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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission file number 0-22784
GATEWAY, INC.
INCORPORATED IN DELAWARE I.R.S. EMPLOYER NUMBER
42-1249184
4545 TOWNE CENTRE COURT, SAN DIEGO, CA 92121
TELEPHONE NUMBER: (858) 799-3401
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 22, 2000 (based on the last sale price on the New York
Stock Exchange as of such date) was approximately $10,263,231,915. At such date,
there were 321,170,974 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Gateway's definitive proxy statement relating to its 2000
annual meeting of stockholders to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year to which
this Report relates, are incorporated by reference in Part III of this Form
10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Gateway, Inc., together with its subsidiary companies ("Gateway" or the
"Company"), is a leading direct marketer of personal computers ("PCs") and
related products and services. Gateway develops, manufactures, markets, and
supports a broad line of desktop and portable PCs, servers and workstations used
by individuals, families, businesses, government agencies and educational
institutions. Gateway also offers diversified products and services "beyond the
box," such as software, peripherals, Internet access services, training
programs, support programs and financing programs. Gateway manages its business
activities primarily in two customer-focused segments: consumer and business.
The Company is one of the leading suppliers of PCs to the U.S. consumer
market, with a market share based on revenue of approximately 23% in 1999,
making Gateway number one in consumer PCs in the U.S. in 1999 according to
Gartner Group/Dataquest U.S. PC Quarterly Statistics. Gateway's strategy is to
deliver the best value to its customers by offering quality, high-performance
PCs and other products and services employing the latest technology at
competitive prices and by providing outstanding service and support along with
quality Internet access. Internet users can access information about Gateway and
its products and services at http://www.gateway.com.
Gateway was incorporated in Iowa on August 15, 1986, merged into a South
Dakota corporation of the same name effective December 29, 1989, and merged into
a Delaware corporation of the same name effective February 20, 1991. Gateway's
common stock trades on the New York Stock Exchange under the symbol GTW.
BUSINESS OPERATIONS
Direct Marketing and Distribution. Gateway sells its products directly
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to PC customers through three complementary distribution channels - phone sales,
its Internet web site, http://www.gateway.com, and the Gateway Country(R)
stores. In April 1996, Gateway became the first major PC manufacturer to provide
consumers the ability to custom configure, order and pay for a personal computer
via the World Wide Web. Gateway Country stores allow customers to test Gateway's
products and have their questions answered by highly trained sales
representatives. Unlike traditional retail stores, Gateway Country stores do not
maintain an inventory of computers for sale, keeping overhead costs low.
Customers can order a computer while at the store, can visit the Gateway website
later and place an order over the Internet, or can call to ask further questions
and order their computer over the telephone. Gateway believes that more than 50%
of its customers take advantage of at least two of these channels before making
their purchases.
Gateway believes that this direct distribution approach provides several
competitive advantages. First, Gateway believes it can offer competitive pricing
by avoiding the additional markups, inventory and occupancy costs associated
with distributors, dealers and traditional retail stores. Second, by alleviating
the need for the high levels of finished goods inventory required by traditional
retail channels, Gateway believes it can respond more quickly to changing
customer demands - offering new products on a timely basis and reducing its
exposure to the risk of product obsolescence. Third, Gateway believes that
working directly with customers promotes brand awareness and customer loyalty as
evidenced by the high number of repeat customers.
Gateway markets its products directly to customers, primarily by placing
advertisements on television, newspapers, magazines, radio, the World Wide Web
(including links from the websites of certain of Gateway's e-commerce partners),
its Internet website, http://www.gateway.com, local promotions and trade show
appearances. These advertisements include product information and Gateway's
toll-free telephone numbers. Gateway also conducts national consumer-oriented
television advertising campaigns. Gateway believes its creative marketing,
including use of its famous trademarked "BLACK AND WHITE SPOT" Design on product
packaging, has helped
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generate significant brand awareness and a loyal customer base.
As of December 31, 1999, a sales force of over 3,900 Company employees
sold Company products directly to customers over the telephone. Customers can
order products over the telephone up to eighteen hours a day and seven days a
week in the U.S. and six days a week elsewhere in the world. As of December 31,
1999, Gateway utilized over 6,600 customer and technical support representatives
providing comprehensive service and support. Gateway's sales force and customer
service staff have continued to expand to meet increased demand for Gateway
products and support services. As of March 1, 2000, Gateway had also expanded
its Gateway Country(R) stores to 242 stores in the United States throughout 44
states (from 144 stores at December 31, 1998), allowing customers direct
interaction with sales representatives. In addition, in February 2000, Gateway
announced plans to install Gateway stores inside more than 1,000 OfficeMax
stores across the U.S. by the end of the first quarter of 2001.
Over 60% of Gateway's business is believed to be attributable to either
previous buyers of GatewayTM PCs or new customers based on referrals. Gateway
has sold over 16.6 million PCs to date, and maintains a database of its
customers. To provide a broader range of services to these customers, Gateway
has introduced innovative means of marketing and communication. These include
regularly distributed sales catalogs, the Gateway Moola credit card that gives
consumers a rebate applicable toward future Gateway purchases. Since 1995,
Gateway has maintained a web site on the Internet, at the address
http://www.gateway.com. Gateway's Internet web site offers information about
Gateway events, new product offerings and technical support advice. In addition,
regular surveys of Gateway's customers also give Gateway valuable marketing,
service and product information.
Business Sales. During 1999, Gateway continued to expand sales and
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marketing efforts directed to its business customers, including small business
and home office as well as to Fortune 1000 customers. In 1999, to meet the needs
of small business and home office customers, Gateway formally introduced its
Gateway Business SolutionSM centers in its Gateway Country stores. Each Gateway
Business Solution center allows potential customers to see the PC solutions for
their business needs and discuss them with trained sales personnel.
Gateway has also established a Custom Integration Services (CIS) program
that reduces the time and expense associated with the deployment of new business
systems. Gateway's CIS analysts accelerate deployment for qualifying purchases
through factory installation of unique software images, development of image
restoration products, asset tagging and factory installation of custom hardware
and software beyond the scope of Gateway's standard build-to-order offerings. In
addition, Gateway offers an optional Mobile Access service, which is a
nationwide mobile computing support package that integrates phone, Internet and
local support through Gateway Country stores. The program's portable computer
loaner program gives traveling professionals access to a mobile computer while
their unit is being repaired, and the program itself features data backup and
retrieval via the Internet, priority technical support, national depot express
service and LCD replacement coverage.
In 1999, for its larger corporate accounts, Gateway continued expanding
its use of third-party resellers to sell to business customers that prefer the
extra services available. To support its traditional Fortune 1000 customer base,
Gateway also increased its major accounts sales force during 1999. In January
2000, Gateway launched its Gateway@WorkSM branding campaign, the Company's first
branding effort aimed exclusively at business customers.
Gateway's business unit also markets products, services and support to
federal, state and local government agencies and institutions as well as to K-12
school systems and other educational institutions. In 1999, Gateway increased
its sales force generally associated with these market segments and, in order to
more aggressively pursue increased sales in these areas, established a sales
group focused on agencies and institutions who had previously never purchased
Gateway products.
Internet Business - Access and E-Commerce. Gateway began offering
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Internet service in November 1997, when it became the first major PC
manufacturer to offer nationwide Internet provider service directly to its
customers. The gateway.netSM Internet service offers electronic mail, Internet
access, and an array of news, entertainment, family-oriented topics, weather,
sports, Internet tips and tutorials. In February 1999, Gateway became the first
PC manufacturer to bundle its own Internet service with sales of its personal
computers.
In February 1999, Gateway purchased a minority ownership share in the e-
commerce operations of NECX Direct. NECX created the first Internet-based,
transaction-capable, e-commerce site in 1993, and in 1998, its site won the U.S.
News and World Report "Best of the Web" award, PC Magazine's "Editor's Choice"
for Computer
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Hardware and PC World's "Best" Online Buying Experience award. NECX and Gateway
developed and launched "SpotShop.com," an e-commerce site that offered Gateway
branded products as well as complimentary peripherals and software from leading
manufacturers. In July 1999, SpotShop.com was integrated with Gateway's website
at http://www.gateway.com, where it is now called the "Accessory Store." Gateway
believes its web site is visited by about 150,000 individuals each day. Through
Gateway.com, Gateway customers are now able to purchase an entire computing
solution from one website offering personalized PCs plus thousands of
peripherals, software and related products.
In October 1999, Gateway announced a wide-ranging relationship with
America Online, Inc. intended to accelerate distribution of each company's
products and services, including joint Internet service on either gateway.net or
America Online offered by Gateway in connection with product sales. By the end
of the fourth quarter of 1999, after adding 400,000 new subscribers in that
quarter, Gateway's joint Internet service with America Online had more than one
million customers. America Online and Gateway also agreed to develop and market
Internet and home networking appliances, collaborate on a co-branded online
software store, further personalize the gateway.net(R) Internet service and
create computer and Internet training programs for America Online subscribers
and Gateway customers.
Your:)Ware Program - Customized Computers. In 1998, Gateway introduced
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the Your:)WareSM program that combines two unique features to address the needs
of today's computer customers. First, a customer is offered a computer
personalized and built to order, with customized hardware and software, combined
with client-centered service, optional software additions, an optional Internet
connection, and financing options. The second feature of the Your:)Ware program
addresses the growing concern that a computer system purchased today will become
outdated and obsolete. After two years and before the end of the fourth year of
ownership, a Your:)Ware customer can trade in the computer and get a credit
toward the purchase of a new system. In April 1999, Gateway launched its
Your:)Ware For BusinessSM program designed to provide customized solutions,
one-to-one account management and a technology refresh program for small and
medium sized businesses. In June 1999, Gateway also introduced its Your:)Ware
For EducationSM program designed to offer training, customized software and
hardware and dedicated support to K-12 school systems.
Financing Programs. In early 1999, Gateway announced the creation of an
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internal division to manage the financing of customer PCs. Gateway believes that
in 1999 Gateway lenders provided approximately $1.8 billion in financing
business related to the Your:)Ware program and through more traditional
financing vehicles for customer purchases.
Quality Product, Service and Supports. Gateway believes that as PC
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customers have become increasingly sophisticated in their purchasing decisions,
quality and reliability have become increasingly important. Gateway works
closely with its suppliers to develop high-quality components, manufactured to
Gateway's specifications. Gateway believes that customers judge quality by
evaluating the performance and reliability of a company's products, as well as a
company's ability to provide comprehensive service and support for its PCs. To
provide superior service and support to its customers, Gateway utilizes more
than 6,600 customer and technical support representatives specifically trained
to assist customers with the resolution of technical questions relating to
Gateway's products.
Latest Technology. Gateway works directly with a wide range of suppliers
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to evaluate the latest developments in PC-related technology. Gateway believes
that these relationships, together with market information obtained from its
direct customer relationships, the flexibility of build-to-order manufacturing,
low inventory and short production lead times allow Gateway to rapidly introduce
and deliver appealing new products and software.
Competitive Pricing. Gateway offers its products at competitive prices
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by seeking to maintain a low-cost operating structure. First, in addition to the
cost advantages of marketing and selling its products directly to its customers,
Gateway endeavors to minimize overhead expenses. Gateway operates manufacturing
facilities in South Dakota, Virginia, Utah, Ireland and Malaysia, locations with
relatively low costs associated with facilities,
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work forces and taxes. Second, Gateway's in-house engineering personnel work
closely with component suppliers in developing and implementing new technology,
reducing the investment usually associated with a traditional, in-house research
and development group. Finally, Gateway believes its large volume of business
affords it certain economies of scale which lower its unit costs and contribute
to operating efficiencies.
Growth Initiatives. The growth in Gateway's net sales and earnings to
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date has resulted primarily from the sale of desktop and portable PCs to
individuals, home offices, small businesses and corporate customers, and to
governmental entities and educational institutions in the U.S. market. Gateway's
sales and earnings have also grown due to the ongoing diversification of its
revenue stream with the introduction and expansion of new products and services,
including financing options, software, peripheral devices, Internet access and
training programs. Gateway believes that most of its continued growth will come
from four areas: (a) the domestic consumer market, including the developing
market for family-use PCs; (b) businesses and institutions, including home
offices, small to medium-size businesses, as well as Fortune 1000 companies,
governmental entities and educational institutions; (c) the continued expansion
of its international operations; and (d) the expansion of "beyond the box"
service and product offerings, including internet access, e-commerce, training
software, peripherals and financing options offered to customers. Gateway
believes that its growth in these areas will benefit from its Gateway Country(R)
stores, which allow direct interaction with retail customers and small business
customers, and the enhancement of its outside sales force which serves
businesses, government agencies and educational institutions.
For a discussion of certain risks associated with Gateway's operations,
see "Factors That May Affect Gateway's Business and Future Results" beginning on
page 9 of this Report.
BUSINESS SEGMENTS
During 1999, Gateway organized its global operations into four operating
regions: (a) the consumer segment in the United States, (b) the business segment
in the United States, (c) Europe, the Middle East and Africa, and (d) Asia
Pacific. The administrative headquarters for Gateway is located in San Diego,
California. The European region, which is managed from Dublin, Ireland, includes
the European countries and certain countries in the Middle East and in Africa.
The Asia Pacific region includes operations in Japan, Australia, New Zealand,
Singapore, Malaysia and Hong Kong. For further information on the Company's
operating segments see Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 11 of the Notes to the Consolidated
Financial Statements.
PC PRODUCTS
Gateway offers a broad line of PCs and PC-based products, including
desktop and portable PCs, servers and workstations. GatewayTM PCs are
custom-configured with a choice of microprocessors of varying clock speeds,
memory and storage capacities, as well as other options, all as specified by the
customer. The following are the key products within this class:
Desktop PCs. Gateway has seven lines of desktop PCs. The Gateway
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Performance, Gateway Select and Gateway Essential lines of desktop PCs are
primarily designed for home users and typically include CD-ROM/DVD-ROM, graphics
and audio systems. In 1999, Gateway introduced its Gateway Profile(TM) and
Gateway Astro(TM) all-in-one PC systems, with the Gateway Profile PC featuring a
flat screen and the Gateway Astro PC providing Gateway's first sub-$800 price
point. The E-Series and GP-Series lines of desktop PCs are designed primarily
for government, education and business clients of all sizes, including those
with networked environments. During 1999, desktop PCs used Intel Pentium(R) and
Celeron(R) processors, and AMD(TM) processors on selected systems.
Portable PCs. Gateway's Solo(R) portable PCs provide portable computing
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capabilities for users who operate in both a mobile and networked environment.
The systems can be designed for either home or business use and are available
with docking stations and various multimedia applications. In January 2000,
Gateway introduced the Solo 9300, which at the time of release contained the
industry's largest display of 15.7 inches. Portables are a growing segment of
Gateway's business, representing over 13% of sales in 1999.
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Servers. Gateway principally offers Gateway ALR(R) branded servers for
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business customers. Every Gateway ALR server has an adaptable design and can be
custom built with a variety of options to fit the customer's needs.
NON-SYSTEM PRODUCTS AND SERVICES
A key element of Gateway's growth strategy is expansion of "beyond the
box" product and service offerings. Gateway offers an assortment of PC-related
products and services, such as peripheral products and software, Internet access
services, financing programs, training programs and services and support.
Peripheral Products and Software. Gateway offers a variety of products
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manufactured or published by third parties including monitors, printers,
fax/modems, CD-ROM drives, external storage devices, and third party software
titles.
Internet Access Services. Gateway's joint Internet service with America
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Online had more than one million subscribers at the end of 1999. Operating this
service jointly with America Online, the industry leader in Internet access
services, Gateway intends to continue pursuing the seamless integration of the
hardware and Internet experience.
Financing Programs. The Company believes that in 1999 Gateway's lenders
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provided approximately $1.8 billion through financing programs directed toward
purchasers of Gateway's PCs. Gateway customers are offered a variety of
traditional lending programs, as well as participation in Gateway's Your:)WareSM
program.
Training. Through the growth of Gateway Country(R) stores, Gateway now
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has more than 4,000 classroom seats throughout the country, offering training on
general PC usage, popular third-party software, Internet usage and networking
services.
Services and Support. Gateway has partnered with a number of
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third-parties to provide and strengthen Gateway's service offerings to consumers
and businesses of all sizes. In addition, with a Gateway Country store presently
located within 30 minutes of 75% of the U.S. population, Gateway offers a unique
ability among PC manufacturers to service directly what it sells.
PRODUCT DEVELOPMENT
Gateway's expenditures on research, development and engineering in each
of the last three years were less than 1% of net sales. Gateway maintains close
and cooperative relationships with many of its suppliers and with other
technology developers. These relationships and Gateway's own engineering staff
have enabled Gateway to evaluate the latest developments in PC technology and to
quickly introduce new products and new product features to the market. Gateway
believes that its strong relationships with its suppliers will continue to give
Gateway access to new technology and enhance its ability to bring the latest
technology to market on a timely basis. In fact, in early March 2000, Gateway
was one of the first PC companies to launch a PC system including a 1 Gigahertz
microprocessor. Direct relationships with its customers also enable Gateway to
obtain valuable market information, which it uses to assist in developing new
product offerings.
MANUFACTURING AND MATERIALS
Gateway has designed its manufacturing process to provide products
custom-configured to conform to customer specifications. Gateway uses production
teams to assemble most of its desktop PCs with each member of a production team
trained to do several tasks, increasing flexibility and efficiency. Third-party
suppliers manufacture the configuration for the Gateway Profile(TM) desktop PC
and the Gateway Astro(TM) desktop PC, with little or no final configuration
needed from Gateway. Third-party suppliers also manufacture the base
configuration for portable PCs, with Gateway completing the final configuration.
Gateway's production teams
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perform quality control tests on each PC, and Gateway's quality assurance staff
inspects samples of completed PCs to ensure that the PCs meet Gateway's quality
specifications and applicable regulatory requirements. Each PC is shipped from
Gateway's manufacturing facilities ready-for-use, with an operating system and
certain application software already installed. Replacement parts are also
generally shipped directly from Gateway to its customers.
Gateway's desktop and portable computer manufacturing operations in
North Sioux City, South Dakota; Hampton, Virginia; Dublin, Ireland; and Malacca,
Malaysia have been assessed and certified as meeting the requirements of the
International Organization for Standardization (ISO) 9002. ISO 9002
certification recognizes Gateway's compliance with international standards for
quality assurance.
PRODUCT WARRANTIES AND TECHNICAL SUPPORT
Product Warranties. Gateway believes its product warranties are an
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important part of achieving customer satisfaction and maintaining Gateway's
image. In general, Gateway provides a 30-day money-back guarantee for customer
returns. Shipping and handling charges to and from the customer are
non-refundable. Gateway provides competitive warranty packages on all of its
manufactured products, ranging from one year to five years. In many cases,
customers have the option of customizing their limited warranty to suit their
particular needs.
E-Support Solutions. Gateway's e-support solutions approach combines
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preloaded, automated system-repairing software and online diagnostic and
computer maintenance programs to deliver automated technical support for its
customers.
Other Technical Support Options. Gateway provides a number of other
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basic technical support options to its customers through its website, as well as
through a variety of other methods, including e-mail, fax, and telephone
support. Many of these technical support options are available to customers
without charge. To expand the range of choices available to customers, Gateway
has also introduced a number of fee-based support options, ranging from software
tutorial services for consumers to advanced network support for small and medium
sized businesses.
PATENTS, TRADEMARKS AND LICENSES
Gateway holds a number of U.S. and foreign patents and has various U.S.
and foreign patent applications pending. In addition to its own engineering
resources, Gateway works closely with PC component suppliers and other
technology developers to stay abreast of the latest developments in PC
technology. Gateway has obtained patent licenses for certain technologies where
such licenses are necessary or advantageous, some of which require significant
royalty payments. In addition, Gateway has entered into patent cross-licenses to
provide access to other technology. Gateway increased the emphasis on internal
patent generation and the strategic acquisition of patents beginning in 1995
which has resulted in an increase in the number of patents in the Gateway
portfolio.
Gateway owns and uses a number of trademarks on or in connection with
its products, including Gateway, Your:)Ware, "BLACK AND WHITE SPOT" design,
Family PC, Gateway, Gateway Country, Gateway.net, Solo, Vivitron and "You've Got
a Friend in the Business", among others. Many of these trademarks are registered
in the United States and other countries. Gateway believes the GATEWAY and the
famous "BLACK AND WHITE SPOT" design trademarks have strong brand name
recognition in the United States marketplace and in many countries throughout
the world.
Because software used on Company-manufactured PCs generally is not
Company-owned, Gateway has entered into software licensing or cross-licensing
arrangements with a number of software developers, including Microsoft
Corporation. For example, Gateway has licenses with Microsoft Corporation for
Windows 98, Windows NT, Windows 2000 and Microsoft Office software products,
among others.
COMPETITION
The PC industry is highly competitive, especially with respect to
pricing and the introduction of new
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products and product features. Gateway competes primarily by adding new
performance features to products while minimizing corresponding price increases.
Timely introduction of new products or product features by Gateway cannot be
guaranteed. Likewise, no assurance can be given that Gateway will continue to
compete successfully by adding new features to its products without
corresponding price increases. In recent years, Gateway and many of its
competitors have regularly lowered prices, and Gateway expects these pricing
pressures to continue. If cost reductions or changes in product mix do not
mitigate these pricing pressures, these competitive price pressures could
substantially reduce profits.
Competitive factors in Gateway's markets include price, availability of
new technology, variety of products and features offered, availability of
products and software, marketing and sales capability, service and support.
Gateway believes it competes favorably with respect to each of these factors.
INTERNATIONAL OPERATIONS
Through its wholly owned subsidiaries, Gateway Ireland Limited and
Gateway Europe (collectively, "Gateway Europe"), Gateway opened a sales, service
and production facility in Dublin, Ireland on October 1, 1993. Since then,
Gateway has expanded its operations and facilities into other European
countries, including Ireland, the United Kingdom, France, Germany, the
Netherlands, Spain and Sweden. Gateway Europe has e-commerce, Internet access
service and retail operations in Ireland, the United Kingdom, France and the
Netherlands. Gateway has been doing business in the Asia Pacific region since
1995, initially with sales and support facilities in Japan, a manufacturing
facility in Malacca, Malaysia, showrooms in Japan and Australia and the
acquisition of the business and substantially all of the assets of Osborne
Computer Corporation, an Australian PC maker. Since then, Gateway has continued
to expand in the region, opening a call center in Kuala Lumpur, Malaysia to
handle direct sales and customer support activities for Singapore, Malaysia, and
Hong Kong; establishing operations in New Zealand; opening administrative
offices in Singapore and Hong Kong; and expanding its retail operations in each
market. In 1999, Gateway entered the Canadian computer market with product,
service and support offerings for Canadian business, government and education
customers.
EMPLOYEES
As of December 31, 1999, Gateway had approximately 21,000 full-time
employees, of which 17,600 were in the U.S., 1,700 were in Europe and 1,700 were
in other foreign countries. Gateway believes employee relations are generally
good.
BACKLOG
As of December 31, 1999, Gateway's backlog of unfilled orders was
approximately $70 million, compared with backlog of approximately $100 million
at the end of fiscal 1998. The Company does not believe that backlog is a
meaningful indicator of sales that can be expected for any period, and there can
be no assurance that the backlog at any point in time will translate into sales
in any subsequent period, particularly in light of the Company's policy of
allowing customers to cancel or reschedule orders under certain circumstances.
SEASONALITY
Gateway's operating results have been subject to seasonality and to
quarterly and annual fluctuations in operating results. Factors involved include
new product developments or introductions, availability of components, changes
in product mix and pricing and product reviews and other media coverage.
Historically, Gateway's sales have increased in the third and fourth quarters
due, in part, to back-to-school and holiday spending.
FACTORS THAT MAY AFFECT GATEWAY'S BUSINESS AND FUTURE RESULTS
The statements contained in this report contain a number of
forward-looking statements based on current management expectations. In addition
to other information contained in this report, the following factors could
affect the Company's future business, consolidated position, results of
operations or cash flows, and could cause
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future results to differ materially from those expressed in any of the
forward-looking statements in this report.
Competitive Market Conditions. The Company encounters aggressive
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competition in its industry with numerous competitors vying for market share.
Competition is driven in large part by price and availability of new technology
and products. The Company believes it can counter these competitive forces by
continuing to react quickly to expected and perceived customer product
requirements and desires, and by maintaining relationships with its suppliers to
bring products quickly to market. There can, however, be no assurance that it
will be able to successfully continue to do so in an ever-changing marketplace.
Any adverse general economic or business conditions could also impact demand for
Gateway's products and services. In addition, the Company expects the industry
trend of declining average unit prices for PCs to continue. Gateway intends to
mitigate the impact of falling prices by diversifying its revenue stream with
software bundles, Internet services, financing and other service and support
offerings. If prices are not offset by reduced costs or increased sales of
higher margin products and services, Gateway's profits could be adversely
impacted.
Suppliers. Gateway requires a high volume of quality components for the
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manufacture of its products, substantially all of which it obtains from outside
suppliers. While Gateway attempts to have multiple suppliers for such
components, in some circumstances it maintains single-source supplier
relationships. Failures of suppliers to meet component delivery schedules have
occasionally disrupted normal production schedules at Gateway and Gateway may
continue to experience production disruptions. Reliance on third party suppliers
also subjects Gateway to the risks of a shortage of components, the possibility
of defective parts produced by others, and increases in component costs (which
can adversely affect Gateway's profitability).
Product Cycles. Short product life cycles resulting from rapid changes
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in technology and consumer preferences and declining product prices characterize
the PC industry. Gateway's internal engineering personnel work closely with PC
component suppliers and other technology developers to evaluate the latest
developments in PC-related technology. However, Gateway may not have access to
or the right to use new technology or may be unable to incorporate such new
technology in its products or features in a timely manner. The increasing
reliance on the Internet is creating new dynamics in the computer industry,
causing an emphasis on speed and connectivity rather than stand-alone computing
power. As Gateway and others introduce a new generation of Internet devices,
sales of traditional personal computers may decline and Gateway's products will
be subject to competition from consumer electronics companies,
telecommunications companies and other major consumer competitors.
Access to Technology. There can be no assurance that Gateway will
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continue to have access to existing or new third-party technology for use in its
products. If Gateway or its suppliers were unable to obtain licenses necessary
to use protected technology in Gateway's products on commercially reasonable
terms, Gateway may be forced to market products without certain desirable
technological features. Gateway could also incur substantial costs to redesign
its products around other parties' protected technology or to defend patent or
copyright infringement actions against Gateway.
Infrastructure Requirements. The Company's rapid growth creates ongoing
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demands for personnel, facilities, information systems and other infrastructure
requirements. If the Company is not successful in continuing to develop its
infrastructure, it could experience disruptions in operations, which could have
an adverse financial impact.
International Operations. Gateway has expanded its operations into
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Europe, the Asia-Pacific region and Canada and believes that further growth is
necessary for Gateway's success. International expansion involves additional
business risks such as foreign currency fluctuation, government regulation,
liability for foreign taxes and product sales, competition with locally strong
competitors, and delivery and support logistics. There can be no assurance that
Gateway will effectively manage these additional risks.
Financial Instruments. In an effort to minimize the impact of currency
---------------------
fluctuations, Gateway engages in hedging programs involving forward exchange
contracts. Factors that could impact the effectiveness of hedging programs,
include volatility of currency markets, reliability of sales forecasts, and
availability of hedging instruments.
9
<PAGE>
E-Commerce. Gateway intends to grow its e-commerce business through
----------
investment in existing companies and continued expansion of its e-commerce site
offering GatewayTM branded products as well as complementary products from other
manufacturers. E-commerce is a relatively new and emerging distribution channel
whose success is dependent on a variety of factors, including its continued
acceptance by consumers. Gateway's success using e-commerce depends on such
factors as the satisfactory performance, reliability and availability of
Gateway's web site; the reliability and efficiency of its computer and
communications hardware systems; its ability to compete with a growing number of
rival e-commerce sites; its ability to evolve, update and improve its services
and offerings in response to changing demands; and the consumer demand for its
products. Expansion in this emerging growth business may require investment in
start-up activities and initial operating losses in this portion of Gateway's
business.
Risks of Minority Investments. Gateway holds and expects to continue to
-----------------------------
make investments in minority interests in companies having operations or
technology in areas within Gateway's strategic focus. Many of these investments
are in early stage companies, investment funds or Internet or e-commerce
companies where operations are not yet sufficient to establish them as
profitable concerns. Certain of these investments are in publicly traded
companies whose share prices are highly volatile. While the overall financial
impact of these investments is not believed to have been unfavorable thus far,
adverse changes in market conditions or poor operating results of underlying
investments could result in Gateway incurring losses or an inability to recover
the carrying value of its investments.
Risks of Acquisitions and Joint Ventures. Gateway has acquired certain
----------------------------------------
businesses that it believes are complementary to its operations and anticipates
making possible acquisitions and entering into possible joint ventures in the
future. While Gateway believes it will effectively integrate such businesses or
joint ventures with its own, Gateway may be unable to successfully do so without
losing key employees or business relationships. In addition, in the case of
acquisitions, Gateway may be unable to smoothly integrate the acquired
companies' marketing, production, development, distribution and management
systems resulting in the Company's inability to realize hoped for cost savings
and/or sales growth. Gateway's gross margins could be adversely affected by any
problems arising during or from such process or the inability to effectively
integrate any current or future acquisitions.
Inventory Risks. By distributing directly to its customers, Gateway has
---------------
been able to avoid the need to maintain high levels of inventory. This has
minimized costs and allows Gateway to respond more quickly to changing customer
demands, reducing its exposure to the risk of product obsolescence. A decrease
in market demand or an increase in supply, among other factors, could result in
higher inventory levels which could have a negative effect on Gateway's
profitability.
Customer or Geographic Sales Mix. Gateway's profits differ slightly
--------------------------------
depending on the product sold, the customer segment and the geographic market
involved. As a result, Gateway's profitability in any fiscal period will depend,
in part, on the corresponding mix of customers, products and geographic markets.
Year 2000 Transition. Gateway's Year 2000 Program is discussed in
--------------------
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000" at page 17 of this Report. To date, Gateway has incurred
no significant costs to remediate any problems arising from the transition to
the Year 2000 beyond costs incurred in anticipation of such transition, but no
assurance can be given that Year 2000 problems will not become apparent in the
future and that such problems will not have a material adverse effect on
Gateway's business, results of operation and financial condition.
10
<PAGE>
ITEM 2. PROPERTIES
Gateway leases space in San Diego, California for its administrative
headquarters. The Company owns space in North Sioux City, South Dakota housing a
production facility, customer sales and support center, training center,
administration and warehouse space. The Company also leases facilities in North
Sioux City used for manufacturing and warehouse space as well as leased space in
Vermillion, South Dakota used for customer service and warehouse space.
Gateway's Sioux Falls, South Dakota facilities serve as a base for the
sale and fulfillment of orders for add-on PC components, the receipt of returned
merchandise and the fulfillment of orders for customer replacement parts. The
Company also leases space in Sioux Falls for remanufacturing operations.
Gateway owns a facility in Kansas City, Missouri housing a customer
sales and support center and owns or leases facilities in Rio Rancho, New Mexico
and Colorado Springs, Colorado for customer support centers. The Company also
leases space in Lakewood, Colorado for an Information Technology and Support
Center, in Lake Forest, California for its business operations.
Gateway owns facilities in Hampton, Virginia and Salt Lake City, Utah
and leases space in Lake Forest, California housing manufacturing, customer
support, sales, warehouse space, and office space at each location respectively.
As of March 1, 2000 Gateway also leases Gateway Country(R) store space in 242
locations throughout the United States.
Gateway's European operations are based in Dublin, Ireland, where
Gateway owns a facility housing the European headquarters, production facility,
customer sales and support center and warehouse space. The Company also leases
office and showroom space in numerous European locations.
In Malacca, Malaysia, Gateway owns a manufacturing facility designed to
serve Gateway's markets in the Asia Pacific region. Gateway also leases a
showroom and call center space in Kuala Lumpur. In Australia, the company leases
a sales and distribution facility in Sydney as well as showroom space in
numerous Australian locations. In Japan, the company leases facilities in
Yokohama and Tokyo used for a customer sales and support centers and warehouse
space and leases showroom space in Tokyo and Osaka. In Singapore and Hong Kong
the Company leases sales and distribution facilities and in New Zealand the
Company leases facilities for manufacturing, sales, customer support,
administration, showrooms and warehouse space.
ITEM 3. LEGAL PROCEEDINGS
Gateway is a party to various lawsuits and administrative proceedings
arising in the ordinary course of its business. Gateway evaluates such lawsuits
and proceedings on a case by case basis, and its policy is to vigorously contest
any such claims which it believes are without merit. Gateway's management
believes that the ultimate resolution of such pending matters will not
materially and adversely affect Gateway's business, consolidated financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Gateway common stock is quoted on the New York Stock Exchange under the
trading symbol "GTW". The following table sets forth the quarterly high and low
price per share for the Common Stock as quoted at the close of trading on such
date in 1998 and 1999 and as adjusted for a two-for-one stock split on September
7, 1999:
High Low
1998: ------ ------
1st quarter ........$24.13 $16.25
2nd quarter ........$29.41 $21.28
3rd quarter ........$33.56 $23.22
4th quarter ........$30.81 $20.75
1999:
1st quarter ........$41.25 $26.81
2nd quarter ........$38.34 $28.53
3rd quarter ........$53.88 $30.03
4th quarter ........$82.50 $46.88
HOLDERS OF RECORD
As of March 22, 2000, there were 4,342 holders of record of the Common
Stock. There were no issued and outstanding shares of the Class A Common Stock
as of such date.
DIVIDENDS
Gateway management believes the best use of retained earnings is to fund
internal growth and for general corporate purposes. As a result, Gateway has not
declared any cash dividends on Common Stock since it was first publicly
registered and does not anticipate paying any cash dividends on Common Stock in
the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In December 1999, America Online, Inc. ("AOL") purchased 2,725,026
shares of the Company's common stock in exchange for a combination of cash and
1,212,396 shares of AOL common stock pursuant to a strategic relationship
between the Company and AOL. Including the issuance of the Company's common
stock in December 1999, AOL has agreed to invest $800 million in the Company
over a three-year period, in a combination of cash and AOL stock. The Company
intends to use the cash proceeds for general working capital purposes and to
hold the AOL stock for investment purposes. The sale and issuance of securities
to AOL in December 1999 was deemed to be exempt from registration under the
Securities Act of 1933, as amended, by virtue of Section 4(2) and/or Regulation
D promulgated under such Act. AOL represented its intention to acquire the
securities for investment only and not with a view to the distribution thereof,
and received adequate information about the Company to formulate an investment
decision. Appropriate legends are affixed to the stock certificate issued in
such transaction.
12
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following historical data were derived from the Company's
consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. This financial data should
be read in conjunction with the consolidated financial statements and notes
thereto beginning on page 20 of this Report and in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 14 of this Report. The information below is not
necessarily indicative of the results of future operations.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales ................. $3,676,328 $5,035,228 $6,293,680 $7,467,925 $8,645,561
---------- ---------- ---------- ---------- ----------
Net income ................ $ 172,981 $ 250,679 $ 109,797 $ 346,399 $ 427,944
Net income per share:
Basic ................ $ 0.60 $ 0.82 $ 0.36 $ 1.11 $ 1.36
Diluted .............. $ 0.55 $ 0.80 $ 0.35 $ 1.09 $ 1.32
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(in thousands)
CONSOLIDATED BALANCE
SHEET DATA:
Total assets ............... $1,124,011 $1,673,411 $2,039,271 $2,890,380 $3,954,688
Long-term obligations,
net of current maturities $ 10,805 $ 7,244 $ 7,240 $ 3,360 $ 2,998
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report includes forward-looking statements made based on current
management expectations pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements are not guarantees of
future performance and actual outcomes may differ materially from what is
expressed or forecasted. Factors that could cause future results to differ from
the Company's expectations include the following: competitive market conditions;
infrastructure requirements; availability and cost of supplies; short product
cycles; access to technology; international operations; credit risk; e-commerce
issues; risks of minority investments; risks of acquisitions or joint ventures;
inventory risks; customer or geographic sales mix; and the Year 2000 transition.
For a discussion of these factors, see " Business - Factors that May Affect
Gateway's Business and Future Results" beginning on page 9 of this Report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain data
derived from the Company's consolidated income statements:
<TABLE>
<CAPTION>
INCREASE INCREASE
1997 (DECREASE) 1998 (DECREASE) 1999
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net sales .................. $6,293,680 19% $7,467,925 16% $8,645,561
Gross profit ............... $1,076,441 44% $1,546,274 23% $1,899,817
Percentage of net sales..... 17.1% 20.7% 22.0%
Selling, general and
administrative expenses... $ 786,168 34% $1,052,047 24% $1,304,147
Percentage of net sales..... 12.5% 14.1% 15.1%
Nonrecurring expenses ...... $ 113,842 -- --
Percentage of net sales..... 1.8% -- --
Operating income............ $ 176,431 180% $ 494,227 21% $ 595,670
Percentage of net sales..... 2.8% 6.6% 6.9%
Net income.................. $ 109,797 215% $ 346,399 24% $ 427,944
</TABLE>
SALES
Gateway set new sales records in 1999, shipping more than 4.6 million
systems and generating more than $8.6 billion in sales during the year. The
Company's 1999 performance eclipsed the prior year's record results, besting
1998 unit shipments and sales by 32% and 16%, respectively, compared to an
increase in unit shipments and sales of 37% and 19% in 1998. Domestic and
international sales grew 15% and 19%, respectively.
The following table summarizes the Company's net sales for the periods
indicated by geographic region:
<TABLE>
<CAPTION>
INCREASE INCREASE
1997 (DECREASE) 1998 (DECREASE) 1999
---------- --------- ---------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net sales:
United States..... $5,303,828 21% $6,412,404 15% $7,386,537
EMEA.............. 634,616 (10%) 570,191 (5%) 543,182
APAC.............. 355,236 37% 485,330 47% 715,842
---------- ---------- ----------
Consolidated......... $6,293,680 19% $7,467,925 16% $8,645,561
========== ========== ==========
</TABLE>
In the United States, net sales growth was led by the consumer segment with
an increase of 25% in 1999 over 1998 while the business segment grew 5% over the
same time period. The consumer and business segments represented 48% and 37%,
respectively, of total Company sales in 1999. Consumer growth was driven by the
combination of new product introductions, expanding beyond the box revenue and
continued channel expansion. The Company successfully launched several new PC
products in 1999 including the Gateway Profile(TM), Gateway Profile II(TM) and
Gateway Astro(TM) series of all-in-one PC systems. New product introductions
provided a unique combination of new form factors and technology with the
ability to deliver into targeted price segments such as the key sub-$1,000 PC
market. In 1999, the Company focused aggressively on diversifying its revenue
stream through adding additional, scalable beyond the box capabilities by
securing a number of strategic alliances. These alliances include a partnership
with America Online, Inc. (AOL) to provide Internet access, portal and commerce
to Gateway.net and AOL customers. The Company also took an equity stake in NECX
Direct LLC (NECX) that leverages NECX's web capabilities and fulfillment engine
for sales of software and peripherals. Beyond the box revenue including software
and peripheral sales, Internet access and portal income, financing, warranty and
training revenue accounted for $800M in 1999 sales, up more than 100% versus
1998 and partially mitigating market pricing pressure. The Company also
continued to add capability around its three direct channels (phones, stores,
web). The Company opened 123 Gateway Country(R) stores worldwide versus total
new store openings of 107 in 1998. At the end of 1999, Gateway had 280 store
locations worldwide. In the first year of significant expansion of the store
concept internationally, Gateway more than doubled penetration in this channel.
Average unit prices (AUPs) were approximately 13% lower in 1999 compared to
a 14% decline in 1998. AUPs continued to decline in 1999 due to a combination
of competitive pricing pressure stemming from component cost decreases and
significant growth in the sub-$1,000 PC market. The Company expects the industry
trend of declining AUPs to continue and intends to mitigate this impact by
continuing to diversify its revenue stream as discussed previously.
On the business front, the Company continued to focus on small/medium
businesses, government and education. These three segments grew at 22% in units
over the prior year. Gateway also continued to add partners to aggressively
pursue the enterprise space. Sales growth in the business segment for the fourth
quarter of 1999 was adversely impacted by Year 2000 concerns among large
business. Management expects that this trend will reverse in 2000 as large
businesses and institutions resume normal purchasing patterns.
International continued to execute against Gateway's global strategy. This
included aggressive Gateway Country store growth and added beyond the box
capabilities. The Asia Pacific region enhanced its unit growth by 65% in 1999
and 63% in 1998. Unit shipments in the European ("EMEA") region increased 12% in
1999, up from a 5% increase in 1998. European volume trends improved
significantly during the second half of 1999 as unit shipments increased 24%
over the second half of 1998. Unit growth in all regions was offset by the
declining AUPs previously discussed.
14
<PAGE>
GROSS PROFIT
Gross profit in 1999 rose to $1.9 billion, an increase of approximately
23% from 1998. As a percentage of sales, gross profit for 1999 increased to
22.0% from 20.7% in 1998 and 17.1% in 1997, improving sequentially every quarter
during 1998 and 1999. Improved margins were driven by aggressive supplier
management and improved cost structure productivity, effective PC pricing
management and the diversified revenue stream from the sale of non-PC services
and products discussed above. The increase over 1997 is partially attributable
to the adverse effects of excess inventories experienced in the third quarter of
1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
To support its significant growth, the Company continues to make
investments in Gateway Country(R) stores as discussed above, personnel, systems
infrastructure and Internet development, domestically and internationally,
resulting in an increase of 24% in selling, general and administrative expenses
(SG&A) in 1999 over 1998. SG&A expenses increased 34% in 1998 over 1997. In
addition, the Company continues to invest in expanding its presence in the
European and Asian markets, building its core systems capability and
strengthening its management team. As a percentage of sales, SG&A expenses were
15.1% in 1999, up from 14.1% in 1998 and 12.5% in 1997. The Company expects SG&A
expenses to continue to increase in support of its anticipated growth, but at a
rate below that of anticipated revenue growth.
15
<PAGE>
OPERATING INCOME
Strong unit growth and gross margin efficiencies contributed to a 21%
increase in operating income for 1999. Operating income improved to 6.9% of
sales in 1999 from 6.6% in 1998. Operating income in 1999 for the consumer and
business segments in the United States was $473.1 million and $474.6 million,
respectively, due to increased sales and improved productivity, partially offset
by the investment in SG&A. This represents a 60% increase in the consumer
segment from 1998 while the business segment declined 15% over 1998. The
Non-segment expenses for 1999 totaled $376.3 million, an increase of 5% over
1998. Operating income for the segments includes SG&A expenses and other
overhead charges directly attributable to the segment. Costs excluded from the
segments primarily consist of general and administrative expenses that are
managed on a corporate-wide basis.
OTHER INCOME, NET
Other income, net includes primarily interest income and expense, gains
from the sale of investments, and foreign exchange transaction gains and losses.
Other income, net increased to $67.8 million in 1999 from $47.0 million in 1998,
due to the additional investment income generated by increases in cash balances
and marketable securities.
INCOME TAXES
The Company's annualized effective tax rate decreased to 35.5% for 1999
from the 36.0% recorded in 1998. The effective tax rate for 1999 was favorably
impacted by shifts in the geographic distribution of the Company's earnings.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents selected financial statistics and
information for the periods indicated:
1997 1998 1999
----------- ----------- -----------
(dollars in thousands)
Cash and marketable securities ..... $ 632,249 $ 1,328,467 $ 1,336,371
Days of sales in accounts receivable 23 22 24
Days inventory on hand ............. 17 9 9
Days in accounts payable ........... 27 36 43
Cash conversion cycle .............. 13 (5) (10)
16
<PAGE>
At December 31, 1999, the Company had cash and cash equivalents of $1.1
billion, marketable securities of $208.7 million and an unsecured committed
credit facility with certain banks aggregating $300.0 million, consisting of a
revolving line of credit facility and a sub-facility for letters of credit. At
December 31, 1999, no amounts were outstanding under the revolving line of
credit. Approximately $1.75 million was committed to support outstanding standby
letters of credit. Management believes the Company's current sources of working
capital, including amounts available under existing credit facilities, will
provide adequate flexibility for the Company's financial needs for at least the
next 12 months.
The Company generated $731.1 million in cash from operations during
1999, including $589.9 million of net income adjusted for non-cash items. Other
significant factors increasing available cash include a decrease in inventory
levels of $23.9 million and an increase in accounts payable and other accrued
liabilities of $466.1 million, partially offset by an increase in accounts
receivable. The Company used approximately $338.2 million for the construction
of new facilities, information systems and equipment; $49.6 million to purchase
investments in marketable securities, net of proceeds of securities sold; $315.2
million to purchase financing receivables, net of proceeds received for
repayment; and $126.9 million to purchase investments in unconsolidated
affiliates. As discussed previously, the Company continued to expand the retail
Gateway Country(R) stores, bringing the total number of stores worldwide to 280
as of December 31, 1999.
At December 31, 1999, the Company had long-term indebtedness and capital
lease obligations of approximately $8.5 million. These obligations relate to the
Company's investments in equipment and facilities. The Company anticipates that
it will retain all earnings in the foreseeable future for development of its
business and will not distribute earnings to its stockholders as dividends.
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 October 1999, the Company entered into a strategic relationship with
America Online, Inc. (AOL) to combine certain of the companies' sales and
distribution channels and capabilities in the development of certain hardware,
software and Internet content. As part of the agreement, AOL agreed to invest
$800 million in the Company over a three-year period, in a combination of cash
and AOL stock. During 1999, AOL purchased 2,725,026 shares of the Company's
common stock in exchange for a combination of cash and 1,212,396 shares of AOL
common stock.
NEW ACCOUNTING PRONOUNCEMENTS
In June 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The objective of this SAB is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. The guidance in the SAB is required
to be followed no later than the second fiscal quarter of the first fiscal year
beginning after December 15, 1999 and is not expected to have a material impact
on the Company's financial position or results of operations.
YEAR 2000
The "Year 2000" issue was the result of many existing computer programs
and chip-based embedded technology systems using only the last two digits to
refer to a year, and therefore, not properly recognizing a year
17
<PAGE>
that begins with "20" instead of the familiar "19." If not corrected, many
computer applications could fail or create erroneous results.
The Company completed its process toward Year 2000 readiness during 1999
and did not experience an adverse effect on the Company, its business or its
financial condition as a result of the date change. During 1999, the Company
expensed incremental costs of $13.1 million on Year 2000 remediation efforts and
expensed $16.7 million on a life-to-date basis.
18
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The results of the Company's foreign operations are affected by changes
in exchange rates between certain foreign currencies and the United States
dollar. The functional currency for most of the Company's foreign operations is
the U.S. dollar. The functional currency for the remaining operations is the
local currency in which the subsidiaries operate. Sales made in foreign
currencies translate into higher or lower sales in U.S. dollars as the U.S.
dollar weakens or strengthens against other currencies. Therefore, changes in
exchange rates may negatively affect the Company's consolidated net sales (as
expressed in U.S. dollars) and gross margins from foreign operations. The
majority of the Company's component purchases are denominated in U.S. dollars.
The Company uses foreign currency forward contracts to hedge foreign
currency transactions and probable anticipated foreign currency transactions.
These forward contracts are designated as a hedge of international sales by U.S.
dollar functional currency entities and intercompany purchases by certain
foreign subsidiaries. The principal currencies hedged are the British Pound,
Japanese Yen, French Franc, Australian Dollar, Singapore Dollar, and the
Deutsche Mark over periods ranging from one to six months. Forward contracts are
accounted for on a mark-to-market basis, with realized and unrealized gains or
losses recognized currently. Gains or losses arising from forward contracts that
are effective as a hedge are included in the basis of the designated
transactions. Fluctuations in U.S. dollar currency exchange rates did not have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows in any given reporting period. Forward contracts
designated to hedge foreign currency transaction exposure of $266,471,000 and
$303,393,000 were outstanding at December 31, 1998 and 1999, respectively. The
estimated fair value of these forward contracts at December 31, 1998 and 1999
was $271,573,000 and $303,917,000, respectively, based on quoted market prices.
Foreign currency exchange contracts are sensitive to changes in foreign
currency exchange rates. At December 31, 1999, a hypothetical 10% adverse change
in foreign currency exchange rates underlying the Company's open forward
contracts would result in an unrealized loss of approximately $32.5 million.
Unrealized gains/losses in foreign currency exchange contracts represent the
difference between the hypothetical rates and the current market exchange rates.
Consistent with the nature of an economic hedge, any unrealized gains or losses
would be offset by corresponding decreases or increases, respectively, of the
underlying transaction being hedged.
The Company is not subject to material market risk with respect to its
investment in marketable securities.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS:
<S> <C>
Report of Independent Accountants .......................................... 21
Consolidated Income Statements for the years
ended December 31, 1997, 1998 and 1999 ............................ 22
Consolidated Balance Sheets at December 31, 1998 and 1999 .................. 23
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1998 and 1999 ............................ 24
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income for the years ended December 31, 1997, 1998 and 1999 ....... 25
Notes to Consolidated Financial Statements ................................. 26
FINANCIAL STATEMENT SCHEDULE:
Schedule II -Valuation and Qualifying Accounts ............................. 41
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Gateway, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index in Item 8. Financial Statements and Supplementary Data, herein present
fairly, in all material respects, the consolidated financial position of
Gateway, Inc. at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ---------------------------------------
PricewaterhouseCoopers LLP
San Diego, California
January 20, 2000
21
<PAGE>
GATEWAY, INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(in thousands, except per share amounts)
1997 1998 1999
---------- ---------- ----------
Net sales .......................... $6,293,680 $7,467,925 $8,645,561
Cost of goods sold ................. 5,217,239 5,921,651 6,745,744
---------- ---------- ----------
Gross profit ................ 1,076,441 1,546,274 1,899,817
Selling, general and
administrative expenses ......... 786,168 1,052,047 1,304,147
Nonrecurring expenses .............. 113,842 -- --
---------- ---------- ----------
Operating income ............. 176,431 494,227 595,670
Other income, net .................. 27,189 47,021 67,809
---------- ---------- ----------
Income before income taxes .. 203,620 541,248 663,479
Provision for income taxes ......... 93,823 194,849 235,535
---------- ---------- ----------
Net income ................... $ 109,797 $ 346,399 $ 427,944
========== ========== ==========
Net income per share:
Basic ........................... $ 0.36 $ 1.11 $ 1.36
========== ========== ==========
Diluted ......................... $ 0.35 $ 1.09 $ 1.32
========== ========== ==========
Weighted average shares outstanding:
Basic ........................... 307,680 311,084 313,974
========== ========== ==========
Diluted ......................... 312,402 317,857 324,421
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
GATEWAY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 1,169,810 $ 1,127,654
Marketable securities ...................................................... 158,657 208,717
Accounts receivable, net ................................................... 558,851 646,339
Inventory .................................................................. 167,924 191,870
Other ...................................................................... 172,944 522,225
----------- -----------
Total current assets .................................................... 2,228,186 2,696,805
Property, plant and equipment, net ............................................. 530,988 745,660
Intangibles, net ............................................................... 65,944 52,302
Other assets ................................................................... 65,262 459,921
----------- -----------
$ 2,890,380 $ 3,954,688
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations ................................ $ 11,415 $ 5,490
Accounts payable ........................................................... 718,071 898,436
Accrued liabilities ........................................................ 415,265 609,132
Accrued royalties .......................................................... 167,873 153,840
Other current liabilities .................................................. 117,050 142,812
----------- -----------
Total current liabilities .............................................. 1,429,674 1,809,710
Long-term obligations, net of current maturities ............................... 3,360 2,998
Warranty and other liabilities ................................................. 112,971 124,862
----------- -----------
Total liabilities ...................................................... 1,546,005 1,937,570
----------- -----------
Commitments and contingencies (Note 3)
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, 1,000,000 shares authorized; 313,138 shares and
320,016 shares issued, respectively ...................................... 3,131 3,200
Additional paid-in capital .................................................. 364,421 656,870
Common stock in treasury, at cost, 730 shares in 1999 ..................... -- (51,796)
Retained earnings ........................................................... 980,908 1,408,852
Accumulated other comprehensive loss ........................................ (4,085) (8)
----------- -----------
Total stockholders' equity ........................................... 1,344,375 2,017,118
----------- -----------
$ 2,890,380 $ 3,954,688
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
GATEWAY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(in thousands)
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 109,797 $ 346,399 $ 427,944
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ................................... 86,774 105,524 134,105
Provision for uncollectible accounts receivable ................. 5,688 3,991 28,334
Deferred income taxes ........................................... (63,247) (58,425) (2,876)
Other, net ...................................................... 42 770 2,381
Nonrecurring expenses ........................................... 113,842 -- --
Changes in operating assets and liabilities:
Accounts receivable......................................... (41,950) (52,164) (115,822)
Inventory ................................................... 59,486 81,300 (23,947)
Other assets ................................................ (54,513) 451 (185,192)
Accounts payable ............................................ 66,253 228,921 181,704
Accrued liabilities ......................................... 48,405 144,899 195,299
Accrued royalties ........................................... 34,148 8,455 (14,033)
Other current liabilities ................................... 35,816 76,278 105,723
Warranty and other liabilities .............................. 42,256 21,252 (2,566)
----------- ----------- -----------
Net cash provided by operating activities ....................... 442,797 907,651 731,054
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures ............................................ (175,656) (235,377) (338,211)
Investments in unconsolidated affiliates ........................ -- -- (126,931)
Purchases of available-for-sale securities ...................... (49,619) (168,965) (146,759)
Proceeds from maturities or sales of available-for-
sale securities ............................................. 10,985 48,924 97,206
Purchase of financing receivables ............................... -- -- (368,133)
Proceeds from repayment of financing receivables ................ -- -- 52,926
Acquisitions, net of cash acquired .............................. (142,320) -- --
Other, net ...................................................... (4,055) (992) (1,384)
----------- ----------- -----------
Net cash (used in) investing activities ......................... (360,665) (356,410) (831,286)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuances of notes payable ........................ 10,000 -- --
Principal payments on long-term obligations and
notes payable ................................................ (15,588) (13,173) (6,287)
Purchase of treasury stock ...................................... -- -- (122,580)
Proceeds from stock issuance .................................... -- -- 100,000
Stock options exercised ......................................... 5,741 36,159 83,341
----------- ----------- -----------
Net cash provided by financing activities ....................... 153 22,986 54,474
----------- ----------- -----------
Foreign exchange effect on cash and cash
equivalents ...................................................... (5,044) 1,982 3,602
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ................ 77,241 576,209 (42,156)
Cash and cash equivalents, beginning of year ........................ 516,360 593,601 1,169,810
----------- ----------- -----------
Cash and cash equivalents, end of year .............................. $ 593,601 $ 1,169,810 $ 1,127,654
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
GATEWAY, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-in Treasury Retained Comprehensive
Shares Amount Capital Stock Earnings Income (Loss) Total
-------- ------- ----------- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 ......... 307,024 $ 3,070 $ 287,210 $ -- $ 524,712 $ 549 $ 815,541
Comprehensive income:
Net income ....................... -- -- -- -- 109,797 -- 109,797
Other comprehensive income:
Foreign currency translation .... -- -- -- -- -- (6,053) (6,053)
Unrealized gain on
available-for-sale
securities ................... -- -- -- -- -- 15 15
-----------
Comprehensive income ......... 103,759
Stock issuances under employee
plans, including tax
benefit of $5,003 ................. 1,232 10 10,734 -- -- -- 10,744
Stock retirement
-------- ------- ----------- ---------- ---------- -------------- -----------
Balances at December 31, 1997 ......... 308,256 3,080 297,944 -- 634,509 (5,489) 930,044
Comprehensive income:
Net income ....................... -- -- -- -- 346,399 -- 346,399
Other comprehensive income:
Foreign currency
translation ................. -- -- -- -- -- 1,549 1,549
Unrealized loss on
available-for-sale securities .. -- -- -- -- -- (145) (145)
-----------
Comprehensive income ...... 347,803
Stock issuances under employee
plans, including tax benefit
of $29,769 ........................ 4,846 49 65,879 -- -- -- 65,928
Stock issued to officer ............ 36 2 598 -- -- -- 600
-------- ------- ----------- ---------- ---------- -------------- -----------
Balances at December 31, 1998 ......... 313,138 3,131 364,421 -- 980,908 (4,085) 1,344,375
Comprehensive income:
Net income ....................... -- -- -- -- 427,944 -- 427,944
Other comprehensive income:
Foreign currency
translation .................... -- -- -- -- -- 4,941 4,941
Unrealized loss on
available-for-sale
securities .................. -- -- -- -- -- (864) (864)
-----------
Comprehensive income ...... 432,021
Purchase of treasury stock .......... -- -- -- (122,580) -- -- (122,580)
Stock issuances under employee
plans, including tax benefit
of $79,961 ........................ 4,153 42 92,476 70,784 -- -- 163,302
Issuance of common stock ............ 2,725 27 199,973 -- -- -- 200,000
-------- ------- ----------- ---------- ---------- -------------- -----------
Balances at December 31, 1999 ......... 320,016 $ 3,200 $ 656,870 $ (51,796) $1,408,852 $ (8) $ 2,017,118
======== ======= =========== ========== ========== ============== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Gateway, Inc. (the "Company") is a direct marketer of personal computers
("PCs") and PC-related products and services. The Company develops,
manufactures, markets and supports a broad line of desktop and portable PCs,
servers, workstations and PC-related products used by individuals, families,
businesses, government agencies and educational institutions. The Company also
offers and supports PC-related services including training, financing and
Internet service.
The significant accounting policies used in the preparation of the
consolidated financial statements of the Company are as follows:
(a) Basis of Presentation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
The Company holds a less than 20% interest in certain unconsolidated
affiliates and does not exercise significant influence with respect to such
companies. These investments are accounted for using the cost method.
(b) Use of Estimates and Certain Concentrations:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain components used by the Company in manufacturing of PC systems
are purchased from a limited number of suppliers. An industry shortage or other
constraints of any key component could result in delayed shipments and a
possible loss of sales, which could affect operating results adversely.
Included in other assets and other current assets are customer financing
receivables totaling approximately $300 million. The Company records a reserve
for uncollectible accounts based on historical collection experience.
(c) Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments and money
market funds with an original maturity of three months or less to be cash
equivalents. The carrying amount approximates fair value because of the short
maturities of these instruments.
(d) Marketable Securities:
The carrying amounts of marketable securities used in computing
unrealized and realized gains and losses are determined by specific
identification. Fair values are determined using quoted market prices. For
available-for-sale securities, which are carried at fair value at the balance
sheet dates, net unrealized holding gains and losses are reported in accumulated
other comprehensive income (loss). Held-to-maturity securities are recorded at
amortized cost. Amortization of related discounts or premiums is included in the
determination of net income.
26
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Marketable securities at December 31, 1999 and 1998 consisted of
available-for-sale mutual funds, commercial paper and debt securities, with
market values that approximate their amortized cost. Realized and unrealized
gains and losses are not material for any of the periods presented.
(e) Inventory:
Inventory, which is comprised of component parts, subassemblies and
finished goods, is valued at the lower of first-in, first-out (FIFO) cost or
market. On a quarterly basis, the Company compares on a part by part basis, the
amount of the inventory on hand and under commitment with its latest forecasted
requirements to determine whether write-downs for excess or obsolete inventory
are required.
(f) Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation is
provided using the straight-line method over the assets' estimated useful lives,
ranging from four to forty years. Amortization of leasehold improvements is
computed using the shorter of the lease term or the estimated useful life of the
underlying asset. Upon sale or retirement of property, plant and equipment, the
related costs and accumulated depreciation or amortization are removed from the
accounts and any gain or loss is included in the determination of net income.
The Company capitalizes costs of purchased software and costs incurred
to develop internal use software. Amortization of software costs begins when the
software is placed in service and is computed on a straight-line basis over the
estimated useful life of the software, ranging from three to five years.
(g) Intangible Assets:
Intangible assets principally consist of technology, a customer base and
distribution network, an assembled work force and trade name obtained through
acquisition. The cost of intangible assets is amortized on a straight-line basis
over the estimated periods benefited, ranging from three to ten years.
(h) Long-lived Assets:
The Company reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss would be recognized when the sum of
the expected undiscounted future net cash flows expected to result from the use
of the asset and its eventual disposition is less than its carrying amount.
(i) Royalties:
The Company has royalty-bearing license agreements that allow the
Company to sell certain hardware and software which is protected by patent,
copyright or license. Royalty costs are accrued and included in cost of goods
sold when products are shipped or amortized over the period of benefit when the
license terms are not specifically related to the units shipped.
(j) Warranty and Other Post-sales Support Programs:
The Company provides currently for the estimated costs that may be
incurred under its warranty and other post-sales support programs.
27
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(k) Revenue Recognition:
The Company generally recognizes revenue from product sales at the time
of shipment provided that no significant obligation remains. The Company
recognizes revenue from services, such as training and Internet service, upon
delivery of the service. For sales involving multiple elements, revenue is
allocated to each element based on the relative fair value using vendor specific
objective evidence.
Revenue from the sale of extended service plans is deferred and
recognized over the extended service period on a straight-line basis. During
1999, the Company also began selling service plans provided by an unrelated
third party. These service plans are administered through a third party with all
performance obligations and risk of loss transferred to the third party upon
sale. Revenue and cost associated with these plans is recognized at the time of
sale.
(l) Advertising Costs:
Advertising costs are charged to expense as incurred.
(m) Income Taxes:
The provision for income taxes is computed using the liability method,
under which deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial reporting
and tax bases of assets and liabilities. Deferred tax assets are reduced by a
valuation allowance when it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
(n) Net Income Per Share:
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.
1997 1998 1999
-------- -------- --------
(in thousands)
Net income for basic and diluted
earnings per share ....................... $109,797 $346,399 $427,944
======== ======== ========
Weighted average shares for basic
earnings per share ....................... 307,680 311,084 313,974
Dilutive effect of stock options ............ 4,722 6,773 10,447
-------- -------- --------
Weighted average shares for diluted
earnings per share ....................... 312,402 317,857 324,421
======== ======== ========
28
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(o) Stock-based Compensation:
The Company measures compensation expense for its employee's and
non-employee director's stock-based compensation using the intrinsic value
method. Compensation charges related to other non-employee stock-based
compensation are measured using fair value methods.
(p) Foreign Currency:
The Company uses the U.S. dollar as its functional currency for certain
of its international operations and the local currency for all other. For
subsidiaries where the local currency is the functional currency, the assets and
liabilities are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Income and expense items are translated at the average
exchange rates prevailing during the period. Gains and losses from translation
are included in accumulated other comprehensive income (loss). Gains and losses
resulting from remeasuring monetary asset and liability accounts that are
denominated in currencies other than a subsidiary's functional currency are
included in "Other income, net".
The Company uses foreign currency forward contracts to hedge foreign
currency transactions and probable anticipated foreign currency transactions.
These forward contracts are designated as a hedge of international sales by U.S.
dollar functional currency entities and intercompany purchases by certain
foreign subsidiaries. The principal currencies hedged are the British Pound,
Japanese Yen, French Franc, Australian Dollar, Singapore Dollar and the Deutsche
Mark over periods ranging from one to six months. Forward contracts are
accounted for on a mark-to-market basis, with realized and unrealized gains or
losses recognized currently. Gains or losses arising from forward contracts
which are effective as a hedge are included in the basis of the designated
transactions. The related receivable or liability with counterparties to the
forward contracts is recorded in the consolidated balance sheet. Cash flows from
settlements of forward contracts are included in operating activities in the
consolidated statements of cash flows. Aggregate transaction gains and losses
included in the determination of net income are not material for any period
presented. Forward contracts designated to hedge foreign currency transaction
exposure of $266,471,000 and $303,393,000 were outstanding at December 31, 1998
and 1999, respectively. The estimated fair value of these forward contracts at
December 31, 1998 and 1999 was $271,573,000 and $303,917,000, respectively,
based on quoted market prices.
The Company continually monitors its positions with, and the credit
quality of, the major international financial institutions which are
counterparties to its foreign currency forward contracts, and has not
experienced nonperformance by any of these counterparties.
(q) New Accounting Pronouncements:
In June 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.
29
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The
objective of this SAB is to provide further guidance on revenue recognition
issues in the absence of authoritative literature addressing a specific
arrangement or a specific industry. The guidance in the SAB is required to be
followed no later than the second fiscal quarter of the fiscal year beginning
after December 15, 1999 and is not expected to have a material impact on the
Company's financial position or results of operations.
(r) Stock split:
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 were distributed on September 7, 1999 to stockholders of
record as of August 20, 1999. Share and per share data for all periods presented
herein have been restated to reflect the two-for-one common stock split.
2. FINANCING ARRANGEMENTS:
(a) Credit Agreement:
The Company is party to an unsecured bank credit agreement (the
"Agreement"), totaling $300 million. The Agreement consists of (1) a revolving
line of credit facility for committed loans and bid loans; and (2) a
sub-facility for letters of credit. Borrowings under the agreement bear interest
at the banks' base rate or, at the Company's option, borrowing rates based on a
fixed spread over the London Interbank Offered Rate (LIBOR). The Agreement
requires the Company to maintain a minimum tangible net worth and maximum debt
leverage ratio, as well as minimum fixed charge coverage. There were no
borrowings outstanding at the end of 1998 and 1999.
At December 31, 1998 and 1999, approximately $2,000,000 and $1,750,000,
respectively, was committed to support outstanding standby letters of credit.
(b) Long-term Obligations:
The carrying amount of the Company's long-term obligations approximates
fair value, which is estimated based on current rates offered to the Company for
obligations of the same remaining maturities. Long-term obligations consist of
the following:
DECEMBER 31,
1998 1999
------- -------
(in thousands)
Notes payable through 2002 with
interest rates ranging from
3.90% to 5.50% .......................... $14,408 $ 8,415
Obligations under capital leases,
payable in monthly installments at a
fixed rate of 6.5% through 2001 ......... 367 73
------- -------
14,775 8,488
Less current maturities ................. 11,415 5,490
------- -------
$ 3,360 $ 2,998
======= =======
30
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The long-term obligations, excluding obligations under capital leases,
have the following maturities as of December 31, 1999, in thousands:
2000.................. $5,430
2001.................. 2,773
2002.................. 212
2003.................. --
2004.................. --
------
$8,415
======
3. COMMITMENTS AND CONTINGENCIES:
The Company leases certain operating facilities and equipment under
noncancelable operating leases expiring at various dates through 2013. Rent
expense was approximately $16,105,000, $25,713,000 and $52,936,000 for 1997,
1998 and 1999, respectively.
Future minimum lease payments under terms of these leases as of December
31, 1999 are as follows:
CAPITAL OPERATING
LEASES LEASES
--------- ----------
(in thousands)
2000............................... $ 60 $ 62,380
2001............................... 18 63,441
2002............................... 5 61,102
2003............................... -- 49,272
2004............................... -- 24,679
Thereafter......................... -- 37,796
------ ---------
Total minimum lease payments....... $ 83 $ 298,670
=========
Less amount representing interest 10
------
Present value of net minimum lease
payments.......................... $ 73
======
The Company has entered into licensing and royalty agreements that allow
it to use certain hardware and software intellectual properties in its products.
Minimum royalty payments due under these agreements for the period 2000 through
2003 total approximately $380,000,000. Total royalty expense is expected to be
greater than this minimum amount for these periods.
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.
31
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES:
The components of the provision for income taxes are as follows:
1997 1998 1999
--------- --------- ---------
(in thousands)
Current:
United States ............ $ 154,049 $ 244,076 $ 238,799
Foreign
3,021 9,198 (388)
Deferred:
United States ............ (49,564) (40,055) (13,850)
Foreign .................. (13,683) (18,370) 10,974
--------- --------- ---------
$ 93,823 $ 194,849 $ 235,535
========= ========= =========
Income (loss) before income taxes included approximately ($24,000,000),
($13,100,000) and $22,500,000 related to foreign operations for the years ended
December 31, 1997, 1998 and 1999, respectively.
A reconciliation of the provision for income taxes and the amount
computed by applying the federal statutory income tax rate to income before
income taxes is as follows:
1997 1998 1999
-------- -------- --------
(in thousands)
Federal income tax at
statutory rate ................... $ 71,267 $189,437 $232,218
Nondeductible purchased
research and development
costs ............................ 20,704 -- --
Other, net .......................... 1,852 5,412 3,317
-------- -------- --------
Provision for income taxes .......... $ 93,823 $194,849 $235,535
======== ======== ========
32
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets and deferred tax liabilities result from temporary
differences in the following accounts:
1998 1999
-------- --------
(in thousands)
U.S. deferred tax assets:
Inventory ............................. $ 17,721 $ 13,245
Accounts receivable ................... 5,206 7,433
Accrued liabilities ................... 52,143 87,710
Other liabilities ..................... 60,539 58,816
Other ................................. 8,048 11,651
-------- --------
Total U.S. ....................... 143,657 178,855
Foreign deferred tax assets:
Operating loss carryforwards .......... 33,454 17,928
Deferred costs ........................ 2,312 6,662
Other ................................. 2,895 8,476
-------- --------
Total foreign .................... 38,661 33,066
-------- --------
Total deferred tax assets .................. 182,318 211,921
-------- --------
U.S. deferred tax liabilities:
Intangible assets ..................... 29,440 46,143
Property, plant & equipment ........... 4,104 13,684
Other ................................. 6,507 1,571
-------- --------
Total deferred tax liabilities ............. 40,051 61,398
-------- --------
Net deferred tax assets .................... $142,267 $150,523
======== ========
The Company has foreign net operating loss carryforwards of $46,400,000.
Of this amount, $27,600,000 expires in the year 2002. The remaining $18,800,000
can be carried forward indefinitely. The Company has assessed its forecast of
future taxable income and the expiration of carryforwards and has determined
that is it more likely than not that the deferred tax asset relating to foreign
net operating loss carryforwards will be realized.
5. STOCK OPTION PLANS:
The Company maintains various stock option plans for its employees.
Employee options are generally granted at the fair market value of the related
common stock at the date of grant. These options generally vest over a four-year
period from the date of grant or the employee's initial date of employment. In
addition, these options expire, if not exercised, ten years from the date of
grant. The Company also maintains option plans for non-employee directors.
Option grants to non-employee directors generally have an exercise price equal
to the fair market value of the related common stock on the date of grant. These
options generally vest over one to three-year periods and expire, if not
exercised, ten years from the date of grant.
For all of the Company's stock option plans, options for 5,164,000,
5,456,000 and 5,544,000 shares of common stock were exercisable at December 31,
1997, 1998 and 1999 with a weighted average exercise price of $4.93, $8.71, and
$12.67, respectively. In addition, options for 1,112,000, 560,000, and 126,000
shares of Class A common stock were exercisable at December 31, 1997, 1998 and
1999 with a weighted average exercise price of $1.01, $0.97, and $0.94,
respectively. Class A common stock may be converted into an equal number of
shares of common stock at any time. There were 16,656,000, 22,530,000, and
4,504,000 shares of common stock available for grant under the plans at December
31, 1997, 1998 and 1999, respectively.
33
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes activity under the stock option plans
for 1997, 1998, and 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Weighted- Class A Weighted-
Common Average Common Average
Stock Price Stock Price
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1996 10,880 $ 6.10 1,426 $ 1.06
Granted 10,506 18.04 -- --
Exercised (926) 5.78 (306) 1.25
Forfeited (1,550) 11.85 -- --
------- ---------- ------- ---------
Outstanding, December 31, 1997 18,910 11.49 1,120 1.01
------- ---------- ------- ---------
Granted 12,236 22.59 -- --
Exercised (4,286) 8.30 (560) 1.05
Forfeited (2,206) 16.38 -- --
------- ---------- ------- ---------
Outstanding, December 31, 1998 24,654 17.10 560 .97
------- ---------- ------- ---------
Granted 20,850 37.17 -- --
Exercised (5,884) 14.12 (434) .97
Forfeited (2,824) 25.14 -- --
------- ---------- ------- ---------
Outstanding, December 31, 1999 36,796 $ 28.60 126 $ .94
======= ========== ======= =========
</TABLE>
The following table summarizes information about the Company's Common
Stock options outstanding at December 31, 1999 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-Average
Range of Exercise Prices Number Remaining Number Weighted-Average
Outstanding Contractual Life Weighted-Average Exercisable Price
at 12/31/99 Price at 12/31/99
- ---------------------------- --------------- -------------------- ------------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
$ .59-16.32 6,992 6.36 $ 10.38 4,009 $ 8.51
16.75-24.72 6,809 8.09 19.23 1,120 19.73
24.78-30.63 7,057 9.03 28.76 281 26.84
30.88-32.88 9,601 9.37 32.50 260 30.88
32.94-82.50 6,463 9.70 50.09 - -
</TABLE>
The weighted average fair value per share of options granted during
1997, 1998 and 1999 was $10.81, $13.67, and $22.51, respectively. The fair value
of these options was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
all grants in 1997, 1998 and 1999: dividend yield of zero percent; expected
volatility of 60 percent; risk-free interest rates ranging from 4.5 to 6.6
percent; and expected lives of the options of three and one-half years.
34
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Since all stock options have been granted with exercise prices equal to
the fair market value of the related common stock at the date of grant, no
compensation expense has been recognized under the Company's stock option plans.
Had compensation cost under the plans been determined based on the estimated
fair value of the stock options granted in 1997, 1998 and 1999, net income and
net income per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net income - as reported ................. $ 109,797 $ 346,399 $ 427,944
Net income - pro forma ................... $ 85,804 $ 297,470 $ 319,494
Net income per share - as reported
Basic ................................. $ .36 $ 1.11 $ 1.36
Diluted ............................... $ .35 $ 1.09 $ 1.32
Net income per share - pro forma
Basic ................................. $ .28 $ .96 $ 1.02
Diluted ............................... $ .28 $ .94 $ 0.98
</TABLE>
The pro forma effect on net income for 1997, 1998 and 1999 is not fully
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to the
vesting of grants made prior to 1997.
6. RETIREMENT SAVINGS PLAN:
The Company has a 401(k) defined contribution plan which covers
employees who have attained 18 years of age and have been employed by the
Company for at least six months. Participants may contribute up to 20% of their
compensation in any plan year and receive a 50% matching employer contribution
of up to 6% of their annual eligible compensation. The Company contributed
$2,068,000, $4,730,000, and $6,433,000 to the Plan during 1997, 1998 and 1999,
respectively.
7. NONRECURRING EXPENSES:
The Company recorded several nonrecurring pretax charges during the
third quarter of 1997 totaling approximately $113,800,000. Of the nonrecurring
charges, approximately $59,700,000 was for the write-off of in-process research
and development acquired in the purchase of Advanced Logic Research, Inc. (ALR)
and certain assets of Amiga Technologies. Also included in the nonrecurring
charges was a non-cash write-off of approximately $45,200,000 resulting from the
abandonment of a capitalized internal use software project and certain computer
equipment. In addition, approximately $8,600,000 was recorded for severance of
employees and the closing of a foreign office.
8. STRATEGIC INVESTMENTS AND ALLIANCES:
During 1999, the Company entered into a strategic relationship with
America Online, Inc. (AOL) to combine certain of the companies' sales and
distribution channels and capabilities in the development of certain hardware,
software and Internet content. As part of the agreement, AOL agreed to invest
$800 million in the Company over a three-year period, in a combination of cash
and AOL stock. During 1999, AOL purchased 2,725,026 shares of the Company's
common stock in exchange for a combination of cash and 1,212,396 shares of AOL
common stock.
35
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1999, the Company purchased a 19.9% interest in NECX Direct, LLC,
an on-line e-commerce computer peripheral retailer, and subsequently sold half
of that interest to a third party. The purchase price of approximately $77.7
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.
During the third quarter of 1997, the Company acquired substantially all
of the outstanding shares of common stock of ALR, a manufacturer of network
servers and personal computers, for a cash purchase price of approximately
$196,400,000. The operating results of ALR were not material for all periods
presented.
9. SELECTED BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
(in thousands)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable .............................................. $ 573,799 $ 662,811
Allowance for uncollectible accounts ............................. (14,948) (16,472)
----------- -----------
$ 558,851 $ 646,339
=========== ===========
Inventory:
Components and subassemblies ..................................... $ 155,746 $ 183,321
Finished goods ................................................... 12,178 8,549
----------- -----------
$ 167,924 $ 191,870
=========== ===========
Property, plant and equipment, net:
Land ............................................................. $ 21,784 $ 18,758
Leasehold improvements ........................................... 57,118 107,317
Buildings ........................................................ 186,361 202,102
Construction in progress ......................................... 74,105 158,305
Internal use software ............................................ 94,306 172,501
Office and production equipment .................................. 249,924 319,585
Furniture and fixtures ........................................... 66,578 99,959
Vehicles ......................................................... 15,402 13,477
----------- -----------
765,578 1,092,004
Accumulated depreciation and amortization ........................ (234,590) (346,344)
----------- -----------
$ 530,988 $ 745,660
=========== ===========
Intangibles:
Intangibles ...................................................... $ 91,220 $ 91,220
Accumulated amortization ......................................... (25,276) (38,918)
----------- -----------
$ 65,944 $ 52,302
=========== ===========
Accrued liabilities:
Warranty ......................................................... $ 110,139 $ 142,729
Other ............................................................ 305,126 466,403
----------- -----------
$ 415,265 $ 609,132
=========== ===========
Other current liabilities:
Deferred revenue ................................................. $ 61,070 $ 108,603
Other ............................................................ 55,980 34,209
----------- -----------
$ 117,050 $ 142,812
=========== ===========
</TABLE>
36
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ............... $ 716 $ 930 $ 1,533
Cash paid during the year for income taxes ........... $163,710 $200,839 $218,944
Supplemental schedule of noncash investing and
Financing activities:
Capital lease obligations incurred for the
purchase of new equipment ......................... $ 4,593 $ 6,741 $ 7,403
Common stock issued in exchange for
common stock of investee .......................... $100,000
Acquisitions
Fair value of assets acquired ............... $271,189
Less: Liabilities assumed .................. 70,773
Cash acquired ..................... 58,096
--------
Acquisitions, net of cash
acquired ...................... $142,320
</TABLE>
11. SEGMENT DATA:
The Company's segments are based on the geography and, in the United
States (U.S.), by customer class. Geographic segments include the U.S., Europe
Middle East Africa (EMEA) and Asia Pacific (APAC). Customer class segments in
the U.S. are Consumer and Business. The Company evaluates the performance of its
Consumer and Business segments based on sales and operating income, and does not
include segment assets or other income and expense items for management
reporting purposes. Segment operating income includes selling, general and
administrative expenses and other overhead charges directly attributable to the
segment and excludes certain expenses managed outside the reporting segment.
Costs excluded from the segments primarily consist of general and administrative
expenses that are managed on a corporate-wide basis. Certain non-segment
operating expenses for prior years have been reclassified to segment specific
operating expenses to conform with current year presentation. Segment
information prior to 1998 has not been restated to reflect the customer class
segments in the U.S. as it is impractical to do so.
37
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth summary information by segment:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------ ---------------------- --------------------
(in thousands)
<S> <C> <C> <C>
United States
Net sales:
Consumer $ 3,339,712 $ 4,158,379
Business 3,072,692 3,225,008
------------------------ ---------------------- --------------------
$ 5,303,828 $ 6,412,404 $ 7,383,387
------------------------ ---------------------- --------------------
Operating income:
Consumer $ 296,390 $ 473,124
Business 560,752 474,599
------------------------ ---------------------- --------------------
$ 597,091 $ 857,142 $ 947,723
------------------------ ---------------------- --------------------
Other income, net 25,041 43,600 57,189
Income tax expense 104,552 205,129 224,949
Depreciation and amortization 67,787 83,386 116,142
Segment assets 1,701,654 2,473,627 3,449,240
Long-lived assets 380,757 522,972 1,124,467
EMEA
Net sales $ 634,616 $ 570,191 $ 543,182
Operating income (loss) (11,566) (6,005) (8,807)
Other income, net 2,946 1,380 3,584
Income tax expense (benefit) 568 (3,048) (734)
Depreciation and amortization 6,695 9,820 9,235
Segment assets 187,215 209,820 241,489
Long-lived assets 59,261 57,548 61,676
APAC
Net sales $ 355,236 $ 485,330 $ 715,842
Operating income (loss) (9,733) 1,153 33,049
Other income, net (798) 2,041 7,036
Income tax expense (benefit) (11,297) (7,232) 11,320
Depreciation and amortization 12,292 12,318 8,728
Segment assets 150,402 206,933 263,959
Long-lived assets 34,278 30,184 38,739
</TABLE>
38
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the segments net sales and operating income is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Net sales:
Segment sales ........................... $6,293,680 $7,467,925 $8,642,411
Non-segment sales ....................... -- -- 3,150
---------- ---------- ----------
Total sales ............................ $6,293,680 $7,467,925 $8,645,561
========== ========== ==========
Operating income:
Segment operating income ................ $ 575,792 $ 852,290 $ 971,965
Non-segment operating expenses .......... 399,361 358,063 376,295
---------- ---------- ----------
Total operating income ................. $ 176,431 $ 494,227 $ 595,670
========== ========== ==========
</TABLE>
39
<PAGE>
GATEWAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following tables contain selected unaudited consolidated quarterly
financial data for the Company:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
1999:
Net sales ......................................... 2,103,411 1,912,109 2,178,496 2,451,545
Gross profit ...................................... 450,504 421,386 480,049 547,878
Operating income .................................. 140,807 122,923 158,779 173,161
Net income ........................................ 99,579 89,225 113,151 125,989
Net income per share:
Basic .................................... $ .32 $ .28 $ .36 $ .40
Diluted .................................. $ .31 $ .28 $ .35 $ .38
Weighted average shares outstanding:
Basic .................................... 312,994 312,886 313,719 316,260
Diluted .................................. 321,194 320,314 323,912 330,617
Stock sales price per share:
High ..................................... $ 41.25 $ 38.34 $ 53.88 $ 82.50
Low ...................................... $ 26.81 $ 28.53 $ 30.03 $ 46.88
1998:
Net sales ......................................... $1,727,927 $1,618,909 $1,815,516 $2,305,573
Gross profit ...................................... 336,494 333,688 377,807 498,285
Operating income .................................. 109,201 83,989 113,355 187,682
Net income ........................................ 75,871 60,740 80,645 129,143
Net income per share:
Basic .................................... $ .25 $ .19 $ .26 $ .41
Diluted .................................. $ .24 $ .19 $ .25 $ .41
Weighted average shares outstanding:
Basic .................................... 309,096 310,854 311,698 312,648
Diluted .................................. 315,150 317,774 319,036 319,134
Stock sales price per share:
High ..................................... $ 24.13 $ 29.41 $ 33.56 $ 30.81
Low ...................................... $ 16.25 $ 21.28 $ 23.22 $ 20.75
</TABLE>
40
<PAGE>
Gateway, Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Balance
Beginning Charged Deductions at
of to from End of
Period Expense Allowance Period
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for uncollectible accounts
(deducted from accounts receivable)....... $18,968 $ 5,688 $ 4,592 $20,064
======= ======= ======= =======
Year ended December 31, 1998:
Allowance for uncollectible accounts
(deducted from accounts receivable)....... $20,064 $ 3,586 $ 8,702 $14,948
======= ======= ======= =======
Year ended December 31, 1999:
Allowance for uncollectible accounts
(deducted from accounts receivable)....... $14,948 $28,334 $26,810 $16,472
======= ======= ======= =======
</TABLE>
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Part III of this report is incorporated by reference to Gateway's definitive
Proxy Statement relating to its Annual Meeting of Stockholders, which will be
filed with the Commission within 120 days of the end of fiscal year 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Financial Statements and Financial Statement Schedule. See Index
to Consolidated Financial Statements and Financial Statement
Schedule at Item 8 on page 20 of this Report.
(2) Exhibits. Exhibits identified in parentheses below as on file
with the Securities and Exchange Commission are incorporated
herein by reference as exhibits hereto.
42
<PAGE>
DESCRIPTION OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Gateway, Inc. (Exhibit No. 3.2 to Amendment
No. 1 to Registration Statement No. 3-70618)
3.2 Amended and Restated Bylaws of Gateway, Inc. (Exhibit No. 3.2 to Form 10-K for 1995)
3.3 Rights Agreement, dated as of January 19, 2000, between Gateway, Inc. and UMB Bank, N.A., as
Rights Agent, including all exhibits thereto. (Exhibit 1.0 to Form 8-A dated February 4, 2000)
10.1 Tax Indemnification Agreement dated as of December 6, 1993 between Gateway, Inc., and Theodore W.
Waitt and the Norman W. Waitt, Jr. S Corp. Trust. (Exhibit No. 10.1 Form 10-K for 1993)*
10.2 Indemnification Agreement dated as of December 6, 1993 between Gateway, Inc. and Theodore W.
Waitt. (Exhibit No. 10.2 to 10-K for 1995)*
10.3 Registration Agreement dated February 22, 1991 between Gateway, Inc., Theodore W. Waitt and
Norman W. Waitt, Jr. as the sole trustee and sole beneficiary of the Norman W. Waitt, Jr. S Corp.
Trust, together with Amendment No. 1 to the Registration Agreement dated as of October 19, 1993
(Exhibit 10.11 to Form S-1)*
10.4 Gateway, Inc. 1992 Stock Option Plan. (Exhibit No. 10.4 to Registration Statement No. 33-70618
(the "Form S-1")*
10.5 Gateway, Inc. 1993 Stock Option Plan for Executives and Key Employees. (Exhibit No. 10.6 to the
Form S-1)*
10.6 Gateway, Inc. 1993 Non-Employee Director Stock Option Plan and Form of Option Grant Letter
(Exhibit No. 10.8 to the Form S-1)*
10.7 Gateway, Inc. 1993 Employee Stock Purchase Equity Plan. (Exhibit No. 10.9 to the Form S-1)*
10.8 Gateway, Inc. 1996 Long-Term Incentive Equity Plan, as amended and restated (Exhibit No. 10.19 to
Form 10-Q for the period ended June 30, 1998)*
10.9 Gateway, Inc. 1996 Non-Employee Directors Stock Option Plan as amended. (Exhibit No. 10.20 to
Form 10-Q for the period ended June 30, 1998)*
10.10 Gateway, Inc. Management Incentive Plan (Exhibit 10.9 to the Form 10-K for 1996)*
10.11 Gateway, Inc. Deferred Compensation Plan, as amended. (Exhibit 10.11 to the Form 10-K for 1998)*
10.12 Gateway, Inc. Retirement Savings Plan. (Exhibit No. 10.16 to Form 10-K for 1995)*
10.13 Consultation and Noncompetition Agreement dated as of August 28, 1997 between the Company and
Richard D. Snyder. (Exhibit 10.14 to Form 10-Q for period ended September 30, 1997)*
10.14 Employment Agreement between Gateway, Inc. and Jeffrey Weitzen dated January 22, 1998 (Exhibit
10.16 to Form 10-K for 1997). *
10.15 Employment Agreement between Gateway, Inc. and David J. Robino dated January 22, 1998, (Exhibit
10.17 to Form 10-K for 1997)*
10.16 Gateway, Inc. 1995 Employee Stock Purchase Plan, as amended. (Exhibit 10.19 to Form 10-Q for
period ended June 30, 1999)*
10.17 Employment Agreement between Gateway, Inc. and Jeffrey Weitzen dated December 8, 1999 (filed
herewith)*
21.1 List of subsidiaries, filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP, filed herewith.
24.1 Powers of attorney, filed herewith.
27.1 Financial Data Schedule and Financial Data Schedules
restated pursuant to SFAS 128, filed herewith (EDGAR
version only).
</TABLE>
*Indicates a management contract or compensatory plan.
Gateway will furnish upon request any exhibit described above upon
payment of Gateway's reasonable expenses for furnishing such exhibit.
(b) Reports on Form 8-K.
43
<PAGE>
No reports on Form 8-K were filed by Gateway
during the quarter ended December 31, 1999.
This report contains the following trademarks and service marks of Gateway, many
of which are registered: Gateway, Your:) Ware, "BLACK AND WHITE SPOT" Design,
Family PC, Gateway, Gateway Country, Gateway.net, Solo, Vivitron and "You've Got
a Friend in the Business". The following trademarks of other companies also
appear in this Report: Intel, AMD, Microsoft and Pentium. These and any other
product or brand names contained herein are trademarks or registered trademarks
of their respective owners.
44
<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
--------------------
Agreement by and between Gateway, Inc., a Delaware corporation (the "Company")
and Jeffrey Weitzen (the "Executive"), made as of the 8th day of December, 1999.
1. Employment Period. The Company hereby agrees to employ the Executive,
-----------------
and the Executive hereby accepts such employment, pursuant to the terms and
conditions set forth in this Agreement, for a period commencing January 1, 2000
(the "Commencement Date") and ending December 31, 2003, unless terminated
earlier as provided herein (the "Initial Employment Period"), provided that the
Initial Employment Term shall be automatically extended for successive one (1)
year periods ("Additional Periods") unless terminated earlier as provided herein
or a party gives written notice to the other party of non-extension at least
ninety (90) days prior to the end of the Initial Employment Period or the then
Additional Period. A notice of non-extension by the Company shall be deemed a
Termination without Cause as of the end of the then Initial Employment Period or
Additional Period or such earlier date after notice as the Executive shall
elect. The period of Executive's actual employment hereunder after the
Commencement Date shall be referred to herein as the "Employment Period."
2. Position and Duties.
-------------------
(a) During the Employment Period, the Executive shall be employed as
President and Chief Executive Officer of the Company and shall report directly
to the Board of Directors of the Company (the "Board"). Executive shall have
the duties and authority commensurate with his positions in public companies of
similar size.
(b) The Executive shall devote substantially his full business time,
attention and efforts to his duties and responsibilities hereunder. It shall
not be a violation of this Section for the Executive to (i) manage his personal
investments, (ii) be involved in charitable, civic and professional activities,
(iii) serve on for profit corporate boards or committees approved by the Board
or the Chairman of the Board or (iv) deliver lectures or fulfill speaking
engagements, provided that the activities referred to in subparts (i) through
(iv) do not interfere substantially with the performance of the Executive's
responsibilities as an employee of the Company or violate the Company's written
rules and policies. In the event the Board notifies Executive in
1
<PAGE>
writing that any such activity presents a conflict, or an appearance of a
conflict, of interest with the Company, or violates the Company's written rules
and policies, the Executive shall cease the activity as soon as reasonably
practicable. A copy of the Non-Competition Agreement signed by Executive as a
condition of employment is attached hereto as Exhibit "A" and made a part
hereof, provided that such agreement shall be deemed to have been modified to
provide that California rather than South Dakota law shall apply.
3. Salary, Bonus and Benefits.
--------------------------
(a) Base Salary. During the Employment Period, the Executive shall
-----------
receive an annual base salary of at least $1,000,000 (as increased from time to
time, "Annual Base Salary"), payable pursuant to the Company's normal payroll
practices. The Board may increase but not decrease Annual Base Salary from time
to time.
(b) Annual Bonus. During the Employment Period, the Executive's
------------
annual target bonus shall be at least equal to 100% of the Executive's Annual
Base Salary (the "Target Bonus") and shall be increased or reduced in accordance
with the pay-out formula if established target performance goals are exceeded or
not met. The target performance goals shall be established by the Compensation
Committee of the Board (the Compensation Committee) at the beginning of each
calendar year if pursuant to a plan subject to Section 162(m) of the Internal
Revenue Code or otherwise, by the Company.
(c) Benefits. The Executive shall be treated in the same manner as,
--------
and shall be entitled to such benefits and other perquisites as provided to,
other senior executive officers of the Company who are required to be listed in
the Company's annual proxy statement ("Reporting Officers"), as adjusted to
reflect his positions. In this regard, the Executive shall be entitled to
benefits under the Company's vacation, benefit and welfare plans which are
generally applicable to other Reporting Officers including, without limitation,
the Company's relocation plan, 1996 Long-Term Incentive Equity Plan, Retirement
Savings Plan, Short-Term and Long-Term Disability Plans.
4. Stock Options.
-------------
(a) Initial Option Grant. At the time Executive commenced employment
--------------------
with the Company, Executive was given an initial option grant ("Initial
Options") to purchase 1,000,000 shares (which was thereafter adjusted for the
stock split that occurred on September 7,
2
<PAGE>
1999) of Gateway common stock. The parties agree that the terms and conditions
of the grant of Initial Options (set forth in Executive's employment contract
dated January 19, 1998 and the grant) are incorporated herein by reference and
made a part hereof.
(b) New Option Grant. The Executive is being granted by the
----------------
Compensation Committee, effective December 8, 1999, a ten year option to
purchase 2,000,000 shares of Gateway common stock (the "New Options"). The New
Options grant will have a grant price equal to the closing price on the New York
Stock Exchange of the Company's common stock on December 8, 1999 and is being
granted pursuant to, and be subject to, the terms of the Company's 1996 Long-
Term Incentive Equity Plan (the "Plan"). The New Options shall vest in four
equal installments on each of the first four anniversaries of the grant date,
provided that full vesting of the New Options shall occur upon any of the
following events (as each is defined in this Agreement): (i) Termination
without Cause (Section 5(a)), (ii) Termination for Good Reason (Section 5(b)),
(iii) Change in Control (Section 5(c)), (iv) death while employed (Section
5(d)), or (v) termination as a result of Disability (Section 5(d)). The
Executive shall have until the close of trading on the New York Stock Exchange
one (1) year from the date of (i) Termination without Cause, (ii) Termination
for Good Reason, (iii) termination for any reason on or after a Change in
Control, or (iv) death or termination on account of Disability to exercise all
vested New Options. In all other cases of termination, the Executive shall have
ninety (90) days following termination to exercise all vested New Options. In
the case of any termination, the above periods will be extended for a time
period equal to the length of any Company imposed blackout period because of
securities law restrictions (including without limitation Rule 10b-5) or
accounting limitations. All New Options held by the Executive which are
unvested on the date of termination of employment will terminate and expire as
of the date of termination of employment.
(c) Recurring Options. Commencing in calendar year 2000 and
-----------------
thereafter in each calendar year during the Employment Period, the Company will
recommend to the Compensation Committee that the Executive receive, twice
annually in accordance with the terms of the Plan (or any replacement plan
therefor), an option grant (calculated using the Black Scholes formula of option
pricing) that would be equivalent to a Black Scholes value of $4,876,000. For
example, using the Black Scholes formula, if the stock price of Gateway
3
<PAGE>
common stock was $50/share at the time of the grant, the Executive would receive
160,026 shares of Gateway common stock ($4,876,000 divided by $30.47 [being the
Black Scholes value at $50/share], which equals 160,026 shares of stock). All
stock option grants under Sections 4(c) of this Agreement will be granted under,
and be subject to, the Plan (or its replacement). All recurring options granted
prior to those commencing in calendar year 2000 were, and shall continue to be,
subject to the terms of the grant and the Plan.
5. Termination of Employment.
-------------------------
(a) Termination without Cause and Termination with Cause. The Company
----------------------------------------------------
may terminate the Executive's employment during the Employment Period without
Cause or with Cause. For purposes of this Agreement, Termination without Cause
shall mean any termination by the Company during the Employment Period other
than for Cause or as a result of death or Disability. Termination for Cause
shall mean termination, within one hundred twenty (120) days of the Chairman of
the Board becoming aware of the event, resulting from the Executive's (i)
conviction (including a plea of guilty or nolo contendere) of any felony of any
kind (other than Limited Vicarious Liability or a routine traffic infraction) or
any other crime (whether it is a felony or not) involving securities fraud or
theft of substantial assets of the Company, (ii) material breach of the Non-
Competition Agreement signed by Executive as a condition of employment (attached
hereto as Exhibit "A") which breach is not cured within twenty (20) days of
written notice thereof; (iii) willful misconduct with regard to the Company, or
gross neglect or dereliction of duty resulting in either case in material
economic harm to the Company; (iv) failure to attempt to follow in good faith
the reasonable lawful direction of the Board despite written instruction to do
so. Limited Vicarious Liability, as used above, shall mean any liability which
is (x) based on acts of the Company for which the Executive is charged solely as
a result of his offices with the Company and (y) in which he was not directly
involved or had prior knowledge of such actions or intended actions with, in
either case, knowledge or reasonable belief that a law was being violated by
such acts.
Notwithstanding the foregoing, the Executive shall not be deemed to
have been terminated for Cause unless he has (i) had ten (10) days written
notice setting forth the reasons for the Company's intention to terminate for
Cause, (ii) had an opportunity to be heard before the Board, and (iii) received
a Notice of Termination from the Board stating that in the opinion of a
4
<PAGE>
majority of the full Board that the Executive is guilty of the conduct set forth
above and specifying the particulars thereof.
(b) Good Reason. The Executive may terminate employment for Good
-----------
Reason. Good Reason means: (i) diminution in the Executive's titles, (ii) the
assignment of duties to the Executive that are materially and adversely
inconsistent with the Executive's positions, (iii) any material diminution in
Executive's authority, responsibility or reporting lines, including but not
limited to maintaining Executive's then positions in the Company but the Company
becoming more than fifty percent (50%) owned by another entity and Executive not
having the same titles, responsibilities and duties in the parent entity, (iv)
removal from, or failure to reelect Executive to, the Board, (v) any material
breach by the Company of this Agreement or (vi) the failure of the Compensation
Committee of the Board to make the grants to be recommended pursuant to Section
4(c). If the Executive determines that Good Reason exists, the Executive must
notify the Company in writing, within 180 days following the Executive's
knowledge of the first event which the Executive determines constitutes Good
Reason, or such event shall not constitute Good Reason under this Agreement. If
the Company remedies such event within thirty (30) days following receipt of
notice, the Executive may not terminate employment for Good Reason as a result
of such event.
(c) Change in Control. Either the Company or the Executive may
-----------------
terminate the Executive's employment for any reason within six (6) months
following the effective date of a Change in Control. For purposes of this
Agreement, Change in Control shall have the same meaning as it does in the Plan.
(d) Death or Disability. The Executive's employment shall terminate
-------------------
automatically upon the Executive's death during the Employment Period. The
Executive's employment under this Agreement shall terminate for "Disability"
where the Executive has been unable to render the material services required by
his position as President and Chief Executive Officer as a result of physical or
mental incapacity for a period of 180 consecutive days and the Company has
notified the Executive of such termination while he is so disabled. The parties
agree that exceeding such a period would constitute an undue hardship for the
Company under Federal and state law including, without limitation, the Americans
with Disabilities Act and the California Fair Employment and Housing Act.
5
<PAGE>
(e) Termination without Good Reason. The Executive may terminate his
-------------------------------
employment with the Company without Good Reason at any time. Notice of non-
extension by the Executive shall be deemed a Termination without Good Reason at
the end of the Employment Period.
(f) Notice of Termination. Any termination of the Executive's
---------------------
employment by the Company or by the Executive shall be communicated by Notice of
Termination to the other party in accordance with Sections 5 and 9(b) of this
Agreement. For purposes of this Agreement, a Notice of Termination means a
written notice which (i) indicates the specific termination provision in this
Agreement being relied upon, (ii) to the extent practicable, sets forth in
reasonable detail the facts and circumstances claimed to provide the basis for
termination, and (iii) if the date of termination is other than the date of
receipt of such notice, specifies the termination date.
6. Payment Obligations of the Company upon Termination.
---------------------------------------------------
(a) Termination without Cause; Termination for Good Reason; Change in
---------------------------------------------------------------------------
Control. Upon (i) Termination without Cause (including notice of non-extension
- -------
by the Company), (ii) Termination for Good Reason, or (iii) Termination for any
reason (other than Cause) within six (6) months after the effective date of a
Change in Control, the Company shall pay the Executive an amount equal to three
(3) times the sum of (i) Executive's Annual Base Salary plus (ii) the lesser of
(x) the highest annual incentive bonus received by the Executive during either
of the last two completed fiscal years and (y) an amount equal to the
Executive's Annual Base Salary. The amount will be paid in a single lump sum
payment within twenty (20) days after the date of termination. The parties agree
that this payment will be the Executive's sole and exclusive remedy for
termination under this Section 6(a) of the Agreement. The parties further agree
that if Executive gives Notice of Termination as a result of a Change in
Control, the Executive will (at the option of the Company) either (i) continue
in his then position as an employee of the Company (at Executive's then existing
Annual Base Salary) for a period of three (3) months following the effective
date of the Change in Control (unless terminated earlier by the Company for
Cause or by the Executive for Good Reason) or (ii) provide senior level
consulting services to the Company as an employee for a period of three (3)
months following the effective date of the Change in Control, in either case on
the same compensation terms as then existing,
6
<PAGE>
prorated for the 3 month period. Any Company stock options or other equity, if
any, held by the Executive as of the date of termination will be handled in
accordance with Section 4 of this Agreement and the applicable plan and grants.
In addition, the Executive will be entitled to Accrued Amounts, as defined in
Section 6(d) below.
(b) Termination for Cause or without Good Reason. If the Executive's
--------------------------------------------
employment is terminated by the Company for Cause or by the Executive without
Good Reason during the Employment Period, the Company will pay to the Executive
the Executive's Annual Base Salary through the date of termination, to the
extent not yet paid, and the Company shall have no further obligations under
this Agreement. In addition, all outstanding Company stock options and other
equity awards, if any, will be handled in accordance with Section 4 of this
Agreement and the applicable plan and grants. In addition, the Executive will
also be entitled to other Accrued Amounts.
(c) Death or Disability. If the Executive's employment is terminated
-------------------
by reason of the Executive's death or Disability not covered by Section 6(a)
during the Employment Period, the Company will pay the Executive (or the
Executive's heirs or representatives, if applicable) the Executive's Annual Base
Salary through the date of termination, to the extent not yet paid and other
Accrued Amounts. In addition, any Company stock options or other equity, if
any, held by the Executive as of the date of termination will be handled in
accordance with Section 4 of this Agreement and the applicable plans and grants.
(d) Accrued Amounts shall mean (i) Annual Base Salary, benefits,
fringes and expense reimbursements due for the period prior to any termination,
(ii) any bonuses earned but unpaid for any prior fiscal year and, unless a
termination covered by Section 6(b) above, a pro rata bonus (based on period of
service in the current fiscal year and on actual achievement against targets
during the fiscal year) and (iii) any other amounts due under the terms of any
plan or program.
7. Excise Tax.
----------
(a) In the event that any payment made, directly or indirectly, by
the Company to or for the benefit of the Executive (which payment is contingent
on a change in the ownership or effective control of the Company or in the
ownership of a substantial portion of the assets of the Company, as those terms
are defined under Internal Revenue Code ("Code") Section
7
<PAGE>
280G) (a "Change in Ownership") (a "Payment") is subject to excise tax imposed
by Section 4999 of the Code on "Excess Parachute Payments" as defined in Section
280G of the Code ("Excise Tax"), then the Executive shall be entitled to receive
an amount equal to such Excise Tax (the "Gross-Up Payment") but will not be
reimbursed for any excise tax or additional taxes payable with respect to such
Gross-Up Payment.
(b) Subject to the provisions of 7(c), and any determination by the
Internal Revenue Service, all determinations required to be made under this
Section 7, including whether and when a Gross-Up Payment is required and the
amount of such Gross-Up Payment, shall be made by the Company's auditors
immediately prior to the Change in Ownership in consultation with the Executive
and his advisors. Any Gross-Up Payment, as determined pursuant to this Section
7, shall be paid by the Company to the Executive within ten (10) days of the
auditor's determination. Notwithstanding the foregoing, in the event that the
Gross-Up Payment, net of all applicable income, excise and payroll taxes, is
less than the amount that Executive would receive, net of all applicable income,
excise and payroll taxes, if Executive's total compensation were reduced to the
level that is the maximum amount Executive could receive without there being any
"Excess Parachute Payment" under Section 280G of the Code (the "No Parachute
Maximum"), Executive's compensation shall be reduced to the No Parachute Maximum
by reducing the lump sum payment due hereunder.
(c) If the Executive receives notice from the Internal Revenue
Service of any claim related to Excess Parachute Payments, the Executive shall
promptly notify the Company. If the Company notifies the Executive in writing
that it desires to contest any claim of Excess Parachute Payment, the Executive
shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim;
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request from time to time,
including, without limitation, accepting legal
representation with respect to such claim by an attorney
selected by the Company and reasonably acceptable to
Executive;
8
<PAGE>
(iii) cooperate with the Company in good faith in order
effectively to contest such claim; and
(iv) permit the Company to participate in any proceeding
relating to such claim.
The Company shall bear and pay directly all costs and expenses (including
additional interest and penalties) incurred in connection with such contest and
shall indemnify and hold the Executive harmless, on an after-tax basis, for any
Excise Tax or income tax (including interest and penalties with respect thereto)
imposed as a result of such contest. Without limitation on the foregoing
provisions of this Section 7(c), the Company shall control all proceedings taken
in connection with such contest (except to the extent there are issues unrelated
to Code Section 4999 being simultaneously contested) and, at its sole option,
may pursue or forgo any and all administrative appeals, proceedings, hearings
and conferences with the taxing authority in respect of such claim and may, at
its sole option, either direct the Executive to pay the tax claimed and sue for
a refund or contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Executive, on an interest-free basis
and shall indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance.
(d) If, after receipt by the Executive of an amount advanced by the
Company pursuant to Section 7(c), the Executive becomes entitled to receive a
refund with respect to such claim, the Executive shall promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto).
8. Successors.
----------
(a) This Agreement is personal to the Executive and shall not be
assignable by the Executive except by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable
by the Executive's heirs or legal representatives. Notwithstanding the
foregoing, any amounts that become payable hereunder pursuant to
9
<PAGE>
Section 6, shall be payable to Executive's estate if not paid prior to the
Executive's death.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns, provided that the Company may not
assign this Agreement except in connection with the assignment or disposition of
all or substantially all of the assets or stock of the Company or by law as a
result of a merger or consolidation and only if such assignee promptly delivers
to Executive a written assumption of this Agreement in form and substance
reasonably acceptable to Executive.
9. Miscellaneous.
-------------
(a) This Agreement shall be governed, by, and construed in accordance
with, the laws of the State of California, without reference to its conflict of
law rules. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect. This Agreement may not be amended or
modified except by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(b) All notices and other communications under this Agreement shall
be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive
-------------------
Jeffrey Weitzen
Chief Executive Officer
4545 Towne Centre Court
San Diego, CA 92121
If to the Company
------------------
Gateway Inc.
4545 Towne Centre Court
San Diego, CA 92121
Attn: General Counsel
or to such other address as either party furnishes to the other in writing in
accordance with this Section 10(b). Notices and communications shall be
effective when actually received by the addressee.
10
<PAGE>
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable and
continue in full force and effect to the fullest extent consistent with law.
(d) Notwithstanding any other provision of this Agreement, the
Company may withhold from amounts payable under this Agreement all federal,
state, local and foreign taxes that are required to be withheld by applicable
laws or regulations.
(e) The Executive's or the company's failure to insist upon strict
compliance with any provision of, or to assert any right under, this Agreement
shall not be deemed to be a waiver of such provision or right or of any other
provision of or right under this Agreement.
(f) Except as provided herein, the Executive and the Company
acknowledge that this Agreement constitutes the entire agreement between the
parties and supersedes any prior agreement between the Executive and the Company
concerning the subject matter hereof, including without limitation, as of the
Commencement Date the Executive's current employment agreement dated January 19,
1998 ("Prior Agreement"). The Executive agrees that, except as provided herein,
the Prior Agreement shall terminate as of the Commencement Date, and the
Executive explicitly waives any rights to payments or benefits under the Prior
Agreement, other than any accrued base salary or benefits owed and unpaid prior
to the Commencement Date. The Executive shall not be entitled to participate in
any severance plans or severance programs of the Company during the Employment
Period.
(g) The Company shall indemnify Executive with respect to claims
(both during and after employment) relating to Executive's service as an
employee, officer and director of the Company and its affiliation and as a
fiduciary of any benefit plan of any of the foregoing to the full extent
permitted by applicable law and the Company shall cover the Executive under the
Company's Directors and Officers indemnification insurance policy (as in effect
from time to time) both during and after employment with regard to actions or
inactions in such capacities.
(h) The Company will reimburse Executive for all legal fees and
expenses incurred in reviewing this Agreement. In addition, the prevailing
party in any litigation with regard to this Agreement or the grants hereunder,
as determined by the Court, shall be awarded
11
<PAGE>
by the Court his or its reasonable legal fees and disbursements, provided that
such fees and disbursements shall not exceed one tenth of one percent of the
paying party's net worth at the time of the judgment.
(i) This Agreement may be executed in several counterparts, each of
which shall be deemed an original, and said counterparts shall constitute but
one and the same instrument.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and,
pursuant to the authorization of its Board of Directors, the Company has caused
this Agreement to be executed in its name on its behalf, all as of the day and
year first above written.
COMPANY
By: _________________________________
Title:_________________________________
__________________________________
Jeffrey Weitzen
12
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF GATEWAY, INC.
NAME JURISDICTION
---- ------------
Gateway Companies, Inc. Delaware
Advanced Logic Research, Inc. Delaware
Cowabunga Enterprises, Inc. Delaware
Gateway Japan, Inc. Japan
Gateway Asia, Inc. Delaware
Gateway Wonders, Inc. Delaware
Over the Moon Productions, Inc. Texas
Gateway Accessory Stores, Inc. Delaware
Spotware Technologies, Inc. Delaware
Wonderworks, Inc. Delaware
Gateway International Holdings, Inc. Delaware
Gateway 2000 International Ltd. Ireland
Gateway Ireland - Cyprus Branch Ireland
Gateway 2000 Computers, Ltd. United Kingdom
Advanced Logic Research Deutschland GmbH Germany
Gateway Nederland B.V. The Netherlands
Gateway France SARL France
Gateway Technologies Espana S.L. Spain
Gateway New Zealand Ltd. New Zealand
Gateway Hong Kong Ltd. Hong Kong
Gateway Singapore Pte Ltd. Singapore
Gateway 2000 Asia Pte Ltd. Delaware
Gateway Malaysia Sdn Bhd Malaysia
Gateway Wholesale Pty. Australia
Gateway 2000 Ireland, Ltd. Ireland
Gateway 2000 Europe Ireland
Gateway Direct L.P. Delaware
Gateway Securities Management, Inc. Delaware
Advanced Logic Research International, Ltd. Virgin Islands
Amiga International, Inc. Delaware
Gateway Consumer Sales, Inc. Delaware
Gateway Pty Ltd. Australia
Gateway Canada Corp. Canada
YourBank.com Utah
Gateway.com L.P. Delaware
GW Securities LLC Delaware
Amiga, Inc. Delaware
Amiga Development, LLC Delaware
Gateway Cyprus, Ltd. Ireland
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Gateway, Inc. on Forms S-8 (File Nos. 33-08837, 33-84116, 33-84118, 33-84120,
33-84122, 33-84124, 333-33231, 333-36071) and Form S-1 (File No. 33-70618) of
our report dated January 20, 2000, on our audits of the consolidated financial
statements and financial statement schedule of Gateway, Inc. as of December 31,
1998 and 1999, and for each of the three years in the period ended December
31,1999, which report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
San Diego, California
March 30, 2000
<PAGE>
EXHIBIT 24.1
Gateway, Inc.
From 10-K; Power of Attorney
Each of the undersigned constitutes and appoints William M. Elliott,
John J. Todd and Stephanie G. Heim, or either of them, as the undersigned's true
and lawful attorney-in-fact and agent, with full power of substitution, in the
undersigned's name, place and stead, in any and all capacities, to sign an
Annual Report on Form 10-K of Gateway, Inc. (the "Company") for the Company's
fiscal year ended December 31, 1999, and any amendment thereto, and to file the
same, with all exhibits thereto and other documents in connection therewith
(collectively, the "Form 10-K"), with the Securities and Exchange Commission,
the New York Stock Exchange and such other state and federal government
commissions and agencies as required under the Securities Act of 1934, as
amended, the regulations thereunder and other applicable law.
Dated: January 19, 2000
TITLE
/s/ Theodore W. Waitt Chairman of the Board and Director
- -----------------------------------
Theodore W. Waitt
/s/ Jeffrey Weitzen President, Chief Executive Officer
- ----------------------------------- and Director
Jeffrey Weitzen
/s/ Charles G. Carey Director
- -----------------------------------
Charles G. Carey
/s/ George H. Krauss Director
- -----------------------------------
George H. Krauss
/s/ Douglas L. Lacey Director
- -----------------------------------
Douglas L. Lacey
/s/ James F. McCann Director
- -----------------------------------
James F. McCann
/s/ Richard D. Snyder Director
- -----------------------------------
Richard D. Snyder
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GATEWAY
INC.'S CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1999 AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,127,654
<SECURITIES> 208,717
<RECEIVABLES> 662,812
<ALLOWANCES> 16,472
<INVENTORY> 191,870
<CURRENT-ASSETS> 2,696,805
<PP&E> 745,660
<DEPRECIATION> 346,344
<TOTAL-ASSETS> 3,954,688
<CURRENT-LIABILITIES> 1,809,710
<BONDS> 2,998
0
0
<COMMON> 3,200
<OTHER-SE> 2,013,918
<TOTAL-LIABILITY-AND-EQUITY> 3,954,688
<SALES> 8,645,561
<TOTAL-REVENUES> 8,645,561
<CGS> 6,745,744
<TOTAL-COSTS> 6,745,744
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 28,334
<INTEREST-EXPENSE> 756
<INCOME-PRETAX> 663,479
<INCOME-TAX> 235,535
<INCOME-CONTINUING> 427,944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 427,944
<EPS-BASIC> 1.36
<EPS-DILUTED> 1.32
</TABLE>
