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US Attorney Launched Gateway Accounts Probe

May 14, 2003 | www.ft.com

Gateway, the ailing personal computer retailer, on Wednesday said the US Attorney's office had launched a criminal investigation into its accounting practices, which are already the subject of a Securities and Exchange Commission probe.

The action, brought by the San Diego office of the US Attorney, covers "the same time period and subject matter" of the SEC case, which has focused on the company's 2000 results, Gateway said in its quarterly results filing.

"Gateway is co-operating fully with this inquiry and does not believe that any current officer is a target of either investigation," the company added.

The SEC, which has been investigating Gateway since December 2000, issued a "Wells" notice in January, indicating that the regulator was about to file charges.

Last month the company adjusted its income for 1999, 2000 and the first quarter of 2001 because of changes in the way it accounted for bundled AOL service. Gateway's net sales and cost of goods sold for 2000 fell by about $340m to $9.3bn and $7.2bn, respectively, as a result of the revision.

The federal investigations come on top of Gateway's considerable business troubles.

The company lags far behind its rivals as the number three PC company and has been losing market share. In 2002 it had 5.9 per cent of the US market, down from 7.2 per cent in the previous year. Dell Computer, US market leader had 28 per cent of the market in 2002, followed by Hewlett-Packard with 20 per cent.

The company has also had to fight the perception that it is in a death sprial after two years of bad news.

This has included thousands of job cuts, the abandonment of non-US markets, the closure of many of its retail outlets and numerous earnings warnings. Its saving grace has been that it has virtually no debt and a pile of cash. At the end of the first quarter, Gateway had $1.2bn in cash, having generated $165m during the previous three months.

Earlier this month Gateway unveiled plans to transform itself into a "branded integrator", selling various technology products at a premium under its black-and-white cow skin logo.

Justin Udelhofen, analyst at Needham & Company, is pessimistic about the company's prospects. "They cannot compete with Dell and their brand is not good enough that they can knock off stuff from Asia and charge a premium for their brand," he said. "I am not sure if the cow is going to save them."

Shares of Gateway fell as much as 8 per cent during morning trade in New York. By midday, they were down 4 per cent at $3.05.


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