Gateway Accounting Inquiry Spawns Criminal Probe

Already battered by a barrage of bad news, Gateway Inc. has revealed that its accounting practices from three years ago or more are now facing investigation from federal law enforcement officials with the authority to bring criminal charges.

The news came in a quarterly report filed Wednesday with the Securities and Exchange Commission (SEC). In it, Poway, California-based Gateway said federal authorities working out of the U.S. Attorney’s office in San Diego have begun to inquire about the same accounting issues the SEC has been investigating since late in 2000.

"The U.S. Attorney’s office has also recently commenced a preliminary inquiry relating to this same time period and subject matter," the company said. "Gateway is cooperating fully and does not believe that any current officer is a target of either investigation."

Closing the Book

While expressing confidence that both inquiries, as well as a handful of outstanding private lawsuits, will be resolved without harming the company, Gateway said such matters are "inherently unpredictable."

Gateway also noted that it recently restated some financial results after conducting its own review of accounting matters, revising top-line sales figures by US$8 million for 1999, $337 million for all of 2000 and $131 million for the first quarter of 2001.

The company has indicated it may have other adjustments to make but that its bottom-line earnings figures would likely not be affected.

Gateway shares fell in afternoon trading Wednesday and slipped further early Thursday to $3.05.

Bigger Problems

The probe apparently centers on how Gateway accounted for the America Online services it bundled with new personal computers. Though it still gives away AOL trials with all new computers, Gateway has changed how it accounts for the revenue derived from those sales .

While the investigation is not a pleasant bit of news, it may not be what most worries Gateway’s investors. Once consistently in the black, Gateway has managed to post a profit only once in the last 10 quarters, and analysts are increasingly concerned about erosion of its share of the PC market.

IDC analyst Roger Kay said Gateway has been among the companies most affected by Dell Computer's (Nasdaq: DELL) strong showing in the PC market in recent years. Kay told the E-Commerce Times that Dell's slimmed-down direct sales model has helped it thrive in tough times, while Gateway has been forced to spend its energy revamping its business in order to compete.

"If PC sales were to grow sharply, it would help Gateway snap out of it, but that's not what anyone is seeing in the near future," Kay added.

Still Stalled

Morningstar.com stock analyst Joseph Beaulieu told the E-Commerce Times Gateway is likely working hard to put the SEC and now the criminal probe behind it and added that because the company has been restating results and acknowledging the inquiries, the company's already low stock price is unlikely to suffer much more in the short term.

"Gateway has been hit as hard as anyone by the maturing of the PC market," he added. "These distractions don't help, but the real task is finding ways to improve their margins and keep their market share from eroding further."

In fact, ahead of an earnings report from Dell, Gartner (NYSE: IT) said the PC market is in line for growth of about 3 percent this year, but the research firm also forecast a basically flat second quarter with little to no growth.

Gateway has tried to counter the PC slide by moving into other markets. While some of those moves -- notably toward enterprise sales and consumer and home electronics -- have been successful, they have yet to help lift the company's bottom line.

A massive restructuring that will see dozens of Gateway Country stores closed and some 1,900 workers laid off currently is under way.