<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 JUNE 30, 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, 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 August 9, 1999, there were 156,612,356 shares of the Common Stock of
the Company, $.01 par value per share, outstanding. As of August 9, 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, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
<S> <C> <C> <C> <C>
1998 1999 1998 1999
---------- ---------- ---------- ----------
Net sales $1,618,909 $1,912,109 $3,346,837 $4,015,520
Cost of goods sold 1,285,221 1,490,723 2,676,655 3,143,630
---------- ---------- ---------- ----------
Gross profit 333,688 421,386 670,182 871,890
Selling, general and administrative expenses 249,699 298,463 476,992 608,159
---------- ---------- ---------- ----------
Operating income 83,989 122,923 193,190 263,731
Other income, net 10,917 16,491 20,265 31,275
---------- ---------- ---------- ----------
Income before income taxes 94,906 139,414 213,455 295,006
Provision for income taxes 34,166 50,189 76,844 106,202
---------- ---------- ---------- ----------
Net income $ 60,740 $ 89,225 $ 136,611 $ 188,804
========== ========== ========== ==========
Share and per share information:
Net income per share:
Basic $ 0.39 $ 0.57 $ 0.88 $ 1.21
========== ========== ========== ==========
Diluted $ 0.38 $ 0.56 $ 0.86 $ 1.18
========== ========== ========== ==========
Weighted average shares outstanding:
Basic 155,427 156,443 154,990 156,470
========== ========== ========== ==========
Diluted 158,887 160,157 158,231 160,377
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
GATEWAY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,169,810 $ 1,060,920
Marketable securities 158,657 167,399
Accounts receivable, net 558,851 584,882
Inventory 167,924 121,451
Other 172,944 321,841
----------- -----------
Total current assets 2,228,186 2,256,493
Property, plant and equipment, net 530,988 624,185
Intangibles, net 65,944 59,693
Other assets 65,262 127,213
----------- -----------
$ 2,890,380 $ 3,067,584
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term obligations $ 11,415 $ 4,788
Accounts payable 718,071 711,217
Accrued liabilities 415,265 466,511
Accrued royalties payable 167,873 162,160
Other current liabilities 117,050 111,147
----------- -----------
Total current liabilities 1,429,674 1,455,823
Long-term obligations, net of current maturities 3,360 1,973
Warranty and other liabilities 112,971 113,552
----------- -----------
Total liabilities 1,546,005 1,571,348
----------- -----------
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 and 1,000,000 shares
authorized in 1998 and 1999, respectively;
156,569 shares and 157,325 shares issued,
in 1998 and 1999, respectively 1,566 1,573
Additional paid-in capital 365,986 386,481
Retained earnings 980,908 1,169,712
Treasury stock -- (54,888)
Accumulated other comprehensive income (4,085) (6,642)
----------- -----------
Total stockholders' equity 1,344,375 1,496,236
----------- -----------
$ 2,890,380 $ 3,067,584
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
GATEWAY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1999
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net Income $ 136,611 $ 188,804
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 49,652 65,256
Provision for uncollectible accounts receivable 1,923 6,564
Deferred income taxes (26,412) (25,725)
Other, net 695 518
Changes in operating assets and liabilities:
Accounts receivable (19,584) (32,594)
Inventory 94,400 46,472
Other assets 1,045 (29,900)
Accounts payable 33,942 (6,102)
Accrued liabilities 50,329 51,687
Accrued royalties 1,809 (5,713)
Other current liabilities 3,182 9,363
Other liabilities (1,492) 581
--------- ----------
Net cash provided by operating activities 326,100 269,211
--------- ----------
Cash flows from investing activities:
Capital expenditures (78,630) (151,833)
Investment in unconsolidated affiliate - (77,726)
Purchases of available-for-sale securities (99,248) (82,739)
Proceeds from maturity of held-to-maturity securities 11,864 73,787
Proceeds from sales of available-for-sale securities 33,898 -
Other investments (1,145) (78,616)
--------- ----------
Net cash used in investing activities (133,261) (317,127)
--------- ----------
Cash flows from financing activities:
Purchase of treasury stock - (70,784)
Principal payments on long-term obligations and notes payable (4,294) (8,015)
Stock options exercised 18,918 21,133
--------- ----------
Net cash provided by (used in) financing activities 14,624 (57,666)
Foreign exchange effect on cash and cash equivalents (1,456) (3,308)
--------- ----------
Net increase in cash and cash equivalents 206,007 (108,890)
Cash and cash equivalents, beginning of period 593,601 1,169,810
--------- ----------
Cash and cash equivalents, end of period $ 799,608 $1,060,920
========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
The accompanying unaudited consolidated financial statements of Gateway,
Inc. (the "Company") as of June 30, 1999 and for the three and six months ended
June 30, 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 (consisting of normal
recurring adjustments) necessary to fairly state the consolidated financial
position, and the consolidated results of operations and cash flows for the
interim period. The results for the interim period are not necessarily
indicative of results to be expected for any other interim period or the entire
year. These financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto for the
year ended December 31, 1998, which are included in the Company's 1998 Annual
Report to the Securities and Exchange Commission on Form 10-K. The preparation
of the consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities, and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
2. COMPREHENSIVE INCOME:
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 and six month periods ended June 30,
1998 and 1999 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------
1998 1999 1998 1999
-------- -------- -------- --------
(in thousands)
(unaudited)
COMPREHENSIVE INCOME:
<S> <C> <C> <C> <C>
Net income $ 60,740 $ 89,225 $136,611 $188,804
Foreign currency translation (1,621) (510) (1,873) (2,556)
Unrealized gain (loss) on available-for-sale
securities (34) (359) 154 (1)
-------- -------- -------- --------
Total comprehensive income $59,085 $ 88,356 $134,892 $186,247
======== ======== ======== ========
</TABLE>
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.
5
<PAGE>
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------
1998 1999 1998 1999
-------- -------- -------- --------
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Net income for basic and diluted
earnings per share $ 60,740 $ 89,225 $136,611 $188,804
======== ======== ======== ========
Weighted average shares for basic
earnings per share 155,427 156,443 154,990 156,470
Dilutive effect of stock options 3,460 3,714 3,241 3,907
-------- -------- -------- --------
Weighted average shares for diluted
earnings per share 158,887 160,157 158,231 160,377
======== ======== ======== ========
</TABLE>
4. SELECTED BALANCE SHEET INFORMATION:
DECEMBER 31, JUNE 30,
1998 1999
----------- -----------
(unaudited)
(in thousands)
Accounts receivable, net:
Accounts receivable $573,799 $601,136
Less allowance for uncollectible accounts (14,948) (16,254)
--------- --------
$558,851 $584,882
======== ========
Inventory:
Components and subassemblies $155,746 $118,075
Finished goods 12,178 3,376
--------- --------
$167,924 $121,451
======== ========
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. STOCK REPURCHASE PROGRAM:
During the first half of 1999, the Company repurchased 1,076,765 shares of
common stock. Of the shares repurchased 236,265 were reissued upon the exercise
of employee stock options. The Company is currently authorized to repurchase up
to the lesser of 10,000,000 shares or $250 million of its available common
stock.
8. 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 general and administrative expenses that are separately managed.
The following table sets forth summary information by segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, June 30,
--------------------------- --------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Net sales:
Consumer $ 710,764 $ 902,655 $1,613,535 $2,114,428
Business 908,145 1,009,454 1,733,302 1,901,092
Non-segment - - - -
---------- ---------- ---------- ----------
Consolidated $1,618,909 $1,912,109 $3,346,837 $4,015,520
========== ========== ========== ==========
Operating income:
Consumer $ 57,327 $ 99,493 $ 161,701 $ 258,442
Business 156,811 168,669 288,001 316,430
Non-segment (130,149) (145,239) (256,512) (311,141)
---------- ---------- ---------- ----------
Consolidated $ 83,989 $ 122,923 $ 193,190 $ 263,731
========== ========== ========== ==========
</TABLE>
7
<PAGE>
9. SUBSEQUENT EVENT:
On August 9, 1999, the Company announced that its Board of Directors
approved a two-for-one common stock split to be effected in the form of a stock
dividend. The shares will be distributed on or about September 7, 1999 to
shareholders of record as of August 20, 1999. Share and per share data for all
periods presented herein have not been restated to reflect the two-for-one
common stock split.
8
<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 operation, 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ------------------------------------
1998 CHANGE 1999 1998 CHANGE 1999
---------- ------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Net sales $1,618,909 18.1% $1,912,109 $3,346,837 20.0% $4,015,520
Gross profit 333,688 26.3% 421,386 670,182 30.1% 871,890
Percentage of net sales 20.6% 22.0% 20.0% 21.7%
Selling, general and
administrative expenses 249,699 19.5% 298,463 476,992 27.5% 608,159
Percentage of net sales 15.4% 15.6% 14.3% 15.2%
Operating income 83,989 46.4% 122,923 193,190 36.5% 263,731
Percentage of net sales 5.2% 6.4% 5.8% 6.6%
Net income $ 60,740 46.9% $ 89,225 136,611 38.2% $ 188,804
</TABLE>
Net Sales
- ---------
Consolidated net sales rose to $1.9 billion for the second quarter of 1999
and to $4.0 billion for first six months of 1999. This represents increases of
18% and 20%, respectively, over the comparable periods of 1998 and a decrease of
9% from the first quarter of 1999 to the second quarter of 1999 due to seasonal
trends in consumer sales. For the second quarter of 1999, consumer segment
sales were $0.9 billion and business segment sales were $1.0 billion, which
represented respective increases of 27% and 11% over the second quarter of 1998.
For the first half of 1999, consumer segment sales were $2.1 billion and
business segment sales were $1.9 billion, which represented respective increases
of 31% and 10% over the comparable period of 1998. For the first quarter of
1999 to the second quarter of 1999, consumer segment sales declined 26% and
business segment sales increased 13%.
9
<PAGE>
The increased consolidated net sales for the second quarter and first half
of 1999 over the comparable periods 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 worldwide grew to 1,003,900 in the
second quarter of 1999 and 2,089,000 for the first half of the year. This
represented increases of 36% and 39%, respectively, over the comparable periods
of 1998. Increases in unit sales were attributed to several key elements such
as the Company's unique multi-channel strategy, including sales from phone, Web,
and Gateway Country(SM) stores, continued focus on delivering superior
products and services, and the Your:)Ware(SM) consumer and business programs.
The effect of increased unit sales on consolidated net revenue for the
second quarter and first half of 1999 were partially offset by declines in
average unit prices (AUPs) of 13% and 14%, respectively, compared to the
comparable periods of 1998. AUPs continued on a declining trend in the second
quarter of 1999 due to component cost decreases and the Company's broadening of
its product offerings in the sub $1,000 PC market. This has been partially
offset by an increase in non-system revenue. 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.
The following table summarizes the Company's net sales, for the periods
indicated, by geographic region:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------- --------------------------------------------
1998 CHANGE 1999 1998 CHANGE 1999
--------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Net sales
United States $1,371,291 17.8% $1,614,962 $2,832,893 20.2% $3,406,479
Europe 130,682 (14.2%) 112,192 293,690 (13.5%) 253,969
Asia Pacific 116,936 58.2% 184,955 220,254 61.2% 355,072
---------- ----- ---------- ---------- ----- ----------
Consolidated $1,618,909 18.1% $1,912,109 $3,346,837 20.0% $4,015,520
========== ===== ========== ========== ===== ==========
</TABLE>
In the United States unit shipments rose 36% in the second quarter of 1999
and 39% for the first half of 1999 over the comparable periods of 1998. The
APAC region continued to achieve significant increases in unit shipments with
growth of 77% and 86% for the second quarter and first half of 1999,
respectively, over the comparable periods of 1998 while increasing 6% in the
second quarter of 1999 compared to the first quarter of 1999. Unit shipments
in the European region ("EMEA") were flat in the second quarter and first half
of 1999 versus the comparable periods of 1998 and decreased 19% in the second
quarter of 1999 compared to the first quarter of 1999.
GROSS PROFIT
- -------------
Gross profit in the second quarter of 1999 increased 26% over the
comparable period of 1998 to $421.4 million and decreased 6% compared to the
first quarter of 1999. For the first half of 1999, gross profit increased 30% to
$871.9 million over the comparable period of 1998. Margin productivity was
driven by an increase in non-system income, pricing discipline, and focused
vendor management. As a percentage of sales, gross profit for the second quarter
of 1999 was 22.0%, up from 20.6% in the second quarter of 1998 and 21.4% in the
first quarter of 1999, representing the sixth consecutive quarter of year-over
year gross profit improvement. As a percentage of sales, gross profit for the
first six months of 1999 was 21.7%, up from 20.0% in the comparable period of
1998.
10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general & administrative ("SG&A") expenses in the second quarter
of 1999 increased 20% to $298.5 million over the second quarter of 1998, while
decreasing 4% compared to the first quarter of 1999. The increase over the
second quarter of 1998 is attributable to increasing internet capabilities,
expanding systems infrastructure, the expansion of Gateway Country(SM) stores
and international expansion. As a percentage of sales, SG&A expenses were 15.6%
for the second quarter of 1999, compared to 15.4% and 14.7% in the second
quarter of 1998 and the first quarter of 1999, respectively. For the first half
of 1999, SG&A expenses increased 28% to $608.2 million over the comparable
period of 1998 while increasing from 14.3% to 15.2% as a percentage of sales.
OPERATING INCOME
- ----------------
Due to the strong unit growth and gross margin efficiencies discussed above
operating income increased 46% to $122.9 million in the second quarter of 1999
compared to the second quarter of 1998. As a percentage of sales operating
income increased to 6.4% in the second quarter of 1999 from 5.2% in the second
quarter of 1998 and decreased from 6.7% in the first quarter of 1999. For the
first half of 1999, operating income increased 36.5% to $263.7 million over the
comparable 1998 period, while as a percentage of sales, operating income
increased to 6.6% from 5.8% during the same periods. Operating income for the
consumer and business segments in the second quarter of 1999 was $99.5 million
and $168.7 million, respectively, while operating expenses not allocated to a
segment were $145.2 million. For the first half of 1999, operating income for
the consumer and business segments was $258.4 and $316.4, respectively, while
operating expenses not allocated to a segment were $311.1 million. 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 that are separately managed.
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 $16.5 million in the second quarter of 1999 from $10.9
million in the second quarter of 1998 and $14.8 million in the first quarter of
1999. For the first half of 1999, other income, net increased to $31.3 million
from $20.3 million reported in the comparable 1998 period. The increases were
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 second
quarter and the first half of 1999, flat compared to the comparable periods of
1998 and first quarter of 1999.
11
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The following table presents selected financial statistics and information
for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1999
----------- -----------
<S> <C> <C>
(dollars in thousands)
Cash and marketable securities $891,851 $1,228,319
Days of sales in accounts receivable 29 28
Inventory turnover 30 42
Days in accounts payable 37 43
</TABLE>
At June 30, 1999, the Company had cash and cash equivalents of $1.1
billion, marketable securities of $167.4 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 June 30,
1999, no amounts were outstanding under the revolving line of credit.
Approximately $2.0 million was committed to support outstanding standby letters
of credit.
The Company generated $269.2 million in cash from operations during the
first half of 1999, including $235.4 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 $151.8 million in cash for facilities, equipment, and software and
$9.0 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 $77.7 million includes a two year option to
acquire the remaining 80.1% interest for additional consideration.
At June 30, 1999, the Company had long-term indebtedness and capital lease
obligations of approximately $6.8 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.
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.
12
<PAGE>
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, 2000. 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.
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 second 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 90% complete
with testing and compliance validation complete for 85% of the inventory. For
business processes and building systems, the Company believes the assessment and
planning phases are complete with remediation/replacement and testing and
compliance validation currently at 70%. The Company plans to complete the
remediation/replacement and testing phases for its mission critical IT systems
during the third quarter of 1999 with the remaining portion 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.
13
<PAGE>
The Company is in 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 half of 1999, the Company expensed incremental
costs of approximately $7.6 million related to the Year 2000 remediation
efforts, and has expensed $11.2 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
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 has completed the review of 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
two 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.
14
<PAGE>
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.
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.
15
<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 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 20, 1999. At
the meeting stockholders voted on (i) the election of two Class III directors of
the Company to hold office until the annual meeting of stockholders of the
Company to be held in 2002 and until a successor is duly elected and qualified,
(ii) approval of an amendment to the Company's Amended and Restated Certificate
of Incorporation to change the Company's name to Gateway, Inc., (iii) approval
of an amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the authorized number of shares of Common Stock, and
(iv) approval of an amendment to the Company's 1995 Employee Stock Purchase
Plan.
<TABLE>
<CAPTION>
Votes Votes Withheld/ Broker
For Against Abstentions Non-Votes
<C> <S> <C> <C> <C> <C>
1. Election of Directors
George H. Krauss 133,337,739 529,776
Richard D. Snyder 133,341,747 525,768
2. Approval of amendment to
Certificate of Incorporation to
change name 131,471,740 2,043,591 352,184 0
3. Approval of amendment to
Certificate of Incorporation to
increase number of authorized
shares of stock 117,737,529 15,748,707 381,279 0
4. Approval of amendment to 1995
Employee Stock Purchase Plan 131,241,884 2,224,874 400,757 0
</TABLE>
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Exhibit
No. Description of Exhibits
- ------- -------------------------------------------------
3.3 Certificate of Amendment to Amended and Restated Certificate of
Incorporation of Gateway, Inc.
10.19 Gateway, Inc. 1995 Employee Stock Purchase Plan, as amended.
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 June 30, 1999.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Gateway, Inc.
Date: August 16, 1999 By: /s/ JOHN J. TODD
----------------
John J. Todd
Senior Vice President, Chief Financial
Officer and Treasurer (authorized officer
and chief accounting officer)
18
<PAGE>
EXHIBIT
No. INDEX TO EXHIBITS
- ------- ------------------------------------------------
3.3 Certificate of Amendment to Amended and Restated Certificate of
Incorporation of Gateway, Inc.
10.19 Gateway, Inc. 1995 Employee Stock Purchase Plan, as amended.
27.1 Financial Data Schedule
19
<PAGE>
Exhibit 3.3
CERTIFICATE OF AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION
OF GATEWAY 2000, INC.
Gateway 2000, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "DGCL"), hereby certifies as follows:
1. The name of the Corporation is Gateway 2000, Inc.
2. The date on which the Restated Certificate of Incorporation of
the Corporation was originally filed with the Secretary of State of Delaware was
December 6, 1993, and a Corrected Restated Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware on
September 15, 1994 (the "Restated Certificate").
3. This Certificate of Amendment amends a provision of the Restated
Certificate and has been duly adopted by the Board of Directors in accordance
with the provisions of Sections 141 and 242 of the DGCL, and further adopted in
accordance with the provisions of Sections 216 and 242 of the DGCL by the
stockholders of the Corporation.
4. Article FIRST of the Restated Certificate is hereby amended and
restated to read in its entirety as follows:
"FIRST: The name of the corporation is Gateway, Inc. (hereinafter
called the "Corporation")."
5. The first paragraph of Article FOURTH of the Restated Certificate
is hereby amended and restated to read in its entirety as follows:
"FOURTH: The total number of shares of capital stock which the
Corporation shall have authority to issue is 1,006,000,000 shares,
consisting of:
(1) 1,000,000,000 shares of Common Stock, par value $.01 per share
("Common Stock");
(2) 1,000,000 shares of Class A Common Stock, par value $.01 per
share ("Class A Common Stock"); and
(3) 5,000,000 shares of Preferred Stock, par value $.01 per share
("Preferred Stock")."
6. This Certificate of Amendment of the Restated Certificate of
Incorporation shall be effective at 12:01 a.m. Eastern Daylight Time on June 1,
1999.
1
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by a duly authorized officer of the Corporation as of May
24, 1999.
GATEWAY 2000, INC.
/s/ Stephanie G. Heim
---------------------
Stephanie G. Heim
Assistant Secretary
2
<PAGE>
Exhibit 10.19
GATEWAY, INC. 1995 EMPLOYEE STOCK PURCHASE PLAN
(As Amended and Restated Effective May 20, 1999)
The Gateway, Inc. 1995 Employee Stock Purchase Plan, effective January 1,
1995, is amended and restated in its entirety as provided herein effective May
20, 1999. The Plan provides Eligible Employees of Gateway 2000, Inc., a Delaware
corporation (the "Company"), and its Subsidiaries an opportunity to purchase
shares of Common Stock of the Company on the terms and conditions set forth
below.
1. Definitions.
-----------
(a) Base Pay - for each Participant, the regular compensation and
commissions earned during each payroll period, before any deductions or
withholding, but excluding overtime pay, bonuses, amounts paid as reimbursements
of expenses arid other additional compensation, under rules uniformly applied by
the Plan Administrator.
(b) Business Day - any day with respect to which NASDAQ quotations
are issued.
(c) Code - the Internal Revenue Code of 1986, as amended.
(d) Common Stock - the Company's Common Stock, par value $.01 per
share.
(e) Eligible Employee - an employee who is eligible to participate in
the Plan pursuant to Section 3.
(f) Exercise Date - the last Business Day of each calendar month.
(g) Exercise Price - unless the Plan Administrator determines before
a Grant Date that a higher or lower price that complies with Code Section 423
shall apply, and subject to the following sentence, the Exercise Price of the
shares of Common Stock which are to be sold under the Plan on the Exercise Date
immediately following such Grant Date shall be 95% of the Fair Market Value of
Common Stock on such Exercise Date. In no event shall the Exercise Price be less
than the lesser of (x) 85% of the Fair Market Value of a share of Common Stock
on the Grant Date for the month in which the Exercise Date falls, or (y) 85% of
the Fair Market Value of a share of Common Stock on the Exercise Date for that
month.
(h) Fair Market Value - the closing price per share of the Company's
Common Stock as reported in The Wall Street Journal on the relevant Business
Day. If no sales of the Company's Common Stock were made on such date, "Fair
Market Value" shall mean the closing price per share of the Company's Common
Stock as reported in The Wall Street Journal for the preceding day on which a
sale of the Company's Common Stock occurred.
(i) Grant Date - the first Business Day of each calendar month.
1
<PAGE>
(j) Participant - an Eligible Employee who is participating in the
Plan pursuant to Section 4.
(k) Plan - Gateway, Inc. 1995 Employee Stock Purchase Plan, as
amended (known prior to February 1, 1997 as "Gateway 2000, Inc. 1993 Employee
Stock Purchase Plan." )
(l) Plan Account - an account maintained by the Company or its
designated record keeper for each Participant to which the Participant's payroll
deductions are credited, against which funds used to purchase shares of Common
Stock are charged and to which shares of Common Stock purchased are credited.
(m) Plan Administrator - such person or persons, including a
committee, as may be appointed by the Board of Directors of the Company to
administer the Plan. The Board of Directors of the Company may at any time
remove or replace the Plan Administrator.
(n) Subsidiaries - all United States corporations (other than the
Company) in one or more unbroken chains of corporations beginning with the
Company if, on the Grant Date, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
2. Stock Subject to the Plan. Subject to Section 12, the aggregate number
-------------------------
of shares of Common Stock which may be sold under the Plan is 1,000,000. The
Company shall make open-market purchases to provide shares of Common Stock for
purchase under the Plan. If sufficient shares are not available through open
market purchases, the Company shall sell Treasury shares or issue authorized but
unissued shares of Common Stock.
3. Eligible Employees. Each active employee of the Company or any of its
------------------
Subsidiaries who has been employed for at least six months arid who is regularly
employed by the Company or any of its Subsidiaries for at least 20 hours per
week and more than 5 months per calendar year shall be eligible to participate
in the Plan.
4. Participation in the Plan.
-------------------------
(a) An Eligible Employee may participate in the Plan by completing
and filing with the Company or its designated record keeper an election form
which authorizes payroll deductions from the employee's pay. Such deductions
shall commence on the first day of the month following the end of the Employee's
six-month eligibility period, or the first day of any month thereafter as
elected by the Employee, and shall continue until the Employee terminates
participation in the Plan or the Plan is terminated. An Eligible Employee may
participate in the Plan only through payroll deductions. Other contributions
will not be accepted.
(b) Notwithstanding the foregoing, an Eligible Employee shall not be
granted an option to purchase shares of Common Stock under this Plan on any
Grant Date if such employee, immediately after the option is granted, owns stock
possessing 5% or more of the total combined voting power or value of all classes
of stock of the Company or any Subsidiary. For purposes of this paragraph, the
rules of Code Section 424(d) shall apply in determining the stock ownership of
an individual, and stock
2
<PAGE>
which an employee may purchase under outstanding options shall be treated as
stock owned by the employee.
5. Payroll Deductions. Payroll deductions shall be made from the amounts
------------------
paid to each Participant for each payroll period in such amounts as the
Participant shall authorize in his election form. The minimum payroll deduction
shall be $10 per month and the maximum payroll deduction shall be 20% of the
Participant's Base Pay; provided that no Eligible Employee may be granted an
option under the Plan which permits his rights to purchase Common Stock under
the Plan, and any other stock purchase plan of the Company or any Subsidiary
that is qualified under Section 423 of the Code, to accrue at a rate which
exceeds $25,000 of Fair Market Value of such stock (determined at the time such
option is granted) for each calendar year in which the option is outstanding at
any time. If a Participant's Base Pay is insufficient in any pay period to allow
the entire payroll deduction elected under the Plan, no deduction shall be made
for such pay period. Payroll deductions will resume with the next pay period in
which the Participant has pay sufficient to permit the deduction. Payroll
deductions under the Plan shall be made in any period only after all other
withholdings, deductions, garnishments and the like have been made.
6. Changes in Payroll Deductions. Subject to the minimum and maximum
-----------------------------
deductions set forth above, a Participant may change the amount of his payroll
deductions by filing a new election form with the Company or its designated
record keeper no later than 10 Business Days in advance of the next calendar
month. The change shall be effective until revoked in writing.
7. Termination of Participation in Plan. A Participant may, at any time
-------------- ---------------------
and for any reason, voluntarily terminate participation in the Plan by written
notification of withdrawal delivered to the appropriate payroll office at least
10 Business Days before the next pay period. A Participant's participation in
the Plan shall be terminated upon termination of his or her employment with the
Company and its Subsidiaries for any reason. In the event a Participant's
participation in the Plan is voluntarily or involuntarily terminated, payroll
deductions under the Plan shall cease; provided, however, that any payroll
deductions credited to such Participant's Plan Account shall be used to purchase
shares of Common Stock on the next Exercise Date. An Eligible Employee whose
participation in the Plan is terminated may rejoin the Plan no earlier than the
first day of the seventh month following the date his participation in the Plan
terminated.
8. Purchase of Shares.
------------------
(a) On each Grant Date, each Participant shall be deemed to have been
granted an option to purchase shares of Common Stock.
(b) On each Exercise Date, each Participant shall be deemed to have
exercised his or her option granted pursuant to Section 8(a). On each Exercise
Date, the Company shall apply the funds credited to each Participant's Plan
Account to the purchase (without commissions or fees) of that number of whole
shares of Common Stock determined by dividing the Exercise Price into the
balance in the Participant's Plan Account on the Exercise Date. Any amount
remaining shall be carried forward to the next calendar month unless the Plan
Account is closed.
(c) As soon as practicable after each Exercise Date, a statement
shall be delivered to each Participant which shall include the number of shares
of Common Stock purchased on the Exercise
3
<PAGE>
Date on behalf of such Participant under the Plan.
(d) When requested, a stock certificate for whole shares of Common
Stock in a Participant's Plan Account purchased pursuant to the Plan shall be
issued in the Participant's name or in the name of the Participant and another
person as joint tenants with right of survivorship or as tenants in common. When
the Participant's employment terminates, a stock certificate for whole shares of
Common Stock in his Plan Account shall be issued in his name or in his name and
the name of another person as joint tenants with right of survivorship or as
tenants in common. A cash payment shall be made for any fraction of a share in
such account, if necessary to close the account.
9. Rights as a Stockholder. As of the Exercise Date, a Participant shall
-----------------------
be treated as record owner of his shares purchased pursuant to the Plan.
10. Rights Not Transferable. Rights under the Plan are not transferable
-----------------------
by a Participant other than by will or the laws of descent and distribution, and
are exercisable during the Participant's lifetime only by the Participant or by
the Participant's guardian or legal representative. No rights or payroll
deductions of a Participant shall be subject to execution, attachment, levy,
garnishment or similar process.
11. Application of Funds. All funds of Participants received or held by
--------------------
the Company under the Plan before purchase of the shares of Common Stock shall
be held by the Company without liability for interest or other increment.
12. Adjustments in Case Changes Affecting Shares. In the event of a
--------------------------------------------
subdivision or consolidation of outstanding shares of Common Stock of the
Company, or the payment of a stock dividend, the number of shares approved for
the Plan shall be increased or decreased proportionately, and such other
adjustment shall be made as may be deemed equitable by the Plan Administrator.
In the event of any other change affecting the Common Stock, such adjustment
shall be made as shall be deemed equitable by the Plan Administrator to give
proper effect to such event.
13. Administration of the Plan. The Plan shall be administered by the
--------------------------
Plan Administrator. The Plan Administrator shall have authority to make rules
and regulations for the administration of the Plan, and its interpretations and
decisions with regard to the Plan and such rules and regulations shall be final
and conclusive. It is intended that the Plan shall at all times meet the
requirements of Code Section 423, if applicable, and the Plan Administrator
shall, to the extent possible, interpret the provision of the Plan so as to
carry out intent.
14. Amendments to the Plan. The Plan Administrator may, at any time, or
----------------------
from time to time, amend or modify the Plan; provided, however, that no
amendment shall be made increasing or decreasing the number of shares authorized
for the Plan (other than as provided in Section 12 or 15), and that, except to
conform the Plan to the requirements of the Code, no amendment shall be made
which would cause the Plan to fall to meet the applicable requirements of Code
Section 423.
15. Termination of Plan. The Plan shall terminate upon the earlier of (a)
-------------------
the terminof the Plan by the Board of Directors of the Company as
specified below, or (b) the date no more shares remain to be purchased under the
Plan. The Board of Directors of the Company may terminate the Plan as of any
date, and the date of termination shall be deemed an Exercise Date. If on such
Exercise Date Participants in
4
<PAGE>
the aggregate have options to purchase more shares of Common Stock than are
available for purchase under the Plan, each Participant shall be eligible to
purchase a reduced number of shares of Common Stock on a pro rata basis, and any
excess payroll deductions shall be returned to Participants, all as provided by
rules and regulations adopted by the Plan Administrator.
16. Costs. All costs and expenses incurred in administering the Plan
-----
shall be paid by the Company.
17. Governmental Regulations. The Company's obligation to sell and
------------------------
deliver its Common Stock pursuant to the Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such stock.
18. Applicable Law. This Plan shall be interpreted under the laws of the
--------------
United States of America and, to the extent not inconsistent therewith, by the
laws of the State of South Dakota. This Plan is not to be subject to the
Employee Retirement Income Security Act of 1974, as amended, but is intended to
comply with Section 423 of the Code, if applicable. Any provisions required to
be set forth in this Plan by such Code section are hereby included as fully as
if set forth in the Plan in full.
19. Effect on Employment. The provisions of this Plan shall not affect
--------------------
the right of the Company or any Subsidiary or any Participant to terminate the
Participant's employment with the Company or any Subsidiary.
20. Withholding. The Company reserves the right to withhold from stock or
-----------
cash distributed to a Participant any amounts which it is required by law to
withhold.
21. Sale of Company. In the event of a proposed sale of all or
---------------
substantially all of the assets of the Company or a merger of the Company with
or into another corporation, the Company shall require that each outstanding
option be assumed or an equivalent option be substituted by the successor or
purchaser corporation, unless the Plan is terminated.
22. Stockholder Approval. The Plan, as amended effective February 1,
--------------------
1997, shall become effective on the date it is adopted by the Board of Directors
of the Company, provided that the stockholders of the Company approve it within
12 months after such date.
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GATEWAY,
INC.'S CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,
1999 AND THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,060,920
<SECURITIES> 167,399
<RECEIVABLES> 601,136
<ALLOWANCES> 16,254
<INVENTORY> 121,451
<CURRENT-ASSETS> 2,256,493
<PP&E> 914,065
<DEPRECIATION> 289,880
<TOTAL-ASSETS> 3,067,584
<CURRENT-LIABILITIES> 1,455,823
<BONDS> 1,973
0
0
<COMMON> 1,573
<OTHER-SE> 1,494,663
<TOTAL-LIABILITY-AND-EQUITY> 3,067,584
<SALES> 4,015,520
<TOTAL-REVENUES> 4,015,520
<CGS> 3,143,630
<TOTAL-COSTS> 3,143,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,564
<INTEREST-EXPENSE> 386
<INCOME-PRETAX> 295,006
<INCOME-TAX> 106,202
<INCOME-CONTINUING> 188,804
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 188,804
<EPS-BASIC> 1.21
<EPS-DILUTED> 1.18
</TABLE>
