
(b) Long-term Obligations:
The carrying amount of the Company's long-term obligations
approximates the fair value, which is estimated based on current
rates offered to the Company for obligations of the same
remaining maturities. Long-term obligations include notes and
obligations under capital leases and consist of the following:
December 31,
1996 1997
(in thousands)
Notes payable through 2001 with interest rates ranging
from zero to 8.87% $ 19,312 $ 20,568
Obligations under capital leases, payable in monthly
installments at fixed rates ranging from 3.28% to
5.90% through 1999 (Note 3) 2,973 641
22,285 21,209
Less current maturities 15,041 13,969
$ 7,244 $ 7,240
Gateway 2000, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The long-term obligations, excluding obligations under
capital leases, have the following maturities as of December 31,
1997:
(in thousands)
1998 $ 13,571
1999 4,928
2000 69
2001 2,000
2002 --
$ 20,568
3. Commitments:
The Company leases certain operating facilities and
equipment under noncancelable operating leases expiring at
various dates through 2010. Rent expense was approximately
$6,214,000, $11,873,000, and $16,105,000 for 1995, 1996 and 1997,
respectively.
Future minimum lease payments under terms of these leases as
of December 31, 1997 are as follows:
Capital Operating
Leases Leases
(in thousands)
1998 $ 398 $ 15,336
1999 254 12,695
2000 3 9,250
2001 -- 8,259
2002 -- 6,360
Thereafter -- 3,625
Total minimum lease
payments $ 655 $ 55,525
Less amount representing
interest 14
Present value of net
minimum lease payments $ 641
The Company has entered into licensing and royalty
agreements which allow it to use certain hardware and software
intellectual properties in its products. Minimum royalty
payments due under these agreements for the period 1998 through
2002 total approximately $346,600,000. Total royalty expense is
expected to be greater than this minimum amount for these
periods.
4. Contingencies:
The Company is a party to various lawsuits and
administrative proceedings arising in the ordinary course of its
business. The Company evaluates such lawsuits and proceedings on
a case-by-case basis, and its policy is to vigorously contest any
such claims which it believes are without merit. The Company's
management believes that the ultimate resolution of such pending
matters will not materially adversely affect the Company's
business, financial position, results of operations or cash
flows.
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 any other state, nor has it established
significant reserves for the payment of such taxes. Management
believes that the amount of any income tax the Company might
ultimately be required to pay for prior periods would not
materially and adversely affect the Company's business,
consolidated financial position, results of operations or cash
flows.
5. Income Taxes:
The components of the provisions for income taxes are as
follows:
For the year ended December 31,
1995 1996 1997
(in thousands)
Current:
United States $109,296 $140,451 $154,049
Foreign 3,594 4,981 3,021
Deferred:
United States (19,823) (1,727) (49,564)
Foreign (3,955) (11,668) (13,683)
$ 89,112 $132,037 $ 93,823
Income (loss) before income taxes included approximately
$9,300,000, $2,400,000 and ($24,000,000) related to foreign
operations for the years ended December 31, 1995, 1996 and 1997,
respectively.
A reconciliation of the provision for income taxes and the
amount computed by applying the federal statutory income tax rate
to income before taxes is as follows:
1995 1996 1997
(in thousands)
Federal income tax at
statutory rate $ 91,732 $133,951 $ 71,267
Nondeductible purchased
research and development
costs -- -- 20,704
Other, net (2,620) (1,914) 1,852
Provision for income taxes $ 89,112 $132,037 $ 93,823
Gateway 2000, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets and deferred tax liabilities result from
temporary differences in the following accounts:
December 31,
1996 1997
(in thousands)
U.S. deferred tax assets:
Inventory $ 8,768 $ 20,572
Accounts receivable 4,955 6,775
Accrued liabilities 21,035 35,793
Other liabilities 16,101 36,912
Property, plant & equipment 539 --
Other 1,125 3,612
Total U.S. 52,523 103,664
Foreign deferred tax assets:
Operating loss carryforwards 12,619 17,832
Other 3,004 2,459
Total foreign 15,623 20,291
Total deferred tax assets 68,146 123,955
U.S. deferred tax liabilities:
Intangible assets 20,126 34,006
Property, plant & equipment -- 2,668
Other 268 3,439
Total deferred tax liabilities 20,394 40,113
Net deferred tax assets $ 47,752 $ 83,842
The Company has foreign net operating loss carryforwards of
$49,000,000. Of this amount, $8,300,000 expires in the year
2000, $27,300,000 in the year 2002 and $13,400,000 in the year
2006. The Company has assessed its sales forecast and the
expiration of carryforwards and has determined that is it more
likely than not that the deferred tax asset relating to foreign
net operating loss carryforwards will be realized.
6. Stock Option Plans:
In 1991, the Company entered into stock option agreements
with certain officers providing for the purchase of 13,224,120
shares of the Company's Common Stock.
In December 1991, the Company and its stockholders adopted
the Gateway 2000, Inc. 1992 Stock Option Plan ("the 1992 Option
Plan") for the benefit of its officers and other managers. Under
the 1992 Option Plan, options to purchase 1,105,104 shares of the
Company's Class A Common Stock were granted. Shares of Class A
Common Stock may be converted into an equal number of shares of
Common Stock at any time after December 18, 1994. Options were
first granted under the Plan in 1992 and generally vest over a
four-year period, retroactive to an option holder's initial date
of employment. These options expire, if not exercised, ten years
from the date of grant.
In 1993, the Company and its stockholders adopted the
Gateway 2000, Inc. 1993 Stock Option Plan (the "1993 Option
Plan") which replaced the 1992 Option Plan. Under the 1993
Option Plan, options to purchase up to 3,874,416 shares of the
Company's Common Stock or Class A Common Stock may be granted.
Under the 1993 Option Plan, after December 14, 1993, only options
for the purchase of Common Stock may be granted. These options
generally vest over a four-year period beginning on either the
grant date or the option holder's initial date of employment.
These options expire, if not exercised, ten years from the date
of grant.
In 1993, the Company and its stockholders also adopted the
Gateway 2000, Inc. 1993 Non-Employee Directors Stock Option Plan
(the "Director Option Plan"). The Director Option Plan
authorized the issuance of up to 40,000 shares of Common Stock to
non-employee directors. Options granted under this plan vest one
year from the grant date and expire, if not exercised, ten years
from the date of grant.
In 1996, the Company and its stockholders adopted the
Gateway 2000, Inc. 1996 Long-Term Incentive Equity Plan (the
"1996 Employee Plan"). Under the 1996 Employee Plan,
participants may receive stock options, stock appreciation rights
or stock awards as determined by the Compensation Committee of
the Board of Directors. The aggregate number of shares of Common
Stock which may be issued or transferred to participants under
the 1996 Employee Plan is 12,800,000. Stock options granted
under this plan vest over a four-year period beginning on the
grant date and expire, if not exercised, ten years from the date
of grant.
In addition, in 1996, the Company and its stockholders
adopted the Gateway 2000, Inc. 1996 Non-Employee Directors Stock
Option Plan (the "1996 Director Plan") which replaced the
Director Option Plan. The 1996 Director Plan authorizes the
issuance of up to 600,000 shares of Common Stock to non-employee
directors. Options granted generally vest over a three-year time
period beginning on the grant date and expire, if not exercised,
ten years from the date of grant.
In 1997, the Company introduced the Gateway GoldShares stock
option program and awarded stock options pursuant to the
Company's 1996 Long-Term Incentive Equity Plan to eligible
employees based on length of service and pay level. Under the
GoldShares program, eligible employees were granted options to
purchase approximately 1,300,000 shares of Common Stock at $32.63
per share in September 1997. Options granted under the plan vest
at the rate of 25% per year from the grant date and expire, if
not exercised, ten years from the date of grant.
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standard No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for the stock option plans.
Had compensation cost for the Company's stock option plans been
determined based on the estimated fair value at the grant date
for awards in 1995, 1996 and 1997 consistent with the provisions
of SFAS No. 123, net income and net income per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net income - as reported $ 172,981 $ 250,679 $ 109,797
Net income - pro forma $ 171,149 $ 241,729 $ 85,804
Net income per share - as
reported
Basic $ 1.19 $ 1.64 $ .71
Diluted $ 1.09 $ 1.60 $ .70
Net income per share - pro forma
Basic $ 1.18 $ 1.58 $ .56
Diluted $ 1.08 $ 1.55 $ .55
</TABLE>
The pro forma effect on net income for 1995, 1996 and 1997
is not fully representative of the pro forma effect on net income
in future years because it does not take into consideration pro
forma compensation expense related to the vesting of grants made
prior to 1995.
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for all grants in
1995, 1996 and 1997: dividend yield of zero percent; expected
volatility of 60 percent; risk-free interest rates ranging from
5.2 to 7.2 percent; and expected lives of the options of three
and one-half years from the date of vesting.
Gateway 2000, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All options have exercise prices equal to the fair market
value of the related stock on the date of grant. A summary of
the status of the Company's stock option plans is presented
below:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
(in thousands, except per share amounts)
Weighted- Class A Weighted-
Common Average Common Average
Stock Price Stock Price
<S> <C> <C> <C> <C>
Outstanding, beginning of period 13,650 $ 1.37 1,248 $ 2.10
Granted 1,384 12.14 -- --
Exercised and converted (6,253) 1.21 (287) 1.97
Forfeited (42) 6.82 -- --
Outstanding, end of period 8,739 $ 3.16 961 $ 2.14
Options available for grant, end
of period 1,937 --
Options exercisable, end of period 7,119 $ 1.30 810 $ 2.01
Weighted-average fair value of
options granted during the year $ 7.45 $ --
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
(in thousands, except per share amounts)
Weighted- Class A Weighted-
Common Average Common Average
Stock Price Stock Price
<S> <C> <C> <C> <C>
Outstanding, beginning of period 8,739 $3.16 962 $ 2.14
Granted 3,260 15.75 -- --
Exercised and converted (6,305) 1.43 (241) 2.13
Forfeited (254) 14.15 (8) 3.25
Outstanding, end of period 5,440 $12.20 713 $ 2.12
Options available for grant, end
of period 12,309 --
Options exercisable, end of
period 1,283 $4.28 672 $ 2.06
Weighted-average fair value of
options granted during the year $ 9.65 $ --
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
(in thousands, except per share amounts)
Weighted- Class A Weighted-
Common Average Common Average
Stock Price Stock Price
<S> <C> <C>
Outstanding, beginning of period 5,440 $ 12.20 713 $ 2.12
Granted 5,253 36.08 -- --
Exercised and converted (463) 11.56 (153) 2.50
Forfeited (775) 23.69 -- --
Outstanding, end of period 9,455 $ 22.98 560 $ 2.02
Options available for grant, end
of period 8,328 --
Options exercisable, end of
period 2,582 $ 9.86 556 $ 2.01
Weighted-average fair value of
options granted during the
year $ 21.61 $ --
</TABLE>
Gateway 2000, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about the Company's
Common Stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options
Exercisable
Range of Number Weighted-Average Number Weighted-
Exercise Outstandi Remaining Weighted- Exercisable Average
Prices ng at Contractual Life Average at 12/31/97 Price
12/31/97 Price
<C> <S><C> <C> <C> <S> <C> <C> <C> <C> <C>
$1.19 - 1.19 760 3.41 years $ 1.19 760 $ 1.19
6.82 -13.38 2,526 7.72 years 11.73 1,077 10.73
13.44 -19.69 1,739 8.19 years 17.62 717 17.15
20.89 -29.44 1,559 9.06 years 28.82 28 25.74
29.53 -34.44 1,428 9.67 years 32.72 - -
35.00 -44.75 1,443 9.56 years 44.66 - -
</TABLE>
<TABLE>
The following table summarizes information about the Company's Class A
Common Stock options outstanding at December 31, 1997:
<CAPTION>
Options Outstanding Options
Exercisable
Range of Number Weighted-Average Number Weighted-Average
Exercise Outstanding Remaining Weighted- Exercisable at Price
Prices at 12/31/97 Contractual Life Average Price 12/31/97
<C> <S><C> <C> <C> <S> <C> <C> <C> <C> <C>
$1.86 - 3.24 560 5.07 years $ 2.02 556 $ 2.01
7. Retirement Savings Plan:
The Company has a 401(k) defined contribution plan which
covers employees who have attained 18 years of age and have been
employed by the Company for at least six months. Participants may
contribute up to 20% of their compensation in any plan year and
receive a 25% matching employer contribution of up to 1% of their
annual eligible compensation for the first 12 months of
participation, and a 50% matching employer contribution up to 2%
of their annual eligible compensation for all subsequent months
of participation. The Company contributed $640,000, $871,000, and
$2,068,000 to the Plan during 1995, 1996 and 1997, respectively.
8. Acquisition:
During the third quarter of 1997, the Company acquired
substantially all of the outstanding shares of common stock of
Advanced Logic Research, Inc. (ALR), a manufacturer of network
servers and personal computers, for a cash purchase price of
approximately $196,400,000. Of the purchase price, approximately
$58,600,000 was allocated to in-process research and development
costs and expensed during the third quarter. These costs were
expensed as the technological feasibility of the in-process
research and development had not yet been established and the
technology had no alternative use. In addition, $83,300,000 of
the purchase price was allocated to certain identifiable
intangibles (including intellectual property, workforce, and
customer base) and the remaining to ALR's net tangible assets
which included approximately $58,100,000 in cash. The acquisition
was accounted for as a purchase business combination. Beginning
July 23, 1997, the results of ALR have been included in the
Company's consolidated financial statements. ALR's operating
results for periods prior to the acquisition date were not
material to the Company's consolidated results of operations.
Gateway 2000, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Nonrecurring Expenses:
The Company recorded several nonrecurring pretax charges
during the third quarter of 1997 totaling approximately
$113,800,000. Of the nonrecurring charges, approximately
$59,700,000 was for the write-off of in-process research and
development acquired in the purchase of ALR and certain assets of
Amiga Technologies. Also included in the nonrecurring charges
was a non-cash write-off of approximately $45,200,000 resulting
from the abandonment of a capitalized internal use software
project and certain computer equipment. In addition,
approximately $8,600,000 was recorded for severance of employees
and the closing of a foreign office.
10. Selected Balance Sheet Information:
December 31,
1996 1997
(in thousands)
Accounts receivable, net:
Accounts receivable $ 468,691 $ 530,743
Allowance for uncollectible accounts (18,968) (20,064)
$ 449,723 $ 510,679
Inventory:
Components and subassemblies $ 269,959 $ 215,318
Finished goods 8,084 33,906
$ 278,043 $ 249,224
Property, plant and equipment, net:
Land $ 14,888 $ 21,431
Leasehold improvements 5,096 21,666
Buildings, including construction in
progress 131,180 177,766
Office and production equipment 144,477 186,281
Furniture and fixtures 25,084 42,055
Vehicles 3,754 4,105
324,479 453,304
Accumulated depreciation and amortization (82,114) (116,835)
$ 242,365 $ 336,469
Internal use software costs, net:
Purchased software $ 33,102 $42,926
Internally developed software 71,475 38,486
104,577 81,412
Accumulated amortization (27,504) (41,414)
$ 77,073 $ 39,998
Amortization expense of $7,674,000, $13,591,000, and
$20,691,000 relating to software costs was included in the
results of operations for the years ended December 31, 1995, 1996
and 1997, respectively.
Gateway 2000, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Supplemental Statements of Cash Flows Information:
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996 1997
(in thousands)
<S> <C> <S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 2,119 $ 665 $ 716
Cash paid during the year for income taxes $ 61,322 $ 101,774 $ 163,710
Supplemental schedule of noncash investing and
financing activities:
Capital lease obligation/long-term
obligations incurred for the purchase of
new equipment $ 11,071 $ 3,126 $ 4,593
Acquisitions
Fair value of assets acquired $ 12,620 $ 271,189
Less: Liabilities assumed 9,000 70,773
Cash acquired - 58,096
Acquisitions, net of cash acquired $ 3,620 $ 142,320
</TABLE>
12. Geographic Data:
The Company operates in one principal business segment
across geographically diverse markets.
Transfers between geographic areas are recorded using
internal transfer prices set by the Company. The Americas
operating income is net of corporate expenses. 1995 geographic
data have been restated to separately reflect the Europe
geographic area.
Export sales from the Americas to unaffiliated customers are
not material for any period presented.
The following table sets forth information about the
Company's operations by geographic area.
<TABLE>
<CAPTION>
Americas Europe Pacific Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
(in thousands)
1997:
Net sales to
unaffiliated
customers $5,303,828 $634,616 $355,236 $-- $ 6,293,680
Transfers between
geographic areas 56,922 16,163 21,071 (94,156) --
Operating profit (loss) 198,638 (11,566) (9,733) (908) 176,431
Identifiable assets 1,701,654 187,215 150,402 -- 2,039,271
1996:
Net sales to
unaffiliated
customers $4,246,047 $552,671 $236,510 $-- $5,035,228
Transfers between
geographic areas 30,208 23,538 4,087 (57,833) --
Operating profit
(loss) 347,348 19,930 (9,946) (1,238) 356,094
Identifiable assets 1,349,781 178,988 144,642 -- 1,673,411
1995:
Net sales to
unaffiliated
customers $3,210,658 $428,107 $37,563 $ -- $3,676,328
Transfers between
geographic areas 250 40,062 -- (40,312) --
Operating profit (loss) 235,259 27,195 (13,019) (427) 249,008
Identifiable assets 967,682 124,796 31,533 -- 1,124,011
</TABLE>
Gateway 2000, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Selected Quarterly Financial Data (Unaudited):
The following tables contain selected unaudited consolidated
quarterly financial data for the Company:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1997:
Net sales $1,419,336 $1,392,658 $1,504,851 $ 1,976,835
Gross profit 265,793 260,358 195,250 355,040
Operating income (loss) 94,878 79,851 (137,850) 139,551
Net income (loss) 67,516 56,483 (107,113) 92,910
Net income (loss) per share:
Basic $ .44 $ .37 $ (.70) $ .60
Diluted $ .43 $ .36 $ (.68) $ .59
Weighted average shares
outstanding:
Basic 153,557 153,740 153,980 153,840
Diluted 157,291 156,231 156,875 156,526
Stock sales price per share:
High $ 32.63 $ 37.38 $ 44.75 $ 36.13
Low $ 23.81 $ 26.19 $ 31.50 $ 25.13
1996:
Net sales $1,142,202 $1,137,262 $1,202,933 $1,552,831
Gross profit 212,331 206,171 223,378 294,276
Operating income 70,502 70,801 87,757 127,034
Net income 50,487 51,352 60,696 88,144
Net income per share:
Basic $ .33 $ .34 $ .40 $ .57
Diluted $ .32 $ .33 $ .39 $ .56
Weighted average shares
outstanding:
Basic 151,192 153,126 153,257 153,394
Diluted 155,732 155,922 156,276 157,120
Stock sales price per share:
High $ 16.13 $ 20.75 $ 25.07 $ 33.13
Low $ 9.00 $ 13.63 $ 13.88 $ 22.32
</TABLE>
<TABLE>
<CAPTION>
Gateway 2000, Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1995, 1996 and 1997
(in thousands)
Balance at
Beginning of Charged to from End of
Period Expense Allowance Period
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for uncollectible
accounts (deducted from accounts
receivable) $ 13,900 $ 7,779 $ 10,125 $ 11,554
Year ended December 31, 1996:
Allowance for uncollectible
accounts deducted from accounts
receivable) $ 11,554 $ 20,832 $ 13,418 $ 18,968
Year ended December 31, 1997:
Allowance for uncollectible
accounts (deducted from accounts
receivable) $ 18,968 $ 5,688 $ 4,592 $ 20,064
</TABLE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Part III of this report is incorporated by reference to Gateway's
definitive Proxy Statement relating to its Annual Meeting of
stockholder's, which will be filed with the Commission within 120
days of the end of fiscal year 1997.
PART IV
Item 14. Exhibits, Financial Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
(1) Financial Statements and Financial Statement
Schedule. See Index to Consolidated Financial
Statements and Financial Statement Schedule at Item 8
on page 17 of this Report.
(2) Exhibits. Exhibits identified in parentheses below,
on file with the Securities and Exchange Commission
are incorporated herein by reference as exhibits
hereto.
<TABLE>
<CAPTION>
Exhibit Description of Exhibits
No.
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of Gateway 2000,
Inc. (Exhibit No. 3.2 to Amendment No. 1 to Registration Statement
No. 3-70618)
3.2 Amended and Restated Bylaws of Gateway 2000, Inc. (Exhibit No. 3.2 to
Form 10-K for 1995)
10.1 Tax Indemnification Agreement dated as of December 6, 1993 between
Gateway 2000, Inc., Theodore W. Waitt and the Norman W. Waitt, Jr. S
Corp. Trust. (Exhibit No. 10.1 Form 10-K for 1993)*
10.2 Indemnification Agreement dated as of December 6, 1993 between
Gateway 2000, Inc. and Theodore W. Waitt. (Exhibit No. 10.2 to 10-K
for 1995)*
10.3 Registration Agreement dated February 22, 1991 between Gateway 2000,
Inc., Theodore W. Waitt and Norman W. Waitt, Jr. as the sole trustee
and sole beneficiary of the Norman W. Waitt, Jr. S Corp. Trust,
together with Amendment No. 1 to the Registration Agreement dated as
of October 19, 1993 (Exhibit 10.11 to Form S-1)*
10.4 Gateway 2000, Inc. 1992 Stock Option Plan. (Exhibit No. 10.4 to
Registration Statement No. 33-70618 (the "Form S-1")*
10.5 Gateway 2000, Inc. 1993 Stock Option Plan for Executives and Key
Employees. (Exhibit No. 10.6 to the Form S-1)*
10.6 Gateway 2000, Inc. 1993 Non-Employee Director Stock Option Plan and
Form of Option Grant Letter (Exhibit No. 10.8 to the Form S-1)*
10.7 Gateway 2000, Inc. 1993 Employee Stock Purchase Equity Plan.
(Exhibit No. 10.9 to the Form S-1)*
10.8 Gateway 2000, Inc. 1996 Long-Term Incentive Equity Plan, as amended
and restated (filed herewith)*
10.9 Gateway 2000, Inc. 1996 Non-Employee Directors Stock Option Plan.
(Exhibit No. 4.3 to Registration Statement on Form S-8 No. 333-
08837)*
10.10 Gateway 2000, Inc. Management Incentive Plan as (Exhibit 10.9 to the
Form 10-K for 1996)*
10.11 Gateway 2000, Inc. Deferred Compensation Plan (Exhibit 10.10 to the
Form 10-K for 1996)*
10.12 Gateway 2000, Inc. Retirement Savings Plan. (Exhibit No. 10.16 to
Form 10-K for 1995)*
Exhibit Description of Exhibits
No.
10.13 Credit Agreement dated as of December 27, 1995 between Gateway 2000,
Inc., Norwest Bank Iowa, National Association, as Administrative
Agent, and certain financial institutions named therein. (Exhibit
No. 4.2 to Form 10-K for 1995)
10.14 1997 Amended and Restated Credit Agreement dated as of September 25,
1997 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 (Exhibit 10.13 to Form 10-
Q for period ended September 30, 1997)
10.15 Consultation and Noncompetition Agreement dated as of August 28, 1997
between the Company and Richard D. Snyder. (Exhibit 10.14 to Form 10-
Q for period ended September 30, 1997)*
10.16 Employment Agreement between Gateway 2000, Inc. and Jeffrey Weitzen
dated January 22, 1998, filed herewith.*
10.17 Employment Agreement between Gateway 2000, Inc. and David J. Robino
dated January 22, 1998, filed herewith.*
21.1 List of subsidiaries, filed herewith.
23.1 Consent of Coopers & Lybrand L.L.P, filed herewith.
24.1 Powers of attorney, filed herewith.
27.1 Financial Data Schedule and Financial Data Schedules restated
pursuant to SFAS 128, filed herewith (EDGAR version only).
</TABLE>
*Indicates a management contract or compensatory plan.
Gateway will furnish upon request any exhibit described
above upon payment of Gateway's reasonable expenses for
furnishing such exhibit.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by Gateway during
the quarter ended December 31, 1997.
This report contains the following trademarks and service marks
of Gateway, many of which are registered: AnyKey, "BLACK AND
WHITE SPOT" Design, CrystalScan, Destination, gateway.net, Family
PC, GATEWAY 2000, Gateway Country, Gateway Gold, "G" Design,
TelePath, Gateway Solo, Solo,Vivitron and "You've Got a Friend in
the Business". The following trademarks of other companies also
appear in this Report: Intel, IBM, Microsoft and Pentium. These
and any other product or brand names contained herein are
trademarks or registered trademarks of their respective owners.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of North Sioux City and
State of South Dakota, on March 24, 1998.
GATEWAY 2000, INC.
By:/s/ Theodore W. Waitt
Theodore W. Waitt
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant in the capacities indicated
on the dates indicated below:
<TABLE>
<CAPTION>
Date Signature Title
<C> <C> <C> <C> <S> <C> <S>
March 24, 1998 /s/ Theodore W. Waitt Chairman of the Board, Chief Executive
Theodore W. Waitt Officer (Principal Executive Officer )and
Director
March 24, 1998 /s/ Jeffrey Weitzen President, Chief Operating Officer and Director
Jeffrey Weitzen
March 24, 1998 /s/ David J. McKittrick Senior Vice President, Chief Financial Officer
David J. McKittrick and Treasurer (Principal Financial Officer
and Principal Accounting Officer)
March 24, 1998 *
Charles G. Carey Director
March 24, 1998 *
James W. Cravens Director
March 24, 1998 *
George H. Krauss Director
March 24, 1998 *
Douglas L. Lacey Director
March 24, 1998 *
James F. McCann Director
March 24, 1998 * Director
Richard D. Snyder
</TABLE>
* By: /s/ William M. Elliott
William M. Elliott
(Attorney-in-fact)
Exhibit 10.8
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 10.16
January 19, 1998
Mr. Jeff Weitzen
13 Cobblefield Drive
Mendham, NJ 07945
Dear Jeff,
I am excited about us working together. I think we seem to have
good synergies in the way we both look at things, and I think it
would be a blast to work with you to build a company that we can
both be proud of. A company that currently has great potential
but depends upon great people and leadership to see it live up to
its promise. Gateway can be truly a company that others envy; a
company that is socially responsible and truly designed for the
next millennium; a company that people would be jazzed to be able
to work for; and a company that customers trust, respect, admire
and count on. Great people and fanatical customer loyalty is the
foundation that leads to great financial success.
I am pleased to offer you the key position of President and Chief
Operating Officer of Gateway 2000 under the following terms (for
defined terms, see Exhibit A):
Title: President and Chief Operating Officer
Role and Responsibilities: Reporting responsibilities as the
title implies. Direct responsibility for the overall P&L of the
company and managing our growth plans. Exact reporting
relationships for persons other than Jeff and Ted will be agreed
to by Jeff and Ted (who have agreed on Dave's reporting
relationships), but will include:
All Line Functions,
Product Functions,
Systems, and
Key Operational Entities.
Salary and Bonus: $750,000 annual salary (pro-rated in the case
of a partial year), plus incentive bonus up to 150% of salary
targeted at 100%, as determined by the Board of Directors or
Compensation Committee. You shall receive a minimum bonus for
1998 of $250,000.
Initial Options: Initial grant of options ("Initial Options") to
purchase 1,000,000 shares exercisable at fair market value on
date of grant, with a ten-year term (except as provided below)
and subject to our standard 4 year vesting. Full vesting of the
Initial Options shall occur upon (i) Termination Without Cause,
(ii) Termination for Good Reason or (iii) a Change in Control.
Full vesting of the Initial Options shall also occur upon a
Nonrenewal of Employment Term (as defined herein). In the event
of termination as a result of death or Disability, the portion of
the Initial Options that would otherwise have vested as a result
of lapse of time during the twenty-four month period following
such event shall immediately become exercisable and any other
unvested portion shall lapse. The exercise period of the vested
portion of the Initial Options shall cease one (1) year after
termination in the case of termination as a result of death or
Disability, Termination without Cause, Termination for Good
Reason, Nonrenewal of Employment Term or a termination for any
reason whatsoever occurring on or after a Change in Control and,
in all other cases, ninety (90) days after termination. The
Initial Options will be granted under Gateway's 1996 Long-Term
Incentive Equity Plan ("Plan") and shall be subject to the terms
of the Plan.
Recurring Options: Eligible for additional options starting in
1999. Targeted at options to purchase 75,000 shares twice a year
based on a $30 stock price (i.e., targets subject to adjustment
based on Black-Scholes value), in each case subject to approval
of the Board of Directors or Compensation Committee in accordance
with the Plan or other applicable Gateway stock option plan. The
terms of such options shall be established by the Board of
Directors or Compensation Committee at the time of grant.
Up-front Sign-On Bonus: Signing bonus (within ten (10) days of
commencement of employment) of $1,400,000 in cash, plus fully-
vested stock grant under the Plan (or outside the Plan on
substantially the same terms) valued at $600,000 at public market
price of Gateway stock on date of grant.
Relocation: Reimbursement for reasonable relocation expenses on
an after-tax basis in accordance with Gateway's relocation plan
including reasonable loss on sale of current home and
reimbursement of reasonable temporary living expenses.
Term: Thirty-six months after commencement of employment
("Employment Term"), subject to renewal for successive additional
one (1) year periods by mutual agreement of the parties; provided
that your Employment Term hereunder shall terminate earlier upon
your death, Termination for Cause or Disability by the Company,
Termination Without Cause by the Company, Termination for Good
Reason by you, Termination without Good Reason by you or
Termination as a result of Change in Control by you.
Change of Control, Termination Without Cause, Etc.: Upon
(i) Termination Without Cause, (ii) Termination for Good Reason,
(iii) Nonrenewal of Employment Term or (iv) termination by you or
the Company of your employment for any reason whatsoever (other
than Cause) within six (6) months after the effective date of a
Change in Control ("Termination as a result of Change in
Control"), you will receive in a lump sum, within twenty (20)
days thereafter, an amount equal to three (3) times the sum of
your then current annual base salary (prior to any deduction in
violation hereof) and annual incentive bonus (being prior to
January 1, 1999, your target bonus and thereafter the highest
such bonus for any of the last two completed fiscal years up to
but not in excess of your then current annual base salary (prior
to any deduction in violation hereof)). Such payments shall be
your sole remedy for such termination of the Employment Term
except as specifically provided herein. In the event of a
Termination by you as a result of Change in Control, you agree,
at the Company's request made within ten (10) days of your giving
notice of termination as a result of a Change in Control, to
either (as requested by the Company) (i) continue full-time
service to the Company for a transition period ending three
months after the effective date of the Change in Control unless
terminated earlier by the Company or by you for Good Reason
(other than a breach of clause (a)(ii) of the definition of such
term because you are reporting to a new CEO) or (ii) provide
senior level consulting services as an employee on the
compensation terms then in effect for up to a three month period
after the effective date of the Change in Control.
Excise Tax: In the event any payment in the nature of
compensation made, directly or indirectly, by the Company to you
which is contingent on a change in the ownership or effective
control of the company or in the ownership of a substantial
portion of the assets of the Company (such terms having their
respective meanings under Code Section 280G) is subject to excise
tax pursuant to Section 4999 of the Internal Revenue Code of
1986, as amended ("Code"), on "excess parachute payments" as
defined in Code Section 280G (an "Excise Tax"), the Company shall
pay you an amount equal to such Excise Tax ("Additional
Compensation") but without further reimbursement to you for any
Excise Tax or additional taxes payable with respect to such
Additional Compensation. You agree, in the event you believe
that you are required to pay any such Excise Tax, to afford the
Company the reasonable ability, after it has paid you any such
amount then due, to contest the imposition of such Excise Tax.
In the event the amount you would receive after the application
of the immediately preceding sentence, net of all applicable
income, excise and payroll taxes, is less than the amount you
would receive, net of all applicable income, excise and payroll
taxes, if your total compensation were reduced to a level that is
the maximum amount that you could receive without there being any
"excess parachute payment" under Code Section 280G (the "No
Parachute Maximum"), your compensation shall be reduced to the No
Parachute Maximum by reducing the lump sum payment due to you
hereunder.
Life and Disability Insurance: In addition to any life insurance
benefits generally available to you as a senior executive, the
Company will pay the premiums for a $5,000,000 term life and lump
sum Disability insurance policy for the initial 12-month period
during the Employment Term only and a $2,500,000 term life and
lump sum Disability insurance policy for the succeeding 12-month
period of the Employment Term only (together in each case with
any amount to reimburse you, on after tax basis, for the income
and payroll taxes, if any, payable by you due to the Company's
payment of such premiums and reimbursements), provided that if
you are not then insurable at normal rates for a person of your
age, the Company will purchase as much insurance as purchasable
at standard rates.
All Terminations: Accrued Amounts when determinable and
otherwise due; and no other amounts shall be payable except as
provided herein.
Transition and Timing: To be mutually agreed, but anticipated to
be starting February of 1998.
Other: (i) Indemnification to the full extent permitted by
applicable law and coverage with respect to claims (both during
and after employment) relating to your period of service during
the Employment Term under the Company's directors and officers
insurance policy (as in effect from time to time),
(ii) participation in all benefits, fringe, incentive and equity
compensation plans (provided that any specific benefits and
rights hereunder shall be netted against any such other similar
benefits and plans) that are generally available to senior
executives to the extent you are eligible to participate therein;
(iii) payment of your reasonable out-of-pocket legal fees and
disbursements for reviewing this arrangement and reimbursement of
your reasonable out-of-pocket legal fees and disbursements
relating to any claim in which you obtain a final judgment of a
court of competent jurisdiction against the Company for breach of
this letter if you materially prevail in the matters raised in
such litigation; and (iv) inclusion in management's slate for the
Company's Board of Directors (without additional compensation) at
the next annual meeting of stockholders following commencement of
employment. All payments and benefits provided under this letter
shall be subject to withholding for applicable income (or
similar) taxes. As a Company executive, you shall be bound by
the terms of the Company's Nondisclosure/Intellectual Property
and Non-Competition Agreements in the respective forms attached
hereto, the provisions of which are incorporated herein by
reference.
Jeff, I am very excited about wrapping this up and getting down
to building a great company together. I believe it is in both
our best interests to reach agreement on the above as soon as
possible.
Sincerely,
Ted Waitt, Chairman
Chief Executive Officer
The above offer is subject to Board approval, and is made upon
reliance of Jeff's representation that he is free to accept the
offer and commence exclusive employment with the Company as of
the date of commencement contemplated hereby without restriction
from any employer other than the Company (other than
confidentiality obligations arising either at law or under
agreement(s) heretofore provided to the Company), provided the
foregoing shall not prevent you from being involved in charitable
activities or managing your personal investments (which shall
exclude investments in competitors of the Company posted at the
time of investment other than passive investments of a less than
five percent equity or debt interest). This letter may not be
assigned by you or the Company other than by the Company in
connection with a sale of all or substantially all of its assets
or by law as a result of a merger or consolidation. Upon
acceptance hereof this letter shall be binding upon and inure to
the benefit of the parties and their successors or permitted
assigns in accordance with the terms hereof. This letter
constitutes the entire agreement of the parties and supersedes
all other prior agreements and understandings, both written and
oral, among the parties, and shall be governed by and construed
in accordance with the internal laws of the State of South
Dakota.
ACCEPTED AND AGREED TO:
________________________
Jeff Weitzen
EXHIBIT A
Cause shall mean (a) your material breach of any of the terms of
the Nondisclosure/Intellectual Property Agreement or the Non-
Competition Agreement, or your representation and agreement to
provide services on an exclusive basis to the Company during the
Employment Term, which breach in any case is not cured within
twenty (20) days of written notice thereof; (b) willful
misconduct with regard to the Company or gross neglect or
dereliction of duty resulting in either such case, in material
economic harm to the Company; (c) failure to follow (or in good
faith attempt to follow) the reasonable lawful written direction
of the Company's CEO, Chairman or Board of Directors; or
(d) conviction of, or pleading nolo contendere to, a felony
(other than a felony predicated on your vicarious liability or
involving a routine traffic violation) or any other crime
involving securities fraud or theft of substantial assets of the
Company. Vicarious liability shall mean any liability which is
based on acts of the Company for which you are charged solely as
a result of your offices with the Company and in which you were
not directly involved or had prior knowledge of such actions or
intended actions with, in either case, knowledge or reasonable
belief that a law was being violated.
Disability shall mean you are then incapable or absent from your
duties with the Company on a full-time basis because of physical
or mental incapacity to perform your material duties and have
been so for 180 days.
Termination for Disability shall mean a termination by the
Company while and as a result of your Disability.
Termination Without Cause shall mean any termination by the
Company during the Employment Term other than for Cause or as a
result of death or Disability. A Nonrenewal of Employment Term
shall be treated the same as a Termination Without Cause.
Good Reason shall mean (a) any diminution in title or any
material diminution in authority, responsibility or reporting
lines not commensurate with your position including but not
limited to as a material diminution (i) maintaining your current
position but in an entity that is a subsidiary of another entity
and not in the ultimate parent company or (ii) reporting to
anyone but the Board of Directors or Ted Waitt or (b) any other
material breach by the Company of this letter, which in any case
is not cured within twenty days of written notice thereof. Your
sole remedy for any breach of this letter by the Company which
would provide you with a right to terminate with Good Reason
shall be a Termination for Good Reason.
Termination for Good Reason shall mean a termination by you as a
result of the occurrence of a Good Reason event that remains
uncured for the specified period. Any notice of termination of
employment for a specific Good Reason event shall be given within
180 days after the first occurrence of the event on which such
Good Reason termination is to be based.
Termination without Good Reason shall mean any termination by you
other than a Termination for Good Reason.
Nonrenewal of Employment Term shall occur on the third
anniversary of the commencement date of employment, unless prior
to such date the Employment Term shall have terminated or the
parties shall have agreed in writing to an extension of the
employment term, if the reason for nonrenewal is a determination
by the Company not to extend the term for any reason (other than
Cause, death, Disability or the lack of your agreement to extend)
or a determination by you not to accept the terms relating to
title, role and responsibility (whether or not the same as in
this letter) or relating to compensation or the other applicable
material terms set forth herein as part of such renewal, it being
understood that your refusal to accept a continuation (or
increase) of the level of compensation you are then receiving, to
agree to a renewal absent an additional sign-on bonus or options
or to accept continuation of such other material terms (i.e.
other than title, role and responsibility) shall not be deemed to
constitute a Nonrenewal of Employment Term. Any nonrenewal of
the Employment Term for any reason not within the foregoing
provisions shall not constitute a "Nonrenewal of Employment Term"
for purposes hereof, and shall be treated as a Termination
without Good Reason.
Accrued Amounts shall mean (a) Base Salary, benefits, fringes and
expense reimbursements due for the period prior to any
termination, (b) any bonuses earned but unpaid for any prior
fiscal year and a pro rata bonus (based on period of service in
the current fiscal year provided at least three months have
elapsed in such year prior to termination) based on actual
achievement against targets during the fiscal year and (c) any
other amounts due under the terms of any plan or program.
Change in Control shall have the meaning set forth in the Plan,
provided that no Change in Control shall be deemed to have
occurred while Ted Waitt continues to serve as CEO of the Company
(or if the Company becomes a subsidiary, its ultimate parent
entity) or, in the case of a sale, transfer or other disposition
of assets, its successor (or if its successor becomes a
subsidiary, its ultimate parent entity).
Exhibit 10.17
January 19, 1998
Mr. David Robino
26 Emily Road
Far Hills, NJ 07931
Dear Dave,
I am excited about us working together. I want you to be by my
side as Gateway moves to the "next level." I need you to help
build the company, which has great potential but depends upon
great people and leadership to see it live up to its promise.
Gateway can be truly a company that others envy; a company that
is socially responsible and truly designed for the next
millennium; a company that people would be jazzed to be able to
work for; and a company that customers trust, respect, admire and
count on. Great people and fanatical customer loyalty is the
foundation that leads to great financial success.
I am pleased to offer you the position of Executive Vice
President and Chief Administrative Officer of Gateway 2000 under
the following terms (for defined terms, see Exhibit A):
Title: Executive Vice President and Chief Administrative Officer
Role and Responsibilities: Reporting shall be directly to the
CEO. Responsibilities shall be commensurate with and shall
include the areas set forth in my letter to you of December 5.
Salary and Bonus: $450,000 annual salary (pro-rated in the case
of a partial year), plus incentive bonus up to 100% of salary
targeted at 65%, as determined by the Board of Directors or
Compensation Committee. You shall receive a minimum bonus for
1998 of $100,000.
Initial Options: Initial grant of options ("Initial Options") to
purchase 200,000 shares exercisable at fair market value on date
of grant, with a ten-year term (except as provided below) and
subject to our standard 4 year vesting. Full vesting of the
Initial Options shall occur upon (i) Termination Without Cause,
(ii) Termination for Good Reason or (iii) Change in Control.
Full vesting of the Initial Options shall also occur upon a
Nonrenewal of Employment Term (as defined herein). In the event
of termination as a result of death or Disability, the portion of
the Initial Options that would otherwise have vested as a result
of lapse of time during the twenty-four month period following
such event shall immediately become exercisable and any other
unvested portion shall lapse. The exercise period of the vested
portion of the Initial Options shall cease one (1) year after
termination in the case of termination as a result of death or
Disability, Termination without Cause, Termination for Good
Reason, Nonrenewal of Employment Term or a termination for any
reason whatsoever occurring on or after a Change in Control and,
in all other cases, ninety (90) days after termination. The
Initial Options will be granted under Gateway's 1996 Long-Term
Incentive Equity Plan ("Plan") and shall be subject to the terms
of the Plan.
Recurring Options: Eligible for additional options starting in
1999. Targeted at options to purchase 30,000 shares twice a year
based on a $30 stock price (i.e., targets subject to adjustment
based on Black-Scholes value), in each case subject to approval
of the Board of Directors or Compensation Committee in accordance
with the Plan or other applicable Gateway stock option plan. The
terms of such options shall be established by the Board of
Directors or Compensation Committee at the time of grant.
Up-front Sign-On Bonus: Signing bonus of $500,000 in cash,
payable within ten (10) days of commencement of employment.
Relocation: Reimbursement for reasonable relocation expenses on
an after-tax basis in accordance with Gateway's relocation plan
including reasonable loss on sale of current home and
reimbursement of reasonable temporary living expenses.
Term: The initial employment term shall end thirty-six months
after commencement of employment ("Initial Employment Term");
provided that the Initial Employment Term hereunder shall
terminate earlier upon your death, Termination for Cause or
Disability by the Company, Termination Without Cause by the
Company, Termination for Good Reason by you, Termination without
Good Reason by you or Termination as a result of Change in
Control by you ("Termination Events"). At the end of the Initial
Employment Term, the Employment Term shall thereafter be extended
on the same terms then in effect for successive additional one
(1) year periods unless either party gives the other party thirty
(30) days prior written notice prior to the end of the Initial
Employment Term or any then current additional term, subject to
earlier termination on the occurrence of a Termination Event.
Your period of employment hereunder shall be referred to as the
"Employment Term."
Change of Control, Termination Without Cause, Etc.: Upon
(i) Termination Without Cause, (ii) Termination for Good Reason,
(iii) Nonrenewal of Employment Term or (iv) termination by you or
the Company of your employment for any reason whatsoever (other
than Cause) within six (6) months after the effective date of a
Change in Control ("Termination as a result of Change in
Control"), you will receive in a lump sum, within twenty (20)
days thereafter, an amount equal to three (3) times the sum of
your then current annual base salary (prior to any deduction in
violation hereof) and annual incentive bonus (being prior to
January 1, 1999, your target bonus and thereafter the highest
such bonus for any of the last two completed fiscal years up to
but not in excess of your then current annual base salary (prior
to any deduction in violation hereof)). Such payment shall be
your sole remedy for such termination of the Employment Term
except as specifically provided herein. In the event of a
Termination by you as a result of Change in Control, you agree,
at the Company's request made within ten (10) days of your giving
notice of termination as a result of a Change in Control, to
either (as requested by the Company) (i) continue full-time
service to the Company for a transition period ending three
months after the effective date of the Change in Control unless
terminated earlier by the Company or by you for Good Reason or
(ii) provide senior level consulting services as an employee on
the compensation terms then in effect for up to a three month
period after the effective date of the Change in Control.
Excise Tax: In the event any payment in the nature of
compensation made, directly or indirectly, by the Company to you
which is contingent on a change in the ownership or effective
control of the Company or in the ownership of a substantial
portion of the assets of the Company (such terms having their
respective meanings under Code Section 280G) is subject to excise
tax pursuant to Section 4999 of the Internal Revenue Code of
1986, as amended ("Code"), on "excess parachute payments" as
defined in Code Section 280G (an "Excise Tax"), the Company shall
pay you an amount equal to such Excise Tax ("Additional
Compensation") but without further reimbursement to you for any
Excise Tax or additional taxes payable with respect to such
Additional Compensation. You agree, in the event you believe
that you are required to pay any such Excise Tax, to afford the
Company the reasonable ability, after it has paid you any such
amount then due, to contest the imposition of such Excise Tax.
In the event the amount you would receive after the application
of the immediately preceding sentence, net of all applicable
income, excise and payroll taxes, is less than the amount you
would receive, net of all applicable income, excise and payroll
taxes, if your total compensation were reduced to a level that is
the maximum amount that you could receive without there being any
"excess parachute payment" under Code Section 280G (the "No
Parachute Maximum"), your compensation shall be reduced to the No
Parachute Maximum by reducing the lump sum payment due to you
hereunder.
Life and Disability Insurance: In addition to any life insurance
benefits generally available to you as a senior executive, the
Company will pay the premiums for a $1,000,000 term life and lump
sum Disability insurance policy for the initial 12-month period
during the Employment Term only and a $500,000 term life and lump
sum Disability insurance policy for the succeeding 12-month
period of the Employment Term only (together in each case with
any amount to reimburse you, on after tax basis, for the income
and payroll taxes, if any, payable by you due to the Company's
payment of such premiums and reimbursements), provided that if
you are not then insurable at standard rates for a person of your
age, the Company will purchase as much insurance as purchasable
at standard rates.
All Terminations: Accrued Amounts when determinable and
otherwise due; and no other amounts shall be payable except as
provided herein.
Transition and Timing: To be mutually agreed, but anticipated to
be starting the week of February 2, 1998.
Other: (i) Indemnification to the full extent permitted by
applicable law and coverage with respect to claims (both during
and after employment) relating to your period of service during
the Employment Term under the Company's directors and officers
insurance policy (as in effect from time to time),
(ii) participation in all benefits, fringe, incentive and equity
compensation plans (provided that any specific benefits and
rights hereunder shall be netted against any such other similar
benefits and plans) that are generally available to senior
executives to the extent you are eligible to participate therein;
and (iii) payment of your reasonable out-of-pocket legal fees and
disbursements for reviewing this arrangement and reimbursement of
your reasonable out-of-pocket legal fees and disbursements
relating to any claim in which you obtain a final judgment of a
court of competent jurisdiction against the Company for breach of
this letter if you materially prevail in the matters raised in
such litigation. All payments and benefits provided under this
letter shall be subject to withholding for applicable income (or
similar) taxes. As a Company executive, you shall be bound by
the terms of the Company's Nondisclosure/Intellectual Property
and Non-Competition Agreements in the respective forms attached
hereto, the provisions of which are incorporated herein by
reference.
Dave, I am very anxious to finalize this offer and excited about
the opportunity to work with you.
Sincerely,
Ted Waitt, Chairman
Chief Executive Officer
The above offer is made upon reliance of Dave's representation
that he is free to accept the offer and commence exclusive
employment with the Company as of the date of commencement
contemplated hereby without restriction from any employer other
than the Company (other than confidentiality obligations arising
either at law or under agreement(s) heretofore provided to the
Company), provided the foregoing shall not prevent you from being
involved in charitable activities or managing your personal
investments (which shall exclude investments in competitors of
the Company posted at the time of investment other than passive
investments of a less than five percent equity or debt interest)
provided such activities do not in any event materially interfere
with the performance of your duties hereunder. This letter may
not be assigned by you or the Company other than by the Company
in connection with a sale of all or substantially all of its
assets or by law as a result of a merger or consolidation. Upon
acceptance hereof this letter shall be binding upon and inure to
the benefit of the parties and their successors or permitted
assigns in accordance with the terms hereof. This letter
constitutes the entire agreement of the parties and supersedes
all other prior agreements and understandings, both written and
oral, among the parties, and shall be governed by and construed
in accordance with the internal laws of the State of South
Dakota.
ACCEPTED AND AGREED TO:
________________________
David Robino
EXHIBIT A
Cause shall mean (a) your material breach of any of the terms of
the Nondisclosure/Intellectual Property Agreement or the Non-
Competition Agreement, or your representation and agreement to
provide services on an exclusive basis to the Company during the
Employment Term, which breach in any case is not cured within
twenty (20) days of written notice thereof; (b) willful
misconduct with regard to the Company or gross neglect or
dereliction of duty resulting in either such case, in material
economic harm to the Company; (c) failure to follow (or in good
faith attempt to follow) the reasonable lawful written direction
of the Company's Chairman or CEO or Board of Directors; or
(d) conviction of, or pleading nolo contendere to, a felony
(other than a felony predicated on your vicarious liability or
involving a routine traffic violation) or any other crime
involving securities fraud or theft of substantial assets of the
Company. Vicarious liability shall mean any liability which is
based on acts of the Company for which you are charged solely as
a result of your offices with the Company and in which you were
not directly involved or had prior knowledge of such actions or
intended actions with, in either case, knowledge or reasonable
belief that a law was being violated.
Disability shall mean you are then incapable or absent from your
duties with the Company on a full-time basis because of physical
or mental incapacity to perform your material duties and have
been so for 180 days.
Termination for Disability shall mean a termination by the
Company while and as a result of your Disability.
Termination Without Cause shall mean any termination by the
Company during the Employment Term other than for Cause or as a
result of death or Disability. A Nonrenewal of Employment Term
shall be treated the same as a Termination Without Cause.
Good Reason shall mean (a) any diminution in title or any
material diminution in authority, responsibility or reporting
lines not commensurate with your position including but not
limited to as a material diminution maintaining your current
position but in an entity that is a subsidiary of another entity
and not in the ultimate parent company or (b) any other material
breach by the Company of this letter, which in either case is not
cured within twenty days of written notice thereof. Your sole
remedy for any breach of this letter by the Company which would
provide you with a right to terminate with Good Reason shall be a
Termination for Good Reason.
Termination for Good Reason shall mean a termination by you as a
result of the occurrence of a Good Reason event that remains
uncured for the specified period. Any notice of termination of
employment for a specific Good Reason event shall be given within
180 days after the first occurrence of the event on which such
Good Reason termination is to be based.
Termination without Good Reason shall mean any termination by you
other than a Termination for Good Reason.
Nonrenewal of Employment Term shall mean the termination of the
Employment Term by the Company as a result of notice of non-
extension given by the Company at least thirty (30) days prior to
the end of the Initial Employment Term or any then current
additional term. Any nonrenewal of the Employment Term by you
shall not constitute a Nonrenewal of Employment Term for purposes
hereof and shall be treated the same as a Termination without
Good Reason.
Accrued Amounts shall mean (a) Base Salary, benefits, fringes and
expense reimbursements due for the period prior to any
termination, (b) any bonuses earned but unpaid for any prior
fiscal year and a pro rata bonus (based on period of service in
the current fiscal year provided at least three months have
elapsed in such year prior to termination) based on actual
achievement against targets during the fiscal year and (c) any
other amounts due under the terms of any plan or program.
Change in Control shall have the meaning set forth in the Plan,
provided that no Change in Control shall be deemed to have
occurred while Ted Waitt continues to serve as CEO or Chairman of
the Company (or if the Company becomes a subsidiary, its ultimate
parent entity) or, in the case of a sale, transfer or other
disposition of assets, its successor (or, if its successor
becomes a subsidiary, its ultimate parent entity).
Exhibit 21.1
Subsidiaries of Gateway 2000, Inc.
Name Jurisdiction of
Incorporation
Advanced Logic Research, Inc. Delaware
Cowabunga Enterprises, Inc. Delaware
Gateway 2000 Asia, Inc Delaware
Gateway 2000 Aviation, Inc. Delaware
Gateway 2000 Business Direct, Inc. Delaware
Gateway 2000 Country Stores, Inc. Delaware
Gateway 2000 Direct Sales, Inc. Delaware
Gateway Enterprise Products, Inc. Delaware
Gateway 2000 Foundation South Dakota
Gateway 2000 Major Accounts, Inc. Delaware
Gateway 2000 Marketing Services, Inc. Delaware
Gateway 2000 Technical Support, Inc. Delaware
Over the Moon Productions, Inc. Texas
Gateway 2000 (M) Sdn. Bhd Malaysia
Gateway 2000 Asia Pte. Ltd. Singapore
Gateway 2000 Computers Gmbh Germany
Gateway 2000 Computers Limited United Kingdom
Gateway 2000 Europe Ireland
Gateway 2000 France SARL France
Gateway 2000 International Limited Ireland
(Netherlands Resident)
Gateway 2000 Ireland Limited Ireland
Gateway 2000 Netherlands BV The Netherlands
Gateway 2000 Pty. Ltd. Australia
Gateway 2000 Sweden AB Sweden
Gateway 2000 Wholesale Pty. Ltd. Australia
Nihon Gateway Nisen Kabushiki Kaisha Japan
(Gateway Japan)
Advanced Logic Research International, Virgin Islands
Inc.
Advanced Logic Research, Inc. (U.K.) United Kingdom
Limited
Advanced Logic Research (Deutschland) Germany
Gmbh
Advanced Logic Research International Singapore
(Pte) Ltd.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statements of Gateway 2000, Inc. on Forms S-8
(File Nos. 33-08837, 33-84116, 33-84118, 33-84120, 33-84122,
33-84124, 333-33231, and 333-36071) of our report dated
January 22, 1998, on our audit of the consolidated financial
statements and financial statement schedule of Gateway 2000,
Inc. as of December 31, 1996 and 1997, and for each of the
three years in the period ended December 31, 1997 which
report is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
March 24, 1998
Gateway 2000, Inc.
Form 10-K; Power of Attorney
The undersigned constitutes and appoints William M. Elliott
and Stephanie G. Heim, or either of them, as the undersigned's
true and lawful attorney-in-fact and agent, with full power of
substitution, in the undersigned's name, place and stead, in any
and all capacities, to sign an Annual Report on Form 10-K of
Gateway 2000, Inc. (the "Company") for the Company's fiscal year
ended December 31, 1997, and any or all amendments thereto, and
to file the same, with all exhibits thereto and other documents
in connection therewith (collectively, the "Form 10-K"), with the
Securities and Exchange Commission the New York Stock Exchange
and such other state and federal government commissions and
agencies as required under the Securities Exchange Act of 1934,
as amended, the regulations thereunder and other applicable law.
Dated: March 17, 1998
/s/Jeffrey Weitzen
Jeffrey Weitzen
President and Chief Operating Officer
Gateway 2000, Inc.
Form 10-K; Power of Attorney
Each of the undersigned constitutes and appoints William M.
Elliott and Stephanie G. Heim, or either of them, as the
undersigned's true and lawful attorney-in-fact and agent, with
full power of substitution, in the undersigned's name, place and
stead, in any and all capacities, to sign an Annual Report on
Form 10-K of Gateway 2000, Inc. (the "Company") for the Company's
fiscal year ended December 31, 1997, and any or all amendments
thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith (collectively, the "Form
10-K"), with the Securities and Exchange Commission the New York
Stock Exchange and such other state and federal government
commissions and agencies as required under the Securities
Exchange Act of 1934, as amended, the regulations thereunder and
other applicable law.
Dated: January 21, 1998
____________________
Theodore W. Waitt Chairman of the Board, Chief
Executive Officer and Director
/s/ Charles G. Carey
Charles G. Carey Director
/s/ James W. Cravens
James W. Cravens Director
/s/ George H. Krauss
George H. Krauss Director
/s/ Douglas L. Lacey
Douglas L. Lacey Director
/s/ James F. McCann
James F. McCann Director
/s/ Richard D. Snyder
Richard D. Snyder Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from Gateway 2000,
Inc.'s consolidated statements of operations for the twelve months ended
December 31, 1997 and the consolidated balance sheet as of December 31, 1997 and
and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JAN-01-1997
<CASH> 593,601
<SECURITIES> 38,648
<RECEIVABLES> 530,743
<ALLOWANCES> 20,064
<INVENTORY> 249,224
<CURRENT-ASSETS> 1,544,683
<PP&E> 534,716
<DEPRECIATION> 158,249
<TOTAL-ASSETS> 2,039,271
<CURRENT-LIABILITIES> 1,003,906
<BONDS> 7,240
0
0
<COMMON> 1,541
<OTHER-SE> 928,503
<TOTAL-LIABILITY-AND-EQUITY> 2,039,271
<SALES> 6,293,680
<TOTAL-REVENUES> 6,293,680
<CGS> 5,217,239
<TOTAL-COSTS> 5,217,239
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,688
<INTEREST-EXPENSE> 716
<INCOME-PRETAX> 203,620
<INCOME-TAX> 93,823
<INCOME-CONTINUING> 109,797
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,797
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.70
</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 NINE MONTHS ENDED SEPTEMBER
30, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 273,987
<SECURITIES> 21,403
<RECEIVABLES> 511,890
<ALLOWANCES> 19,230
<INVENTORY> 376,648
<CURRENT-ASSETS> 1,330,076
<PP&E> 489,179
<DEPRECIATION> 137,945
<TOTAL-ASSETS> 1,832,631
<CURRENT-LIABILITIES> 884,118
<BONDS> 5,741
0
0
<COMMON> 1,541
<OTHER-SE> 839,319
<TOTAL-LIABILITY-AND-EQUITY> 1,832,631
<SALES> 4,316,845
<TOTAL-REVENUES> 4,316,845
<CGS> 3,595,444
<TOTAL-COSTS> 3,595,444
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,422
<INTEREST-EXPENSE> 577
<INCOME-PRETAX> 57,074
<INCOME-TAX> 40,187
<INCOME-CONTINUING> 16,887
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,887
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</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 SIX MONTHS ENDED JUNE 30,
1997 AND THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 449,719
<SECURITIES> 20,080
<RECEIVABLES> 500,169
<ALLOWANCES> 28,342
<INVENTORY> 460,258
<CURRENT-ASSETS> 1,519,827
<PP&E> 487,975
<DEPRECIATION> 142,249
<TOTAL-ASSETS> 1,914,779
<CURRENT-LIABILITIES> 900,111
<BONDS> 6,210
0
0
<COMMON> 1,539
<OTHER-SE> 946,076
<TOTAL-LIABILITY-AND-EQUITY> 1,914,779
<SALES> 2,811,994
<TOTAL-REVENUES> 2,811,994
<CGS> 2,285,843
<TOTAL-COSTS> 2,285,843
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,910
<INTEREST-EXPENSE> 354
<INCOME-PRETAX> 189,312
<INCOME-TAX> 65,313
<INCOME-CONTINUING> 123,999
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123,999
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.79
</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, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 547,252
<SECURITIES> 8,985
<RECEIVABLES> 442,978
<ALLOWANCES> 23,006
<INVENTORY> 314,954
<CURRENT-ASSETS> 1,397,644
<PP&E> 450,781
<DEPRECIATION> 125,711
<TOTAL-ASSETS> 1,775,790
<CURRENT-LIABILITIES> 830,540
<BONDS> 6,599
0
0
<COMMON> 768
<OTHER-SE> 882,306
<TOTAL-LIABILITY-AND-EQUITY> 1,775,790
<SALES> 1,419,336
<TOTAL-REVENUES> 1,419,336
<CGS> 1,153,543
<TOTAL-COSTS> 1,153,543
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,184
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> 103,078
<INCOME-TAX> 35,562
<INCOME-CONTINUING> 67,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,516
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.43
</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 TWELVE MONTHS ENDED
DECEMBER 31, 1996 AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 516,360
<SECURITIES> 0
<RECEIVABLES> 468,691
<ALLOWANCES> 18,968
<INVENTORY> 278,043
<CURRENT-ASSETS> 1,318,342
<PP&E> 429,056
<DEPRECIATION> 109,618
<TOTAL-ASSETS> 1,673,411
<CURRENT-LIABILITIES> 799,769
<BONDS> 7,244
0
0
<COMMON> 768
<OTHER-SE> 814,773
<TOTAL-LIABILITY-AND-EQUITY> 1,673,411
<SALES> 5,035,228
<TOTAL-REVENUES> 5,035,228
<CGS> 4,071,601
<TOTAL-COSTS> 4,071,601
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 21,612
<INTEREST-EXPENSE> 637
<INCOME-PRETAX> 382,716
<INCOME-TAX> 132,037
<INCOME-CONTINUING> 250,679
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 250,679
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 1.60
</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 NINE MONTHS ENDED SEPTEMBER
30, 1996 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 401,126
<SECURITIES> 0
<RECEIVABLES> 420,141
<ALLOWANCES> 18,561
<INVENTORY> 210,598
<CURRENT-ASSETS> 1,082,089
<PP&E> 402,512
<DEPRECIATION> 93,740
<TOTAL-ASSETS> 1,416,562
<CURRENT-LIABILITIES> 622,570
<BONDS> 12,374
0
0
<COMMON> 767
<OTHER-SE> 724,223
<TOTAL-LIABILITY-AND-EQUITY> 1,416,562
<SALES> 3,482,398
<TOTAL-REVENUES> 3,482,398
<CGS> 2,821,896
<TOTAL-COSTS> 2,821,896
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13,760
<INTEREST-EXPENSE> 460
<INCOME-PRETAX> 248,146
<INCOME-TAX> 85,610
<INCOME-CONTINUING> 162,536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 162,536
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.04
</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 SIX MONTHS ENDED JUNE 30,
1996 AND THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-10-1996
<CASH> 362,552
<SECURITIES> 0
<RECEIVABLES> 384,768
<ALLOWANCES> 14,044
<INVENTORY> 199,091
<CURRENT-ASSETS> 1,000,486
<PP&E> 364,396
<DEPRECIATION> 81,659
<TOTAL-ASSETS> 1,310,775
<CURRENT-LIABILITIES> 587,049
<BONDS> 8,128
0
0
<COMMON> 766
<OTHER-SE> 660,852
<TOTAL-LIABILITY-AND-EQUITY> 1,310,775
<SALES> 2,279,464
<TOTAL-REVENUES> 2,279,464
<CGS> 1,849,884
<TOTAL-COSTS> 1,849,884
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,269
<INTEREST-EXPENSE> 322
<INCOME-PRETAX> 154,302
<INCOME-TAX> 52,463
<INCOME-CONTINUING> 101,839
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<NET-INCOME> 101,839
<EPS-PRIMARY> 0.67
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</TABLE>
