Gateway AAER 1911

1
Gateway AAER 1911

• Outbound program
• Offer pre-approved loans to buy a PC to consumers
  that had been denied credit previously
• Test program -- 10 million/quarter
• Inbound sales started slipping so Gateway
  became more aggressive
• Advised that expected loan losses were 38
  profit margin
• Despite warnings, grew even more to meet revenue
  targets
• Grew to 112 million
• Represented 32 of receivables at end of quarter
  vs. 0 one year prior
• Failed to disclose outbound program

2
Other receivables related activities in Q2 of
2000

• Sold approximately 50 million in high quality
  loans receivable
• Recorded gain on sale 0.01 per share
• Cash 50
• Loans receivable 45.7
• Gain on sale 4.3

3
One more important set of facts

• Gateway sold the loans to the entity that
  typically serviced their loans
  (relationship???)
• Gateway loaned the buyer the 50 million to buy
  the loans
• Loan to buyer was at below-market rate
• They recorded the note receivable (loan) as
• Note receivable 50
• Cash 50
• But PV of cash flows lt 50
• Should have assumed these were one transaction
• Note receivable 50
• Discount on note receivable 4.3
• Loans receivable 45.7

4
Suspicious behavior

• Loan sale deal done via wire transfers on June 30
  ???
• 0.01 per share gain on sale is the amount by
  which they beat the consensus analyst forecast
• Internal emails suggest Gateway would need the
  sale "for the quarter.
• Next quarter also had memo entitled Gap to
  consensus
• Not the only tools they used
• Improper revenue recognition on sale with
  contingency
• Improper bill-and-hold sale
• Improper revenue recognition on internet service
  bundles