| GATEWAY INC Item 1A Risk Factors In addition to other information contained in this Annual Report, the following factors could affect our future business, results of operations, cash flows or financial position, and could cause future results to differ materially from those expressed in any of the forward-looking statements contained in this Annual Report |
| The PC industry is extremely competitive and pricing pressures have reduced our gross margins and challenge our ability to maintain profitability |
| Consolidation in the PC industry has resulted in larger and stronger competitors in many of our markets and we continue to experience increased competition in the PC industry in certain of our business segments |
| We compete primarily on the basis of customer satisfaction, price, product value, technology, product offerings with innovative performance features, quality, reliability, brand recognition, customer service and support, and by maintaining strategic supplier relationships that enable us to bring products to market quickly |
| We expect these competitive pressures to continue into the foreseeable future, including the reduction of average unit prices in Retail |
| We also expect that average sales prices of our PCs will continue to decline, although this may be partially offset by an increased product mix of relatively higher priced notebook PCs, Gateway branded PCs in Retail and liquid crystal display monitors |
| If we continue to reduce PC prices in response to competition we may be unable to maintain or improve gross margins through cost reductions or offsetting sales of higher margin Non-PC products |
| Our overall gross margin as a percentage of sales has declined due to our shift in overall distribution to third party retail and competitive pressures |
| To the extent we are unable to maintain or grow our revenues and market share and maintain or improve our gross margins, our business prospects and financial condition would be adversely affected |
| Reliance upon third-party patents and intellectual property licensing could limit our ability to innovate and exposes us to actual and potential litigation |
| There is no assurance that we will continue to have access to existing or new third-party technology for use in our products |
| While it may be necessary in the future to seek or renew licenses relating to various aspects of our products and business methods, we believe that based upon past experience and industry practice, such licenses generally can be obtained on commercially reasonable terms |
| However, there is no assurance that the necessary licenses would be available on acceptable terms |
| If we or our suppliers are unable to obtain such licenses, we may be forced to market products without certain desirable technological features |
| We could also incur substantial costs to redesign our products around other parties’ protected technology |
| Because of technological changes in the PC industry and the convergence of PCs with Non-PC products, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible certain components of our products and business methods may unknowingly infringe upon existing patents of others |
| For example, we are a party to various lawsuits and claims, including assertions of patent infringements and intellectual property-related administrative proceedings that arise in connection with our business |
| Although intellectual property-related lawsuits and claims have not historically had a material adverse effect on our consolidated financial position, operating results or cash flows, we cannot predict the outcome of these matters with certainty |
| If such relief was granted or substantial damages were incurred, our business and results of operations would be materially adversely affected |
| In addition, responding to such claims, regardless of their merit, is time consuming, results in significant expenses, and diverts the attention of management and technical personnel |
| We attempt to transfer the risk of inadvertent patent infringement to our original design manufacturers and suppliers via contract |
| We are not always successful in contractually transferring such risk to our original design manufacturers and suppliers, and even when we do so we may be unable to enforce their obligations or they may be unable to adequately defend any patent infringement claims against our PCs and Gateway-branded Non-PC 9 ______________________________________________________________________ [33]Table of Contents products |
| If we are unable to impose upon our original design manufacturers and suppliers the costs of patent infringement claims, our future operating results and financial condition could be materially adversely affected |
| Because one customer accounts for a substantial portion of our revenues, the loss of this customer would cause a significant decline in our revenues |
| A single customer, Best Buy, accounted for approximately 34prca of total revenues for 2005, up from 23prca of total revenues for 2004, and is expected to continue to be a significant customer in the future |
| Although we work to expand and diversify our customer base, reductions or terminations of product purchases by, or pricing pressures from, this customer or other major third-party retailers without an offsetting increase in new sales to other customers, would result in a substantial decline in our revenue and operating results |
| Failure to develop and maintain relationships with several key third-party retailers could adversely affect sales |
| Our products are sold primarily through direct channels and third-party retail partners |
| Third-party retail sales have expanded significantly since early 2004 |
| We expect a substantial portion of our future sales will be to a small number of key third-party retailers |
| Additionally, third-party retailer orders may vary considerably from quarter to quarter |
| If the financial condition of these retailers weakens or if they were to cease or significantly reduce the distribution of our products, Gateway’s business and financial results could be adversely affected |
| If significant variability is experienced, Gateway’s business and financial results for a particular quarter could be adversely affected |
| In addition, failure to foster and maintain strategic relationships with these retailers and find a balance between direct sales and third-party retail sales could have a significant adverse impact on our revenues and operating results |
| If we fail to attract new customers, retain our existing customers and/or replace revenues associated with our higher-margin service revenues, our operating results will be adversely impacted |
| The success of our business depends on increasing the overall number of customer transactions in a cost-effective manner |
| To do this, we must attract new and repeat customers through our various marketing channels, including our website, our telephone call centers, our professional sales force and our third-party retail partners, and then convert these interactions into sales transactions |
| Our reduced marketing expenditures have contributed to reduced demand within our Direct and Professional segments and our ability to successfully bid on future public sector business could be negatively impacted if we fail to perform under any of our existing public sector contracts |
| Furthermore, some of our third-party retail partners sell or may sell private label PCs at competitive prices |
| These sales have the potential to adversely affect our market share |
| In addition, a portion of Gateway’s revenue and profit is derived from higher-margin Internet access services and extended warranties sold in prior periods and recognized over time under our revenue recognition policy, which we expect to decline in the future |
| If we do not achieve increased transaction volume, or replace our higher margin service revenues with alternative sources of profit margin, our ability to grow and maintain profitability will be adversely impacted |
| Information technology systems integration issues could disrupt our internal operations, which could have significant adverse effects on our profitability |
| We are implementing a new enterprise resource planning system, as well as order capture and customer service applications, and continue to develop and modify certain of our other systems |
| We have experienced development and implementation delays with certain projects, and we may experience interruptions in availability of portions of our information technology infrastructure, additional delays in development and implementation, or unanticipated system errors |
| We may not be successful in implementing these new systems, and transitioning data and other aspects of the process could be expensive, time consuming and disruptive |
| Any disruptions that may occur in the implementation of these new systems or any future systems could adversely 10 ______________________________________________________________________ [34]Table of Contents affect our ability to report in an accurate and timely manner the results of our financial operations and otherwise efficiently operate our business, which could have significant adverse effects on our profitability |
| We are dependent on manufacturing and services provided by a limited number of third parties and failure to properly manage these relationships could significantly impact our results of operations |
| We are dependent upon third-party providers of manufacturing and support services |
| We currently outsource all of our manufacturing operations, a significant portion of our service and support functions, and some administrative and operational services to third-party providers under contract |
| One of the third-party providers of service and support functions is partly-owned by Gateway and controlled by a former executive officer of Gateway |
| Although we have partnered with certain vendors, we have no assurance that business interruptions will not occur or that these third parties will meet the needs of our business |
| If we are unable to properly manage our relationships with these third-party providers or accurately forecast our demand requirements for them, our revenues and gross margins may be adversely affected |
| Similarly, if our third-party providers do not comply with their contractual obligations, our results of operations could be adversely impacted |
| We require a high volume of quality products and components for our PC and Non-PC offerings, substantially all of which are obtained from a limited number of original design manufacturers and suppliers |
| In some circumstances we maintain single or dual-source vendor relationships, such as with Microsoft for operating system products and Intel and AMD for PC microprocessors |
| There currently is a lawsuit between AMD and Intel, the outcome of which could impact our results of operations |
| If the supply of a key material product or component were delayed or curtailed, our ability to ship the related product in a timely and cost-effective manner could be adversely affected |
| We seek to mitigate a portion of these risks in some cases by maintaining insurance to protect ourselves against loss of profits due to a vendor’s inability to perform due to an insurable property loss |
| In addition, we seek to mitigate such risks by having dual sources of supply where appropriate and by using reputable and reliable vendors |
| However, even where multiple vendors are available, we may source from a single vendor to take advantage of volume discounts, for product technical characteristics or quality reasons, or to maintain access to certain key components that are at times subject to industry-wide availability and pricing pressures |
| In cases where we need to switch to another original design manufacturer or supplier and alternative sources of supply are available, qualification of the sources and establishment of reliable new or additional production with such original design manufacturers or suppliers could result in delays and possible reductions in net sales |
| We also receive market development funding from a few of these suppliers |
| If the amount of market development funding were to significantly decline, our results of operations could be adversely affected |
| To minimize some of these risks, we monitor the financial status of certain key original design manufacturers, suppliers and service providers and assess the likelihood of disruption to the supply of products, components, or services |
| Certain of our commercial partners currently are financially weak, and we have established contingency plans to mitigate our financial and operating exposure |
| However, such plans for any key commercial partner that experiences financial instability may not prevent delays or curtailments of deliveries of key products, components or services, or eliminate our financial exposure to future costs such as warranty claims or the write-off of receivables from the re-sale of component raw materials to select original design manufacturers, which could adversely affect our future operating results and financial condition |
| In addition, industry consolidation impacts our supply chain and many of our competitors obtain products or components from the same original design manufacturers and suppliers that we utilize |
| Our competitors may obtain better pricing and other terms, more favorable allocations of products and components during periods of limited supply, and could limit our ability to engage in relationships with certain original design manufacturers and suppliers |
| In addition, certain of our original design manufacturers and suppliers could decide in the future to not continue conducting business with us |
| Any of these actions by our competitors, original design manufacturers or suppliers could adversely affect our future operating results and financial condition |
| 11 ______________________________________________________________________ [35]Table of Contents Our plans to open a final assembly facility exposes us to financial and operational risk |
| To better serve our Professional and Direct customers, we plan to open a Gateway dedicated US final assembly facility in 2006 |
| We will assemble configure-to-order desktops, notebooks and servers according to customer specifications at this facility, as well as provide custom imaging services and government compliance certification |
| This new facility is expected to increase our ability to serve our Professional and Direct customers and improve our cost efficiency |
| The facility will, however, increase our fixed costs, require us to implement additional systems and controls, and require additional management oversight and expertise |
| Should any of these costs and requirements escalate, our results of operations and financial condition could be adversely impacted |
| Our reliance on original design manufacturers or suppliers of key products and components exposes us to potential product quality issues and unanticipated warranty costs that could affect the on-time delivery and performance of our products and services |
| While outsourcing arrangements may lower our product and operating costs, they also reduce our direct control over production and distribution |
| If we are unable to ship our products in desired quantities and in a timely manner due to a delay or curtailment of the supply of material products or components, or product quality issues arise due to faulty products or components manufactured by original design manufacturers or suppliers, the market for our products or services could be adversely affected with a resulting reduction in revenues |
| Our estimated warranty and extended warranty costs are affected by ongoing product failure rates and specific product class failures |
| If product failure rates, material usage or service delivery costs exceed our estimates due to faulty products or components manufactured by original design manufacturers or suppliers, warranty expenses may increase |
| In many instances we rely on offshore suppliers, particularly from Asia, for product assembly and manufacturing, and risks associated with transportation, including timely delivery to our primary ports of Los Angeles and Long Beach, California, and other natural or human factors may disrupt the flow of product |
| If for any reason manufacturing or logistics in any of these locations or the subsequent transportation to the US or other customer locations were disrupted by economic, business, environmental, political, medical, military or terrorist events, Gateway’s operations and financial condition could be adversely affected |
| In addition, we may experience production and financial difficulties if any of our significant original design manufacturers or suppliers suffer financial instability |
| This includes our likely inability to obtain reimbursement for prepaid warranty costs from certain original design manufacturers, should their financial condition deteriorate |
| Should such original design manufacturers or suppliers fail to either produce or deliver products as scheduled or to provide prepaid warranty coverage, our operations and financial condition may be adversely affected |
| Failure to develop and introduce new and technologically advanced products in an industry characterized by short product life cycles could adversely affect our growth and efforts to sustain profitability |
| Our business model depends on bringing new and innovative products to market quickly |
| The success of our product introductions depends on many factors including the availability of new products, successful quality control and launch readiness efforts, our ability to successfully forecast product demand, training of sales and support personnel, and customer acceptance of new technology |
| In addition, the introduction of certain new technologies, such as the upcoming Microsoft Windows^® Vista™ operating system, presents us with uncertainties regarding the speed of customer acceptance and the related forecasting of customer demand |
| If we are unable to successfully forecast demand for new products, we may not properly manage our inventory levels and may have increased exposure to supply shortages, product obsolescence and other supply-related risks |
| Short product life cycles resulting from rapid changes in technology and consumer preferences and declining product prices characterize the PC industry and Non-PC products |
| Our internal engineering personnel work closely with product and component suppliers and other technology developers to evaluate the latest developments in PC and Non-PC products |
| There is no assurance that we will continue to have access to or the right to use new technology, or be successful incorporating such new technology in our products in a timely manner |
| 12 ______________________________________________________________________ [36]Table of Contents The failure to properly manage inventory could result in material losses |
| By distributing many of our products directly to our customers prior to our acquisition of eMachines, we historically avoided the need to maintain high levels of finished goods inventory |
| This minimized costs and allowed us to respond more quickly to changing customer demands and reduced our exposure to the risk of finished product obsolescence |
| As we increase sales volume into third-party retail channels, managing our inventory effectively has become increasingly important |
| Third-party retailers may quickly increase orders during periods of product shortages, cancel orders if their inventory is too high, or delay orders in anticipation of new products |
| Orders also may be adjusted in response to the supply of our competitors’ products and seasonal fluctuations in end-user demand |
| If we are not successful in forecasting component or product demand, we could have excess or insufficient inventory of certain components or products and any excess inventory may result in reduced prices and inventory write- downs, which in turn could result in lower gross margins |
| A decrease in market demand or a decision to increase supply, among other factors, could result in higher finished goods and component inventory levels, and a decrease in value of this inventory could have a negative effect on our results of operations |
| Although we believe our inventory and related reserve provisions are adequate, given the rapid and unpredictable pace of product obsolescence in the PC industry, no assurance can be given that we will not incur significant additional inventory and related charges |
| In addition, by purchasing component parts on behalf of original design manufacturers, we have increased our credit risk with these original design manufacturers |
| The failure to attract, retain and motivate key personnel could have a significant near-term adverse impact on our operations |
| Our ability to attract, retain and motivate employees and maintain employee morale has been adversely impacted by a number of factors, including workforce reductions, the closure of facilities and a competitive PC business environment |
| We have experienced, and may continue to experience, turnover in senior management and in the general workforce |
| Most recently, our former Chief Executive Officer resigned on February 8, 2006 and our Chairman of the Board, Richard D Snyder, assumed the role of interim Chief Executive Officer |
| Based on past experiences with other companies, these transitions, including the transition from an interim to a permanent Chief Executive Officer, may be a distraction to senior management, business operations, commercial partners and customers |
| Turnover, particularly among senior management, can also create distractions as we search for replacement personnel, which could result in significant recruiting, relocation, training and other costs, and can cause operational inefficiencies as replacement personnel become familiar with our business and operations |
| In addition, manpower in certain areas may be constrained, which could lead to disruptions over time |
| There can be no assurance that we will continue to successfully attract or retain the management we need, or be able to maintain an optimal workforce size |
| Any inability to attract, retain or motivate such personnel or address manpower constraints as needed could materially adversely affect our future operating results and financial condition |
| We have outsourced operations in countries outside of the US and changes in the political environment, economic policies and other factors within those countries or the US could adversely affect our business |
| We have outsourced a substantial portion of our manufacturing operations to countries in Asia and Eastern Europe and to Mexico |
| A change in these countries’ economic liberalization and deregulation policies could adversely affect business and economic conditions in the affected country generally and could negatively impact the cost-saving benefits of our outsourced operations overseas |
| While our contract obligations are typically in US dollars, changes in currency exchange rates could impact our suppliers and increase our prices |
| In particular, the recent change in the Chinese yuan to United States dollar exchange rate, or any future changes, could increase our costs for products and components sourced from China |
| Any political instability could also change the present satisfactory legal environment for us through the imposition of restrictions on foreign ownership, repatriation of funds, adverse labor laws, and the like |
| Further, risks associated with transportation and other natural or human factors, including disease epidemics, may disrupt operations in and the flow of products from certain countries |
| We also have outsourced workers in countries outside of the US in technical support call 13 ______________________________________________________________________ [37]Table of Contents centers, repair centers, and refurbishment centers |
| These outsourced operations present us with similar economic and political risks |
| The political climate in the US also could change so that it would not be practical for us to use international operational and manufacturing centers |
| This could adversely affect our ability to maintain or create low-cost operations outside the US Environmental laws and regulations and unforeseen costs could impact our future earnings |
| Production and marketing of products in certain states and countries may subject Gateway to environmental and other regulations |
| We also could face significant costs and liabilities in connection with product take-back legislation, which provides customers the ability to return product at the end of its useful life and places financial and other responsibility for environmentally safe collection, recycling, treatment and disposal with Gateway |
| We also face increasing complexity in our product design and procurement and operations as we adjust to new and upcoming requirements relating to the materials composition of our products, including the restrictions on lead and certain other substances in electronics that will apply to specified electronics products put on the market in the European Union as of July 1, 2006 (Restriction of Hazardous Substances (ROHS)) |
| The European Union has also finalized the Waste Electrical and Electronic Equipment Directive, which makes producers of electrical goods, including computers and printers, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products |
| There is substantial complexity associated with compliance with these new regulations and the costs of implementation are not easily quantifiable |
| Compliance also necessitates our reliance on the representations made by suppliers as to material composition; while such representations are believed to be accurate, we could face significant costs and liabilities if the representations prove to not be accurate |
| Furthermore, we must rely on our suppliers’ ability to respond to environmental requirements with compliant products and documentation in a timely manner |
| Similar laws and regulations have been or may be enacted in other states and countries |
| Other environmental regulations may require Gateway to reengineer its products to utilize components which are more environmentally compatible and such reengineering and component substitution may result in additional costs to Gateway |
| Although Gateway does not anticipate any material adverse effects based on the nature of our operations and the effect of such laws, there is no assurance that such existing laws or future laws will not have a material adverse effect on Gateway |
| With the shift to third-party retail, we are increasingly subject to seasonality which can make it difficult to forecast results of operations and anticipate near term developments |
| Gateway’s revenues and operating margins vary among products, distribution channels and the seasonal buying habits of our customers |
| Historically revenues in the Retail segment are seasonally higher during the second half of the year, and Professional segment revenues are seasonally higher in the second and third quarters |
| Consequently, the overall operating margins of Gateway in any given period will depend, in part, on the product, geographic and channel mix reflected in that period’s net sales, as well as seasonality factors related to the time of the year |
| In addition, we typically experience an increase in sales activity near quarter-end |
| Developments late in a quarter, such as lower-than-anticipated demand for Gateway’s products or late arriving components and scheduling/production delays at our manufacturing or logistics partners, fluctuations in product, geographic and channel mix, and the effect of seasonality on our sales and operating margins can have significant adverse impacts on Gateway and our results of operations and financial condition for a given reporting period |
| Expansion into international markets exposes us to increased risks |
| Gateway has expanded sales of PCs and certain Non-PC products into international markets |
| While Gateway previously sold PCs in international markets and eMachines has been selling in international markets for several years, there can be no assurance that such markets will accept Gateway PCs and Non-PC products to the extent we expect |
| International sales are subject to certain inherent risks including unexpected changes in regulatory requirements and tariffs, including antidumping penalties, risks in hedging for foreign currency fluctuations for 14 ______________________________________________________________________ [38]Table of Contents non-US dollar sales, difficulties in managing foreign operations, legal remedies that can affect accounts receivable collection and potentially adverse tax consequences |
| In addition, given that our products in international markets are sold primarily through a small number of third-party retail partners, Gateway’s business and financial results could be adversely affected if the financial condition of any of these retailers weakens or if they were to cease or significantly reduce the distribution of our products |
| For those international sales denominated in US dollars, any strengthening of the US dollar relative to the currencies of other countries into which we sell our products and services could make our products and services more expensive, thereby reducing the price-competitiveness of our products |
| Should any of these difficulties arise, our results of operations and financial condition could be adversely impacted |
| War, terrorist acts and other political and economic uncertainties may adversely affect our operating results |
| War and the related political and economic uncertainties, terrorist attacks, national and international responses to terrorist attacks, and other acts of hostility could materially adversely affect demand for our products and disrupt our supply chain or customer fulfillment logistics or operations, resulting in an adverse impact on our future operating results and financial condition |
| If we cannot sustain our recent profitability and we incur significant net losses or negative cash flows, the business could fail |
| We experienced net losses in the years ended December 31, 2003 and 2004 of dlra515 million and dlra568 million, respectively |
| While we reported net income of dlra6 million for the year ended December 31, 2005, approximately dlra40dtta5 million was attributable to the Marketing, Development and Settlement Agreement with Microsoft, and we cannot guarantee that our profitability will continue |
| Additional significant net losses would materially adversely affect Gateway’s financial condition, results of operations and cash flows |
| Our cash and marketable securities balances have declined since the first quarter of 2004 from historically higher levels due to the eMachines acquisition, restructuring our company, working capital usage in support of expanding our Retail business, and other operating, investing and financing activities |
| While our cash and marketable securities balances did not change materially from December 31, 2004 to December 31, 2005, we may be unable to generate positive cash flow, which would result in declining cash and marketable securities balances |
| While we believe we will have sufficient cash and financial flexibility to meet our operational cash needs, if we are unable to maintain sufficient liquidity, our future results of operations and financial condition would be adversely impacted |
| Public perception regarding Internet security and online privacy could adversely affect our revenues and fraudulent customer activities perpetrated online could result in losses |
| Customer concerns over the security of transactions conducted on the Internet or the privacy of user information may inhibit the growth of our web sales |
| To securely transmit confidential information, such as customer credit card numbers, we rely on encryption and authentication technology |
| Unanticipated events or developments could result in a compromise or breach of the systems we use to protect customer transaction data |
| Furthermore, our information systems infrastructure and that of our service providers may be vulnerable to viruses, other harmful code or harmful activity transmitted over the Internet |
| While we proactively search and protect against intrusions into our infrastructure, a virus, other harmful code or harmful activity could cause a service disruption |
| Even though historical losses related to fraudulent customer activities have been minimal, we bear some of the financial risk from products or services purchased through fraudulent payment methods |
| We have implemented a number of anti-fraud measures, but a failure to adequately control fraudulent methods of payment could adversely affect our operations and financial results |
| 15 ______________________________________________________________________ [39]Table of Contents Failure to accurately estimate and monitor our rebate-redemption rates could significantly impact results of operations |
| From time to time we offer product rebates on purchases of certain of our PCs and Non-PC products |
| We use historical data to assist us in determining the percentage of customers who will claim these product rebates |
| We must estimate future product rebate redemptions to price our products effectively |
| If we experience an unexpected increase in rebate redemption rates, then the effective average selling price of our products would be reduced below the level we anticipated and our net revenues and gross margins would decline, thereby adversely impacting our results of operations |
| Further, to the extent customers do not cash product rebate checks, we could be liable to pay unclaimed funds to certain states, including amounts attributable to prior periods |
| A substantial portion of our services and support offerings, including customer care, is provided by third-party service providers and we could experience additional costs and/or declines in customer satisfaction levels if we are unable to properly monitor and manage such providers |
| We have consolidated our service and support providers and rely on such providers to supply warranty repairs and other support offerings, including customer and tech-support services, to our customers |
| While such providers are required to maintain certain service levels, there can be no guarantee that such companies will provide our customers with the same high-level of service we otherwise would provide ourselves, which could result in additional corrective costs, lower customer satisfaction levels and declines in customer demand |
| If we do not maintain our reputation and expand our name recognition, we may lose customers which would adversely impact our financial results |
| Developing and maintaining awareness of our Gateway and eMachines brand names is critical to achieving widespread acceptance of our PC and Non-PC offerings |
| Promotion and enhancement of our brand will depend largely on whether we cost-effectively provide reliable and desirable products and services to customers and the effectiveness of our marketing efforts |
| Currently, third-party retailers are often our first points of contact with consumers and these retailers provide much of our product advertising as we have reduced our internal spending on marketing |
| If these retailers reduce or cease advertising our products, we may need to increase our own sales and marketing expenses to create and maintain brand awareness among potential consumers |
| If customers do not perceive our products to be of high quality, our brand names and reputation could be harmed, which could adversely impact our financial results |
| Recent changes in accounting for equity compensation will adversely affect earnings and could affect our ability to attract and retain key employees |
| Historically, we have used stock options as a component of our employee compensation program in order to align employees’ interests with those of our stockholders, encourage retention, and provide competitive compensation packages |
| In December 2004, the Financial Accounting Standards Board issued SFAS Number 123-R, which requires companies to record a charge to earnings for the fair value of employee stock option grants and other equity incentives, effective for interim and annual periods beginning after December 31, 2005 |
| Although we accelerated the vesting of all stock options that had exercise prices in excess of the market price on October 4, 2005, because these options did not provide sufficient incentive to our employees when compared with the potential future compensation expense that would have been attributable to these options, we expect that equity compensation will continue to be a component of our total compensation program |
| The accounting treatment for outstanding unvested equity awards will affect our future earnings and could limit Gateway’s willingness to use equity-based compensation plans, which could affect our ability to attract and retain employees |