<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-22784
-------
-------------------------
GATEWAY 2000, INC.
(Exact name of registrant as specified in its charter)
Delaware 42-1249184
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4545 Towne Centre Court
San Diego, California 92121
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (619) 799-3401
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _________.
-----
As of May 7, 1999, there were 156,527,582 shares of the Common Stock of the
Company, $.01 par value per share, outstanding. As of May 7, 1999, there were no
shares of the Company's Class A Common Stock, $.01 par value per share,
outstanding.
<PAGE>
I. FINANCIAL INFORMATION
Item 1. Financial Statements
Gateway 2000, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1998 and 1999
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------
1998 1999
---------------------- -------------------
<S> <C>
Net sales $ 1,727,927 $ 2,103,411
Cost of goods sold 1,391,433 1,652,907
---------------------- -------------------
Gross profit 336,494 450,504
Selling, general and administrative expenses 227,293 309,697
---------------------- -------------------
Operating income 109,201 140,807
Other income, net 9,347 14,785
---------------------- --------------------
Income before income taxes 118,548 155,592
Provision for income taxes 42,677 56,013
====================== ===================
Net income $ 75,871 $ 99,579
====================== ===================
Net income per share:
Basic $ 0.49 $ 0.64
======================= ===================
Diluted $ 0.48 $ 0.62
======================= ===================
Weighted average shares outstanding:
Basic 154,548 156,497
======================= ===================
Diluted 157,575 160,597
======================= ===================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
Gateway 2000, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and March 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,169,810 $1,108,211
Marketable securities 158,657 165,137
Accounts receivable, net 558,851 517,169
Inventory 167,924 164,478
Other 172,944 181,247
------------- --------------
Total current assets 2,228,186 2,136,242
Property, plant and equipment, net 530,988 570,315
Intangibles, net 65,944 62,623
Other assets 65,262 127,249
------------- --------------
$2,890,380 $2,896,429
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term obligations $ 11,415 $ 10,553
Accounts payable 718,071 631,761
Accrued liabilities 415,265 434,406
Accrued royalties 167,873 140,790
Other current liabilities 117,050 147,068
------------- --------------
Total current liabilities 1,429,674 1,364,578
Long-term obligations, net of current maturities 3,360 2,867
Warranty and other liabilities 112,971 117,707
------------- --------------
Total liabilities 1,546,005 1,485,152
------------- --------------
Commitments and Contingencies (Note 5)
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000 shares authorized; none
issued and outstanding - -
Class A Common Stock, nonvoting, $.01 par value, 1,000 shares
authorized; none issued and outstanding - -
Common Stock, $.01 par value, 220,000 shares authorized;
156,569 shares and 157,169 shares issued in
1998 and 1999, respectively 1,566 1,572
Additional paid-in capital 365,986 389,722
Retained earnings 980,908 1,080,487
Treasury stock, at cost, 700 shares - (54,731)
Accumulated other comprehensive income (4,085) (5,773)
------------- --------------
Total stockholders' equity 1,344,375 1,411,277
------------- --------------
$2,890,380 $2,896,429
============= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
Gateway 2000, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1998 and 1999
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 75,871 $ 99,579
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 23,971 31,652
Provision for uncollectible accounts receivable 1,412 4,004
Deferred income taxes (18,205) (3,553)
Other, net 671 192
Changes in operating assets and liabilities:
Accounts receivable 37,384 37,677
Inventory 63,819 3,445
Other current assets 8,416 7,969
Accounts payable (27,957) (87,153)
Accrued liabilities 36,145 19,361
Accrued royalties (8,506) (27,083)
Other current liabilities 26,996 39,508
Warranty and other liabilities (4,380) 4,737
---------------- ----------------
Net cash provided by operating activities 215,637 130,335
---------------- ----------------
Cash flows from investing activities:
Capital expenditures (41,198) (67,550)
Investment in unconsolidated affiliate - (77,615)
Purchases of available-for-sale securities (34,928) (42,829)
Proceeds from maturities of available-for-sale securities 6,864 36,515
Other, net (210) 2,582
----------------- ----------------
Net cash used in investing activities (69,472) (148,897)
----------------- ----------------
Cash flows from financing activities:
Share repurchase - (54,731)
Principal payments on long-term obligations and notes payable (8,239) (1,356)
Stock options exercised 9,563 14,252
---------------- ----------------
Net cash provided by (used in) financing activities 1,324 (41,835)
Foreign exchange effect on cash and cash equivalents 1,080 (1,202)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 148,569 (61,599)
Cash and cash equivalents, beginning of period 593,601 1,169,810
---------------- ----------------
Cash and cash equivalents, end of period $ 742,170 $ 1,108,211
================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General:
The accompanying unaudited consolidated financial statements of Gateway
2000, Inc. (the "Company") as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 have been prepared on the same basis as the audited
consolidated financial statements for the year ended December 31, 1998 and, in
the opinion of management, reflect all adjustments necessary to fairly state the
consolidated financial position, results of operations and cash flows for the
interim period. All adjustments are of a normal, recurring nature. The results
for the interim period are not necessarily indicative of results to be expected
for any other interim period or the entire year. These financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto for the year ended December 31, 1998, which are
included in the Company's 1998 Annual Report on Form 10-K, filed with the
Securities and Exchange Commission. The preparation of the consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities 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.
2. Comprehensive Income:
Comprehensive income for the Company includes net income, foreign
currency translation effects, and unrealized gains or losses on available-for-
sale securities which are charged or credited to the accumulated other
comprehensive income (loss) account within stockholders' equity.
Comprehensive income for the three months ended March 31, 1998 and 1999
was as follows:
<TABLE>
<CAPTION>
Three Months Ended
1998 1999
--------------- ---------------
(in thousands)
(Unaudited)
<S> <C> <C>
Comprehensive income:
Net income $ 75,871 $ 99,579
Foreign currency translation (252) (2,046)
Unrealized gain on available-for-sale
securities 187 358
----------- -----------
$ 75,806 $ 97,891
=========== ===========
</TABLE>
5
<PAGE>
3. Share and Per Share Information:
Basic earnings per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share is computed using the combination of dilutive common stock
equivalents and the weighted average number of common shares outstanding during
the period.
The following table sets forth a reconciliation of shares used in the
computation of basic and diluted earnings per share.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1999
------------ ------------
(in thousands)
(Unaudited)
<S> <C> <C>
Net income for basic and diluted
earnings per share $ 75,871 $ 99,579
Weighted average shares for basic
earnings per share 154,548 156,497
Dilutive effect of stock options 3,027 4,100
------------ ------------
Weighted average shares for diluted
earnings per share 157,575 160,597
============ ============
</TABLE>
4. Selected Balance Sheet Information:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ ------------
(Unaudited)
(in thousands)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 573,799 $ 528,617
Less allowance for uncollectible accounts (14,948) (11,448)
------------ ------------
$ 558,851 $ 517,169
============ ============
Inventory:
Components and subassemblies $ 155,746 $ 157,645
Finished goods 12,178 6,833
------------ ------------
$ 167,924 $ 164,478
============ ============
</TABLE>
5. Contingencies:
The Company is a party to various lawsuits and administrative
proceedings arising in the ordinary course of its business. The Company
evaluates such lawsuits and proceedings on a case-by-case basis, and its policy
is to vigorously contest any such claims which it believes are without merit.
The Company's management believes that the ultimate resolution of such pending
matters will not materially adversely affect the Company's business, financial
position, results of operations or cash flows.
6
<PAGE>
6. Investment in Unconsolidated Affiliate:
During the first quarter of 1999, the Company purchased a 19.9% interest in
NECX Direct, LLC, an on-line e-commerce computer peripheral retailer. The
purchase price of approximately $77.6 million includes a two year option to
acquire the remaining 80.1% interest for additional consideration. The
investment is being accounted for using the cost method.
7. Segment Data:
The Company evaluates the performance of its consumer and business segments
based on segment sales and operating income and does not include segment assets
or other income and expense items for management reporting purposes. Operating
income for these segments includes selling, general, and administrative expenses
and other overhead charges directly attributable to the segment and excludes
certain expenses managed outside the reportable segments. Costs excluded from
the consumer and business segments primarily consist of corporate marketing
costs and other selling, general and administrative expenses.
The following table sets forth summary information by segment:
Three Months Ended March 31,
1998 1999
---- ----
(in thousands)
(Unaudited)
Net sales:
Consumer $ 902,771 $ 1,211,773
Business 825,156 891,638
Non-segment - -
=========== ============
Consolidated $ 1,727,927 $ 2,103,411
=========== ============
Operating income:
Consumer $ 104,373 $ 158,948
Business 131,191 147,761
Non-segment (126,363) (165,902)
=========== ============
Consolidated $ 109,201 140,807
============ ============
7
<PAGE>
Item 2. 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 or
referenced 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:
<TABLE>
<CAPTION>
For the Three Months ended March 31,
1998 Increase 1999
--------------- ---------------- ----------------
(dollars in thousands)
<S> <C> <C> <C>
Net sales $ 1,727,927 22% $ 2,103,411
Gross profit $ 336,494 34% $ 450,504
Percentage of net sales 19.5% 21.4%
Selling, general and
administrative expenses $ 227,293 36% $ 309,697
Percentage of net sales 13.2% 14.7%
Operating income $ 109,201 29% $ 140,807
Percentage of net sales 6.3% 6.7%
Net income $ 75,871 31% $ 99,579
</TABLE>
Net Sales
- ---------
Consolidated net sales increased to $2.1 billion in the first quarter
of 1999, a 22% increase compared to the first quarter of 1998. Consumer and
business segment sales were $1.2 billion and $.9 billion, respectively, in the
first quarter of 1999 representing increases of 34% and 8%, respectively, for
the consumer and business segments compared to the first quarter of 1998.
The increased consolidated net sales for the first quarter of 1999 over
the comparable period of 1998 were primarily driven by continued strong unit
growth in the United States and continued momentum in the Asia Pacific region
("APAC"). Unit shipments grew to 1,085,000 in the first quarter of 1999, a 42%
increase over the first quarter of 1998. Increases across the desktop, portable,
and server product lines for the first quarter of 1999 were attributed to
several key elements: execution of the Company's unique multi-channel strategy,
including phone, Web, and Gateway CountrySM stores; increased investment behind
building the Gateway brand; and continued focus on delivering superior products
and services, most notably through the Your:)WareSM consumer program.
8
<PAGE>
The effect of increased unit sales on consolidated net revenue for the
first quarter of 1999 was partially offset by a decline in average unit prices
(AUPs) of 14% compared to the first quarter of 1998. AUPs declined in the first
quarter of 1999 due to component cost decreases and growth in the sub $1,000
PC market. The Company expects the industry trend of declining AUPs to continue
and intends to mitigate this by diversifying its revenue stream with software
bundles, Internet service, financing and other service offerings. AUPs declined
3% in the first quarter of 1999 as compared to the fourth quarter of 1998.
The following table summarizes the Company's net sales, for the periods
indicated, by geographic region:
<TABLE>
<CAPTION>
For the Three Months ended March 31,
1998 Change 1999
---------------------- --------------------- ----------------
(dollars in thousands)
<S> <C> <C> <C>
Net sales:
United States $ 1,461,603 23 % $ 1,791,517
Europe 163,007 (13)% 141,776
Asia Pacific 103,317 65 % 170,118
-------------------- --------------------- ----------------
Consolidated $ 1,727,927 22 % $ 2,103,411
==================== ===================== ================
</TABLE>
In the United States unit shipments rose 42% over the comparable period of
1998 due to the factors discussed above. The APAC region continued to achieve
significant increases in unit shipments with growth of 96%. Unit shipments in
the European region ("EMEA") were flat compared to the first quarter of 1998.
The Company has put new management in place in EMEA and is focusing on the top
line initiatives previously discussed to address the declining unit shipment
growth.
Gross Profit
- ------------
Gross profit in the first quarter of 1999 rose to $450.5 million, an
increase of approximately 34% from the comparable period in 1998. Margin
productivity was driven by pricing discipline, focused vendor management,
healthy overseas margin performance, solid execution, and a richer product mix.
As a percentage of sales, gross profit for the first quarter 1999 was 21.4%, up
from 19.5% in the first quarter of 1998, representing the fifth consecutive
quarter of year-over year gross profit improvement. Gross profit as a percentage
of sales in the first quarter of 1999 was flat compared to the fourth quarter of
1998.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general & administrative ("SG&A") productivity in the first
quarter was offset by continued strategic investment across a number of fronts,
including systems infrastructure, personnel, the Internet, Gateway CountrySM
stores and international expansion. As a percentage of sales, SG&A was 14.7% for
the first quarter of 1999, compared to 13.2% and 13.5% in the first and fourth
quarters of 1998, respectively. SG&A expenses for the first quarter of 1999
increased approximately 36% over the first quarter of 1998 and were flat
compared to the fourth quarter of 1998. The Company invested in SG&A in:
Internet development, new stores, infrastructure and international expansion.
This accounted for 1.5 points of the 14.7 points invested in SG&A in the first
quarter of 1999.
Operating Income
- ----------------
Due to the strong unit growth and gross margin efficiencies discussed above
operating income increased 29% to $140.8 million compared to the first quarter
of 1998. As a percentage of sales operating income increased to 6.7% from 6.3%
in the first quarter of 1998 and decreased from 8.1% in the fourth quarter of
1998. Operating
9
<PAGE>
income for the consumer and business segments in the first quarter of 1999 were
$158.9 million and $147.8 million, respectively, while operating expenses not
allocated to a segment were $165.9 million. Operating income improvements for
the consumer and business segments represent 52% and 13% increases,
respectively, over the first quarter of 1998. Operating income for the consumer
and business segments includes SG&A expenses and other overhead charges directly
attributable to the segment and excludes certain expenses managed outside the
reportable segments. Costs excluded from the consumer and business segments
primarily consist of corporate marketing costs and other SG&A expenses.
Other Income
- ------------
Other income, net includes other income net of expenses, such as
interest income and expense and foreign exchange transaction gains and losses.
Other income, net increased to $14.8 million in the first quarter of 1999 from
$9.3 million in the first quarter of 1998 and $14.1 million in the fourth
quarter of 1998, primarily due to the additional interest income generated by
increases in cash balances and marketable securities.
Income Taxes
- ------------
The Company's annualized effective tax rate was 36.0% for the quarter,
flat compared to the first and fourth quarters of 1998.
Liquidity and Capital Resources
- -------------------------------
The following table presents selected financial statistics and
information for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------
1998 1999
-------------------------------- ----------------------------
(dollars in thousands)
<S> <C> <C>
Cash and marketable securities $ 809,014 $ 1,273,348
Days of sales in accounts receivable 25 22
Inventory turnover 26 40
Days in accounts payable 30 34
</TABLE>
At March 31, 1999, the Company had cash and cash equivalents of $1.1
billion, marketable securities of $165.1 million and an unsecured committed
credit facility with certain banks of $225 million, consisting of a revolving
line of credit facility and a sub-facility for letters of credit. At March 31,
1999, no amounts were outstanding under the revolving line of credit.
Approximately $2.0 million was committed to support outstanding standby letters
of credit.
10
<PAGE>
The Company generated $130.3 million in cash from operations during the
first quarter of 1999, including $131.9 million of net income adjusted for non-
cash items. Decreases in inventory levels and days sales in accounts receivable,
and increase in days purchases in accounts payable balances are attributable to
the Company's increased focus on working capital management. The Company used
approximately $67.5 million in cash for facilities, equipment, and software and
$6.3 million to purchase investments in marketable securities, net of proceeds
of securities sold.
During the first quarter of 1999, the Company purchased a 19.9% interest in
NECX Direct, LLC, an on-line e-commerce computer peripheral retailer. The
purchase price of approximately $77.6 million includes a two year option to
acquire the remaining 80.1% interest for additional consideration.
At March 31, 1998, the Company had long-term indebtedness and capital lease
obligations of approximately $13.4 million. These obligations relate primarily
to the Company's expansion of international operations and its investments in
equipment and facilities. The Company anticipates that it will retain all
earnings in the foreseeable future for development of its business and will not
distribute earnings to its stockholders as dividends.
On April 30, 1999, the Company filed a universal shelf registration
statement which contemplates that the Company may from time to time sell up to
$1.0 billion of debt or equity securities, which will provide the Company with
greater flexibility to respond to acquisition and market opportunities.
In May 1999, the Company committed to invest $200 million in CMGI, Inc. as
part of a strategic relationship.
Management believes the Company's current and anticipated sources of
working capital, including net cash provided by operating activities and amounts
available under existing credit facilities, will provide adequate flexibility
for the Company's financial needs for at least the next 12 months.
New Accounting Pronouncements
- -----------------------------
In June of 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 1999. The objective of the
statement is to establish accounting and reporting standards for derivative
instruments and hedging activities. The Company uses foreign currency forward
contracts, a derivative instrument, to hedge foreign currency transactions and
anticipated foreign currency transactions. The adoption of this new accounting
pronouncement is not expected to be material to the Company's consolidated
financial position or results of operations.
In 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Accounting Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which is effective
for fiscal years beginning after December 15, 1998. The SOP provides guidance on
when costs incurred for internal-use computer software are and are not to be
capitalized, and on the accounting for such software that is marketed to
customers. The adoption of this SOP did not have a material impact on the
Company's consolidated financial position or results of operations.
11
<PAGE>
Year 2000
- ---------
The "Year 2000" issue has arisen because many existing computer programs
and chip-based embedded technology systems use only the last two digits to refer
to a year, and therefore, do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results.
State of readiness: The Company has adopted a seven-step process toward
Year 2000 readiness consisting of the following: (i) awareness: fostering an
understanding of and commitment to the problem and its potential risks; (ii)
inventory: identifying and locating systems and technology components that may
be affected; (iii) assessment: reviewing these components for Year 2000
compliance and assessing the scope of potential Year 2000 issues; (iv) planning:
defining the technical solutions, labor and work plans necessary for each
affected system; (v) remediation/replacement: completing the programming to
upgrade or replace the problem software or hardware; (vi) testing and compliance
validation: conducting testing followed by independent validation by a separate
internal verification team; and (vii) implementation: placing the corrected
systems and technology back into the business environment with a management
monitoring system to ensure ongoing compliance.
The Company has grouped its internal systems and technology into the
following three categories for purposes of Year 2000 compliance: (i) information
resource applications and technology consisting of enterprise-wide systems
supported by the Company's centralized information technology organization (IT);
(ii) business processes consisting of hardware, software, and associated
computer chips as well as external vendors used in the operation of the
Company's core business functions; and (iii) building systems consisting of non-
IT equipment that use embedded computer chips such as elevators, automated room
key systems and HVAC equipment. The Company is prioritizing its efforts based on
the severity with which non-compliance would affect service, core business
processes or revenues, and whether there are viable, non-automated fallback
procedures (Mission Criticality).
As of the end of the first quarter, the Company believes the Awareness and
Inventory phases are complete. For IT systems, the Company believes the
assessment, planning and remediation/replacement phases are over 75% complete
with testing and compliance validation complete for 60% of the inventory. For
business processes and building systems, the Company believes the assessment and
planning phases are over 70% complete with remediation/replacement and testing
and compliance validation currently at 50% complete. The Company plans to
complete the remediation/replacement and testing phases for its mission critical
IT systems by the end of the second quarter of 1999 with the remaining half of
1999 reserved for unplanned contingencies and compliance validation and quality
assurance. For mission critical business processes and building systems, the
same level of completion is targeted for October 1999.
The Company has also initiated Year 2000 compliance communications with its
significant third party suppliers, vendors and business partners. The Company is
focusing its efforts on the business interfaces most critical to its customer
service, core business processes and revenues, including those third parties
that support the most critical enterprise-wide IT systems, the Company's primary
suppliers of non-IT products, or provide the most critical payment processing
functions. Responses have been received from a majority of the third parties
that comprise this group.
Costs: During the first quarter 1999, the Company expensed incremental
costs of approximately $3.5 million related to the Year 2000 remediation
efforts, and has expensed $7.2 million on a life-to-date basis. The current
total estimated cost to complete the Year 2000 remediation efforts is from $14
to $16 million, exclusive of upgrades to existing applications and
implementation of new systems. Internal and external costs specifically
12
<PAGE>
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.
Year 2000 Contingency Plans: The Company is reviewing its existing
contingency plans for potential modification to address specific Year 2000
issues as they arise and expects to continue this process during the next three
fiscal quarters.
Company Products: With respect to PC products sold to customers, for all
the Company hardware based on the Intel(R) family of Pentium processors
(Pentium(R), Pentium(R) Pro, Pentium II(R), Pentium(R)II Xeon(TM) and
Celeron(TM) processors) and using an operating system provided by the Company,
the Company warrants to customers that such systems sold after January 1, 1997,
will process dates correctly before, during and after January 1, 2000. This
warranty applies to desktop, portable, Destination(R), and server products, and
it is governed by the terms and conditions outlined in the original system
warranty. It does not include application software, or non-Company branded
external hardware peripherals such as printers, scanners and joysticks. Because
the Company does not control the design of these products, it cannot ensure how
they access or calculate date information in the computer. Certain hardware sold
before January 1, 1997 will require remediation or replacement to become Year
2000 compliant. The Company may experience increased customer claims for Year
2000 failures for these products and for failures resulting from software or
non-Company branded external hardware peripherals. Additional information
concerning the Year 2000 issue and the Company's compliance program is available
on the Company's website at www.gateway.com/.
Risks of the Company's Year 2000 Issues: Based on current information, the
Company believes that the Year 2000 problem will not have a material adverse
effect on the Company, its consolidated financial position, results of
operations or cash flows. However, there are no assurances that Year 2000
remediation by the Company or third parties will be properly and timely
completed, and failure to do so could have a material adverse effect on the
Company, its business and its financial condition. The Company cannot predict
the effects that Year 2000 non-compliance would have on it, which would
ultimately depend on numerous uncertainties such as: (i) whether significant
third parties properly and timely address the Year 2000 issue; (ii) whether
broad-based or systemic economic failures may occur, and the severity and
duration of such failures, including loss of utility and/or telecommunications
services, and errors or failures in financial transactions or payment processing
systems such as credit cards; and (iii) whether the Company becomes the subject
of litigation or other proceedings regarding any Year 2000-related events and
the outcome of any such litigation or proceedings.
Factors That May Affect Future Results
Factors that could impact the Company's results of operations, cash flows
or financial position and cause future results to differ from the Company's
expectations include the following: competitive market conditions;
infrastructure requirements; component supply shortages; short product cycles;
access to technology; risks of international expansion; foreign currency
fluctuations; credit risk of consumer loan accounts; the success of e-commerce;
risks of acquired businesses; increased inventory costs; changes in customer or
geographic sales mix; costs associated with the Year 2000 transition; general
domestic and international economic conditions; as well as risks identified in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998 and other filings with the Securities and Exchange Commission.
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.
13
<PAGE>
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.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
There has not been a material change in the Company's exposure to foreign
currency risks since December 31, 1998.
14
<PAGE>
II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various lawsuits and administrative proceedings
arising in the ordinary course of its business. The Company evaluates such
lawsuits and proceedings on a case by case basis, and its policy is to
vigorously contest any such claims which it believes are without merit. The
Company's management believes that the ultimate resolution of such pending
matters will not materially and adversely affect the Company's business,
consolidated financial position, results of operations or cash flows.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Description of Exhibits
-----------------------
NO
--
27.1 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Gateway 2000, INC.
Date: May 17, 1999 By: /s/ JOHN J. TODD
_______________________________________
John J. Todd
Senior Vice President, Chief Financial
Officer and Treasurer (authorized
officer and chief accounting officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GATEWAY
2000, INC.'S CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31,1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,108,211
<SECURITIES> 165,137
<RECEIVABLES> 528,617
<ALLOWANCES> 11,448
<INVENTORY> 164,478
<CURRENT-ASSETS> 2,136,242
<PP&E> 831,430
<DEPRECIATION> 261,115
<TOTAL-ASSETS> 2,896,429
<CURRENT-LIABILITIES> 1,364,578
<BONDS> 2,867
0
0
<COMMON> 1,572
<OTHER-SE> 1,409,705
<TOTAL-LIABILITY-AND-EQUITY> 2,896,429
<SALES> 2,103,411
<TOTAL-REVENUES> 2,103,411
<CGS> 1,652,907
<TOTAL-COSTS> 1,652,907
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,005
<INTEREST-EXPENSE> 393
<INCOME-PRETAX> 156,592
<INCOME-TAX> 56,013
<INCOME-CONTINUING> 99,579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,579
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.62
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