Leases uncapitalized annual rentals 624 mill pension

Leases, Uncapitalized Annual rentals $62.4 mill.
Pension Liability None
Pfd Stock None
Common Stock 321,170,974 shs. (100% of Cap'l) as of 3/22/00 Shr. Equity ($mil) C
BUSINESS: Gateway, Inc. manufactures, markets, and supports a product line of Wintel-
compatible desktop, notebook, and sub-notebook personal computers. It markets directly to
businesses, individuals, government agencies, and educational institutions. Manufacturing
facilities located in South Dakota, Ireland, and Malaysia. Foreign sales 14.6% of '99 total;
1999 depreciation rate, 12.3%
Has about 21,000 employees, 4,500 shareholders. Theodore W. Wait owns 35.8% of
common stock; Legg Mason, Inc. 6.3%; Amvescap, PLC, 5.9% (4/00 Proxy). Chairman:
Theodore W. Waitt. President and CEO: Jeff Weitzen. Incorporated: Delaware.
Address: 4545 Towne Centre Court, San Diego, CA 02121. Telephone: [phone].
Internet: .
Gateway is aggressively moving to diversify its revenue stream. On February 23rd, the
company revealed an annual sales target of $30 billion by 2004. Management has set a goal
of generating over half of the company's profits from sales of services and noncomputer
products. The company is aiming for nonsystem income to reach 40% by the end of this
year. By comparison, in 1999, Gateway had sales of $8.65 billion and nonsystem income
accounted for about 20% of profits.
Meanwhile, the company is expanding its retail presence through an greement with
OfficeMax. Gateway will take over the computer departments in over 1,000 OfficeMax
stores. These departments will be run in a similar manner as the company's Country Stores,
except the OfficeMax locations will not offer in-store training because of insufficient space. In
addition to a fixed rent (based on square footage, not a percentage of sales), Gateway will
also invest $50 million in OfficeMax convertible preferred stock. The companies hope to
complete the conversions to Gateway's store-within-a-store format by the end of March
2001.
Another alliance, with Sun Microsytems, Is designed to help both companies
extend their reach. Sun's sales representatives will refer customers to Gateway to
meet their needs for Windows-based computers, which Gateway will load with the
necessary software to integrate with Sun's Solaris-based servers. This pact should
help Gateway boost sales to businesses. In 1999, corporate customers accounted for
less than 45% of the company's domestic sales, but operating margins are higher in
that market, 14.7% versus 11.4% for the consumer market.
These shares are favorably ranked. Sales need to grow at an annual rate of about
28% to meet the ambitious goal of $30 billion in 2004. Growth this year will probably
fall short of this level, but we believe the aforementioned alliances will hit full stride by
mid-2001, thus providing a boost to sales and earnings. Even if Gateway reaches its
long-term goals, the current quote discounts much of our projected, share-net gains,
thus making this equity an average selection for 3- to 5- year price appreciation
potential.