-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CwXR20hi30tfAkxDOmXmieJCSfgF+VuA88J+/n97SPNBEstz3hcw4hcfCYQyKimk Du2OYUzhsDEG8HJA5x3nMA== 0000895812-98-000005.txt : 19980327 0000895812-98-000005.hdr.sgml : 19980327 ACCESSION NUMBER: 0000895812-98-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GATEWAY 2000 INC CENTRAL INDEX KEY: 0000895812 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 421249184 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22784 FILM NUMBER: 98573448 BUSINESS ADDRESS: STREET 1: 610 GATEWAY DR CITY: NORTH SIOUX CITY STATE: SD ZIP: 57049 BUSINESS PHONE: 6052322594 MAIL ADDRESS: STREET 2: 610 GATEWAY DRIVE CITY: NORTH SIOUX CITY STATE: SD ZIP: 57049-2000 10-K405 1 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, 1997 Commission file number 0-22784 GATEWAY 2000, INC. A Delaware Corporation I.R.S. Employer Number 42-1249184 610 Gateway Drive, North Sioux City, South Dakota 57049-2000 Telephone number: (605) 232-2000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par New York Stock Exchange value $.01 per share 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 13, 1998 (based on the last sale price of $42 per share for the registrant's Common Stock on the New York Stock Exchange as of such date) was $3,644,782,344. At such date, there were 154,857,480 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of Gateway's definitive proxy statement relating to its 1998 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. PART I Item 1. Business General Gateway 2000, Inc. and its subsidiaries (collectively "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, digital media (convergence) PCs, servers, workstations and PC-related products used by individuals, families, businesses, government agencies and educational institutions. In November 1997, Gateway became the first major PC manufacturer to offer nationwide Internet provider service directly to its customers through gateway.netSM internet services. The Company believes it is one of the leading suppliers of PCs to the U.S. consumer market, with a market share of approximately 12% in the 1997 fourth quarter. Gateway's strategy is to deliver the best value to it's customers by offering quality, high-performance PCs and other products employing the latest technology at competitive prices and by providing outstanding service and support. 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. In December 1993, Gateway completed its initial public offering of Common Stock and was listed on NASDAQ. On May 22, 1997, Gateway moved to the New York Stock Exchange, and began trading under the symbol GTW. Strategy Gateway's strategy is comprised of the following: Direct Marketing. Gateway markets its products directly to PC customers, primarily by placing advertisements in computer trade magazines, newspapers, selected family-oriented business and travel publications and its internet website, http://www.gateway.com. Gateway also conducts a national consumer-oriented television advertising campaign. The Company has expanded its marketing operations through the opening of Gateway CountrySM stores including 22 stores opened in the fourth quarter of 1997. The Gateway Country store concept allows customers to operate and evaluate the entire line of Gateway products. Unlike traditional retail channels, these locations maintain no inventory of finished systems. At December 31, 1997, Gateway operated 37 Gateway Country stores. As compared with more traditional channels of distribution, the direct approach to the PC marketplace provides several advantages. First, Gateway believes it can consistently maintain competitive product pricing by avoiding the additional markups and the inventory and occupancy costs associated with traditional retail channels. Second, by avoiding the higher levels of inventory required in traditional retail channels, Gateway attempts to reduce its exposure to the risk of product obsolescence and improve its flexibility in offering new products to customers on a timely basis. Third, Gateway believes that working directly with PC customers promotes customer loyalty and brand awareness. For example, Gateway believes that over one- half of its business is attributable to repeat or referral customers. Quality Products. Gateway believes that as PC customers have gained greater knowledge and sophistication in their purchasing decisions, quality and reliability have become increasingly important decision-making factors. Gateway works closely with its suppliers to develop high-quality components, manufactured to Gateway's specifications. In addition, every Gateway 2000 PC undergoes extensive quality control testing. Latest Technology. Gateway works directly with a wide range of suppliers to evaluate the latest developments in PC-related technology. Gateway believes that these relationships, together with market information obtained from its direct customer relationships, have enabled it to bring to the market on a timely basis products with broad market demand. 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. Gateway is generally one of the earliest PC manufacturers to incorporate Intel Corporation's latest PC microprocessors into its product line, most recently including the Pentium IIr. At the end of the fourth quarter of 1997, Gateway was an industry leader in shipments of Pentium IIr based PCs. In July 1997, Gateway acquired Advanced Logic Research, Inc. (ALR). ALR designs and manufactures multiprocessor servers, computer workstations and desktop PCs. ALR operates as a wholly- owned subsidiary of Gateway and continues to market its products under the ALR brand through its established worldwide network of resellers, system integrators, dealers and distributors and selected original equipment manufacturers. As a result of the technology acquired with the ALR acquisition, Gateway has introduced a number of server and high-end desktop products under its own brand. Gateway's server products utilize ALR's four-way and six-way symmetrical multiprocessing technology. For a discussion of certain risks associated with Gateway's operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Results" beginning on page 15 of this Report. Quality Service and Support. 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 4,700 customer and technical support representatives specifically trained to assist customers with the resolution of technical questions relating to Gateway's products. Gateway maintains separate technical support organizations in the United States, Europe, Japan, Australia, and Malaysia. Competitive Pricing. Gateway offers its products at competitive prices. To profitably deliver quality products at competitive prices, Gateway seeks to maintain a low-cost operating structure. First, in addition to the cost advantages of marketing its products directly to end users, Gateway endeavors to minimize overhead expenses. For example, by virtue of its locations in South Dakota, Virginia, Ireland and Malaysia, Gateway believes that it has been able to lower expenses because of the relatively lower costs associated with the facilities, work forces and taxes in these locations. 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 purchasing powers and 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 date has resulted primarily from the sale of desktop PCs to individuals, small businesses and corporate, governmental and institutional customers in the U.S. market. Also, growth in net sales of Gateway's portable products has continued from previous years. Gateway has continued to expand its product line, including the NS-Series servers being introduced in Gateway's product line for the first time in 1997. Gateway believes that most of its continued growth will come from four areas: the domestic consumer market, including the developing market for family-use PCs; the small to medium-size business; the further development of major account relationships (generally, Fortune 1000 companies, governmental entities and educational institutions); and the continued expansion of its international operations. Also, Gateway has continued its efforts to reach these markets through its development of the Gateway CountrySM stores, allowing direct interaction with retail customers, and the enhancement of its outside sales force which serves businesses, government agencies and educational institutions. By the end of 1997, Gateway had opened 37 stores. Gateway expects to more than double the total number of stores by the end of 1998. Geographic Areas of Operation Gateway has organized its global operations into three operating regions. The Americas region principally includes the United States, Canada, and South America, and is managed from North Sioux City, South Dakota. The Europe 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, Singapore, Malaysia and Hong Kong. A summary of operating results for Gateway's industry segment, broken down by geographic area, is incorporated herein by reference to Note 12 of the consolidated financial statements included on page 34 of this Report. Products Gateway offers a broad line of desktop and portable PCs, digital media (convergence) PCs, servers, workstations, and access to the Internet, as well as peripheral products, third party software, and service and support programs. 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. Additionally, PCs are available with a wide variety of operating and application software. Desktop PCs. Gateway has three lines of desktop PCs. The Gateway G-Series of desktop PCs is primarily designed for home users and typically includes CD-ROM, graphics, and audio systems. The E-Series and GP-Series lines of desktop PCs are designed for businesses of all sizes, including those with networked environments. All desktop PCs utilize Intel Pentiumr processors and are available with MMX technology. During the last quarter of 1997, Pentium II processor - based desktop systems accounted for 43% of desk-top shipments. Portable PCs. Gateway Solo portable PCs provide portable computing 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. Portable systems also utilize Intel Pentium processors and are available with MMX technology. Portables are a fast growing segment of the business, representing approximately 11% of sales in 1997. Digital Media (Convergence) PCs. Digital media (convergence) PCs combine home entertainment or business conference room and personal computing capabilities into a single product. These systems typically can include large color monitors, wireless keyboard and pointing devices, CD and digital video disc (DVD) ROM drives, a TV/VGA video card, a high fidelity audio card, and a communication center with a high speed internet connection. Gateway is a market leader in this product line. Servers. The NS-Series of network servers can meet a variety of server applications within a networked computing environment and can be designed with up to six Pentium Pror processors in a rack mountable or free standing configuration. The NS Rack Mount provides centralized computing in a single, space-saving location that offers ease of serviceability. The NS- Series of products also includes the NS-Data Station line of external storage sub-systems, and a series of rack options such as Rack Cabinets, Quick Hot Swap drawers, and Tape Backup Unit drawers. gateway.netSM Internet service. In November 1997, Gateway became the first major PC manufacturer to offer nationwide Internet provider service directly to its customers. gateway.net Internet service offers electronic mail, Internet access, and an array of news, entertainment, family-oriented topics, weather, sports, Internet tips and tutorials. Peripheral Products and Software. Gateway also offers a variety of additional products including monitors, printers, fax/modems, CD-ROM drives, external storage devices, and popular third party software titles. 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 addition, ALR maintains a research and development staff. Direct relationships with its customers also enable Gateway to obtain valuable market information, which it uses to assist in developing its offerings of new products and product features. 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 its desktop PCs with each member of a production team trained to do several tasks, increasing flexibility and efficiency. Third-party suppliers manufacture the base configuration for portable PCs and Gateway completes final configuration. Gateway's production teams 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 certain application software already installed. Replacement parts are also generally shipped directly from Gateway to its customers. Although Gateway designs and contracts for the manufacture of components according to Gateway's specifications, Gateway does not itself manufacture any components used in its PCs. Gateway attempts to use parts and components available from, and cross- compatible between, multiple suppliers. In some circumstances, however, Gateway maintains single-source supplier relationships due to technology, availability, price, quality or other considerations. Gateway's desktop and portable computer manufacturing operations in North Sioux City, South Dakota, Hampton, Virginia, Singapore 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. In general, Gateway does not enter into long-term contracts for the supply of components used in the manufacture of GatewayTM PCs. Gateway believes that short-term supply arrangements generally allow it to respond more effectively to rapid technological change and consumer preferences. In the future, Gateway may enter into long-term supply arrangements when management believes it is prudent. Occasional disruptions to Gateway's normal production schedules have been, and may continue to be, experienced because of suppliers' failures to meet component delivery schedules. These disruptions can result in manufacturing inefficiencies and may temporarily increase Gateway's backlog. Gateway tries to reduce such disruptions by regularly evaluating supplier performance and seeking alternate or additional suppliers as necessary. Gateway requires a high volume of quality components for the manufacture of its products. The computer industry periodically experiences shortages of certain components, such as memory, CD- ROM drives or video cards. An industry shortage or other constraint of any key component could adversely affect Gateway's ability to deliver products on schedule or to realize expected gross margins. Marketing and Sales Gateway is among the industry leaders in PC sales to home users and small and medium businesses. In 1997, approximately 35% of total Gateway sales were to U.S. home users, 30% to U.S. businesses, 20% to U.S. educational institutions and government, and 15% of total sales were international. Gateway markets its products directly to PC customers, primarily by placing advertisements in computer trade magazines, newspapers, selected family-oriented business and travel publications and its internet website, http://www.gateway.com. 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 generate significant brand awareness and a loyal customer base. As of December 31, 1997, a sales force of approximately 2,400 Company employees sold Company products directly to customers over the telephone. Customers can order products over the telephone up to fifteen 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, 1997, Gateway utilized over 4,700 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. For example, Gateway has increased its major accounts sales force in support of its Fortune 1000 customer base. Gateway has also expanded its Gateway CountrySM stores to 37 stores throughout 20 states, allowing customers direct interaction with sales representatives. 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. During the peak fourth quarter holiday season in 1997, sales over the Company's web site exceeded $4.0 million per day. Over 50% of Gateway's business is believed to be attributable to either previous buyers of GatewayTM PCs or new customers referred by previous buyers. Gateway has sold over 8.3 million PCs to date, and maintains a database of its customers. To capitalize on this customer database, Gateway has introduced innovative means of marketing and communication. These include the Gateway Moola Mastercardr credit card that gives consumers a rebate applicable toward future Gateway purchases and the quarterly GW2k: Gateway Magazine. In October 1995, Gateway opened a web site on the Internet, at the address http://www.gateway.com. The web site and the GW2k: Gateway Magazine offer information on Company 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. Product Warranties and Technical Support Gateway believes its product warranties and support are essential to achieving customer satisfaction and maintaining Gateway's image. The key elements of Gateway's product warranties and technical support program, including the Gateway GoldSM service and support program, are as follows: 30-Day Limited Money-Back Guarantee. In general, Gateway provides a 30-day money-back guarantee for customer returns. Shipping charges to and from the customer are non-refundable. Limited Warranty. Gateway provides a three-year limited warranty for desktop PCs, and a one-year limited warranty for portable PCs. The warranty period begins at the delivery date of the product and covers repairs or replacements for any defect in either workmanship or components. Gateway will test and ship a new or remanufactured replacement part, which the customer can then install. Technicians are specifically trained to assist customers in the installation of replacement parts via telephone support. On-Board Diagnostic Tools. During 1998, Gateway expects to launch the HelpSpotTM software tools, which will provide customers with a suite of diagnostic tools to diagnose system problems. The HelpSpot software tools also include tutorial information to assist customers with system operations. Toll-Free Telephone Technical Support. Gateway offers its customers telephone access to technical support services (toll- free in the U.S., Australia, Austria, Belgium, France, Germany, Ireland, Japan, Luxembourg, Switzerland, the United Kingdom, Sweden, Malaysia and the Netherlands). Gateway's technicians are specifically trained to assist customers with the resolution of technical questions related to Gateway's products. Gateway provides 24 hours per day, seven days per week telephone support in the U.S. and in Japan. In addition, technicians have access to a technical laboratory which allows them to replicate and attempt to solve specific customer problems. Each technician initially receives 160 hours of classroom diagnostic training and receives additional classroom training as new products are introduced. Gateway also employs a more experienced technical staff whose primary purpose is to assist the technicians on the telephone, answer complex questions and provide on-the-job training. Gateway utilizes an interactive response system to provide recorded answers to the questions most frequently asked by customers. Technical Support Via E-Mail and Fax. In addition to the toll-free telephone support, Gateway's customers may send questions regarding Gateway's products via e-mail or fax and receive assistance from Gateway's technicians. Customers may also use a touch tone telephone to obtain automatic fax delivery of any of approximately 150 documents containing various technical information with regard to Gateway's products. Web Site: Bulletin Board Support. Gateway has a website on the Internet which, among other things, allows users to access technical support information with regard to Gateway's products. Gateway also offers its customers free membership to its electronic bulletin board service. This service may be used to obtain technical advice, and the website and the electronic bulletin board service permit users to correspond with other Gateway PC users and download selected software. In addition, Gateway's technicians are responsible for supporting customers on various other websites and bulletin board systems. On-Site Repair Service. On-site repair service is available at Gateway's discretion through independent contractors in Gateway's principal markets for desktop PCs. Gateway Service Options. Gateway offers several fee-based service options to give customers the flexibility to customize our services to their needs. Gateway GoldSM Premium service and support provides two additional years of onsite service as well as priority access to technical support professionals for desktop PCs. For portable PCs, the extended service option provides an additional two years of parts replacement coverage as well as priority access to technical support professionals. Custom Integration Services (CIS) allows customers to custom configure their systems with non-Gateway standard components, software, and services. In addition, software tutorial services are available through an independent supplier. Patents, Trademarks and Licenses The Company holds several U.S. and foreign patents and has various U.S. and foreign patent applications pending. In addition, Gateway works closely with PC component suppliers and other technology developers to stay abreast of the latest developments in PC technology. Where necessary, Gateway has obtained patent licenses for certain technologies, some of which require significant royalty payments. Beginning in 1995, Gateway began to emphasize in-house patent generation and strategic acquisition of patents. While Gateway does not believe that its continued success will depend upon technology patented or acquired by Gateway, there can be no assurance that Gateway will 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. Gateway owns and uses a number of trademarks on or in connection with its products, including AnyKey, "BLACK AND WHITE SPOT" Design, CrystalScan, Destination, Family PC, Gateway 2000, Gateway Gold, "G" Design, Telepath, Gateway Solo, Vivitron and "You've Got a Friend in the Business", among others. Many of these trademarks are registered. Gateway believes the GATEWAY 2000 and the famous "BLACK AND WHITE SPOT" design trademarks have strong brand name recognition in the United States marketplace and plans to develop similar recognition internationally. Because software used on Company-manufactured PCs may not be 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 95, Windows, MS-DOS and Microsoft Office software products, among others. Competition The PC industry is highly competitive, especially with respect to pricing and the introduction of new 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. Gateway competes with companies who sell their products primarily through direct marketing channels, such as Dell Computer Corporation and Micron Electronics, Inc. In addition, Gateway competes directly and indirectly with PC manufacturers, such as International Business Machines Corporation, Compaq Computer Corporation, Packard Bell Electronics, Inc., Hewlett- Packard Company and Apple Computer, Inc. In addition to utilizing their own direct sales forces, these competitors market their products through national and regional distributors and dealers; distribution channels in which Gateway generally has not participated other than through its ALR subsidiary. Competitive factors in Gateway's markets include price, availability of new technology, variety of products and features offered, availability of peripheral products and software, marketing and sales capability, service and support. Gateway believes it competes favorably with respect to each of these factors. Seasonality The computer industry generally has been subject to seasonality and to significant quarterly and annual fluctuations in operating results, and Gateway's operating results have been subject to such fluctuations. Fluctuations can result from a wide variety of factors affecting Gateway and its competitors. These factors include new product developments or introductions, availability of components, changes in product mix and pricing and product reviews and other media coverage. Gateway's business is also sensitive to the spending patterns of its customers, which in turn are subject to prevailing economic conditions. Historically, Gateway's sales have increased in the third and fourth quarters due, in part, to back-to-school and holiday spending. International Operations Through its wholly owned subsidiaries, Gateway 2000 Ireland Limited and Gateway 2000 Europe (collectively, "Gateway Ireland"), 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 and currently has showrooms in London, Paris, Munich, Cologne, Stockholm and Amsterdam and sales and support facilities in Germany and the United Kingdom. In the last half of 1995, Gateway entered the Asia Pacific region with sales and support facilities in Japan, showrooms in Tokyo, Melbourne, Brisbane and Sydney, a manufacturing facility in Malacca, Malaysia and the acquisition of the business and substantially all of the assets of Osborne Computer Corporation, an Australian PC maker. During 1997, showrooms were opened in Perth, Australia; Auckland, New Zealand; and Kuala Lumpur, Malaysia. Gateway also expanded in Kuala Lumpur with a new call center to handle the direct sales activities of Malaysia, Singapore and Hong Kong as well as customer support activities. A Gateway Country SM store was introduced in Osaka, Japan during 1997, with another store in Nagoya to become functional in June 1998. Gateway uses either direct selling or distributors to market PCs in foreign countries, depending on each country's infrastructure, consumer preferences, language and culture. While Gateway's international operations have increased market share to date, there can be no assurance that Gateway's expansion into international markets will be successful. Failure of Gateway to achieve or maintain successful international operations could materially and adversely affect Gateway's business, consolidated financial position or results of operations. In addition to the challenges to Gateway of managing the potential growth of its international operations, international expansion involves additional business risks such as foreign currency fluctuation, government regulation, liability for foreign taxes and product sales, and delivery and support logistics. There can be no assurance that Gateway will effectively manage these additional risks. Government Regulation Gateway's PCs must meet standards established by the Federal Communications Commission, and similar agencies in other countries, for radio frequency emissions and must receive appropriate certification prior to being shipped. A delay or inability to obtain certification may delay or prevent Gateway from introducing new products or features and therefore could materially and adversely affect Gateway's business, consolidated financial position, results of operations or cash flows. In addition, Gateway's advertising, shipping and other operations are subject to state regulations, regulations of the Federal Trade Commission and the U.S. Department of Commerce in the U.S., and similar foreign agencies in foreign jurisdictions. Even inadvertent or sporadic failure to comply with such regulations can result in significant fines, penalties and forced rebates levied against Gateway or special restrictions placed on Gateway's ability to ship product overseas. While Gateway has not been subject to any significant enforcement penalties to date, and while Gateway continues to use its best efforts to comply with all applicable foreign and domestic governmental regulations, Gateway does have matters pending before these agencies and accordingly, there can be no assurance that significant penalties will not be levied against Gateway in the future. Employees As of December 31, 1997, Gateway had approximately 13,300 full-time employees, of which 10,600 were in the U.S., 1,600 were in Europe and 1,100 were in other foreign countries. No employee of Gateway is represented by a labor union. Gateway believes employee relations are generally good. Backlog As of December 31, 1997, backlog was approximately $135 million, compared with backlog of approximately $110 million at the end of fiscal 1996. 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. Customers No customer accounted for 10% or more of Gateway's sales in 1997. Item 2. Properties Gateway owns 111 acres of land and facilities with a total of 856,800 square feet of space in North Sioux City, South Dakota. These facilities house Gateway's headquarters, a production facility, a customer sales and support center, a training center and warehouse space. Gateway also leases facilities with a total of 82,000 square feet of space in North Sioux City, South Dakota which are used for manufacturing and warehouse space. Gateway leases 162,700 square feet in Vermillion, South Dakota used for customer service and warehouse space. Gateway owns facilities with a total of 218,000 square feet of space in Sioux Falls, South Dakota. These 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. Gateway leases 182,000 square feet in Sioux Falls for remanufacturing operations. Gateway owns a facility with 208,400 square feet of space in Kansas City, Missouri and Kansas City, Kansas. The facility is used for a customer sales and support center. Gateway owns facilities with a total of 424,000 square feet of space in Hampton, Virginia. These facilities are used for manufacturing, customer support, and warehouse space. Gateway leases facilities in Irvine, California totaling 115,000 square feet. The facilities are used for manufacturing, sales, warehouse, and office space. Gateway also leases Gateway CountrySM store space in 37 cities located in 20 states, totaling 377,900 square feet. Gateway has purchased 35 acres of land in Salt Lake City, Utah and is currently constructing a facility to house another manufacturing plant. Gateway has also purchased 9 acres of land and a 50,000 square foot facility in Rio Rancho, New Mexico to be used as a customer support center. In Colorado Springs, Colorado, Gateway has leased a 50,000 square foot facility to be used as a customer support center. Gateway's European operations are based in Dublin, Ireland, where Gateway owns a 310,000 square foot facility. The facility houses Gateway's European headquarters, production facility, customer sales and support center and warehouse space. In Liederbach, Germany, Gateway leases a facility used for office and warehouse space. Gateway also leases showroom space in London, Paris, Munich, Cologne, Stockholm, and Amsterdam. In Malacca, Malaysia, Gateway owns a 187,200 square foot manufacturing facility which was opened to serve Gateway's markets in the Asia Pacific region. Gateway also leases a showroom and call center space in Kuala Lumpur. In Australia, Gateway leases a 57,000 square-foot sales and distribution facility in Sydney. Additionally, Gateway leases showroom space in Brisbane, Melbourne and Sydney. In Japan, Gateway leases facilities with 80,900 square feet in Yokohama and Tokyo used for a customer sales and support center and warehouse space. Gateway also leases showroom space in Tokyo and Osaka. In Singapore, Gateway leases a total of 32,900 square feet of facilities for office, manufacturing, 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. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market Information As of May 22, 1997, the Common Stock was quoted on the New York Stock Exchange under the trading symbol "GTW". Prior to May 22, 1997, the Common Stock was quoted on the NASDAQ National Market under the trading symbol "GATE". The following table sets forth the quarterly high and low price per share information for the Common Stock as quoted at the close of trading on such date in 1996 and 1997 and as adjusted for a two-for-one stock split on June 16, 1997: High Low 1996: 1st quarter $ 16.13 $ 9.00 2nd quarter $ 20.75 $ 13.63 3rd quarter $ 25.07 $ 13.88 4th quarter $ 33.13 $ 22.32 1997: 1st quarter $ 32.63 $ 23.81 2nd quarter $ 37.38 $ 26.19 3rd quarter $ 44.75 $ 31.50 4th quarter $ 36.13 $ 25.13 Holders of Record As of March 13, 1998, there were 4,543 holders of record of the Common Stock. There were no issued and outstanding shares of the Class A Common Stock as of such date. The Class A Common Stock is non-voting except on matters for which the General Corporation Law of the State of Delaware requires class voting. Dividends Gateway management believes the best use of retained earnings is to fund internal growth. 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 in the foreseeable future. Item 6. Selected Consolidated Financial Data The following historical data were derived from the Company's consolidated financial statements, which have been audited by Coopers & Lybrand L.L.P., independent accountants. This financial data should be read in conjunction with the consolidated financial statements and notes thereto beginning on page 19 of this Report and in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 11 of this Report. The information below is not necessarily indicative of the results of future operations. Year Ended December 31,
1993 1994 1995 1996 1997 (in thousands, except per share data) Consolidated Statements of Operations Data: Net sales $1,731,664 $2,701,200 $3,676,328 $5,035,228 $6,293,680 Cost of goods sold 1,460,842 2,343,698 3,070,234 4,099,073 5,217,239 Gross profit 270,822 357,502 606,094 936,155 1,076,441 Selling, general and administrative 357,086 580,061 786,168 expenses 121,682 216,505 Nonrecurring 113,842 expenses - - - - Operating income 149,140 140,997 249,008 356,094 176,431 Other income, net 4,848 5,106 13,085 26,622 27,189 Income before income taxes 153,988 146,103 262,093 382,716 203,620 Provision for actual and pro forma 132,037 income taxes 53,896 50,130 89,112 93,823 Net income and pro forma net income $ 100,092 $ 95,973 $ 172,981 $ 250,679 $ 109,797 Net income and pro forma Net income per share: Basic $ .82 $ .66 $ 1.19 $ 1.64 $ .71 Diluted $ .71 $ .61 $ 1.09 $ 1.60 $ .70 Weighted average shares outstanding: Basic 122,504 144,768 145,256 152,745 153,840 Diluted 141,907 157,313 157,988 156,237 156,201
December 31, 1993 1994 1995 1996 1997 (in thousands) Consolidated Balance Sheet Data: Current assets $ 500,520 $ 654,160 $ 866,189 $1,318,342 $ 1,544,683 Total assets $ 564,281 $ 770,579 $1,124,011 $1,673,411 $ 2,039,271 Current liabilities $ 254,844 $ 348,875 $ 525,291 $ 799,769 $ 1,003,906 Long-term obligations, net of current $ 29,145 $ 27,131 $ 10,805 $ 7,244 $ 7,240 maturities Stockholders' equity $ 280,292 $ 376,035 $ 555,519 $ 815,541 $ 930,044
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. There are many factors that affect the Company's business and its results of operations, including the factors discussed 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: 1995 1996 1997 Net sales 100.0% 100.0% 100.0% Cost of goods sold 83.5% 81.4% 82.9% Gross profit 16.5% 18.6% 17.1% Selling, general and administrative expenses 9.7% 11.5% 12.5% Nonrecurring expenses - - 1.8% Operating income 6.8% 7.1% 2.8% Other income, net 0.3% 0.5% 0.4% Income before income taxes 7.1% 7.6% 3.2% Provision for income taxes 2.4% 2.6% 1.5% Net income 4.7% 5.0% 1.7% Sales. Sales in 1997 increased 25% to $6.29 billion from $5.04 billion in 1996. The increase in sales resulted from continued demand growth in the Americas and Asia Pacific markets, the acquisition of Advanced Logic Research, Inc. (ALR) on July 23, 1997, and the continued growth in sales of the Company's portable products. Sales in the Americas region grew 25% over 1996 levels to $5.30 billion. International sales increased 25% to $989.8 million over the prior year. Sales in the Company's European region were $634.6 million, an increase of approximately 15% over the comparable period of 1996 despite a decrease in sales from the level in the second quarter of 1997. Sales for 1997 in the Company's Asia Pacific region totaled $355.2 million, an increase of 50% over 1996. Unit shipments in 1997 increased 35% to approximately 2,580,000 from 1,909,000 in 1996. Unit shipments in the Company's Americas region grew 35% over 1996. In the Company's European region, unit shipments grew 20% over 1996, and unit shipments in the Company's Asia Pacific region grew 84% over 1996. Sales from Pentium MMX-based and Pentium II-based desktop products accounted for approximately 32% and 24%, respectively, of the Company's total sales in 1997. Throughout 1997, sales from Pentium MMX-based and Pentium II-based products increased each quarter, to approximately 35% and 49%, respectively, in the fourth quarter. Portable products accounted for approximately 11% of total sales in 1997, versus approximately 9% in 1996. Portable products sales increased 56% and convergence product sales increased 55% over the prior year. Weighted average unit prices (AUP) declined approximately 8% during 1997. Generally, unit prices for specific PC products have decreased over time, reflecting the effects of competition and reduced component costs associated with advances in technology. The Company has generally offset the impact of these declines in component costs by adding or improving product features and by introducing new products based on newer technology at higher unit prices, resulting in fairly stable unit prices over time. When the timing of component cost reductions and new technology introduction is different, AUPs can fluctuate. The reduction in 1997 AUPs from 1996 levels is partially due to abnormally high AUPs experienced in the first four months of 1996. Beginning in the second quarter of 1996, in addition to normal component cost declines, the Company experienced significant declines in Dynamic Random Access Memory (DRAM) costs. AUPs throughout the second half of 1996 and the first half of 1997 were fairly stable, but began to decline in the third quarter of 1997 as component cost reductions again outpaced the introduction of new technology. Sales in 1996 increased 37% to $5.04 billion from $3.68 billion in 1995. The increase resulted from continued demand growth in the Americas and European markets, expansion into the Asia Pacific region and accelerated growth in sales of the Company's portable products. Unit shipments in 1996 increased 43% to approximately 1,909,000 from 1,338,000 in 1995. Average unit prices declined approximately 4% during 1996, reflecting the normal rate of component cost declines, significant cost declines in DRAM and a slowing of new technology during 1996. Gross Profit. Gross profit in 1997 increased approximately 15% to $1.076 billion from $936.2 million in 1996, but as a percentage of sales, gross profit decreased to 17.1% from 18.6% in 1996. The decline in gross profit as a percentage of sales was due to the effects of excess inventories during the third quarter of 1997. During this time period, there were significant declines in the market value of many inventory components. In order to promptly mitigate the impact of these excess inventories, the Company sold product with profit margins below targeted levels. In addition, reserves were recorded against excess and obsolete inventories still on hand at the end of the third quarter. Gross profit in 1996 increased approximately 54% from $606.1 million in 1995. As a percentage of sales, gross profit increased to 18.6% from 16.5% in 1995. Gross profit improved during 1996 principally due to improvements in meeting product sales mix forecasts associated with the introduction of new products, a decrease in DRAM prices and decreases in aggregate royalty cost per unit. Gross margin as a percent of sales also increased due to the timing of component cost decreases being passed on to customers through price declines. Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses in 1997 increased by approximately 36% to $786.2 million from $580.1 million in 1996. As a percentage of sales, these expenses increased to approximately 12.5% in 1997 from approximately 11.5% in 1996. The increase is primarily the result of increases in personnel, marketing, depreciation and amortization and the inclusion of the operating expenses of ALR. Beginning in 1997, certain expenses relating to the fulfillment of parts warranties have been reclassed from selling, general and administrative expenses to cost of goods sold. Personnel-related costs increased approximately 33% in 1997 compared with 1996, as a result of the continued building of the Company's infrastructure and increased expenditures to expand the sales force and technical support. The Company expects to continue to make the necessary personnel-related expenditures and investments to manage the growth of the Company. Marketing expenses increased approximately 52% in 1997 as compared to 1996. The increase represents the Company's continued efforts to target broader market bases, including the novice user. Also, marketing efforts were increased to support the expansion of the Gateway CountrySM stores. Depreciation and amortization expenses increased approximately 41% in 1997 compared to 1996, as a result of the Company's continued investments in facilities and software applications. Amortization expense increased due to intangible assets obtained in the acquisition of ALR during 1997. Selling, general and administrative expenses in 1996 increased 62% to $580.1 million from $357.1 million in 1995. As a percentage of sales, these expenses increased to 11.5% in 1996 from 9.7% in 1995. Significant factors contributing to this net increase included: higher personnel costs, additional marketing programs and overhead expenses associated with the Asia Pacific region. Nonrecurring Expenses. The Company recorded several nonrecurring pretax charges totaling $113.8 million in the third quarter of 1997. Of the nonrecurring charges, $59.7 million was for the write-off of in-process research and development acquired with the purchase of ALR and certain assets of Amiga Technologies. Also included in the nonrecurring charges was a non-cash write-off of $45.2 million resulting from the abandonment of a capitalized internal-use software project and certain computer equipment. In addition, $8.6 million was recorded for severance of employees and the closing of a foreign office. Operating Income. Due to the nonrecurring expenses incurred during the third quarter of 1997, a declining percentage of gross profit and the increase in operating expenses, operating income in 1997 decreased by 50% to $176.4 million from $356.1 million in 1996. Operating income, excluding nonrecurring items in 1997, decreased 18% from 1996 to $290.3 million. As a percentage of sales, operating income decreased to 2.8% in 1997 (4.6% excluding nonrecurring items) from 7.1% in 1996. In 1996, operating income increased 43% from $249.0 million in 1995, and remained relatively constant as a percentage of sales. Other Income, Net. Other income, net includes other income net of expenses, such as interest income and expense, lease financing commissions, referral fees for on-line services and foreign exchange transaction gains and losses. Other income, net increased to $27.2 million in 1997 from $26.6 million in 1996. The principal cause of this increase was the generation of additional interest income as a result of the availability of additional cash and marketable securities in 1997 compared to 1996. Other income, net in 1996 increased to $26.6 million from $13.1 million in 1995 primarily due to additional interest income generated as a result of the availability of additional cash and marketable securities as compared to 1995, and the generation of commissions from referrals for on-line services. Income Taxes. The Company's effective tax rate was 46.1%, 34.5%, and 34.0% in 1997, 1996 and 1995, respectively. The increase in the 1997 effective tax rate was primarily due to the impact of nonrecurring expenses relating to the write-off of in- process research and development arising in connection with the acquisitions of ALR and certain assets of Amiga Technologies which were nondeductible for income tax purposes. The effective tax rate for 1997 excluding the nonrecurring items was approximately 35.5%. The change from 1996 is attributed to shifts in the geographic distribution of the Company's earnings, which also impacted the change in the 1996 rate versus the 1995 rate. Liquidity and Capital Resources The Company has financed its operating and capital expenditure requirements to date principally through cash flow from its operations. At December 31, 1997, the Company had cash and cash equivalents of $593.6 million, marketable securities of $38.6 million and an unsecured committed credit facility with certain banks of $225 million, consisting of a revolving line of credit facility and a sub-facility for letters of credit. At December 31, 1997, no amounts were outstanding under the revolving line of credit. Approximately $3.5 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 or future credit facilities, will provide adequate flexibility for the Company's financial needs for at least the next 12 months. The Company generated approximately $442.8 million of cash from operations during 1997. Increases in accounts receivable and other current assets consumed approximately $96.5 million offset by decreases in inventory levels of $59.5 million. Also, increases in accounts payable, accrued liabilities and other liabilities contributed $156.9 million. The Company used approximately $360.7 million in cash for investing activities as a result of the Company's continued investment in facilities, a $38.6 million net investment in marketable securities, and the $142.3 million purchase of ALR, net of cash acquired. Of the purchase price, $58.6 million was allocated to in-process research and development projects. The Company expects ALR to continue to develop these projects into commercially viable products in the normal course of business over the next 1 to 5 years. At December 31, 1997, the Company had long-term indebtedness and capital lease obligations of approximately $21.2 million. These obligations relate primarily to the Company's expansion of international operations and its investments in equipment and facilities. Borrowings, exclusive of capital lease obligations, bear fixed and variable rates of interest currently ranging from interest free (for certain incentive funds from the Industrial Development Authority of the City of Hampton, Virginia) to 8.87% and have varying maturities through the year 2001. The Company's capital lease obligations relate principally to its computer and telephone system equipment. 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. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 131 - Disclosures about Segments of an Enterprise and Related Information. SFAS 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by management. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements is also to be provided. SFAS No. 131 is effective for the Company in 1998. Based on current internal reporting, the Company does not expect this new accounting pronouncement to have a significant impact on its segment reporting. Year 2000 The Company recognizes the need to ensure that its operations will not be adversely impacted by Year 2000 software failures. Software failures due to processing errors potentially arising from calculations using the Year 2000 date are a known risk. In 1997, the Company created a corporate-wide Year 2000 project team representing all business units of the Company. The Company's Year 2000 remediation efforts include the implementation of upgrades to existing system applications as well as the addition and implementation of new system applications. The Company anticipates the implementation phase of this project to begin no later than the second quarter of 1998 and to be completed by the second quarter of 1999. If the necessary modifications and implementations are not made on a timely basis, the Year 2000 issue could have a material, adverse effect on the business, consolidated financial position, results of operations or cash flows of the Company. In addition to internal Year 2000 software and equipment implementation activities, the Company is in contact with its suppliers to assess their compliance. There can be no absolute assurance that there will not be a material adverse effect on the Company if third parties do not convert their systems in a timely manner and in a way that is compatible with the Company's systems. The Company believes that its actions with suppliers will minimize these risks. Through 1997, the Company had expensed incremental costs of approximately $350,000 related to the Year 2000 remediation efforts. The current total estimated cost to complete the Year 2000 remediation efforts is from $10 to $15 million, exclusive of upgrades to existing applications and implementation of new systems. Internal and external costs specifically associated with modifying internal-use software for the Year 2000 will be charged to expense as incurred. All of these costs are being funded through operating cash flows. The Company's current estimates of the amount of time and costs necessary to implement and test its computer systems are based on the facts and circumstances existing at this time. The estimates were derived utilizing multiple assumptions of future events including the continued availability of certain resources, implementation success and other factors. New developments may occur that could affect the Company's estimates for the Year 2000 compliance. These developments include, but are not limited to: (a) the availability and cost of personnel trained in this area, (b) the ability to locate and correct all relevant computer code and equipment, and (c) the planning and modification success needed to achieve full implementation. In addition, since there is no uniform definition of Year 2000 "compliance" and not all customer situations can be anticipated, the Company may experience an increase in warranty and other claims as a result of the Year 2000 transition. Factors That May Affect Future Results Factors that could cause future results to differ from these expectations include the following: growth in the personal computer industry; competitive factors and pricing pressures; component supply shortages; inventory risks due to shifts in market demand; changes in the product, customer or geographic sales mix in any particular period; the outcome of pending and future litigation; access to necessary intellectual property rights; changes in government regulation; foreign currency fluctuations; risks of acquired businesses; and general domestic and international economic conditions. In addition to other information contained in this Report, the following factors, among others, sometimes have affected, and in the future could affect, the Company's actual results, and could cause future results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. The Company has experienced, and may continue to experience, problems with respect to the size of its work force and production facilities and the adequacy of its management information and other systems, purchasing and inventory controls, and the forecasting of component part needs. These problems can result in high backlog of product orders, delays in customer support response times and increased expense levels. Short product life cycles characterize the PC industry, resulting from rapid changes in technology and consumer preferences and declining product prices. The Company's in-house engineering personnel work closely with PC component suppliers and other technology developers to evaluate the latest developments in PC-related technology. There can be no assurance that the Company will continue to have access to or the right to use new technology or will be successful in incorporating such new technology in its products or features in a timely manner. Certain key management employees, particularly Ted Waitt, Chairman and Chief Executive Officer and a founder of the Company, have been instrumental in the success of the Company. The Company has not entered into an employment agreement with Ted Waitt. The loss of Ted Waitt's services could materially and adversely affect the Company. Over the past several years, state tax authorities have made inquiries as to whether or not the Company's alleged contacts with those states might require the collection of sales and use taxes from customers and/or the payment of income tax in those states. The Company evaluates such inquiries on a case-by-case basis, and will vigorously contest any such claims for payment of taxes which it believes are without merit. The Company has favorably resolved these types of tax issues in the past without any material adverse consequences. However, there can be no assurance that the amount of any sales or use taxes the Company might ultimately be required to pay for prior periods would not materially affect the Company's results of operations or cash flows in any given reporting period. The Company currently pays state income taxes in the states where it has a physical presence. The Company has not paid income taxes in other states, nor has it established significant reserves for the payment of such taxes. Management believes that the amount of any income tax the Company might ultimately be required to pay for prior periods would not materially and adversely affect the Company's business, consolidated financial position, results of operations or cash flows. 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 strengthens or weakens 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, the Japanese Yen, the French Franc 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. 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. Foreign currency exchange contracts are sensitive to changes in foreign currency exchange rates. At December 31, 1997, 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 $27 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, such unrealized gains or losses would be offset by corresponding decreases or increases, respectively, of the underlying transaction being hedged. Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Financial Statements: Report of Independent Accountants ....................... 18 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 97 ............... 19 Consolidated Balance Sheets at December 31, 1996 and 1997 20 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997....................21 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997..............22 Notes to Consolidated Financial Statements.................... 23 Financial Statement Schedule: Schedule II -Valuation and Qualifying Accounts.................36 Report of Independent Accountants To the Stockholders and Board of Directors Gateway 2000, Inc. We have audited the consolidated financial statements and financial statement schedule of Gateway 2000, Inc. as listed in the index on page 17 of this Form 10-K. 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 the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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 the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gateway 2000, Inc. as of December 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Omaha, Nebraska January 22, 1998 Gateway 2000, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 1995, 1996 and 1997 (in thousands, except per share amounts)
1995 1996 1997 Net sales $ 3,676,328 $ 5,035,228 $ 6,293,680 Cost of goods sold 3,070,234 4,099,073 5,217,239 Gross profit 606,094 936,155 1,076,441 Selling, general and administrative expenses 357,086 580,061 786,168 Nonrecurring expenses - - 113,842 Operating income 249,008 356,094 176,431 Other income, net 13,085 26,622 27,189 Income before income taxes 262,093 382,716 203,620 Provision for income taxes 89,112 132,037 93,823 Net income $ 172,981 $ 250,679 $ 109,797 Net income per share: Basic $ 1.19 $ 1.64 $ .71 Diluted $ 1.09 $ 1.60 $ .70 Weighted average shares outstanding: Basic 145,256 152,745 153,840 Diluted 157,988 156,237 156,201
The accompanying notes are an integral part of the consolidated financial statements. Gateway 2000, Inc. CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1997 (in thousands, except per share amounts)
1996 1997 ASSETS Current assets: Cash and cash equivalents $ 516,360 $ 593,601 Marketable securities -- 38,648 Accounts receivable, net 449,723 510,679 Inventory 278,043 249,224 Other 74,216 152,531 Total current assets 1,318,342 1,544,683 Property, plant and equipment, net 242,365 336,469 Internal use software costs, net 77,073 39,998 Intangibles, net 9,869 82,590 Other assets 25,762 35,531 $ 1,673,411 $ 2,039,271 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of long-term obligations $ 15,041 $ 13,969 Accounts payable 411,788 488,717 Accrued liabilities 190,762 271,250 Accrued royalties 125,270 159,418 Income taxes payable 40,334 26,510 Other current liabilities 16,574 44,042 Total current liabilities 799,769 1,003,906 Long-term obligations, net of current maturities 7,244 7,240 Warranty and other liabilities 50,857 98,081 Total liabilities 857,870 1,109,227 Commitments and Contingencies (Notes 3 and 4) Stockholders' equity: Preferred stock, $.01 par value, 10,000 shares authorized; none issued and outstanding -- -- Class A common stock, nonvoting, $.01 par value, 2,000 shares authorized; none issued and outstanding -- -- Common stock, $.01 par value, 440,000 shares authorized; 153,512 shares and 154,128 shares issued and outstanding, respectively 1,536 1,541 Additional paid-in capital 288,744 299,483 Retained earnings 524,712 634,509 Other 549 (5,489) Total stockholders' equity 815,541 930,044 $ 1,673,411 $ 2,039,271 The accompanying notes are an integral part of the consolidated financial statements.
Gateway 2000, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1995, 1996 and 1997 (in thousands)
1995 1996 1997 Cash flows from operating activities: Net income $ 172,981 $ 250,679 $109,797 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 38,086 61,763 86,774 Provision for uncollectible accounts receivable 7,779 20,832 5,688 Deferred income taxes (23,778) (13,395) (63,247) Other, net 520 1,986 42 Nonrecurring expenses -- -- 113,842 Changes in operating assets and liabilities: Accounts receivable (157,958) (66,052) (41,950) Inventory (103,202) (54,261) 59,486 Other current assets (10,847) (13,311) (54,513) Accounts payable 51,765 176,724 66,253 Accrued liabilities 20,690 51,390 48,405 Accrued royalties 37,567 1,885 34,148 Income taxes payable 50,516 42,880 8,347 Other current liabilities (7,252) 177 27,469 Other liabilities 12,890 22,699 42,256 Net cash provided by 442,797 operating activities 89,757 483,996 Cash flows from investing activities: Capital expenditures (95,817) (112,187) (162,010) Internal use software costs (39,040) (31,559) (13,646) Purchases of available-for-sale securities (10,679) -- (49,619) Purchases of held-to-maturity securities (1,685) -- -- Proceeds from maturities of held-to-maturity securities 5,000 -- -- Proceeds from maturities or sales of available-for- sale securities 33,023 3,030 10,985 Acquisitions, net of cash acquired (3,620) -- (142,320) Other, net (13,152) 2,667 (4,055) Net cash used in investing activities (125,970) (138,049) (360,665) Cash flows from financing activities: Proceeds from issuance of notes 10,000 payable 5,000 10,000 Principal payments on long-term obligations and notes payable (24,600) (14,047) (15,588) Stock options exercised 5,741 8,107 9,520 Net cash provided by (used 153 in) financing activities (11,493) 5,473 Foreign exchange effect on cash and cash equivalents 82 (1,457) (5,044) Net increase (decrease) in cash and 77,241 cash equivalents (47,624) 349,963 Cash and cash equivalents, 214,021 516,360 beginning of year 166,397 Cash and cash equivalents, end of $ 166,397 $ 516,360 $ 593,601 year
The accompanying notes are an integral part of the consolidated financial statements. Gateway 2000, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 1995, 1996 and 1997 (in thousands)
Common Stock Additional Paid-in Retained Shares Amount Capital Earnings Other Total Balances at December 31, 1994 144,792 $ 1,448 $ 273,676 $ 101,052 $ (141) $ 376,035 Net income -- -- -- 172,981 -- 172,981 Stock issuances under employee plans, including tax benefit of $ 23,030 6,541 66 31,071 -- -- 31,137 Stock retirement (2,227) (22) (25,046) -- -- (25,068) Foreign currency translation -- -- -- -- 324 324 Other -- -- -- -- 110 110 Balances at December 31, 1995 149,106 1,492 279,701 274,033 293 555,519 Net income -- -- -- 250,679 -- 250,679 Stock issuances under employee plans, including tax benefit of $ 30,451 6,545 66 39,905 -- -- 39,971 Stock retirement (2,139) (22) (30,862) -- -- (30,884) Foreign currency translation -- -- -- -- 225 225 Other -- -- -- -- 31 31 Balances at December 31, 1996 153,512 1,536 288,744 524,712 549 815,541 Net income -- -- -- 109,797 -- 109,797 Stock issuances under employee plans, including tax benefit of $ 5,003 616 5 10,739 -- -- 10,744 Foreign currency translation -- -- -- -- (6,053) (6,053) Other -- -- -- -- 15 15 Balances at December 31, 1997 154,128 $ 1,541 $299,483 $ 634,509 $ (5,489) $ 930,044
The accompanying notes are an integral part of the consolidated financial statements. Gateway 2000, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Gateway 2000, Inc. (the "Company") is a direct marketer of personal computers ("PCs") and PC-related products. The Company develops, manufactures, markets and supports a broad line of desktop and portable PCs, digital media (convergence) PCs, servers, workstations and PC-related products used by individuals, families, businesses, government agencies and educational institutions. The significant accounting policies used in the preparation of the consolidated financial statements of Gateway 2000, Inc. are as follows: (a) Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. (b) 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. (c) Marketable Securities: The carrying amounts of the 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, net unrealized holding gains and losses are reported as a separate component of stockholders' equity, net of tax. Held-to-maturity securities are recorded at amortized cost. Amortization of related discounts or premiums is included in the determination of net income. Marketable securities at December 31, 1997, consisted of available-for-sale mutual funds, commercial paper and debt securities, with a market value of $38,648,000 and an amortized cost of $38,636,000, with variable maturities through 1999. Realized and unrealized gains and losses are not material for any of the periods presented. (d) 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. (e) Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is provided using straight-line and accelerated methods over the assets' estimated useful lives. 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. (f) Internal Use Software Costs: The Company capitalizes costs of purchased software and, once technological feasibility has been established, costs incurred in developing software for internal use. Amortization of software costs begins when the Gateway 2000, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) software is placed in service and is computed on a straight-line basis over the estimated useful life of the software, generally 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. The realizability of intangibles is evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount. (h) 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. (i) 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. (j) Stock Split: On May 15, 1997, the Board of Directors authorized a two-for- one stock split which was distributed on or about June 16, 1997, to shareholders of record on June 2, 1997. All references in the financial statements to number of shares and per share amounts of the Company's stock have been retroactively restated to reflect the increased number of common shares outstanding. (k) Revenue Recognition: Sales are recorded when products are shipped. A provision for estimated sales returns is recorded in the period in which related sales are recognized. Revenue from separately priced extended warranty programs is deferred and recognized over the extended warranty period on a straight-line basis. (l) Net Income Per Share: In 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 128 , "Earnings per Share" which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effect of options, warrants and convertible securities. Earnings per share amounts for all periods presented have been restated to SFAS 128 requirements. Gateway 2000, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table sets forth a reconciliation of shares used in the computation of basic and diluted earnings per share.
1995 1996 1997 (in thousands) Net income for basic and diluted earnings per share $ 172,981 $ 250,679 $ 109,797 Weighted average shares for basic earnings per share 145,256 152,745 153,840 Dilutive effect of stock options 12,732 3,492 2,361 Weighted average shares for diluted earnings per share 157,988 156,237 156,201
(m) Foreign Currency: The Company uses the U.S. dollar as its functional currency for the majority of its international operations. 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 as a component of stockholders' equity. 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, the Japanese Yen, the French Franc, 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 $132,930,000 and $257,051,000 were outstanding at December 31, 1996 and 1997, respectively. The estimated fair value of these forward contracts at December 31, 1996 and 1997, was $137,726,000 and $253,519,000, 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 does not anticipate nonperformance by any of these counterparties. (n) 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. Gateway 2000, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (o) Reclassifications: Certain reclassifications have been made to prior years' financial statements to conform to current year presentation. These reclassifications had no impact on previously reported net income or stockholders' equity. 2. Financing Arrangements: (a) Credit Agreement: The Company is party to an unsecured bank credit agreement (the "Agreement"), totaling $225 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 1996 and 1997. At December 31, 1996 and 1997, approximately $4,360,000 and $3,515,000, 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 the fair value, which is estimated based on current rates offered to the Company for obligations of the same remaining maturities. Long-term obligations include notes and obligations under capital leases and consist of the following: December 31, 1996 1997 (in thousands) Notes payable through 2001 with interest rates ranging from zero to 8.87% $ 19,312 $ 20,568 Obligations under capital leases, payable in monthly installments at fixed rates ranging from 3.28% to 5.90% through 1999 (Note 3) 2,973 641 22,285 21,209 Less current maturities 15,041 13,969 $ 7,244 $ 7,240 Gateway 2000, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The long-term obligations, excluding obligations under capital leases, have the following maturities as of December 31, 1997: (in thousands) 1998 $ 13,571 1999 4,928 2000 69 2001 2,000 2002 -- $ 20,568 3. Commitments: The Company leases certain operating facilities and equipment under noncancelable operating leases expiring at various dates through 2010. Rent expense was approximately $6,214,000, $11,873,000, and $16,105,000 for 1995, 1996 and 1997, respectively. Future minimum lease payments under terms of these leases as of December 31, 1997 are as follows: Capital Operating Leases Leases (in thousands) 1998 $ 398 $ 15,336 1999 254 12,695 2000 3 9,250 2001 -- 8,259 2002 -- 6,360 Thereafter -- 3,625 Total minimum lease payments $ 655 $ 55,525 Less amount representing interest 14 Present value of net minimum lease payments $ 641 The Company has entered into licensing and royalty agreements which allow it to use certain hardware and software intellectual properties in its products. Minimum royalty payments due under these agreements for the period 1998 through 2002 total approximately $346,600,000. Total royalty expense is expected to be greater than this minimum amount for these periods. 4. Contingencies: The Company is a party to various lawsuits and administrative proceedings arising in the ordinary course of its business. The Company evaluates such lawsuits and proceedings on a case-by-case basis, and its policy is to vigorously contest any such claims which it believes are without merit. The Company's management believes that the ultimate resolution of such pending matters will not materially adversely affect the Company's business, financial position, results of operations or cash flows. Over the past several years, state tax authorities have made inquiries as to whether or not the Company's alleged contacts with those states might require the collection of sales and use taxes from customers and/or the payment of income tax in those states. The Company evaluates such inquiries on a case-by-case basis, and will vigorously contest any such claims for payment of taxes which it believes are without merit. The Company has favorably resolved these types of tax issues in the past without any material adverse consequences. However, there can be no assurance that the amount of any sales or use taxes the Company might ultimately be required to pay for prior periods would not materially affect the Company's results of operations or cash flows in any given reporting period. The Company currently pays state income taxes in the states where it has a physical presence. The Company has not paid income taxes in any other state, nor has it established significant reserves for the payment of such taxes. Management believes that the amount of any income tax the Company might ultimately be required to pay for prior periods would not materially and adversely affect the Company's business, consolidated financial position, results of operations or cash flows. 5. Income Taxes: The components of the provisions for income taxes are as follows: For the year ended December 31, 1995 1996 1997 (in thousands) Current: United States $109,296 $140,451 $154,049 Foreign 3,594 4,981 3,021 Deferred: United States (19,823) (1,727) (49,564) Foreign (3,955) (11,668) (13,683) $ 89,112 $132,037 $ 93,823 Income (loss) before income taxes included approximately $9,300,000, $2,400,000 and ($24,000,000) related to foreign operations for the years ended December 31, 1995, 1996 and 1997, respectively. A reconciliation of the provision for income taxes and the amount computed by applying the federal statutory income tax rate to income before taxes is as follows: 1995 1996 1997 (in thousands) Federal income tax at statutory rate $ 91,732 $133,951 $ 71,267 Nondeductible purchased research and development costs -- -- 20,704 Other, net (2,620) (1,914) 1,852 Provision for income taxes $ 89,112 $132,037 $ 93,823 Gateway 2000, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred tax assets and deferred tax liabilities result from temporary differences in the following accounts: December 31, 1996 1997 (in thousands) U.S. deferred tax assets: Inventory $ 8,768 $ 20,572 Accounts receivable 4,955 6,775 Accrued liabilities 21,035 35,793 Other liabilities 16,101 36,912 Property, plant & equipment 539 -- Other 1,125 3,612 Total U.S. 52,523 103,664 Foreign deferred tax assets: Operating loss carryforwards 12,619 17,832 Other 3,004 2,459 Total foreign 15,623 20,291 Total deferred tax assets 68,146 123,955 U.S. deferred tax liabilities: Intangible assets 20,126 34,006 Property, plant & equipment -- 2,668 Other 268 3,439 Total deferred tax liabilities 20,394 40,113 Net deferred tax assets $ 47,752 $ 83,842 The Company has foreign net operating loss carryforwards of $49,000,000. Of this amount, $8,300,000 expires in the year 2000, $27,300,000 in the year 2002 and $13,400,000 in the year 2006. The Company has assessed its sales forecast 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. 6. Stock Option Plans: In 1991, the Company entered into stock option agreements with certain officers providing for the purchase of 13,224,120 shares of the Company's Common Stock. In December 1991, the Company and its stockholders adopted the Gateway 2000, Inc. 1992 Stock Option Plan ("the 1992 Option Plan") for the benefit of its officers and other managers. Under the 1992 Option Plan, options to purchase 1,105,104 shares of the Company's Class A Common Stock were granted. Shares of Class A Common Stock may be converted into an equal number of shares of Common Stock at any time after December 18, 1994. Options were first granted under the Plan in 1992 and generally vest over a four-year period, retroactive to an option holder's initial date of employment. These options expire, if not exercised, ten years from the date of grant. In 1993, the Company and its stockholders adopted the Gateway 2000, Inc. 1993 Stock Option Plan (the "1993 Option Plan") which replaced the 1992 Option Plan. Under the 1993 Option Plan, options to purchase up to 3,874,416 shares of the Company's Common Stock or Class A Common Stock may be granted. Under the 1993 Option Plan, after December 14, 1993, only options for the purchase of Common Stock may be granted. These options generally vest over a four-year period beginning on either the grant date or the option holder's initial date of employment. These options expire, if not exercised, ten years from the date of grant. In 1993, the Company and its stockholders also adopted the Gateway 2000, Inc. 1993 Non-Employee Directors Stock Option Plan (the "Director Option Plan"). The Director Option Plan authorized the issuance of up to 40,000 shares of Common Stock to non-employee directors. Options granted under this plan vest one year from the grant date and expire, if not exercised, ten years from the date of grant. In 1996, the Company and its stockholders adopted the Gateway 2000, Inc. 1996 Long-Term Incentive Equity Plan (the "1996 Employee Plan"). Under the 1996 Employee Plan, participants may receive stock options, stock appreciation rights or stock awards as determined by the Compensation Committee of the Board of Directors. The aggregate number of shares of Common Stock which may be issued or transferred to participants under the 1996 Employee Plan is 12,800,000. Stock options granted under this plan vest over a four-year period beginning on the grant date and expire, if not exercised, ten years from the date of grant. In addition, in 1996, the Company and its stockholders adopted the Gateway 2000, Inc. 1996 Non-Employee Directors Stock Option Plan (the "1996 Director Plan") which replaced the Director Option Plan. The 1996 Director Plan authorizes the issuance of up to 600,000 shares of Common Stock to non-employee directors. Options granted generally vest over a three-year time period beginning on the grant date and expire, if not exercised, ten years from the date of grant. In 1997, the Company introduced the Gateway GoldShares stock option program and awarded stock options pursuant to the Company's 1996 Long-Term Incentive Equity Plan to eligible employees based on length of service and pay level. Under the GoldShares program, eligible employees were granted options to purchase approximately 1,300,000 shares of Common Stock at $32.63 per share in September 1997. Options granted under the plan vest at the rate of 25% per year from the grant date and expire, if not exercised, ten years from the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standard No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the estimated fair value at the grant date for awards in 1995, 1996 and 1997 consistent with the provisions of SFAS No. 123, net income and net income per share would have been reduced to the pro forma amounts indicated below:
1995 1996 1997 (in thousands, except per share amounts) Net income - as reported $ 172,981 $ 250,679 $ 109,797 Net income - pro forma $ 171,149 $ 241,729 $ 85,804 Net income per share - as reported Basic $ 1.19 $ 1.64 $ .71 Diluted $ 1.09 $ 1.60 $ .70 Net income per share - pro forma Basic $ 1.18 $ 1.58 $ .56 Diluted $ 1.08 $ 1.55 $ .55
The pro forma effect on net income for 1995, 1996 and 1997 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 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for all grants in 1995, 1996 and 1997: dividend yield of zero percent; expected volatility of 60 percent; risk-free interest rates ranging from 5.2 to 7.2 percent; and expected lives of the options of three and one-half years from the date of vesting. Gateway 2000, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) All options have exercise prices equal to the fair market value of the related stock on the date of grant. A summary of the status of the Company's stock option plans is presented below:
Year Ended December 31, 1995 (in thousands, except per share amounts) Weighted- Class A Weighted- Common Average Common Average Stock Price Stock Price Outstanding, beginning of period 13,650 $ 1.37 1,248 $ 2.10 Granted 1,384 12.14 -- -- Exercised and converted (6,253) 1.21 (287) 1.97 Forfeited (42) 6.82 -- -- Outstanding, end of period 8,739 $ 3.16 961 $ 2.14 Options available for grant, end of period 1,937 -- Options exercisable, end of period 7,119 $ 1.30 810 $ 2.01 Weighted-average fair value of options granted during the year $ 7.45 $ --
Year Ended December 31, 1996 (in thousands, except per share amounts) Weighted- Class A Weighted- Common Average Common Average Stock Price Stock Price Outstanding, beginning of period 8,739 $3.16 962 $ 2.14 Granted 3,260 15.75 -- -- Exercised and converted (6,305) 1.43 (241) 2.13 Forfeited (254) 14.15 (8) 3.25 Outstanding, end of period 5,440 $12.20 713 $ 2.12 Options available for grant, end of period 12,309 -- Options exercisable, end of period 1,283 $4.28 672 $ 2.06 Weighted-average fair value of options granted during the year $ 9.65 $ --
Year Ended December 31, 1997 (in thousands, except per share amounts) Weighted- Class A Weighted- Common Average Common Average Stock Price Stock Price Outstanding, beginning of period 5,440 $ 12.20 713 $ 2.12 Granted 5,253 36.08 -- -- Exercised and converted (463) 11.56 (153) 2.50 Forfeited (775) 23.69 -- -- Outstanding, end of period 9,455 $ 22.98 560 $ 2.02 Options available for grant, end of period 8,328 -- Options exercisable, end of period 2,582 $ 9.86 556 $ 2.01 Weighted-average fair value of options granted during the year $ 21.61 $ --
Gateway 2000, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about the Company's Common Stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable Range of Number Weighted-Average Number Weighted- Exercise Outstandi Remaining Weighted- Exercisable Average Prices ng at Contractual Life Average at 12/31/97 Price 12/31/97 Price $1.19 - 1.19 760 3.41 years $ 1.19 760 $ 1.19 6.82 -13.38 2,526 7.72 years 11.73 1,077 10.73 13.44 -19.69 1,739 8.19 years 17.62 717 17.15 20.89 -29.44 1,559 9.06 years 28.82 28 25.74 29.53 -34.44 1,428 9.67 years 32.72 - - 35.00 -44.75 1,443 9.56 years 44.66 - -
The following table summarizes information about the Company's Class A Common Stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable Range of Number Weighted-Average Number Weighted-Average Exercise Outstanding Remaining Weighted- Exercisable at Price Prices at 12/31/97 Contractual Life Average Price 12/31/97 $1.86 - 3.24 560 5.07 years $ 2.02 556 $ 2.01 7. 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 25% matching employer contribution of up to 1% of their annual eligible compensation for the first 12 months of participation, and a 50% matching employer contribution up to 2% of their annual eligible compensation for all subsequent months of participation. The Company contributed $640,000, $871,000, and $2,068,000 to the Plan during 1995, 1996 and 1997, respectively. 8. Acquisition: During the third quarter of 1997, the Company acquired substantially all of the outstanding shares of common stock of Advanced Logic Research, Inc. (ALR), a manufacturer of network servers and personal computers, for a cash purchase price of approximately $196,400,000. Of the purchase price, approximately $58,600,000 was allocated to in-process research and development costs and expensed during the third quarter. These costs were expensed as the technological feasibility of the in-process research and development had not yet been established and the technology had no alternative use. In addition, $83,300,000 of the purchase price was allocated to certain identifiable intangibles (including intellectual property, workforce, and customer base) and the remaining to ALR's net tangible assets which included approximately $58,100,000 in cash. The acquisition was accounted for as a purchase business combination. Beginning July 23, 1997, the results of ALR have been included in the Company's consolidated financial statements. ALR's operating results for periods prior to the acquisition date were not material to the Company's consolidated results of operations. Gateway 2000, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. 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 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. 10. Selected Balance Sheet Information: December 31, 1996 1997 (in thousands) Accounts receivable, net: Accounts receivable $ 468,691 $ 530,743 Allowance for uncollectible accounts (18,968) (20,064) $ 449,723 $ 510,679 Inventory: Components and subassemblies $ 269,959 $ 215,318 Finished goods 8,084 33,906 $ 278,043 $ 249,224 Property, plant and equipment, net: Land $ 14,888 $ 21,431 Leasehold improvements 5,096 21,666 Buildings, including construction in progress 131,180 177,766 Office and production equipment 144,477 186,281 Furniture and fixtures 25,084 42,055 Vehicles 3,754 4,105 324,479 453,304 Accumulated depreciation and amortization (82,114) (116,835) $ 242,365 $ 336,469 Internal use software costs, net: Purchased software $ 33,102 $42,926 Internally developed software 71,475 38,486 104,577 81,412 Accumulated amortization (27,504) (41,414) $ 77,073 $ 39,998 Amortization expense of $7,674,000, $13,591,000, and $20,691,000 relating to software costs was included in the results of operations for the years ended December 31, 1995, 1996 and 1997, respectively. Gateway 2000, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Supplemental Statements of Cash Flows Information:
Year ended December 31, 1995 1996 1997 (in thousands) Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 2,119 $ 665 $ 716 Cash paid during the year for income taxes $ 61,322 $ 101,774 $ 163,710 Supplemental schedule of noncash investing and financing activities: Capital lease obligation/long-term obligations incurred for the purchase of new equipment $ 11,071 $ 3,126 $ 4,593 Acquisitions Fair value of assets acquired $ 12,620 $ 271,189 Less: Liabilities assumed 9,000 70,773 Cash acquired - 58,096 Acquisitions, net of cash acquired $ 3,620 $ 142,320
12. Geographic Data: The Company operates in one principal business segment across geographically diverse markets. Transfers between geographic areas are recorded using internal transfer prices set by the Company. The Americas operating income is net of corporate expenses. 1995 geographic data have been restated to separately reflect the Europe geographic area. Export sales from the Americas to unaffiliated customers are not material for any period presented. The following table sets forth information about the Company's operations by geographic area.
Americas Europe Pacific Eliminations Consolidated (in thousands) 1997: Net sales to unaffiliated customers $5,303,828 $634,616 $355,236 $-- $ 6,293,680 Transfers between geographic areas 56,922 16,163 21,071 (94,156) -- Operating profit (loss) 198,638 (11,566) (9,733) (908) 176,431 Identifiable assets 1,701,654 187,215 150,402 -- 2,039,271 1996: Net sales to unaffiliated customers $4,246,047 $552,671 $236,510 $-- $5,035,228 Transfers between geographic areas 30,208 23,538 4,087 (57,833) -- Operating profit (loss) 347,348 19,930 (9,946) (1,238) 356,094 Identifiable assets 1,349,781 178,988 144,642 -- 1,673,411 1995: Net sales to unaffiliated customers $3,210,658 $428,107 $37,563 $ -- $3,676,328 Transfers between geographic areas 250 40,062 -- (40,312) -- Operating profit (loss) 235,259 27,195 (13,019) (427) 249,008 Identifiable assets 967,682 124,796 31,533 -- 1,124,011
Gateway 2000, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. Selected Quarterly Financial Data (Unaudited): The following tables contain selected unaudited consolidated quarterly financial data for the Company:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (in thousands, except per share amounts) 1997: Net sales $1,419,336 $1,392,658 $1,504,851 $ 1,976,835 Gross profit 265,793 260,358 195,250 355,040 Operating income (loss) 94,878 79,851 (137,850) 139,551 Net income (loss) 67,516 56,483 (107,113) 92,910 Net income (loss) per share: Basic $ .44 $ .37 $ (.70) $ .60 Diluted $ .43 $ .36 $ (.68) $ .59 Weighted average shares outstanding: Basic 153,557 153,740 153,980 153,840 Diluted 157,291 156,231 156,875 156,526 Stock sales price per share: High $ 32.63 $ 37.38 $ 44.75 $ 36.13 Low $ 23.81 $ 26.19 $ 31.50 $ 25.13 1996: Net sales $1,142,202 $1,137,262 $1,202,933 $1,552,831 Gross profit 212,331 206,171 223,378 294,276 Operating income 70,502 70,801 87,757 127,034 Net income 50,487 51,352 60,696 88,144 Net income per share: Basic $ .33 $ .34 $ .40 $ .57 Diluted $ .32 $ .33 $ .39 $ .56 Weighted average shares outstanding: Basic 151,192 153,126 153,257 153,394 Diluted 155,732 155,922 156,276 157,120 Stock sales price per share: High $ 16.13 $ 20.75 $ 25.07 $ 33.13 Low $ 9.00 $ 13.63 $ 13.88 $ 22.32
Gateway 2000, Inc. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1995, 1996 and 1997 (in thousands) Balance at Beginning of Charged to from End of Period Expense Allowance Period Year ended December 31, 1995: Allowance for uncollectible accounts (deducted from accounts receivable) $ 13,900 $ 7,779 $ 10,125 $ 11,554 Year ended December 31, 1996: Allowance for uncollectible accounts deducted from accounts receivable) $ 11,554 $ 20,832 $ 13,418 $ 18,968 Year ended December 31, 1997: Allowance for uncollectible accounts (deducted from accounts receivable) $ 18,968 $ 5,688 $ 4,592 $ 20,064
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 stockholder's, which will be filed with the Commission within 120 days of the end of fiscal year 1997. 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 17 of this Report. (2) Exhibits. Exhibits identified in parentheses below, on file with the Securities and Exchange Commission are incorporated herein by reference as exhibits hereto.
Exhibit Description of Exhibits No. 3.1 Amended and Restated Certificate of Incorporation of Gateway 2000, Inc. (Exhibit No. 3.2 to Amendment No. 1 to Registration Statement No. 3-70618) 3.2 Amended and Restated Bylaws of Gateway 2000, Inc. (Exhibit No. 3.2 to Form 10-K for 1995) 10.1 Tax Indemnification Agreement dated as of December 6, 1993 between Gateway 2000, Inc., 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 2000, Inc. and Theodore W. Waitt. (Exhibit No. 10.2 to 10-K for 1995)* 10.3 Registration Agreement dated February 22, 1991 between Gateway 2000, 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 2000, Inc. 1992 Stock Option Plan. (Exhibit No. 10.4 to Registration Statement No. 33-70618 (the "Form S-1")* 10.5 Gateway 2000, Inc. 1993 Stock Option Plan for Executives and Key Employees. (Exhibit No. 10.6 to the Form S-1)* 10.6 Gateway 2000, 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 2000, Inc. 1993 Employee Stock Purchase Equity Plan. (Exhibit No. 10.9 to the Form S-1)* 10.8 Gateway 2000, Inc. 1996 Long-Term Incentive Equity Plan, as amended and restated (filed herewith)* 10.9 Gateway 2000, Inc. 1996 Non-Employee Directors Stock Option Plan. (Exhibit No. 4.3 to Registration Statement on Form S-8 No. 333- 08837)* 10.10 Gateway 2000, Inc. Management Incentive Plan as (Exhibit 10.9 to the Form 10-K for 1996)* 10.11 Gateway 2000, Inc. Deferred Compensation Plan (Exhibit 10.10 to the Form 10-K for 1996)* 10.12 Gateway 2000, Inc. Retirement Savings Plan. (Exhibit No. 10.16 to Form 10-K for 1995)* Exhibit Description of Exhibits No. 10.13 Credit Agreement dated as of December 27, 1995 between Gateway 2000, Inc., Norwest Bank Iowa, National Association, as Administrative Agent, and certain financial institutions named therein. (Exhibit No. 4.2 to Form 10-K for 1995) 10.14 1997 Amended and Restated Credit Agreement dated as of September 25, 1997 among the Company, the banks party thereto, Norwest Bank Iowa, N.A., as Administrative Agent and Bank of America National Trust and Savings Association as Documentation Agent (Exhibit 10.13 to Form 10- Q for period ended September 30, 1997) 10.15 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)* 10.16 Employment Agreement between Gateway 2000, Inc. and Jeffrey Weitzen dated January 22, 1998, filed herewith.* 10.17 Employment Agreement between Gateway 2000, Inc. and David J. Robino dated January 22, 1998, filed herewith.* 21.1 List of subsidiaries, filed herewith. 23.1 Consent of Coopers & Lybrand L.L.P, 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).
*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. No reports on Form 8-K were filed by Gateway during the quarter ended December 31, 1997. This report contains the following trademarks and service marks of Gateway, many of which are registered: AnyKey, "BLACK AND WHITE SPOT" Design, CrystalScan, Destination, gateway.net, Family PC, GATEWAY 2000, Gateway Country, Gateway Gold, "G" Design, TelePath, Gateway Solo, Solo,Vivitron and "You've Got a Friend in the Business". The following trademarks of other companies also appear in this Report: Intel, IBM, Microsoft and Pentium. These and any other product or brand names contained herein are trademarks or registered trademarks of their respective owners. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of North Sioux City and State of South Dakota, on March 24, 1998. GATEWAY 2000, INC. By:/s/ Theodore W. Waitt Theodore W. Waitt Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the dates indicated below:
Date Signature Title March 24, 1998 /s/ Theodore W. Waitt Chairman of the Board, Chief Executive Theodore W. Waitt Officer (Principal Executive Officer )and Director March 24, 1998 /s/ Jeffrey Weitzen President, Chief Operating Officer and Director Jeffrey Weitzen March 24, 1998 /s/ David J. McKittrick Senior Vice President, Chief Financial Officer David J. McKittrick and Treasurer (Principal Financial Officer and Principal Accounting Officer) March 24, 1998 * Charles G. Carey Director March 24, 1998 * James W. Cravens Director March 24, 1998 * George H. Krauss Director March 24, 1998 * Douglas L. Lacey Director March 24, 1998 * James F. McCann Director March 24, 1998 * Director Richard D. Snyder
* By: /s/ William M. Elliott William M. Elliott (Attorney-in-fact) EX-10.8 2 Exhibit 10.8 Gateway 2000, Inc. 1996 Long-Term Incentive Equity Plan As Amended 1. Purpose. The 1996 Long-Term Incentive Equity Plan (the "Plan") is intended to promote the long-term success of Gateway 2000, Inc. (the "Company") and its stockholders by strengthening the Company's ability to attract and retain highly competent managers and other selected employees and to provide a means to encourage stock ownership and proprietary interest in the Company. 2. Term. The Plan shall become effective upon its ratification and approval by the affirmative vote of the holders of a majority of the securities of the Company present or represented, and entitled to vote at, a meeting of stockholders of the Company, and shall terminate at the close of business on the fifth anniversary of such approval date unless terminated earlier by the compensation Committee (as defined in Section 3). After termination of the Plan, no future awards may be granted, but previously granted awards shall remain outstanding in accordance with their applicable terms and conditions and the terms and conditions of the Plan. 3. Plan Administration. A committee (the "Compensation Committee") appointed by the Board of Directors of the Company (the "Board") shall be responsible for administering the Plan. The Compensation Committee shall be comprised of two or more non- employee members of the Board who shall qualify as disinterested persons to administer the Plan as contemplated by (1) Rule 16b-3 under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rules; and (2) Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The Compensation Committee shall have full and exclusive power to interpret the Plan and to adopt such rules, regulations and guidelines for carrying out the Plan as it may deem necessary or proper, and such power shall be executed in the best interests of the company and in keeping with the objectives of the Plan. This power includes but is not limited to selecting award recipients, establishing all award terms and conditions and adopting modifications, amendments and procedures, as well as rules and regulations governing awards under the Plan. The interpretation and construction of any provision of the Plan or any option or right granted hereunder and all determinations by the Compensation Committee in each case shall be final, binding and conclusive with respect to all interested parties. 4. Eligibility. Any employee of the Company shall be eligible to receive one or more awards under the Plan. "Company" includes any entity that is directly or indirectly controlled by the Company or any entity in which the Company has a significant equity interest, as determined by the Compensation Committee. 5. Shares of Common Stock Subject to the Plan. Subject to the provisions of Section 6 of the Plan, the aggregate number of shares of Common Stock, $.01 par value, of the Company ("Shares") which may be transferred to participants under the Plan shall be 12,800,000. The aggregate number of Shares that may be issued under awards pursuant to Section 8.3 of the Plan shall not exceed 6,400,000 Shares, and the aggregate number of Shares that may be covered by awards granted to any single individual under the Plan shall not exceed 1,000,000 Shares per fiscal year of the Company. Any or all of the Shares may be granted in the form of incentive stock options ("ISOs") intended to comply with Section 422 of the Code. Shares subject to awards under the Plan which expire, terminate, or are canceled prior to exercise or, in the case of awards granted under Section 8.3, do not vest, shall thereafter be available for the granting of other awards. Shares which have been exchanged by a participant as full or partial payment to the Company in connection with any award under the Plan, also shall thereafter be available for the granting of other awards. In instances where a stock appreciation right ("SAR") or other award is settled in cash, the Shares covered by such award shall remain available for issuance under the Plan. Likewise, the payment of cash dividends and dividend equivalents paid in cash in conjunction with outstanding awards shall not be counted against the Shares available for issuance. Any Shares that are issued by the company, and any awards that are granted through the assumption of, or in substitution for, outstanding awards previously granted by acquired entity shall not be counted against the Shares available for issuance under the Plan. Any Shares issued under the Plan may consist in whole or in part of authorized and unissued Shares or of treasury Shares, and no fractional Shares be issued under the Plan. Cash may be paid in lieu of any fractional Shares in settlements of awards under the Plan. 6. Adjustments. In the event of any stock dividend, stock split, combination or exchange of Shares, merger, consolidation, spin-off, recapitalization or other distribution (other than normal cash dividends) of Company assets to stockholders, or any other change affecting Shares or Share price, such proportionate adjustments, if any, as the Compensation Committee in its discretion may deem appropriate to reflect such change shall be made with respect to (1) the aggregate number of Shares that may be issued under the Plan, the aggregate number of Shares that may be issued pursuant to Section 8.3 of the Plan, and the aggregate number of Shares that may be granted to any single individual under the Plan; (2) each outstanding award made under the Plan; and (3) the exercise price per Share for any outstanding stock options, SARs or similar awards under the Plan. 7. Fair Market Value. "Fair Market Value," for all purposes under the Plan, shall mean the closing price of a Share as reported daily in The Wall Street Journal or similar, readily available public source for the date in question. If no sales of Shares were made on such date, the closing price of a Share as reported for the preceding day on which a sale of Shares occurred shall be used. 8. Awards. The Compensation Committee shall determine the type or types of award(s) to be made to each participant. Awards may be granted singly, in combination or in tandem. Awards also may be made in combination or in tandem with, in replacement of, as alternatives to or as the payment form for grants or rights under any other compensation plan or individual contract or agreement of the Company including those of any acquired entity. The types of awards that may be granted under the Plan are: 8.1. Stock Options. A stock option is a right to purchase a specified number of Shares during a specified period as determined by the Compensation Committee. The purchase price per Share for each stock option shall be not less than 100% of Fair Market Value on the date of grant, except if a stock option is granted retroactively in tandem with or as a substitution for a SAR, the exercise price may be no lower than the Fair Market Value of a Share as set forth in award agreements for such tandem or replaced SAR. A stock option may be in the form of an ISO which, in addition to being subject to applicable terms, conditions and limitations established by the Compensation Committee, complies with Section 422 of the Code. The price at which Shares may be purchased under a stock option shall be paid in full by the optionee at the time of the exercise in cash or such other method permitted by the Compensation Committee, including (1) tendering Shares (with prior approval of the Chief Executive Officer if Shares are owned less than six months); (2) authorizing a third party to sell the Shares (or a sufficient portion thereof) acquired upon exercise of a stock option and assigning the delivery to the Company of a sufficient amount of the sale proceeds to pay for all the Shares acquired through such exercise; or (3) any combination of the above. 8.2. SARs. A SAR is a right to receive a payment, in cash and/or Shares, equal to the excess of the Fair Market Value of a specified number of Shares on the date the SAR is exercised over the Fair Market Value on the date the SAR was granted as set forth in the applicable award agreement; except that if a SAR is granted retroactively in tandem with or in substitution for a stock option, the designated Fair Market Value set forth in the award agreement shall be no lower than the Fair Market Value of a Share for such tandem or replaced stock option. 8.3. Stock Awards. A stock award is a grant made or denominated in Shares or units equivalent in value to Shares. All or part of any stock award may be subject to conditions and restrictions established by the Compensation Committee, as set forth in the applicable award agreement, which may include, but are not limited to, continuous service with the Company and/or the achievement of performance goals. The performance criteria that may be used by the Compensation Committee in granting a stock award contingent on performance goals shall consist of earnings, earnings per share, revenues, profit growth, profit- related return ratios, cash flow or total stockholder return. The Compensation Committee may select one criterion or multiple criteria for measuring performance, and the measurement may be stated in absolute terms or relative to comparable companies. Notwithstanding anything to the contrary contained in the Plan, the Compensation Committee may grant a stock award which is not contingent on performance goals or which is contingent on performance goals other than those specified in this Section 8.3, provided the Compensation Committee shall have determined that such award is not required to satisfy the requirements for "qualified performance-based compensation" within the meaning of Section 162(m) of the Code. 9. Dividends and Dividend Equivalents. The Compensation Committee may provide that any awards under the Plan earn dividends or dividend equivalents. Such dividends or dividend equivalents may be paid currently or may be credited to a participant's account. Any crediting of dividends or dividend equivalents may be subject to such restrictions and conditions as the Compensation Committee may establish, including reinvestment in additional Shares or Share equivalents. 10. Deferrals and Settlements. Payment of awards may be in the form of cash, stock, other awards or combinations thereof as the Compensation Committee shall determine at the time of grant, and with such restrictions as it may impose. The Compensation Committee also may require or permit participants to elect to defer the issuance of Shares or the settlement of awards in cash under such rules and procedures as it may establish under the Plan. It also may provide that deferred settlements include the payment or crediting of interest on the deferral amounts, or the payment or crediting of dividend equivalents where the deferral amounts are denominated in Shares. 11. Transferability and Exercisability. Awards granted under the Plan shall not be transferable or assignable other than (1) by will or the laws of descent and distribution; (2) by gift or other transfer of an award to any trust or estate in which the original award recipient or such recipient's spouse or other immediate relative has a substantial beneficial interest, or to a spouse or other immediate relative, provided that any such transfer is permitted by Rule 16B-3 under the Exchange Act as in effect when such transfer occurs and the Board does not rescind this provision prior to such transfer; or (3) pursuant to a qualified domestic relations order (as defined by the Code). However, any award so transferred shall continue to be subject to all the terms and conditions contained in the instrument evidencing such award. In the event that a participant terminates employment with the Company to assume a position with a governmental, charitable, educational or other non-profit institution, the Compensation Committee may subsequently authorize a third party, including but not limited to a "blind" trust, to act on behalf of and for the benefit of such participant regarding any outstanding awards held by the participant subsequent to such termination of employment. If so permitted by the Compensation Committee, a participant may designate a beneficiary or beneficiaries to exercise the rights of the participant and receive any distribution under the Plan upon the death of the participant. 12. Award Agreements. Awards under the Plan shall be evidenced by agreements as approved by the Compensation Committee that set forth the terms, conditions and limitations for each award, which may include the term of an award (except that in no event shall the term of any ISO exceed a period of ten years from the date of its grant), the provisions applicable in the event the participant's employment terminates, and the Compensation Committee's authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind any award. The Compensation Committee need not require the execution of any such agreement, in which case acceptance of the award by the participant shall constitute agreement to the terms of the award. 13. Foreign Participation. In order to assure the viability of awards granted to participants employed in foreign countries, the Compensation Committee may provide for such special terms as it may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. Moreover, the Compensation Committee may approve such supplements to, or amendments, restatements or alternative versions of the Plan as it may consider necessary or appropriate for such purposes without thereby affecting the terms of the Plan as in effect for any other purposes; provided that, no such supplements, amendments, restatements or alternative versions shall increase the Share limitations contained in Section 5 of the Plan. 14. Acceleration and Settlement of Awards. The Compensation Committee shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, liquidation or change of control of the Company, as defined by the Compensation Committee, to provide for the acceleration of vesting and for settlement, including cash payment of an award granted under the Plan, upon or immediately before the effectiveness of such event. However, the granting of awards under the Plan shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure, or to merge, consolidate, dissolve, liquidate, sell or transfer all or any portion of its businesses or assets. 14A. Change of Control 14A.1. Additional Option Grant; Substituted Options. In the event of a Change of Control as defined in Section 14A.2(a): (a) All employees who received a grant of options under this Plan in the twelve months preceding the effective date of such Change in Control shall receive a grant of options, effective as of the day preceding such Change in Control, equal to the aggregate number of options granted to such employee in such twelve-month period, provided that any such grant shall comply with Section 162 (m) of the Code. All such options shall vest 100% twenty-four months from the date of grant unless vesting is accelerated as provided below. (b) All outstanding options that are not exercisable on the date of a Change in Control, including any options granted pursuant to paragraph (a) above, shall immediately become exercisable in full upon such Change in Control unless, in the case of a Change in Control described in Section 14A.2 (a) (i) or (iii), the acquiring company has agreed in writing to assume the option obligation by substituting options of its own which are comparable in all respects to the outstanding options under the Plan (including the provisions of paragraph (a) (iii) below), with each such substituted option appropriately adjusted to apply to the number and class of securities which would have been issuable to the holder thereof had the option been exercised immediately prior to such Change in Control (including adjustments to the number and exercise price of such options). (iii) Notwithstanding anything to the contrary in the foregoing or elsewhere in the Plan, in the event of a participant's Involuntary Termination within eighteen (18) months of the effective date of a Change in Control described in Section 14A.2 (a) (i) or (iii), such termination shall be treated as approved by the Compensation Committee for purposes of all of such participant's option award agreements, and all of such participant's then outstanding nonexercisable options shall become exercisable in full as of midnight of the day before such termination. 14A.2 Definitions. (a) For purposes hereof, the term "Change in Control" shall mean (i) the acquisition, directly or indirectly by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders, or (ii) a change in the composition of the board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been initially elected or nominated for election as Board members during such period by at least a majority of the board members described in clauses (A) and (B) who were still in office at the time such election or nomination was approved by the Board, (iii) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (iv) the sale, transfer or other disposition of all or substantially all of the Company's assets or the complete liquidation or dissolution of the Company. (b) For purposes hereof, the term "Involuntary Termination" shall mean any of the following changes in the terms and conditions of an employee's employment: (i) an involuntary termination of employment for any reason other than death, entitlement to benefits under the Company's long-term disability plan or Cause; (ii) a reduction in his or her level of compensation (including base salary), fringe benefits and participation in corporate performance based bonus or incentive programs; (iii) a change in his or her position with the Company which materially reduces his or her level of job responsibility and/or authority; or (iv) without the employee's consent, the relocation of the employee's regular assigned workplace by more than 50 additional miles from his or her residence. (c) For purposes hereof, the term "Cause" shall mean: (i) the willful and continued failure of an employee to perform substantially the employee's duties with the Company or an affiliate (other than a failure resulting from an incapacity due to physical or mental illness), after written notice specifically identifying any such failures has been delivered to the employee and the employee has been given an opportunity to cure such failures; (ii) the willful engaging by the employee in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company; (iii) the commission of any act of fraud, embezzlement or dishonesty by the participant; or (iv) any unauthorized use or disclosure by such person of confidential information or trade secrets of the Company or any subsidiary of the Company. 14A.3 Parachute Payments. In the event that the aggregate present value of payments to a participant under this Plan and/or under any other plan, program, or arrangement maintained by the Company constitutes an "excess parachute payment" (within the meaning of Code Section 280G(b) (1)) and the excise tax on such payment would cause the net parachute payments (after taking into account federal and state income and excise taxes) to which such participant would otherwise be entitled to be less than what such participant would have netted (after taking into account federal and state income taxes) had the present value of such participant's total parachute payments equaled $1.00 less than three times his or her "base amount" (within the meaning of Code Section 280G (b) (3) (A)), unless the Company and the affected individual(s) otherwise have agreed by separate contract or award, his or her total "parachute payments" (within the meaning of Code Section 280G (b) (2) (A)) shall be reduced (but by the minimum possible amount) so that their aggregate present value equals $1.00 less than three times such base amount. For purposes of this calculation, it shall be assumed that such participant's tax rate will be the maximum marginal federal and state income tax rate on earned income, with such maximum federal rate to be computed with regard to Code Section 1(g), if applicable. In the event that the participant and the Company are unable to agree as to the amount of the reduction described above, if any, the participant shall select a law firm or accounting firm from among those regularly consulted (during the twelve-month period immediately prior to the relevant change of control) by the Company regarding federal income tax matters, and such law firm or accounting firm shall determine the amount of such reduction and such determination shall be final and binding upon the participant and the Company. 15. Plan Amendment. The Plan may be amended by the Compensation Committee as it deems necessary or appropriate to better achieve the purposes of the Plan, except that no such amendment shall be made without the approval of the Company's stockholders which would increase the number of Shares available for issuance in accordance with Sections 5 and 6 of the Plan, or cause the Plan not to comply with Rule 16b-3 (or any successor rule) under the Exchange Act or Section 162(m) of the Code. The Board may suspend the Plan or terminate the Plan at any time; provided that, that no such action adversely affects any outstanding benefit. Any Shares authorized under Section 5 (or any amendment thereof) with respect to which no Award is granted prior to termination of the Plan, or with respect to which an Award is terminated, forfeited or canceled after termination of the Plan, shall automatically be transferred to any subsequent long-term incentive equity plan for employees of the Company. 16. Tax Withholding. The Company shall have the right to deduct from any settlement of an award made under the Plan, including the delivery or vesting of Shares, a sufficient amount to cover withholding of any federal, state or local taxes required by law, or to take such other action as may be necessary to satisfy any such withholding obligations. The Compensation Committee may, in its discretion and subject to such rules as it may adopt, permit participants to use Shares to satisfy required tax withholding (with prior approval of the Chief Executive Officer if Shares are owned less than six months) and such Shares shall be valued at the Fair Market Value as of the settlement date of the applicable award. 17. Registration of Shares. Notwithstanding any other provision of the Plan, the Company shall not be obligated to offer or sell any Shares unless such Shares are at that time effectively registered or exempt from registration under the Securities Act of 1933, as amended (the "Securities Act") and the offer and sale of such Shares are otherwise in compliance with all applicable federal and state securities laws and the requirements of any stock exchange or similar agency on which the Company's securities may then be listed or quoted. The Company shall have no obligation to register the Shares under the federal securities laws or take any other steps as may be necessary to enable the Shares to be offered and sold under federal or other securities laws. Prior to receiving Shares, a Plan participant may be required to furnish representations or undertakings deemed appropriate by the Company to enable the offer and sale of the Shares or subsequent transfers of any interest in such Shares to comply with the Securities Act and other applicable securities laws. Certificates evidencing Shares shall bear any legend required by, or useful for the purposes of compliance with, applicable securities laws, this Plan or award agreements. 18. Other Benefit and Compensation Programs. Unless otherwise specifically determined by the compensation Committee, settlements of awards received by participants under the Plan shall not be deemed a part of a participant's regular, recurring compensation for purposes of calculating payments or benefits from any Company benefit plan, severance program or the severance pay law of any country. Further, the Company may adopt other compensation programs, plans or arrangements as it deems appropriate or necessary. 19. Unfunded Plan. Unless otherwise determined by the Compensation Committee, the Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between the Company and any participant or other person. To the extent any person holds any rights by virtue of an award granted under the Plan, such rights shall be no greater than the rights of an unsecured general creditor of the Company. 20. Use of Proceeds. The cash proceeds received by the Company from the issuance of Shares pursuant to awards under the Plan shall constitute general funds of the Company. 21. Regulatory Approvals. The implementation of the Plan, the granting of any award under the Plan, and the issuance of Shares upon the exercise or settlement of any award shall be subject to the Company's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the awards granted under it or the Shares issued pursuant to it. 22. Employment Rights. The Plan does not constitute a contract of employment, and participation in the Plan will not give a participant the right to continue in the employ of the Company on a full-time, part-time or any other basis. Participation in the Plan will not give any participant any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. 23. Governing Law. The validity, construction and effect of the Plan and any actions taken or relating to the Plan shall be determined in accordance with the laws of the State of South Dakota and applicable federal law. 24. Successors and Assigns. The Plan shall be binding on all successors and assigns of a participant, including, without limitation, the estate of such participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the participant's creditors. EX-10.16 3 Exhibit 10.16 January 19, 1998 Mr. Jeff Weitzen 13 Cobblefield Drive Mendham, NJ 07945 Dear Jeff, I am excited about us working together. I think we seem to have good synergies in the way we both look at things, and I think it would be a blast to work with you to build a company that we can both be proud of. A company that currently has great potential but depends upon great people and leadership to see it live up to its promise. Gateway can be truly a company that others envy; a company that is socially responsible and truly designed for the next millennium; a company that people would be jazzed to be able to work for; and a company that customers trust, respect, admire and count on. Great people and fanatical customer loyalty is the foundation that leads to great financial success. I am pleased to offer you the key position of President and Chief Operating Officer of Gateway 2000 under the following terms (for defined terms, see Exhibit A): Title: President and Chief Operating Officer Role and Responsibilities: Reporting responsibilities as the title implies. Direct responsibility for the overall P&L of the company and managing our growth plans. Exact reporting relationships for persons other than Jeff and Ted will be agreed to by Jeff and Ted (who have agreed on Dave's reporting relationships), but will include: All Line Functions, Product Functions, Systems, and Key Operational Entities. Salary and Bonus: $750,000 annual salary (pro-rated in the case of a partial year), plus incentive bonus up to 150% of salary targeted at 100%, as determined by the Board of Directors or Compensation Committee. You shall receive a minimum bonus for 1998 of $250,000. Initial Options: Initial grant of options ("Initial Options") to purchase 1,000,000 shares exercisable at fair market value on date of grant, with a ten-year term (except as provided below) and subject to our standard 4 year vesting. Full vesting of the Initial Options shall occur upon (i) Termination Without Cause, (ii) Termination for Good Reason or (iii) a Change in Control. Full vesting of the Initial Options shall also occur upon a Nonrenewal of Employment Term (as defined herein). In the event of termination as a result of death or Disability, the portion of the Initial Options that would otherwise have vested as a result of lapse of time during the twenty-four month period following such event shall immediately become exercisable and any other unvested portion shall lapse. The exercise period of the vested portion of the Initial Options shall cease one (1) year after termination in the case of termination as a result of death or Disability, Termination without Cause, Termination for Good Reason, Nonrenewal of Employment Term or a termination for any reason whatsoever occurring on or after a Change in Control and, in all other cases, ninety (90) days after termination. The Initial Options will be granted under Gateway's 1996 Long-Term Incentive Equity Plan ("Plan") and shall be subject to the terms of the Plan. Recurring Options: Eligible for additional options starting in 1999. Targeted at options to purchase 75,000 shares twice a year based on a $30 stock price (i.e., targets subject to adjustment based on Black-Scholes value), in each case subject to approval of the Board of Directors or Compensation Committee in accordance with the Plan or other applicable Gateway stock option plan. The terms of such options shall be established by the Board of Directors or Compensation Committee at the time of grant. Up-front Sign-On Bonus: Signing bonus (within ten (10) days of commencement of employment) of $1,400,000 in cash, plus fully- vested stock grant under the Plan (or outside the Plan on substantially the same terms) valued at $600,000 at public market price of Gateway stock on date of grant. Relocation: Reimbursement for reasonable relocation expenses on an after-tax basis in accordance with Gateway's relocation plan including reasonable loss on sale of current home and reimbursement of reasonable temporary living expenses. Term: Thirty-six months after commencement of employment ("Employment Term"), subject to renewal for successive additional one (1) year periods by mutual agreement of the parties; provided that your Employment Term hereunder shall terminate earlier upon your death, Termination for Cause or Disability by the Company, Termination Without Cause by the Company, Termination for Good Reason by you, Termination without Good Reason by you or Termination as a result of Change in Control by you. Change of Control, Termination Without Cause, Etc.: Upon (i) Termination Without Cause, (ii) Termination for Good Reason, (iii) Nonrenewal of Employment Term or (iv) termination by you or the Company of your employment for any reason whatsoever (other than Cause) within six (6) months after the effective date of a Change in Control ("Termination as a result of Change in Control"), you will receive in a lump sum, within twenty (20) days thereafter, an amount equal to three (3) times the sum of your then current annual base salary (prior to any deduction in violation hereof) and annual incentive bonus (being prior to January 1, 1999, your target bonus and thereafter the highest such bonus for any of the last two completed fiscal years up to but not in excess of your then current annual base salary (prior to any deduction in violation hereof)). Such payments shall be your sole remedy for such termination of the Employment Term except as specifically provided herein. In the event of a Termination by you as a result of Change in Control, you agree, at the Company's request made within ten (10) days of your giving notice of termination as a result of a Change in Control, to either (as requested by the Company) (i) continue full-time service to the Company for a transition period ending three months after the effective date of the Change in Control unless terminated earlier by the Company or by you for Good Reason (other than a breach of clause (a)(ii) of the definition of such term because you are reporting to a new CEO) or (ii) provide senior level consulting services as an employee on the compensation terms then in effect for up to a three month period after the effective date of the Change in Control. Excise Tax: In the event any payment in the nature of compensation made, directly or indirectly, by the Company to you which 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 (such terms having their respective meanings under Code Section 280G) is subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended ("Code"), on "excess parachute payments" as defined in Code Section 280G (an "Excise Tax"), the Company shall pay you an amount equal to such Excise Tax ("Additional Compensation") but without further reimbursement to you for any Excise Tax or additional taxes payable with respect to such Additional Compensation. You agree, in the event you believe that you are required to pay any such Excise Tax, to afford the Company the reasonable ability, after it has paid you any such amount then due, to contest the imposition of such Excise Tax. In the event the amount you would receive after the application of the immediately preceding sentence, net of all applicable income, excise and payroll taxes, is less than the amount you would receive, net of all applicable income, excise and payroll taxes, if your total compensation were reduced to a level that is the maximum amount that you could receive without there being any "excess parachute payment" under Code Section 280G (the "No Parachute Maximum"), your compensation shall be reduced to the No Parachute Maximum by reducing the lump sum payment due to you hereunder. Life and Disability Insurance: In addition to any life insurance benefits generally available to you as a senior executive, the Company will pay the premiums for a $5,000,000 term life and lump sum Disability insurance policy for the initial 12-month period during the Employment Term only and a $2,500,000 term life and lump sum Disability insurance policy for the succeeding 12-month period of the Employment Term only (together in each case with any amount to reimburse you, on after tax basis, for the income and payroll taxes, if any, payable by you due to the Company's payment of such premiums and reimbursements), provided that if you are not then insurable at normal rates for a person of your age, the Company will purchase as much insurance as purchasable at standard rates. All Terminations: Accrued Amounts when determinable and otherwise due; and no other amounts shall be payable except as provided herein. Transition and Timing: To be mutually agreed, but anticipated to be starting February of 1998. Other: (i) Indemnification to the full extent permitted by applicable law and coverage with respect to claims (both during and after employment) relating to your period of service during the Employment Term under the Company's directors and officers insurance policy (as in effect from time to time), (ii) participation in all benefits, fringe, incentive and equity compensation plans (provided that any specific benefits and rights hereunder shall be netted against any such other similar benefits and plans) that are generally available to senior executives to the extent you are eligible to participate therein; (iii) payment of your reasonable out-of-pocket legal fees and disbursements for reviewing this arrangement and reimbursement of your reasonable out-of-pocket legal fees and disbursements relating to any claim in which you obtain a final judgment of a court of competent jurisdiction against the Company for breach of this letter if you materially prevail in the matters raised in such litigation; and (iv) inclusion in management's slate for the Company's Board of Directors (without additional compensation) at the next annual meeting of stockholders following commencement of employment. All payments and benefits provided under this letter shall be subject to withholding for applicable income (or similar) taxes. As a Company executive, you shall be bound by the terms of the Company's Nondisclosure/Intellectual Property and Non-Competition Agreements in the respective forms attached hereto, the provisions of which are incorporated herein by reference. Jeff, I am very excited about wrapping this up and getting down to building a great company together. I believe it is in both our best interests to reach agreement on the above as soon as possible. Sincerely, Ted Waitt, Chairman Chief Executive Officer The above offer is subject to Board approval, and is made upon reliance of Jeff's representation that he is free to accept the offer and commence exclusive employment with the Company as of the date of commencement contemplated hereby without restriction from any employer other than the Company (other than confidentiality obligations arising either at law or under agreement(s) heretofore provided to the Company), provided the foregoing shall not prevent you from being involved in charitable activities or managing your personal investments (which shall exclude investments in competitors of the Company posted at the time of investment other than passive investments of a less than five percent equity or debt interest). This letter may not be assigned by you or the Company other than by the Company in connection with a sale of all or substantially all of its assets or by law as a result of a merger or consolidation. Upon acceptance hereof this letter shall be binding upon and inure to the benefit of the parties and their successors or permitted assigns in accordance with the terms hereof. This letter constitutes the entire agreement of the parties and supersedes all other prior agreements and understandings, both written and oral, among the parties, and shall be governed by and construed in accordance with the internal laws of the State of South Dakota. ACCEPTED AND AGREED TO: ________________________ Jeff Weitzen EXHIBIT A Cause shall mean (a) your material breach of any of the terms of the Nondisclosure/Intellectual Property Agreement or the Non- Competition Agreement, or your representation and agreement to provide services on an exclusive basis to the Company during the Employment Term, which breach in any case is not cured within twenty (20) days of written notice thereof; (b) willful misconduct with regard to the Company or gross neglect or dereliction of duty resulting in either such case, in material economic harm to the Company; (c) failure to follow (or in good faith attempt to follow) the reasonable lawful written direction of the Company's CEO, Chairman or Board of Directors; or (d) conviction of, or pleading nolo contendere to, a felony (other than a felony predicated on your vicarious liability or involving a routine traffic violation) or any other crime involving securities fraud or theft of substantial assets of the Company. Vicarious liability shall mean any liability which is based on acts of the Company for which you are charged solely as a result of your offices with the Company and in which you were 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. Disability shall mean you are then incapable or absent from your duties with the Company on a full-time basis because of physical or mental incapacity to perform your material duties and have been so for 180 days. Termination for Disability shall mean a termination by the Company while and as a result of your Disability. Termination Without Cause shall mean any termination by the Company during the Employment Term other than for Cause or as a result of death or Disability. A Nonrenewal of Employment Term shall be treated the same as a Termination Without Cause. Good Reason shall mean (a) any diminution in title or any material diminution in authority, responsibility or reporting lines not commensurate with your position including but not limited to as a material diminution (i) maintaining your current position but in an entity that is a subsidiary of another entity and not in the ultimate parent company or (ii) reporting to anyone but the Board of Directors or Ted Waitt or (b) any other material breach by the Company of this letter, which in any case is not cured within twenty days of written notice thereof. Your sole remedy for any breach of this letter by the Company which would provide you with a right to terminate with Good Reason shall be a Termination for Good Reason. Termination for Good Reason shall mean a termination by you as a result of the occurrence of a Good Reason event that remains uncured for the specified period. Any notice of termination of employment for a specific Good Reason event shall be given within 180 days after the first occurrence of the event on which such Good Reason termination is to be based. Termination without Good Reason shall mean any termination by you other than a Termination for Good Reason. Nonrenewal of Employment Term shall occur on the third anniversary of the commencement date of employment, unless prior to such date the Employment Term shall have terminated or the parties shall have agreed in writing to an extension of the employment term, if the reason for nonrenewal is a determination by the Company not to extend the term for any reason (other than Cause, death, Disability or the lack of your agreement to extend) or a determination by you not to accept the terms relating to title, role and responsibility (whether or not the same as in this letter) or relating to compensation or the other applicable material terms set forth herein as part of such renewal, it being understood that your refusal to accept a continuation (or increase) of the level of compensation you are then receiving, to agree to a renewal absent an additional sign-on bonus or options or to accept continuation of such other material terms (i.e. other than title, role and responsibility) shall not be deemed to constitute a Nonrenewal of Employment Term. Any nonrenewal of the Employment Term for any reason not within the foregoing provisions shall not constitute a "Nonrenewal of Employment Term" for purposes hereof, and shall be treated as a Termination without Good Reason. Accrued Amounts shall mean (a) Base Salary, benefits, fringes and expense reimbursements due for the period prior to any termination, (b) any bonuses earned but unpaid for any prior fiscal year and a pro rata bonus (based on period of service in the current fiscal year provided at least three months have elapsed in such year prior to termination) based on actual achievement against targets during the fiscal year and (c) any other amounts due under the terms of any plan or program. Change in Control shall have the meaning set forth in the Plan, provided that no Change in Control shall be deemed to have occurred while Ted Waitt continues to serve as CEO of the Company (or if the Company becomes a subsidiary, its ultimate parent entity) or, in the case of a sale, transfer or other disposition of assets, its successor (or if its successor becomes a subsidiary, its ultimate parent entity). EX-10.17 4 Exhibit 10.17 January 19, 1998 Mr. David Robino 26 Emily Road Far Hills, NJ 07931 Dear Dave, I am excited about us working together. I want you to be by my side as Gateway moves to the "next level." I need you to help build the company, which has great potential but depends upon great people and leadership to see it live up to its promise. Gateway can be truly a company that others envy; a company that is socially responsible and truly designed for the next millennium; a company that people would be jazzed to be able to work for; and a company that customers trust, respect, admire and count on. Great people and fanatical customer loyalty is the foundation that leads to great financial success. I am pleased to offer you the position of Executive Vice President and Chief Administrative Officer of Gateway 2000 under the following terms (for defined terms, see Exhibit A): Title: Executive Vice President and Chief Administrative Officer Role and Responsibilities: Reporting shall be directly to the CEO. Responsibilities shall be commensurate with and shall include the areas set forth in my letter to you of December 5. Salary and Bonus: $450,000 annual salary (pro-rated in the case of a partial year), plus incentive bonus up to 100% of salary targeted at 65%, as determined by the Board of Directors or Compensation Committee. You shall receive a minimum bonus for 1998 of $100,000. Initial Options: Initial grant of options ("Initial Options") to purchase 200,000 shares exercisable at fair market value on date of grant, with a ten-year term (except as provided below) and subject to our standard 4 year vesting. Full vesting of the Initial Options shall occur upon (i) Termination Without Cause, (ii) Termination for Good Reason or (iii) Change in Control. Full vesting of the Initial Options shall also occur upon a Nonrenewal of Employment Term (as defined herein). In the event of termination as a result of death or Disability, the portion of the Initial Options that would otherwise have vested as a result of lapse of time during the twenty-four month period following such event shall immediately become exercisable and any other unvested portion shall lapse. The exercise period of the vested portion of the Initial Options shall cease one (1) year after termination in the case of termination as a result of death or Disability, Termination without Cause, Termination for Good Reason, Nonrenewal of Employment Term or a termination for any reason whatsoever occurring on or after a Change in Control and, in all other cases, ninety (90) days after termination. The Initial Options will be granted under Gateway's 1996 Long-Term Incentive Equity Plan ("Plan") and shall be subject to the terms of the Plan. Recurring Options: Eligible for additional options starting in 1999. Targeted at options to purchase 30,000 shares twice a year based on a $30 stock price (i.e., targets subject to adjustment based on Black-Scholes value), in each case subject to approval of the Board of Directors or Compensation Committee in accordance with the Plan or other applicable Gateway stock option plan. The terms of such options shall be established by the Board of Directors or Compensation Committee at the time of grant. Up-front Sign-On Bonus: Signing bonus of $500,000 in cash, payable within ten (10) days of commencement of employment. Relocation: Reimbursement for reasonable relocation expenses on an after-tax basis in accordance with Gateway's relocation plan including reasonable loss on sale of current home and reimbursement of reasonable temporary living expenses. Term: The initial employment term shall end thirty-six months after commencement of employment ("Initial Employment Term"); provided that the Initial Employment Term hereunder shall terminate earlier upon your death, Termination for Cause or Disability by the Company, Termination Without Cause by the Company, Termination for Good Reason by you, Termination without Good Reason by you or Termination as a result of Change in Control by you ("Termination Events"). At the end of the Initial Employment Term, the Employment Term shall thereafter be extended on the same terms then in effect for successive additional one (1) year periods unless either party gives the other party thirty (30) days prior written notice prior to the end of the Initial Employment Term or any then current additional term, subject to earlier termination on the occurrence of a Termination Event. Your period of employment hereunder shall be referred to as the "Employment Term." Change of Control, Termination Without Cause, Etc.: Upon (i) Termination Without Cause, (ii) Termination for Good Reason, (iii) Nonrenewal of Employment Term or (iv) termination by you or the Company of your employment for any reason whatsoever (other than Cause) within six (6) months after the effective date of a Change in Control ("Termination as a result of Change in Control"), you will receive in a lump sum, within twenty (20) days thereafter, an amount equal to three (3) times the sum of your then current annual base salary (prior to any deduction in violation hereof) and annual incentive bonus (being prior to January 1, 1999, your target bonus and thereafter the highest such bonus for any of the last two completed fiscal years up to but not in excess of your then current annual base salary (prior to any deduction in violation hereof)). Such payment shall be your sole remedy for such termination of the Employment Term except as specifically provided herein. In the event of a Termination by you as a result of Change in Control, you agree, at the Company's request made within ten (10) days of your giving notice of termination as a result of a Change in Control, to either (as requested by the Company) (i) continue full-time service to the Company for a transition period ending three months after the effective date of the Change in Control unless terminated earlier by the Company or by you for Good Reason or (ii) provide senior level consulting services as an employee on the compensation terms then in effect for up to a three month period after the effective date of the Change in Control. Excise Tax: In the event any payment in the nature of compensation made, directly or indirectly, by the Company to you which 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 (such terms having their respective meanings under Code Section 280G) is subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended ("Code"), on "excess parachute payments" as defined in Code Section 280G (an "Excise Tax"), the Company shall pay you an amount equal to such Excise Tax ("Additional Compensation") but without further reimbursement to you for any Excise Tax or additional taxes payable with respect to such Additional Compensation. You agree, in the event you believe that you are required to pay any such Excise Tax, to afford the Company the reasonable ability, after it has paid you any such amount then due, to contest the imposition of such Excise Tax. In the event the amount you would receive after the application of the immediately preceding sentence, net of all applicable income, excise and payroll taxes, is less than the amount you would receive, net of all applicable income, excise and payroll taxes, if your total compensation were reduced to a level that is the maximum amount that you could receive without there being any "excess parachute payment" under Code Section 280G (the "No Parachute Maximum"), your compensation shall be reduced to the No Parachute Maximum by reducing the lump sum payment due to you hereunder. Life and Disability Insurance: In addition to any life insurance benefits generally available to you as a senior executive, the Company will pay the premiums for a $1,000,000 term life and lump sum Disability insurance policy for the initial 12-month period during the Employment Term only and a $500,000 term life and lump sum Disability insurance policy for the succeeding 12-month period of the Employment Term only (together in each case with any amount to reimburse you, on after tax basis, for the income and payroll taxes, if any, payable by you due to the Company's payment of such premiums and reimbursements), provided that if you are not then insurable at standard rates for a person of your age, the Company will purchase as much insurance as purchasable at standard rates. All Terminations: Accrued Amounts when determinable and otherwise due; and no other amounts shall be payable except as provided herein. Transition and Timing: To be mutually agreed, but anticipated to be starting the week of February 2, 1998. Other: (i) Indemnification to the full extent permitted by applicable law and coverage with respect to claims (both during and after employment) relating to your period of service during the Employment Term under the Company's directors and officers insurance policy (as in effect from time to time), (ii) participation in all benefits, fringe, incentive and equity compensation plans (provided that any specific benefits and rights hereunder shall be netted against any such other similar benefits and plans) that are generally available to senior executives to the extent you are eligible to participate therein; and (iii) payment of your reasonable out-of-pocket legal fees and disbursements for reviewing this arrangement and reimbursement of your reasonable out-of-pocket legal fees and disbursements relating to any claim in which you obtain a final judgment of a court of competent jurisdiction against the Company for breach of this letter if you materially prevail in the matters raised in such litigation. All payments and benefits provided under this letter shall be subject to withholding for applicable income (or similar) taxes. As a Company executive, you shall be bound by the terms of the Company's Nondisclosure/Intellectual Property and Non-Competition Agreements in the respective forms attached hereto, the provisions of which are incorporated herein by reference. Dave, I am very anxious to finalize this offer and excited about the opportunity to work with you. Sincerely, Ted Waitt, Chairman Chief Executive Officer The above offer is made upon reliance of Dave's representation that he is free to accept the offer and commence exclusive employment with the Company as of the date of commencement contemplated hereby without restriction from any employer other than the Company (other than confidentiality obligations arising either at law or under agreement(s) heretofore provided to the Company), provided the foregoing shall not prevent you from being involved in charitable activities or managing your personal investments (which shall exclude investments in competitors of the Company posted at the time of investment other than passive investments of a less than five percent equity or debt interest) provided such activities do not in any event materially interfere with the performance of your duties hereunder. This letter may not be assigned by you or the Company other than by the Company in connection with a sale of all or substantially all of its assets or by law as a result of a merger or consolidation. Upon acceptance hereof this letter shall be binding upon and inure to the benefit of the parties and their successors or permitted assigns in accordance with the terms hereof. This letter constitutes the entire agreement of the parties and supersedes all other prior agreements and understandings, both written and oral, among the parties, and shall be governed by and construed in accordance with the internal laws of the State of South Dakota. ACCEPTED AND AGREED TO: ________________________ David Robino EXHIBIT A Cause shall mean (a) your material breach of any of the terms of the Nondisclosure/Intellectual Property Agreement or the Non- Competition Agreement, or your representation and agreement to provide services on an exclusive basis to the Company during the Employment Term, which breach in any case is not cured within twenty (20) days of written notice thereof; (b) willful misconduct with regard to the Company or gross neglect or dereliction of duty resulting in either such case, in material economic harm to the Company; (c) failure to follow (or in good faith attempt to follow) the reasonable lawful written direction of the Company's Chairman or CEO or Board of Directors; or (d) conviction of, or pleading nolo contendere to, a felony (other than a felony predicated on your vicarious liability or involving a routine traffic violation) or any other crime involving securities fraud or theft of substantial assets of the Company. Vicarious liability shall mean any liability which is based on acts of the Company for which you are charged solely as a result of your offices with the Company and in which you were 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. Disability shall mean you are then incapable or absent from your duties with the Company on a full-time basis because of physical or mental incapacity to perform your material duties and have been so for 180 days. Termination for Disability shall mean a termination by the Company while and as a result of your Disability. Termination Without Cause shall mean any termination by the Company during the Employment Term other than for Cause or as a result of death or Disability. A Nonrenewal of Employment Term shall be treated the same as a Termination Without Cause. Good Reason shall mean (a) any diminution in title or any material diminution in authority, responsibility or reporting lines not commensurate with your position including but not limited to as a material diminution maintaining your current position but in an entity that is a subsidiary of another entity and not in the ultimate parent company or (b) any other material breach by the Company of this letter, which in either case is not cured within twenty days of written notice thereof. Your sole remedy for any breach of this letter by the Company which would provide you with a right to terminate with Good Reason shall be a Termination for Good Reason. Termination for Good Reason shall mean a termination by you as a result of the occurrence of a Good Reason event that remains uncured for the specified period. Any notice of termination of employment for a specific Good Reason event shall be given within 180 days after the first occurrence of the event on which such Good Reason termination is to be based. Termination without Good Reason shall mean any termination by you other than a Termination for Good Reason. Nonrenewal of Employment Term shall mean the termination of the Employment Term by the Company as a result of notice of non- extension given by the Company at least thirty (30) days prior to the end of the Initial Employment Term or any then current additional term. Any nonrenewal of the Employment Term by you shall not constitute a Nonrenewal of Employment Term for purposes hereof and shall be treated the same as a Termination without Good Reason. Accrued Amounts shall mean (a) Base Salary, benefits, fringes and expense reimbursements due for the period prior to any termination, (b) any bonuses earned but unpaid for any prior fiscal year and a pro rata bonus (based on period of service in the current fiscal year provided at least three months have elapsed in such year prior to termination) based on actual achievement against targets during the fiscal year and (c) any other amounts due under the terms of any plan or program. Change in Control shall have the meaning set forth in the Plan, provided that no Change in Control shall be deemed to have occurred while Ted Waitt continues to serve as CEO or Chairman of the Company (or if the Company becomes a subsidiary, its ultimate parent entity) or, in the case of a sale, transfer or other disposition of assets, its successor (or, if its successor becomes a subsidiary, its ultimate parent entity). EX-21.1 5 Exhibit 21.1 Subsidiaries of Gateway 2000, Inc. Name Jurisdiction of Incorporation Advanced Logic Research, Inc. Delaware Cowabunga Enterprises, Inc. Delaware Gateway 2000 Asia, Inc Delaware Gateway 2000 Aviation, Inc. Delaware Gateway 2000 Business Direct, Inc. Delaware Gateway 2000 Country Stores, Inc. Delaware Gateway 2000 Direct Sales, Inc. Delaware Gateway Enterprise Products, Inc. Delaware Gateway 2000 Foundation South Dakota Gateway 2000 Major Accounts, Inc. Delaware Gateway 2000 Marketing Services, Inc. Delaware Gateway 2000 Technical Support, Inc. Delaware Over the Moon Productions, Inc. Texas Gateway 2000 (M) Sdn. Bhd Malaysia Gateway 2000 Asia Pte. Ltd. Singapore Gateway 2000 Computers Gmbh Germany Gateway 2000 Computers Limited United Kingdom Gateway 2000 Europe Ireland Gateway 2000 France SARL France Gateway 2000 International Limited Ireland (Netherlands Resident) Gateway 2000 Ireland Limited Ireland Gateway 2000 Netherlands BV The Netherlands Gateway 2000 Pty. Ltd. Australia Gateway 2000 Sweden AB Sweden Gateway 2000 Wholesale Pty. Ltd. Australia Nihon Gateway Nisen Kabushiki Kaisha Japan (Gateway Japan) Advanced Logic Research International, Virgin Islands Inc. Advanced Logic Research, Inc. (U.K.) United Kingdom Limited Advanced Logic Research (Deutschland) Germany Gmbh Advanced Logic Research International Singapore (Pte) Ltd. EX-23.1 6 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Gateway 2000, Inc. on Forms S-8 (File Nos. 33-08837, 33-84116, 33-84118, 33-84120, 33-84122, 33-84124, 333-33231, and 333-36071) of our report dated January 22, 1998, on our audit of the consolidated financial statements and financial statement schedule of Gateway 2000, Inc. as of December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997 which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Omaha, Nebraska March 24, 1998 EX-24.1 7 Gateway 2000, Inc. Form 10-K; Power of Attorney The undersigned constitutes and appoints William M. Elliott 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 2000, Inc. (the "Company") for the Company's fiscal year ended December 31, 1997, and any or all amendments 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 Exchange Act of 1934, as amended, the regulations thereunder and other applicable law. Dated: March 17, 1998 /s/Jeffrey Weitzen Jeffrey Weitzen President and Chief Operating Officer Gateway 2000, Inc. Form 10-K; Power of Attorney Each of the undersigned constitutes and appoints William M. Elliott 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 2000, Inc. (the "Company") for the Company's fiscal year ended December 31, 1997, and any or all amendments 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 Exchange Act of 1934, as amended, the regulations thereunder and other applicable law. Dated: January 21, 1998 ____________________ Theodore W. Waitt Chairman of the Board, Chief Executive Officer and Director /s/ Charles G. Carey Charles G. Carey Director /s/ James W. Cravens James W. Cravens Director /s/ George H. Krauss George H. Krauss Director /s/ Douglas L. Lacey Douglas L. Lacey Director /s/ James F. McCann James F. McCann Director /s/ Richard D. Snyder Richard D. Snyder Director EX-27 8
5 The Schedule contains summary financial information extracted from Gateway 2000, Inc.'s consolidated statements of operations for the twelve months ended December 31, 1997 and the consolidated balance sheet as of December 31, 1997 and and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1997 JAN-01-1997 593,601 38,648 530,743 20,064 249,224 1,544,683 534,716 158,249 2,039,271 1,003,906 7,240 0 0 1,541 928,503 2,039,271 6,293,680 6,293,680 5,217,239 5,217,239 0 5,688 716 203,620 93,823 109,797 0 0 0 109,797 0.71 0.70
EX-27 9
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GATEWAY 2000, INC.'S CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 273,987 21,403 511,890 19,230 376,648 1,330,076 489,179 137,945 1,832,631 884,118 5,741 0 0 1,541 839,319 1,832,631 4,316,845 4,316,845 3,595,444 3,595,444 0 2,422 577 57,074 40,187 16,887 0 0 0 16,887 0.11 0.11
EX-27 10
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GATEWAY 2000, INC.'S CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 449,719 20,080 500,169 28,342 460,258 1,519,827 487,975 142,249 1,914,779 900,111 6,210 0 0 1,539 946,076 1,914,779 2,811,994 2,811,994 2,285,843 2,285,843 0 2,910 354 189,312 65,313 123,999 0 0 0 123,999 0.81 0.79
EX-27 11
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GATEWAY 2000, INC.'S CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 547,252 8,985 442,978 23,006 314,954 1,397,644 450,781 125,711 1,775,790 830,540 6,599 0 0 768 882,306 1,775,790 1,419,336 1,419,336 1,153,543 1,153,543 0 1,184 165 103,078 35,562 67,516 0 0 0 67,516 0.44 0.43
EX-27 12
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GATEWAY 2000, INC.'S CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 516,360 0 468,691 18,968 278,043 1,318,342 429,056 109,618 1,673,411 799,769 7,244 0 0 768 814,773 1,673,411 5,035,228 5,035,228 4,071,601 4,071,601 0 21,612 637 382,716 132,037 250,679 0 0 0 250,679 1.64 1.60
EX-27 13
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GATEWAY 2000, INC.'S CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 401,126 0 420,141 18,561 210,598 1,082,089 402,512 93,740 1,416,562 622,570 12,374 0 0 767 724,223 1,416,562 3,482,398 3,482,398 2,821,896 2,821,896 0 13,760 460 248,146 85,610 162,536 0 0 0 162,536 1.07 1.04
EX-27 14
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GATEWAY 2000, INC.'S CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-10-1996 362,552 0 384,768 14,044 199,091 1,000,486 364,396 81,659 1,310,775 587,049 8,128 0 0 766 660,852 1,310,775 2,279,464 2,279,464 1,849,884 1,849,884 0 7,269 322 154,302 52,463 101,839 0 0 0 101,839 0.67 0.65
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