<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------- ---------------
COMMISSION FILE NUMBER 0-22784
GATEWAY, INC.
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 42-1249184
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4545 TOWNE CENTRE COURT
SAN DIEGO, CALIFORNIA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 799-3401
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
As of August 9, 2000, there were 322,257,139 shares of the Common Stock
of the Company, $.01 par value per share, outstanding. As of August 9, 2000,
there were no shares of the Company's Class A Common Stock, $.01 par value per
share, outstanding.
<PAGE>
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATEWAY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -----------------------------------------
1999 2000 1999 2000
------------------- --------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Net sales $ 1,912,109 $ 2,141,875 $ 4,015,520 $ 4,479,759
Cost of goods sold 1,490,723 1,643,546 3,143,630 3,453,293
------------------- --------------------- --------------------- -------------------
Gross profit 421,386 498,329 871,890 1,026,466
Selling, general and administrative expenses 298,463 329,688 608,159 664,625
------------------- --------------------- --------------------- -------------------
Operating income 122,923 168,641 263,731 361,841
Other income, net 16,491 19,945 31,275 37,649
------------------- --------------------- --------------------- -------------------
Income before income taxes 139,414 188,586 295,006 399,490
Provision for income taxes 50,189 66,948 106,202 141,819
------------------- --------------------- --------------------- -------------------
Net income $ 89,225 $ 121,638 $ 188,804 $ 257,671
=================== ===================== ===================== ===================
Share and per share information:
Net income per share:
Basic $ 0.28 $ 0.38 $ 0.60 $ 0.80
=================== ===================== ===================== ===================
Diluted $ 0.28 $ 0.37 $ 0.59 $ 0.78
=================== ===================== ===================== ===================
Weighted average shares outstanding:
Basic 312,886 321,265 312,940 320,639
=================== ===================== ===================== ===================
Diluted 320,314 331,727 320,754 332,076
=================== ===================== ===================== ===================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
<PAGE>
GATEWAY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 2000
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
--------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,127,654 $ 732,261
Marketable securities 208,717 206,688
Accounts receivable, net 646,339 658,677
Inventory 191,870 210,351
Other 522,225 471,835
--------------- ----------------
Total current assets 2,696,805 2,279,812
Property, plant and equipment, net 745,660 821,181
Intangibles, net 52,302 177,111
Other assets 459,921 798,939
--------------- ----------------
$ 3,954,688 $ 4,077,043
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term obligations $ 5,490 $ 4,244
Accounts payable 898,436 739,772
Accrued liabilities 609,132 450,105
Accrued royalties payable 153,840 167,338
Other current liabilities 142,812 220,996
--------------- ----------------
Total current liabilities 1,809,710 1,582,455
Long-term obligations, net of current maturities 2,998 1,286
Warranty and other liabilities 124,862 150,751
--------------- ----------------
Total liabilities 1,937,570 1,734,492
--------------- ----------------
Commitments and Contingencies (Note 5)
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000 shares authorized; none
issued and outstanding - -
Class A Common Stock, nonvoting, $.01 par value, 1,000 shares
authorized; none issued and outstanding - -
Common Stock, $.01 par value, 1,000,000 shares authorized;
320,016 shares and 322,363 shares issued
in 1999 and 2000, respectively 3,200 3,224
Additional paid-in capital 656,870 691,148
Treasury stock, at cost, 730 shares and 198 shares (51,796) (11,767)
in 1999 and 2000, respectively
Retained earnings 1,408,852 1,666,524
Accumulated other comprehensive income (8) (6,578)
--------------- ----------------
Total stockholders' equity 2,017,118 2,342,551
--------------- ----------------
$ 3,954,688 $ 4,077,043
=============== ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
GATEWAY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1999 2000
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 188,804 $ 257,671
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 65,256 90,664
Provision for uncollectible accounts receivable 6,564 9,394
Deferred income taxes (25,725) (6,983)
Other, net 518 (2,736)
Changes in operating assets and liabilities:
Accounts receivable (32,594) (21,732)
Inventory 46,472 (18,481)
Other assets (29,900) 35,399
Accounts payable (6,102) (159,822)
Accrued liabilities 51,687 (161,576)
Accrued royalties (5,713) 13,498
Other current liabilities 9,363 111,866
Other liabilities 581 23,287
----------------- ----------------
Net cash provided by operating activities 269,211 170,449
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (151,833) (153,579)
Investments in unconsoliated entities (91,726) (246,900)
Purchases of available-for-sale securities (82,739) (73,665)
Proceeds from maturity of available-for-sale securities 73,787 76,941
Purchase of financing receivables (66,024) (323,124)
Proceeds from repayment of financing receivables - 196,198
Purchase of note receivable - (50,000)
Other, net 1,408 2,372
----------------- ----------------
Net cash used in investing activities (317,127) (571,757)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (70,784) (37,045)
Principal payments on long-term obligations and notes payable (8,015) (2,958)
Stock options exercised 21,133 45,264
----------------- ----------------
Net cash provided by (used in) financing activities (57,666) 5,261
Foreign exchange effect on cash and cash equivalents (3,308) 654
----------------- ----------------
Net decrease in cash and cash equivalents (108,890) (395,393)
Cash and cash equivalents, beginning of period 1,169,810 1,127,654
----------------- ----------------
Cash and cash equivalents, end of period $ 1,060,920 $ 732,261
================= ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
The accompanying unaudited consolidated financial statements of
Gateway, Inc. (the "Company") as of June 30, 2000 and for the three and six
months ended June 30, 1999 and 2000 have been prepared on the same basis as the
audited consolidated financial statements for the year ended December 31, 1999
and, in the opinion of management, reflect all adjustments necessary to fairly
state the consolidated financial position, results of operations and cash flows
for the interim periods. All adjustments are of a normal, recurring nature. The
results for the interim periods are not necessarily indicative of results to be
expected for any other interim period or the entire year. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto for the year ended December 31, 1999,
which are included in the Company's 1999 Annual Report on Form 10-K, filed with
the Securities and Exchange Commission. The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. COMPREHENSIVE INCOME:
Comprehensive income for the Company includes net income, foreign
currency translation effects, and unrealized gains or losses on
available-for-sale securities which are charged or credited to the accumulated
other comprehensive income (loss) account within stockholders' equity.
Comprehensive income for the three and six month periods ended June 30,
1999 and 2000 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- -------------------------------
1999 2000 1999 2000
---------------- ---------------- -------------- ---------------
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME:
Net income $ 89,225 $ 121,638 $ 188,804 $ 257,671
Foreign currency translation (510) (1,000) (2,556) (505)
Unrealized loss on available-for-sale securities (359) (4,853) (1) (6,065)
---------------- ---------------- -------------- ---------------
Total Comprehensive Income $ 88,356 $ 115,785 $ 186,247 $ 251,101
================ ================ ============== ===============
</TABLE>
5
<PAGE>
3. SHARE AND PER SHARE INFORMATION:
Basic earnings per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share is computed using the combination of diluted common stock
equivalents and the weighted average number of common shares outstanding during
the period.
The following table sets forth a reconciliation of shares used in the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- -------------------------------
1999 2000 1999 2000
---------------- ---------------- -------------- ---------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Net income for basic and diluted
earnings per share $ 89,225 $ 121,638 $ 188,804 $ 257,671
================ ================ ============== ===============
Weighted average shares for basic
earnings per share 312,886 321,265 312,940 320,639
Dilutive effect of stock options 7,428 10,462 7,814 11,437
---------------- ---------------- -------------- ---------------
Weighted average shares for diluted
earnings per share 320,314 331,727 320,754 332,076
================ ================ ============== ===============
</TABLE>
4. SELECTED BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------------ ------------------
(unaudited)
(in thousands)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 662,811 $ 672,054
Less allowance for uncollectible accounts (16,472) (13,377)
------------------ ------------------
$ 646,339 $ 658,677
================== =================
Inventory:
Components and subassemblies $ 183,321 $ 201,379
Finished goods 8,549 8,972
------------------ -----------------
$ 191,870 $ 210,351
================== =================
</TABLE>
6
<PAGE>
5. CONTINGENCIES:
The Company is a party to various lawsuits and administrative
proceedings arising in the ordinary course of its business. The Company
evaluates such lawsuits and proceedings on a case-by-case basis, and its policy
is to vigorously contest any such claims which it believes are without merit.
The Company's management believes that the ultimate resolution of such pending
matters will not materially and adversely affect the Company's business,
financial position, results of operations or cash flows.
6. STRATEGIC INVESTMENTS AND ALLIANCES:
During the first quarter of 1999, the Company paid $77.7 million for a
19.9% interest and an option to acquire the remaining 80.1% interest in NECX
Direct, LLC, an on-line e-commerce computer peripheral retailer. The Company
subsequently sold half of that interest to a third party. During the first
quarter of 2000, the Company issued 537,554 shares of common stock to exercise
its option to purchase the remaining 80.1% interest. The transaction was
accounted for as a purchase business combination. The aggregate purchase price
of approximately $135 million, which includes the cost basis of the original
investment and liabilities assumed, has been allocated primarily to goodwill
that is being amortized over a ten year period. Pro forma statements of
operations reflecting the acquisition of NECX are not shown as they would not
differ materially from reported results.
During the second quarter of 2000, the Company entered into an
agreement with OfficeMax, Inc. that provides for the installation of a Gateway
store inside of all OfficeMax locations in the United States. As a part of this
transaction, the Company invested $50 million in OfficeMax, Inc. convertible
preferred stock on April 28, 2000. In addition, the Company entered into an
agreement with Consumer Financial Network ("CFN") to jointly market PCs,
Internet access, financing, training and other PC-related products and services
to corporations providing their employees with Internet-based services both in
the office and at home. As part of this transaction, the Company invested $150
million in CFN convertible preferred stock.
7
<PAGE>
7. SEGMENT DATA:
The Company's segments are based on 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 (AP). 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 net sales and operating expenses for prior
periods have been reclassified to conform with current year presentation.
The following table sets forth summary information by segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------ ----------------------------------
1999 2000 1999 2000
------------------ ---------------- --------------- ---------------
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Net sales:
United States:
Consumer $ 795,956 $ 1,048,115 $ 1,897,406 $ 2,368,107
Business 819,005 735,590 1,509,072 1,346,248
------------------ ---------------- --------------- ---------------
1,614,961 1,783,705 3,406,478 3,714,355
EMEA 112,193 135,158 253,969 321,391
AP 184,955 222,097 355,073 437,670
Non-segment - 915 - 6,343
------------------ ---------------- --------------- ---------------
Consolidated $ 1,912,109 $ 2,141,875 $ 4,015,520 $ 4,479,759
================== ================ =============== ===============
Operating income:
United States:
Consumer $ 53,269 $ 139,954 $ 149,652 $ 311,208
Business 139,619 112,595 253,400 197,799
------------------ ---------------- --------------- ---------------
192,888 252,549 403,052 509,007
EMEA (5,998) (4,211) (7,387) (1,996)
AP 13,636 9,987 26,113 24,220
Non-segment (77,603) (89,684) (158,047) (169,390)
------------------ ---------------- --------------- ---------------
Consolidated $ 122,923 $ 168,641 $ 263,731 $ 361,841
================== ================ =============== ===============
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report includes forward-looking statements made based on current
management expectations pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements are not guarantees of
future performance and actual outcomes may differ materially from what is
expressed or forecasted. There are many factors that affect the Company's
business, consolidated position, results of operations and cash flows, including
the factors discussed or referenced below.
RESULTS OF OPERATIONS
Strong consumer growth and strong international sales coupled with
expansion of beyond the box revenue, decreasing component costs, and improved
productivity drove net income to $122 million a 36% increase over the same
period in 1999. The following table sets forth, for the periods indicated,
certain data derived from the Company's consolidated statements of operations,
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------ -------------------------------------------
1999 CHANGE 2000 1999 CHANGE 2000
---------------- ---------- -------------- ---------------- ---------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 1,912,109 12.0% $ 2,141,875 $ 4,015,520 11.6% $4,479,759
Gross profit 421,386 18.3% 498,329 871,890 17.7% 1,026,466
Percentage of net sales 22.0% 23.3% 21.7% 22.9%
Selling, general and
administrative expenses 298,463 10.5% 329,688 608,159 9.3% 664,625
Percentage of net sales 15.6% 15.4% 15.2% 14.8%
Operating income 122,923 37.2% 168,641 263,731 37.2% 361,841
Percentage of net sales 6.4% 7.9% 6.6% 8.1%
Net income $ 89,225 36.3% $ 121,638 $ 188,804 36.5% $ 257,671
</TABLE>
NET SALES
Gateway consolidated net sales increased to $2.1 billion and $4.5
billion in the second quarter and first six months of 2000, respectively,
representing an increase in unit shipments of 17% over the comparable periods
of 1999. For the second quarter, domestic sales grew by 11% while
international sales increased by 20% during the same period.
9
<PAGE>
The following table summarizes the Company's net sales, for the periods
indicated, by geographic region:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------- ---------------------------------------------
1999 CHANGE 2000 1999 CHANGE 2000
--------------- ----------- ----------------- ---------------- ----------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales
United States $ 1,614,961 10.5% $ 1,784,620 $ 3,406,478 9.2% $3,720,698
EMEA 112,193 20.5% 135,158 253,969 26.6% 321,391
AP 184,955 20.1% 222,097 355,073 23.3% 437,670
--------------- ----------- ----------------- ---------------- ----------- ---------------
Consolidated $ 1,912,109 12.0% $ 2,141,875 $ 4,015,520 11.6% $4,479,759
=============== =========== ================= ================ =========== ===============
</TABLE>
In the United States, net sales growth was led by the consumer
segment with an increase of 32% over the second quarter of 1999 while the
business segment declined 10%. Consumer sales growth was driven by growth in
telephone, Gateway Country-Registered Trademark- store expansion and Internet
sales. The Gateway Country stores retail channel added 31 stand-alone
locations bringing the worldwide total to 349 locations at the end of the
second quarter of 2000. In addition to the new Gateway Country store
locations, the Company continued to develop the OfficeMax, Inc. strategic
alliance by opening Gateway Country stores inside of 92 OfficeMax stores by
quarter's end, an increase of 80 from the end of the first quarter of 2000.
Beyond-the-box revenue including software and peripheral sales, Internet
access and portal income, financing, warranty and training revenue accounted
for 40% of income for the second quarter of 2000, up over 100% from the
second quarter of 1999. Gateway's sales to businesses declined 10% in the
second quarter compared with last year as the Company continued to refocus
its efforts on sales to small and medium businesses and government and
education institutions, which are Gateway's core target markets in the
business space. Sequentially, Gateway Business performance showed improvement
over the first quarter sales decline of 19% and management is targeting flat
growth in the third quarter and positive growth in the fourth quarter of 2000.
Sales in the European, Middle East, African ("EMEA") segment and Asia
Pacific region were $135.2 million and $222.1 million, respectively, in the
second quarter of 2000, representing increases of 21% and 20%, respectively,
over the second quarter of 1999. The growth in EMEA and Asia Pacific was due to
the expansion in the number of store-with-in-a-store outlets as the Company
ended the quarter with 230 retail outlets in EMEA and 87 in Asia Pacific.
GROSS PROFIT
Gross profit in the second quarter of 2000 increased 18% over the
comparable period of 1999 to $498.3 million and increased 18% over the first
six months of 1999 to $1.0 billion. Margin productivity was driven by the
diversified revenue stream provided by the Company's beyond-the-box strategy
discussed above, favorable component prices, effective PC pricing management
and productivity gains from Six Sigma initiatives. As a percentage of sales,
gross profit for the second quarter of 2000 was 23.3%, up from 22.0% in the
second quarter of 1999, representing the tenth consecutive quarter of
year-over-year gross profit improvement.
10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the second
quarter and first six months of 2000 increased 11% and 9%, respectively,
compared to the same periods of 1999. SG&A productivity gains kept SG&A
expenses at 15.4% of sales, flat to the same period in 1999, despite
continued strategic investments in the Gateway Country-Registered Trademark-
store and international expansion discussed above. The Company has launched
several Six Sigma initiatives to re-engineer core processes and limit
headcount additions to further increase SG&A productivity.
OPERATING INCOME
Operating income increased more than three times revenue growth to
$168.6 million, representing an increase of 37% over the second quarter of 1999.
As discussed above, operating income was favorably impacted by gross margin
improvement and effective expense productivity. As a percentage of sales,
operating income increased to 7.9% from 6.4% in the second quarter of 1999.
Recurring profits from the beyond-the-box strategy, including Internet access
and portal income, financing and warranty revenue totaled 20% of second quarter
operating income. Operating income for the consumer and business segments in the
United States was $140.0 million and $112.6 million, respectively, in the second
quarter of 2000. Consumer segment operating profit growth was 163% over the
second quarter of 1999 while the business segment operating income declined 19%
in the same period. For the first six months of 2000, operating income was
$361.8 million, an increase of 37% over the first six months of 1999.
OTHER INCOME
Other income includes other income net of expenses, such as interest
income and expense and foreign exchange transaction gains and losses. Other
income increased to $19.9 million from $16.5 million in the same period of 1999.
For the first six months of 2000, other income increased to $37.6 million from
$31.3 million reported in the comparable 1999 period. The increases were
primarily due to the additional investment income generated by cash balances and
marketable securities.
INCOME TAXES
The Company's annualized effective tax rate was 35.5% for the second
quarter of 2000, a decrease from the 36% rate for the second quarter of 1999.
The effective tax rate for 2000 is consistent with the 1999 annual effective
rate which reflects a favorable impact from 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------
1999 2000
-------------------------------- ----------------------------
(dollars in thousands)
<S> <C> <C>
Cash and marketable securities $ 1,228,319 $ 938,949
Days of sales in accounts receivable 28 28
Days inventory on hand 8 10
Days in accounts payable 43 41
Cash conversion cycle (7) (3)
</TABLE>
<PAGE>
At June 30, 2000, the Company had cash and cash equivalents of $732.3
million, marketable securities of $206.7 million and an unsecured committed
credit facility with certain banks aggregating $300 million, consisting of a
revolving line of credit facility and a sub-facility for letters of credit. At
June 30, 2000, no amounts were outstanding under the revolving line of credit.
The Company has a universal shelf registration statement which contemplates that
the Company may from time to time sell up to $1.0 billion of debt or equity
securities, which will provide the Company with greater flexibility to respond
to acquisition and market opportunities. Management believes the Company's
current 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.
11
<PAGE>
The Company generated $170.5 million in cash from operations during
the first six months of the year, including $348.0 million of net income
adjusted for non-cash items. Other significant factors affecting available
cash include an increase in inventory levels of $18.5 million, a decrease of
accounts payable and other liabilities of $172.7 million and a $21.7 million
increase in accounts receivable. The Company used approximately $153.6
million for the construction of new facilities, information systems and
equipment and $126.9 million to purchase financing receivables, net of
proceeds received for payment, and $246.9 million in investment in
unconsolidated entities, which includes $150 million in Consumer Financial
Network convertible preferred stock and $50 million of Office Max, Inc.
convertible preferred stock. As discussed previously, the Company continued
to expand the retail Gateway Country-Registered Trademark- stores bringing
the total number of stores worldwide to 349 as of June 30, 2000. The Company
anticipates that it will retain all earnings to its stockholders as dividends.
At June 30, 2000, the Company had long-term indebtedness and capital
lease obligations of approximately $5.5 million. These obligations relate
principally to the Company's investments in equipment and facilities.
NEW ACCOUNTING PRONOUNCEMENTS
In June of 1998 the Financial Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133) 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 financial position
or results of operations.
In December 1999, the Securities and Exchanges Commission issues 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 fourth quarter of the fiscal year beginning
after December 15, 1999 and will not have a material impact on the Company's
consolidated financial position or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Factors that could impact the Company's business, consolidated
financial position, results of operations and cash flows and cause future
results to differ from the Company's expectations include the following:
competitive market conditions; component supply shortages; short product cycles;
access to technology; infrastructure requirements; risks of international
expansion; foreign currency fluctuations; the success of e-commerce; risks of
minority investments; risks of acquisitions and joint ventures; increased
inventory costs; and changes in customer or geographic sales mix; as well as
risks identified in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 and other filings with the Securities and Exchange
Commission.
The Company has experienced, and may continue to experience, problems
with respect to the size of its work force and production facilities and the
adequacy of its management information and other systems, purchasing and
inventory controls, and the forecasting of component part needs. These problems
can result in high backlog of product orders, delays in customer support
response times and increased expense levels.
Short product life cycles characterize the PC industry, resulting from
rapid changes in technology and consumer preferences and declining product
prices. The Company's in-house engineering personnel work closely with PC
component suppliers and other technology developers to evaluate the latest
developments in PC-related technology. There is no assurance that the Company
will continue to have access to or the right to use new technology or will be
successful in incorporating such new technology in its products or features in a
timely manner.
12
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has not been a material change in the Company's exposure to
foreign currency risks since December 31, 1999.
13
<PAGE>
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various lawsuits and administrative
proceedings arising in the ordinary course of its business. The Company
evaluates such lawsuits and proceedings on a case by case basis, and its policy
is to vigorously contest any such claims which it believes are without merit.
The Company's management believes that the ultimate resolution of such pending
matters will not materially and adversely affect the Company's business,
consolidated financial position, results of operations or cash flows.
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 18, 2000.
At the meeting, stockholders elected three Class I directors of the Company and
approved the Gateway, Inc. 2000 Equity Incentive Plan. The results of
stockholder voting are as follows:
<TABLE>
<CAPTION>
Votes Votes Withheld/ Broker
For Against Abstentions Non-Votes
<S> <C> <C> <C> <C>
1. Election of Directors
Charles G. Carey 274,358,165 10,206,556
James F. McCann 274,344,115 10,220,606
Theodore W. Waitt 273,206,803 11,357,918
2. Approval of the Gateway, Inc.
2000 Equity Incentive Plan
175,786,157 72,393,432 1,680,740 34,704,392
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C>
10.18 Gateway, Inc. 2000 Equity Incentive Plan, filed herewith
27.1 Financial Data Schedule, filed herewith
(b) REPORTS ON FORM 8-K:
</TABLE>
No Reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2000.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GATEWAY, INC.
Date: August 14, 2000 By: /s/ John J. Todd
----------------------------------
John J. Todd
Senior Vice President &
Chief Financial Officer
(authorized officer and
chief accounting officer)
15
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. INDEX TO EXHIBITS
--- -----------------
<S> <C>
10.18 Gateway, Inc. 2000 Equity Incentive Plan, filed herewith
27.1 Financial Data Schedule, filed herewith
</TABLE>
16
