<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 September 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 November 9, 2000, there were 323,346,222 shares of the Common Stock
of the Company, $.01 par value per share, outstanding. As of November 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 INCOME STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------ ------------------------------------------
1999 2000 1999 2000
------------------ ---------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Net sales $ 2,178,496 $ 2,530,093 $ 6,194,016 $ 7,009,852
Cost of goods sold 1,698,447 1,946,489 4,842,077 5,399,782
------------------ ---------------------- --------------------- --------------------
Gross profit 480,049 583,604 1,351,939 1,610,070
Selling, general and administrative expenses 321,270 364,477 929,429 1,029,101
------------------ ---------------------- --------------------- --------------------
Operating income 158,779 219,127 422,510 580,969
Other income, net 18,020 17,482 49,295 55,131
------------------------------------------ --------------------- --------------------
Income before income taxes 176,799 236,609 471,805 636,100
Provision for income taxes 63,648 83,996 169,850 225,815
------------------ ---------------------- --------------------- --------------------
Net income $ 113,151 $ 152,613 $ 301,955 $ 410,285
================== ====================== ===================== ====================
Share and per share information:
Net income per share:
Basic $ 0.36 $ 0.47 $ 0.96 $ 1.28
================== ====================== ===================== ====================
Diluted $ 0.35 $ 0.46 $ 0.94 $ 1.24
================== ====================== ===================== ====================
Weighted average shares outstanding:
Basic 313,719 322,408 313,203 321,221
================== ====================== ===================== ====================
Diluted 323,912 333,681 321,755 332,348
================== ====================== ===================== ====================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
GATEWAY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
---------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,127,654 $ 849,998
Marketable securities 208,717 132,874
Accounts receivable, net 646,339 741,155
Inventory, net 191,870 199,643
Other 522,225 668,212
---------------- -----------------
Total current assets 2,696,805 2,591,882
Property, plant and equipment, net 745,660 840,271
Intangibles, net 52,302 171,873
Other assets 459,921 858,489
---------------- -----------------
$ 3,954,688 $ 4,462,515
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 898,436 $ 908,707
Accrued liabilities 609,132 513,539
Accrued royalties 153,840 133,040
Other current liabilities 148,302 199,694
---------------- -----------------
Total current liabilities 1,809,710 1,754,980
Long-term obligations, net of current maturities 2,998 2,796
Warranty and other noncurrent liabilities 124,862 153,407
---------------- -----------------
Total liabilities 1,937,570 1,911,183
---------------- -----------------
Contingencies (Note 6)
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000 shares authorized; none
issued - -
Class A Common Stock, nonvoting, $.01 par value, 1,000 shares
authorized; none issued - -
Common Stock, $.01 par value, 1,000,000 shares authorized; 320,016 shares
and 323,153 shares issued in 1999 and 2000, respectively 3,200 3,232
Additional paid-in capital 656,870 735,251
Treasury stock, at cost, 730 shares in 1999 (51,796) -
Retained earnings 1,408,852 1,819,137
Accumulated other comprehensive loss (8) (6,288)
---------------- -----------------
Total stockholders' equity 2,017,118 2,551,332
---------------- -----------------
$ 3,954,688 $ 4,462,515
================ =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
GATEWAY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1999 2000
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 301,955 $ 410,285
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 99,458 139,942
Provision for uncollectible accounts receivable 17,617 15,087
Deferred income taxes (13,252) (6,517)
Other, net 367 (4,400)
Changes in operating assets and liabilities:
Accounts receivable (167,342) (109,903)
Inventory (4,119) (7,773)
Other assets (77,353) (37,696)
Accounts payable 145,090 9,563
Accrued liabilities 105,636 (97,985)
Accrued royalties (9,210) (20,800)
Other current liabilities 38,554 111,291
Other liabilities 464 25,910
----------------- -----------------
Net cash provided by operating activities 437,865 427,004
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (240,914) (236,591)
Investment in unconsolidated entities (128,298) (246,900)
Purchases of available-for-sale securities (126,890) (80,968)
Proceeds from maturity of available-for-sale securities 85,304 -
Proceeds from sales of available-for-sale securities - 157,154
Purchase of financing receivables, net of repayments (146,991) (276,528)
Purchase of note receivable - (62,500)
Other, net (1,841) 1,539
----------------- -----------------
Net cash used in investing activities (559,630) (744,794)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (70,784) (37,045)
Principal payments on long-term obligations and notes payable (7,721) (8,685)
Stock options exercised 43,879 78,632
Proceeds from issuance of long-term obligations - 3,000
Proceeds from issuance of stock - 1,775
----------------- -----------------
Net cash provided by (used in) financing activities (34,626) 37,677
Foreign exchange effect on cash and cash equivalents 1,054 2,457
----------------- -----------------
Net decrease in cash and cash equivalents (155,337) (277,656)
Cash and cash equivalents, beginning of period 1,169,810 1,127,654
----------------- -----------------
Cash and cash equivalents, end of period $ 1,014,473 $ 849,998
================= =================
</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 September 30, 2000 and for the three and
nine months ended September 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. FINANCE RECEIVABLES:
Finance receivables, included in other current assets and other
assets, consist of receivables due from customer installment purchases of the
Company's products and services net of allowance for losses. Finance charges
on the receivables are recognized using the interest method. Finance charge
accruals are generally suspended on accounts when they become 60 days
contractually delinquent. Receivable origination and commitment fees are
deferred and amortized as a component of finance charges over the life of the
related receivable.
The Company maintains an allowance for losses on finance receivables
at an amount that it believes is sufficient to provide for losses in its
existing receivables portfolio. The allowance is evaluated on a regular basis
by management and is based upon management's periodic review of the
collectibility of the receivables with respect to historical experience, the
nature and volume of the portfolio, adverse situations that may affect the
customer's ability to repay and general economic conditions. Finance
receivables are charged to the allowance for losses when they are deemed to
be uncollectible, generally when the receivable becomes 180 days delinquent.
Although the allowance for losses on finance receivables reflected in the
Company's consolidated balance sheet at September 30, 2000 is considered
adequate by the Company's management, there can be no assurance that this
allowance will prove to be adequate over time to cover ultimate losses in
connection with the Company's finance receivables.
5
<PAGE>
3. 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 nine month periods ended
September 30, 1999 and 2000 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- -------------------------------
1999 2000 1999 2000
---------------- ---------------- -------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME:
Net income $ 113,151 $ 152,613 $ 301,955 $ 410,285
Foreign currency translation 5,438 2,252 2,881 1,747
Unrealized gain (loss) on available-for-sale
securities 1,357 (1,962) 1,357 (8,027)
---------------- ---------------- -------------- ---------------
Total Comprehensive income $ 119,946 $ 152,903 $ 306,193 $ 404,005
================ ================ ============== ===============
</TABLE>
4. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- -------------------------------
1999 2000 1999 2000
---------------- ---------------- -------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Net income for basic and diluted
earnings per share $ 113,151 $ 152,613 $ 301,955 $ 410,285
================ ================ ============== ===============
Weighted average shares for basic
earnings per share 313,719 322,408 313,203 321,221
Dilutive effect of stock options 10,193 11,273 8,552 11,127
---------------- ---------------- -------------- ---------------
Weighted average shares for diluted
earnings per share 323,912 333,681 321,755 332,348
================ ================ ============== ===============
</TABLE>
6
<PAGE>
5. SELECTED BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER 30,
31,
1999 2000
-------------- ------------------
(in thousands)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 662,811 $ 756,272
Less allowance for uncollectible accounts (16,472) (15,117)
--------------- ----------------
$ 646,339 $ 741,155
================ ==================
Inventory:
Components and subassemblies $ 183,321 $ 194,607
Finished goods 8,549 5,036
---------------- ------------------
$ 191,870 $199,643
================ ==================
Other assets:
Financing receivables, net of allowance for losses $ 294,677 $ 592,244
Investments in unconsolidated entities 202,865 413,405
Deferred income taxes 164,979 174,888
Other 319,625 346,164
---------------- ------------------
$ 982,146 $1,526,701
Less other current assets (522,225) (668,212)
------------------ ------------------
$ 459,921 $ 858,489
================ ==================
</TABLE>
6. 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.
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.
7
<PAGE>
The following table sets forth summary information by segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ ----------------------------------
1999 2000 1999 2000
------------------ ---------------- --------------- ---------------
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Net sales:
United States:
Consumer $ 1,121,374 $ 1,427,286 $ 3,018,779 $ 3,801,737
Business 778,387 796,335 2,287,461 2,142,582
------------------ ---------------- --------------- ---------------
1,899,761 2,223,621 5,306,240 5,944,319
EMEA 118,835 134,204 372,803 455,596
AP 159,900 172,268 514,973 609,937
------------------ ---------------- --------------- ---------------
Consolidated $ 2,178,496 $ 2,530,093 $ 6,194,016 $ 7,009,852
================== ================ =============== ===============
Operating income:
United States:
Consumer $ 110,371 $ 206,914 $ 260,383 $ 518,123
Business 102,596 109,124 356,357 306,923
------------------ ---------------- --------------- ---------------
212,967 316,038 616,740 825,046
EMEA (4,069) (10,712) (11,456) (12,708)
AP 6,141 (8,235) 32,254 15,985
Non-segment (56,260) (77,964) (215,028) (247,354)
------------------ ---------------- --------------- ---------------
Consolidated $ 158,779 $ 219,127 $ 422,510 $ 580,969
================== ================ =============== ===============
</TABLE>
8. 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 Company is continuing to evaluate
the effect that such adoption may have on its consolidated results of operations
and financial position. The impact of the adoption will be based on factors such
as specific derivative and hedging activities, market conditions and contractual
arrangements at the date of adoption.
In December 1999, the Securities and Exchanges 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 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.
In July 2000, the Emerging Issues Task Force reached a consensus on EITF
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," which
requires that freight charges billed to customers be included in net sales. This
consensus will be adopted during the fourth quarter of 2000 and will result in a
reclassification of freight revenue and freight cost. The result will be an
increase in net sales and cost of goods sold for all periods presented and will
not have any impact on net income or earnings per share.
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
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------ -------------------------------------------
1999 CHANGE 2000 1999 CHANGE 2000
---------------- ---------- -------------- ---------------- ---------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 2,178,496 16.1% $ 2,530,093 $6,194,016 13.2% $ 7,009,852
Gross profit 480,049 21.6% 583,604 1,351,939 19.1% 1,610,070
Percentage of net sales 22.0% 23.1% 21.8% 23.0%
Selling, general and
administrative expenses 321,270 13.4% 364,477 929,429 10.7% 1,029,101
Percentage of net sales 14.7% 14.4% 15.0% 14.7%
Operating income 158,779 38.0% 219,127 422,510 37.5% 580,969
Percentage of net sales 7.3% 8.7% 6.8% 8.3%
Net income $ 113,151 34.9% $ 152,613 $ 301,955 35.9% $ 410,285
</TABLE>
NET SALES
Gateway consolidated net sales increased to $2.5 billion and $7.0
billion in the third quarter and first nine months of 2000, respectively. For
the third quarter of 2000, domestic sales grew by 17% while international
sales increased by 10% as compared to the third quarter of 2000.
The following table summarizes the Company's net sales, for the periods
indicated, by geographic region:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------- ---------------------------------------------
1999 CHANGE 2000 1999 CHANGE 2000
--------------- ----------- ----------------- ---------------- ----------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales
United States $ 1,899,761 17.0% $ 2,223,621 $5,306,240 12.0% $ 5,944,319
Europe 118,835 12.9% 134,204 372,803 22.2% 455,596
Asia Pacific 159,900 7.7% 172,268 514,973 18.4% 609,937
--------------- ----------- ----------------- ---------------- ----------- ---------------
Consolidated $ 2,178,496 16.1% $ 2,530,093 $6,194,016 13.2% $ 7,009,852
=============== =========== ================= ================ =========== ===============
</TABLE>
In the United States, net sales growth was led by the consumer
segment with an increase of 27% over the third quarter of 1999 while the
business segment increased 2%. Consumer sales growth was driven by growth in
all sales channels. The Gateway Country-Registered Trademark- stores retail
channel added 35 stand-alone locations bringing the worldwide total to
9
<PAGE>
384 locations at the end of the third 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 294 OfficeMax stores by quarter's end, an increase of 202 from the end of
the second quarter of 2000. Beyond-the-box revenue including software and
peripheral sales, Internet access and portal income, financing, warranty and
training revenue accounted for more than 50% of income for the third quarter
of 2000. Gateway's sales to businesses increased 2% in the third 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.
Gateway Business performance was driven by a doubling of the number of
business sales representatives servicing small business in Gateway Country
stores and enhanced business products and solutions, training, and local
service support through the Gateway Networking Solutions Program.
Sales in the European, Middle East, African ("EMEA") segment and
Asia Pacific ("AP") region were $134.2 million and $172.3 million,
respectively, in the third quarter of 2000, representing increases of 13% and
8%, respectively, over the third quarter of 1999. The growth in EMEA and AP
was due to the expansion in the number of store-with-in-a-store outlets as
the Company ended the quarter with 275 retail outlets in EMEA and 100 in AP.
GROSS PROFIT
Gross profit in the third quarter of 2000 increased 22% over the
comparable period of 1999 to $583.6 million and increased 19% over the first
nine months of 1999 to $1.6 billion. Margin productivity was driven by the
diversified revenue stream provided by the Company's beyond-the-box strategy
discussed above, favorable component prices, and productivity gains from Six
Sigma initiatives. As a percentage of sales, gross profit for the third
quarter of 2000 was 23.1%, up from 22% in the third quarter of 1999,
representing the eleventh consecutive quarter of year-over-year gross profit
improvement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the third
quarter and first nine months of 2000 increased 13% and 11%, respectively,
compared to the same periods of 1999. While continuing to invest in
long-term, strategic investments in Gateway Country-Registered Trademark-
store and international expansion, the Company experienced a reduction in
SG&A expenses as a percentage of sales versus the third quarter of 1999 due
to productivity initiatives. As a percentage of sales, SG&A expenses were
14.4% for the third quarter of 2000, compared to 14.7% in the third quarter
of 1999.
OPERATING INCOME
Operating income increased more than twice revenue growth to $219.1
million, representing an increase of 38% over the third 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 8.7% from 7.3% in the third quarter of 1999.
Recurring profits from the beyond-the-box strategy, including Internet access
and portal income, financing and warranty revenue totaled more than 25% of
third quarter operating income. Operating income for the consumer and
business segments in the United States was $206.9 million and $109.1 million,
respectively, in the third quarter of 2000. For the first nine months of
2000, operating income was $581.0 million, an increase of 38% over the first
nine months of 1999.
10
<PAGE>
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 decreased to $17.5 million from $18.0 million in the same period of
1999. For the first nine months of 2000, other income increased to $55.1
million from $49.3 million reported in the comparable 1999 period.
INCOME TAXES
The Company's annualized effective tax rate was 35.5% for the third
quarter of 2000, a decrease from the 36% rate for the third 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>
SEPTEMBER 30,
---------------------------------------------------------------
1999 2000
-------------------------------- ----------------------------
(dollars in thousands)
<S> <C> <C>
Cash and marketable securities $ 1,215,025 $ 982,872
Days of sales in accounts receivable 29 26
Days inventory on hand 8 10
Days in accounts payable 46 42
Cash conversion cycle (9) (6)
</TABLE>
At September 30, 2000, the Company had cash and cash equivalents of
$850.0 million, marketable securities of $132.9 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 September 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.
The Company generated $427.0 million in cash from operations during
the first nine months of the year, including $554.4 million of net income
adjusted for non-cash items. Other significant factors affecting available
cash include an increase in inventory levels of $7.8 million, an increase of
accounts payable and other liabilities of $28.0 million and a $109.9 million
increase in accounts receivable. The Company used approximately $236.6
million for the construction of new facilities, information systems and
equipment and $276.5 million to purchase financing receivables, net of
repayment proceeds 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. Finance receivables, net of allowance for loan losses,
increased to $592.2 million as of September 30, 2000 and is expected to
continue to grow as the Company continues to finance the sale of its products
and services. As discussed previously, the Company continued to expand the
retail Gateway Country-Registered Trademark- stores bringing the total number
of stores worldwide to 384 as of September 30, 2000. The Company anticipates
that it will retain all earnings in the foreseeable future for future
development of its business and will not distribute earnings to its
stockholders as dividends.
11
<PAGE>
At September 30, 2000, the Company had long-term indebtedness and
capital lease obligations of approximately $2.8 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
Company is continuing to evaluate the effect that such adoption may have on
its consolidated results of operations and financial position. The impact of
the adoption will be based on factors such as specific derivative and hedging
activities, market conditions and contractual arrangements at the date of
adoption.
In December 1999, the Securities and Exchanges 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 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.
In July 2000, the Emerging Issues Task Force reached a consensus on
EITF Issue 00-10, "Accounting for Shipping and Handling Fees and Costs,"
which requires that freight charges billed to customers be included in net
sales. This consensus will be adopted during the fourth quarter of 2000 and
will result in a reclassification of freight revenue and freight cost. The
result will be an increase in net sales and cost of goods sold for all
periods presented and will not have any impact on net income or earnings per
share.
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 and the ability of the Company to develop products based on new or
evolving technology or new form factors such as internet appliances; 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; results of financing
customer orders; 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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There has not been a material change in the Company's exposure to
foreign currency risks since December 31, 1999.
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II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various lawsuits and administrative
proceedings arising in the ordinary course of its business. The Company
evaluates such lawsuits and proceedings on a case by case basis, and its
policy is to vigorously contest any such claims which it believes are without
merit. The Company's management believes that the ultimate resolution of such
pending matters will not materially and adversely affect the Company's
business, consolidated financial position, results of operations or cash
flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT DESCRIPTION OF EXHIBITS
NO.
10.19 Form of Executive Officer Change of Control Compensation Agreement
27.1 Financial Data Schedule, filed herewith.
(b) REPORTS ON FORM 8-K:
No Reports on Form 8-K were filed by the Company during the quarter
ended September 30, 2000.
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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: November 14, 2000 By: /s/ John J. Todd
------------------------------------
John J. Todd
Senior Vice President and Chief
Financial Officer (authorized
officer and chief accounting officer)
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EXHIBIT INDEX TO EXHIBITS
NO.
10.19 Form of Executive Officer Change of Control Compensation
Agreement
27.1 Financial Data Schedule
16
