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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 1, 1994
COMMISSION FILE NUMBER:0-17017
DELL COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
9505 ARBORETUM BOULEVARD
AUSTIN, TEXAS 78759-7299
(512) 338-4400
(Address, zip code and telephone number of registrant's
principal executive offices)
A DELAWARE CORPORATION IRS EMPLOYER ID NO. 74-2487834
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING TWELVE MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
AS OF JUNE 6, 1994, 38,325,567 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR
VALUE $.01 PER SHARE, WERE OUTSTANDING.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MAY 1, JANUARY 30,
1994 1994
---------- ----------
<S> <C> <C>
Current assets:
Cash.................................................... $ 26,252 $ 3,355
Short-term investments.................................. 286,733 333,667
Accounts receivable, net................................ 449,248 410,774
Inventories, net........................................ 210,567 220,265
Other current assets.................................... 117,024 80,323
---------- ----------
Total current assets............................. 1,089,824 1,048,384
Property and equipment, net............................... 94,942 86,892
Other assets.............................................. 5,169 5,204
---------- ----------
$1,189,935 $1,140,480
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 300,795 $ 282,708
Accrued liabilities..................................... 243,685 237,651
Income taxes............................................ 21,568 17,628
---------- ----------
Total current liabilities........................ 566,048 537,987
Long-term debt............................................ 100,000 100,000
Other liabilities......................................... 38,872 31,385
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value; shares authorized:
5,000,000; shares issued and outstanding: 1,250,000... 13 13
Common stock: $.01 par value; shares authorized:
100,000,000; shares issued and outstanding: 381 379
38,249,741 and 37,929,031, respectively...............
Additional paid-in capital.............................. 325,446 320,041
Unrealized gain (loss) on short-term investments........ (6,000) 3,230
Retained earnings....................................... 187,576 170,790
Cumulative translation adjustment....................... (22,401) (23,345)
---------- ----------
Total stockholders' equity....................... 485,015 471,108
---------- ----------
$1,189,935 $1,140,480
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MAY 1, MAY 2,
1994 1993
---------- ----------
<S> <C> <C>
Net sales.......................................................... $ 766,632 $ 672,364
Cost of sales...................................................... 596,800 559,240
---------- ----------
Gross profit..................................................... 169,832 113,124
Operating expenses:
Selling, general and administrative.............................. 94,877 87,534
Research, development and engineering............................ 14,970 11,441
---------- ----------
Total operating expenses.................................. 109,847 98,975
---------- ----------
Operating income.......................................... 59,985 14,149
Financing and other income (expense), net.......................... (32,531) 828
---------- ----------
Income before income taxes................................ 27,454 14,977
Provision for income taxes......................................... 8,481 4,792
---------- ----------
Net income................................................ 18,973 10,185
Preferred stock dividends.......................................... 2,187 --
---------- ----------
Net income applicable to common stockholders....................... $ 16,786 $ 10,185
========== ==========
Earnings per common share.......................................... $ .42 $ .25
========== ==========
Shares used in per common share calculation........................ 40,315 40,455
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
MAY 1, MAY 2,
1994 1993
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 18,973 $ 10,185
Charges to income not requiring cash outlays:
Depreciation and amortization................................... 7,571 6,681
Unrealized loss on investment derivatives....................... 9,283 --
Unrealized loss on short-term investments....................... 15,500 --
Other........................................................... 586 24
Changes in:
Operating working capital....................................... (41,351) (68,782)
Non-current assets and liabilities.............................. 7,228 4,914
--------- ---------
Net cash provided by (used in) operating activities........ 17,790 (46,978)
Cash flows from investing activities:
Short-term investments:
Purchases....................................................... (884,170) (445,254)
Maturities and other redemptions................................ 818,322 416,198
Sales........................................................... 83,000 26,420
Capital expenditures.............................................. (15,537) (19,425)
--------- ---------
Net cash provided by (used in) investing activities........ 1,615 (22,061)
Cash flows from financing activities:
Net (payments for) proceeds from short-term borrowings............ (145) 14,069
Borrowings from long-term debt.................................... -- 73,782
Preferred stock dividends paid.................................... (2,187) --
Issuance of common stock under employee plans..................... 4,898 4,573
--------- ---------
Net cash provided by financing activities.................. 2,566 92,424
Effect of exchange rate changes on cash............................. 926 (408)
--------- ---------
Net increase in cash................................................ 22,897 22,977
Cash at beginning of period......................................... 3,355 14,948
--------- ---------
Cash at end of period............................................... $ 26,252 $ 37,925
========= =========
</TABLE>
See Note 5 for Supplemental Statement of Cash Flow information.
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited financial statements should be read in context of
the consolidated financial statements and notes thereto filed with the
Commission in the Company's fiscal 1994 Annual Report on Form 10-K. In the
opinion of management, the accompanying consolidated financial statements
reflect all adjustments (consisting only of normal recurring accruals)
considered necessary to present fairly the financial position of Dell Computer
Corporation and its consolidated subsidiaries at May 1, 1994, and January 30,
1994, and the results of operations for the three-month periods ended May 1,
1994, and May 2, 1993. Operating results for the three-month period ended May
1, 1994, are not necessarily indicative of the results that may be expected for
the year ending January 29, 1995. Certain prior-period amounts have been
reclassified for comparative purposes.
Unless otherwise indicated, all references to years in connection with
financial information refer to the Company's fiscal years and all references to
quarters in connection with financial information refer to the Company's fiscal
quarters.
NOTE 2 -- SHORT TERM INVESTMENTS
During the first quarter of 1995, certain short-term investments experienced
declines in fair value as a result of increased interest rates. Certain
individual investments had a decline in fair value assessed to be
other-than-temporary which, in accordance with SFAS 115, require the Company to
reduce the cost basis of such individual investments to fair value by recording
a charge against income. Accordingly, the Company recorded a $15.5 million
charge to financing and other income (expense) during the first quarter of
1995. Additionally, other unrealized losses on short-term investments in the
amount of $9.3 million ($6.0 million net of tax) at May 1, 1994, were assessed
to be temporary and recorded as a separate component of stockholders' equity.
Subsequent to May 1, 1994, in response to further declines in fair value, the
Company implemented a stop-loss strategy with respect to those instruments with
unrealized losses at May 1, 1994, that resulted in the sale of certain of these
short-term investments. As a result of the sale of these instruments, the
Company will recognize additional pre-tax losses totaling $7.6 million in the
second quarter of 1995.
NOTE 3 -- INVESTMENT DERIVATIVES
At May 1, 1994, and January 30, 1994, the Company had outstanding interest
rate derivative contracts with total notional amounts of $159 million and $355
million, respectively. During the three months ended May 1, 1994, the value of
the Company's investment derivative portfolios decreased as a result of
interest rate increases in the United States, Canadian, Japanese and European
interest rate markets. As a result, the Company recognized realized and
unrealized losses during 1995's first quarter of $22.6 million in financing and
other income (expense). Subsequent to May 1, 1994, in response to further
declines in fair value, the Company implemented a stop-loss strategy that
resulted in the sale of all remaining investment derivatives. As a result, the
Company will recognize additional pre-tax losses totaling $1.3 million in the
second quarter of 1995.
NOTE 4 -- EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income available to
common stockholders by the weighted average number of common shares and common
share equivalents outstanding (if dilutive) during each period. Common share
equivalents include stock options. The Preferred Stock is not a common share
equivalent for purposes of computing earnings per common share. The number of
common equivalent shares outstanding relating to stock options is computed
using the treasury stock method.
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NOTE 5 - SUPPLEMENTAL FINANCIAL INFORMATION (IN THOUSANDS)
Supplemental Statement of Financial Position Information:
<TABLE>
<CAPTION>
MAY 1, JANUARY 30,
1994 1994
--------- -----------
<S> <C> <C>
Inventories:
Production materials ......................... $ 186,808 $ 195,744
Work-in-process and finished goods ........... 23,759 24,521
--------- ---------
$ 210,567 $ 220,265
========= =========
</TABLE>
Supplemental Statement of Operations Information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
MAY 1, MAY 2,
1994 1993
--------- ---------
<S> <C> <C>
Financing and other income (expense):
Investment income:
Short-term investment income, net .......... (10,889) 2,649
Interest rate derivatives .................. (22,607) 673
Interest expense ............................. (2,170) (1,419)
Foreign currency transaction gains ........... 2,540 268
Other 595 (1,343)
--------- ---------
$ (32,531) $ 828
========= =========
</TABLE>
Supplemental Statement of Cash Flows Information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
MAY 1, MAY 2,
1994 1993
--------- ---------
<S> <C> <C>
Changes in operating working capital accounts:
Accounts receivable, net .................... $ (37,113) $ (59,204)
Inventories, net ............................ 9,964 (38,474)
Accounts payable ........................... 17,322 53,415
Accrued liabilities ......................... (3,607) (22,608)
Other current assets ........................ (31,659) (4,088)
Income taxes payable ........................ 3,742 2,177
--------- ---------
$ (41,351) $ (68,782)
========= =========
Changes in non-current assets and liabilities:
Other assets ................................ $ 40 $ 353
Other liabilities ........................... 7,188 4,561
--------- ---------
$ 7,228 $ 4,914
========= =========
</TABLE>
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Unless otherwise indicated, all references to years in connection with
financial information refer to the Company's fiscal years and all references to
quarters in connection with financial information refer to the Company's fiscal
quarters.
RESULTS OF OPERATIONS
The Company reported net income for the first quarter of 1995 of $19.0
million or $.42 per common share on consolidated net sales of $766.6 million
compared with net income of $10.2 million or $.25 per common share on
consolidated net sales of $672.4 million for the comparable period in 1994.
The improved results for the first quarter of 1995 are primarily due to higher
gross margins and operating income partially offset by realized and unrealized
losses related to the Company's investment derivative and short-term investment
portfolios.
The Company's gross profit as a percentage of consolidated net sales
increased to 22.2% for the first quarter of 1995 from 16.8% for the first
quarter of 1994. Gross profit for the first quarter of 1994 would have been
19.9% but was reduced by pre-tax charges of over $20 million related to
notebook computers. The increase in gross profit from 19.9% to 22.2% is
primarily due to improvements in component costs and quality, increased sales
of higher margin products such as Pentium(TM) microprocessor-based desktops and
servers, and improved manufacturing and sales efficiencies from 1994 to 1995.
Higher gross profit, coupled with lower operating expenses as a
percentage of revenue, led to a significant increase in operating income to
$60.0 million for the first quarter of 1995 from $14.2 million of operating
income for the comparable prior-year period. The Company believes that the
improvement in its profit margins for the first quarter of 1995 over profit
margins for the same period in 1994 was partially attributable to improvements
in internal processes. The Company is continuing to implement further
improvements to these processes. Implementation of these improved processes
will pose challenges that could adversely affect the Company's gross profit and
operating expenses in future periods. No assurance can be given that the
Company's restructuring efforts will be successful or that significant
additional costs will not be incurred, although the Company believes it has
taken adequate charges for the expected costs associated with its restructuring
efforts.
First quarter 1995 net income of $19.0 million was adversely affected
by realized and unrealized after-tax losses totaling $26.3 million on certain
investment derivatives and short-term investments. Net losses on investment
derivatives recognized in the first quarter of 1995 were $15.6 million on an
after-tax basis and provisions for impairment of the Company's short-term
investment portfolio accounted for $10.7 million of the losses on an after-tax
basis.
The following table sets forth for the periods indicated the percentage
of consolidated net sales represented by certain items in the Company's
consolidated statements of income.
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<TABLE>
<CAPTION>
PERCENTAGE OF CONSOLIDATED NET
SALES
==============================
THREE MONTHS ENDED
------------------------------
MAY 1, 1994 MAY 2, 1993
----------- -----------
<S> <C> <C>
Net sales:
North America (U.S. and Canada)....................... 64.6% 67.7%
Europe................................................ 30.4 28.8
Other international................................... 5.0 3.5
----- -----
Consolidated net sales.............................. 100.0 100.0
Cost of sales......................................... 77.8 83.2
----- -----
Gross profit ....................................... 22.2 16.8
Operating expenses:
Selling, general and administrative................... 12.4 13.0
Research, development and engineering................. 1.9 1.7
----- -----
Total operating expenses ........................... 14.3 14.7
----- -----
Operating income.................................. 7.9 2.1
Financing and other income (expense), net............... (4.3) .1
----- -----
Income before income taxes............................ 3.6 2.2
Provision for income taxes.............................. 1.1 .7
----- -----
Net income............................................ 2.5 1.5
Preferred stock dividends............................... .3 --
----- -----
Net income applicable
to common stockholders.............................. 2.2% 1.5%
===== =====
</TABLE>
Net Sales
The Company's consolidated net sales increased 14% to $766.6 million
for the first quarter of 1995 compared with $672.4 million for 1994's first
quarter. First quarter 1995 unit volumes increased by approximately 3% over
volumes in the comparable period of 1994, and average revenue per unit for the
first quarter of 1995 increased 11%. The increase in average revenue per unit
was primarily due to increased sales of higher priced products such as Pentium
microprocessor-based desktops and servers and more modest price reductions
during the first quarter of 1995 than typically experienced in prior periods.
The Company's consolidated net sales (expressed in United States
dollars) were reduced by .6% in the first quarter of 1995 by fluctuations in
the average value of the United States dollar relative to its average value in
the comparable period of the prior year, particularly because of the weakening
of the Canadian dollar. Based on this information, the Company believes that
the increase in consolidated net sales was primarily caused by an increase in
unit sales and higher average prices per unit which were partially offset by
changes in foreign currency exchange rates.
Net sales from the Company's Pentium microprocessor-based systems,
initially introduced in the third quarter of 1994, increased to 8% of first
quarter 1995 consolidated net sales. Net sales from the Company's 486-based
systems continued to increase and represented 79% and 75% of consolidated net
sales for the first quarters of 1995 and 1994, respectively. The increase in
consolidated net sales was led by sales of 486- and Pentium
microprocessor-based mid-size and small-chassis desktop systems, which
accounted for 72% and 62% of consolidated net sales for the first quarters of
1995 and 1994, respectively. Sales of 386- and 386SX-based desktop systems,
which were discontinued in the fourth quarter of 1994, represented 9% of
consolidated net sales for the first quarter of 1994.
The Company believes that the absence of a full notebook computer
product line during the majority of 1994 and in the first quarter of 1995 was a
contributing factor to its decreased sales growth and that the Company's
re-entry represents a significant growth opportunity. The Company also
believes that a significant opportunity for market expansion lies in the
network server market, where the Company's presence has been limited. Since
January
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30, 1994, the Company has introduced two new product lines: The PowerEdge(TM)
server line, introduced on March 7, 1994, includes 90- and 100-megahertz
Pentium microprocessor-based systems for network applications; and the
Latitude(TM) notebook personal computer line, introduced on February 21, 1994,
marks the first stage of the Company's phased re-entry into the notebook
computer market. Sales of Latitude notebook computers were 2% of consolidated
net sales for the first quarter of 1995 compared with notebook computer sales
of 6% in the comparable period of 1994. Sales of servers and workstations
accounted for 13% of consolidated net sales for each of the first quarters of
1995 and 1994. There can be no assurance that the Company's notebook, server,
or other development activities will be successful, that product technologies
will be available to the Company, that the Company will be able to deliver
commercial quantities of computer products in a timely manner, or that such
products will achieve market acceptance.
North American sales increased 9% in the first quarter of 1995 to
$495.4 million from $455.0 million for the comparable period in 1994. The
Company's European operations contributed net revenues of $232.8 million for
the first quarter of 1995, representing a 20% increase over $193.6 million of
net revenues for the first quarter of 1994. Other international sales increased
61% to $38.4 million for the first quarter of 1995 from $23.8 million for the
comparable period of 1994. These increases resulted primarily from increased
sales in existing markets and, to a lesser extent, expansion into new markets.
The Company believes that its international growth affords significant
opportunities to achieve higher levels of operating and economic efficiencies.
Consolidated net sales to major corporate, government and education
accounts increased 18% to $384.1 million for the first quarter of 1995 from
$325.2 million for the first quarter of 1994. Sales to medium- and small-sized
businesses and individuals increased 6% to $276.2 million for the first quarter
of 1995 from $259.5 million for the first quarter of 1994.
The Company does not believe that backlog is a meaningful indicator of
sales that can be expected for any period. In conjunction with its effort to
minimize the time between customer order and product delivery, the Company
attempts to hold its backlog of customer orders to a minimum. Backlog
represented approximately $25.9 million at May 1, 1994. Consistent with the
Company's unconditional return policy, customers may cancel or reschedule
orders without penalty prior to commencement of manufacturing.
Gross Profit
The Company's gross profit as a percentage of consolidated net sales
increased to 22.2% for the first quarter of 1995 from 16.8% for the first
quarter of 1994. Gross profit for the first quarter of 1994 would have been
19.9% but was reduced by pre-tax charges of over $20 million related to
notebook computers. The increase in gross profit from 19.9% to 22.2% is
primarily a result of improvements in component costs and quality due to the
Company's vendor certification and vendor consolidation programs; increased
sales of higher margin products such as Pentium microprocessor-based desktops
and servers driven by changes in the Company's sales incentive programs and
pricing actions; and manufacturing and sales efficiencies resulting from
process improvements as the Company continues its restructuring efforts.
The Company implemented pricing actions to stimulate demand on
selected products late in the first quarter of 1995. Additional pricing
actions will occur as the Company attempts to maintain a competitive mix of
price, performance and customer support services. The Company attempts to
mitigate the effect of its pricing actions through improvements in the product
mix, reduced component costs, manufacturing efficiencies and operating expense
controls.
Dell's manufacturing process requires a high volume of quality
components. Several microprocessors used in the Company's products are
currently available only from Intel Corporation. In addition, the Company has
certain single supplier relationships that are considered advantageous for
reasons including performance, quality, support, delivery and price
considerations. Reliance on those vendors, as well as industry supply
conditions, generally involves several risks, including the possibility of a
shortage of components, increases in component costs and reduced control over
delivery schedules, which could adversely affect the Company's financial
results. The
8
<PAGE> 10
Company occasionally experiences delays in receiving certain components, which
can cause delays in the shipment of some products to customers. For example,
during the first quarter of 1995, the Company experienced supply constraints
for its sole-sourced leading edge static random access memory which caused
delays in the shipment of certain Pentium microprocessor-based advanced
systems. Late in the first quarter, availability of this component through
additional suppliers mitigated this shortage and the Company is currently
receiving adequate supplies of this component. There can be no assurance that
the Company will be able to continue to obtain additional supplies in a timely
or cost-effective manner.
The results of the Company's international operations are subject to
currency fluctuations. However, the Company attempts to reduce its exposure to
currency fluctuations through the use of foreign currency option contracts for
periods not exceeding twelve months and, to a lesser extent, through the use of
forward contracts, generally for periods not exceeding three months, which
hedge certain anticipated intercompany shipments to foreign subsidiaries.
Forward contracts entered into to hedge anticipated intercompany shipments,
none of which were outstanding at the end of the first quarter of 1995, are
accounted for on a mark-to- market basis. The Company has purchased options to
hedge a portion of its anticipated, but not firmly committed, intercompany
sales for 1995 and may enter into additional hedging transactions as management
considers appropriate. Based upon foreign currency exchange rates at the end of
the first quarter of 1995, option contracts that hedge 1995 anticipated
shipments to international subsidiaries had a combined net realized and
unrealized deferred gain of $.3 million.
Operating Expenses
Operating expenses for the first quarter of 1995 increased 11% to
$109.8 million from $99.0 million for the comparable period in 1994. As a
percentage of sales, operating expenses for the first quarter of 1995 decreased
to 14.3% from 14.7% for the first quarter of 1994. The Company believes that
its ability to manage operating costs is an important factor in its ability to
remain price competitive. No assurance can be given that the Company's efforts
to manage operating expenses as a percentage of sales will be successful.
Financing and Other Income (Expense)
Financing and other income (expense) was $(32.5) million in the first
quarter of 1995 compared with $.8 million in the comparable prior year period.
Short-term investment income (loss) was $(10.9) million in the first
quarter of 1995 compared with $2.6 million in the first quarter of 1994. The
loss in 1995's first quarter was primarily due to an unrealized $15.5 million
decline in fair value of certain of the Company's short-term investments which
were assessed to be other-than-temporary, resulting in a reduction of the cost
basis to fair value as of May 1, 1994, by recording a pre-tax charge against
income. Additionally, other unrealized losses on short-term investments in the
amount of $9.3 million ($6.0 million net of tax) at May 1, 1994, were assessed
to be temporary and recorded as a separate component of stockholders' equity.
The decline in the fair value of short-term investments is a result of interest
rate increases in the United States, Canadian, Japanese, and European interest
rate markets. Subsequent to May 1, 1994, in response to further declines in
fair value, the Company implemented a stop-loss strategy with respect to those
instruments with unrealized losses at May 1, 1994, that resulted in the sale of
certain of these short-term investments. As a result of the sale of these
instruments, the Company will recognize additional pre-tax losses totaling $7.6
million in the second quarter of 1995.
In the normal course of business, the Company has historically
employed a variety of interest rate derivative instruments to more efficiently
manage its principal, market and credit risks as well as to enhance its
investment yield. Derivative instruments used included interest rate swaps,
written and purchased interest rate options and swaptions (options to enter
into interest rate swaps). The Company structured derivative instruments in
interest rate markets where it has foreign operations. Interest rate
derivatives generally involve exchanges of interest payments based upon fixed
and floating interest rates without exchanges of underlying notional amounts.
Consequently, the Company's exposure to credit loss was significantly less than
the stated notional amounts.
9
<PAGE> 11
Realized and unrealized net gains (losses) on interest rate
derivatives recognized in income were $(22.6) million in the first quarter of
1995, compared with $.7 million in the first quarter of 1994. The losses
recognized in the first quarter of 1995 primarily resulted from increases in
the United States, Canadian, Japanese, and European interest rate markets.
During the first quarter of 1995, the Company reduced its investment derivative
portfolio by 55% from a notional principal amount of $355 million at January
30, 1994, to $159 million at May 1, 1994. Subsequent to May 1, 1994, in
response to further declines in fair value, the Company implemented a stop-loss
strategy that ultimately resulted in the sale of all remaining investment
derivatives. As a result, the Company will recognize additional pre-tax losses
totaling $1.3 million in the second quarter of 1995. In the future, the Company
intends to use derivative contracts only to hedge interest rate risk on its
debt and equity.
Interest expense in the first quarter of 1995 increased to $2.2
million from $1.4 million in the first quarter of 1994. The increase in
interest expense in the first quarter of 1995 was primarily due to higher
effective borrowing rates associated with the 11% Senior Notes issued in the
third quarter of 1994 relative to the borrowings outstanding during the first
quarter of 1994. Concurrently with the issuance of the Notes, the Company
entered into interest rate swaps agreements to manage the interest costs
associated with the Notes. The swap agreements effectively change the
Company's interest rate exposure from a fixed-rate to a floating rate basis and
resulted in a weighted average interest rate of 10.28% on the Notes for the
first quarter of 1995.
Net foreign currency transaction gains increased to $2.5 million for
the first quarter of 1995 from $.3 million in the comparable 1994 period
primarily as a result of the strengthening of the Japanese Yen versus the
United States dollar.
Financing fees and other income (expense) was $.6 million in the first
quarter of 1995 compared to ($1.3) million in the first quarter of 1994. The
increase in the first quarter of 1995 was primarily due to lower
financing-related expenses for deferred financing costs written off in the
first quarter of 1994.
Income Tax
The Company's effective tax rate was 30.9% for the first quarter of
1995 compared with 32.0% for the same period in 1994. The change in the
effective tax rate resulted from changes in the geographical distribution of
income and losses.
HEDGING ACTIVITIES
The results of the Company's international operations are affected by
changes in exchange rates between certain foreign currencies and the United
States dollar. The Company's exposure to currency fluctuations has increased as
a result of the expansion of its international operations. The functional
currency for most of the Company's international subsidiaries is the local
currency of the subsidiary. An increase in the value of the United States
dollar increases costs incurred by the Company's international operations
because many of its international subsidiaries' component purchases are
denominated in the United States dollar. Changes in exchange rates may
negatively affect the Company's consolidated net sales (as expressed in United
States dollars) and gross profit margins from international operations. The
Company monitors this exposure and attempts to mitigate the exposure through
hedging transactions.
Because of the significant growth in the Company's international
operations in recent years, the Company has attempted through various means to
mitigate the effects of currency fluctuations. The purpose of the Company's
hedging program is to protect the Company from the risk that the
dollar-equivalent price of anticipated cash flows resulting from sale of
products from its manufacturing subsidiaries to its international sales
subsidiaries will be adversely affected by changes in foreign currency exchange
rates. The Company's hedging activities consist primarily of hedging
anticipated intercompany sales to its international subsidiaries and resulting
intercompany balances through the use of purchased options for periods not
exceeding twelve months and, to a lesser extent, forward contracts, generally
for periods not exceeding three months. The risk of loss associated with
purchased options is limited to the amount of premiums paid for the option
contracts, which could be significant. The premium amounts paid on purchased
options are amortized over the period of the hedged transaction. Gains and
losses
10
<PAGE> 12
incurred on purchased option contracts are deferred until occurrence of the
hedged transaction and recognized as a component of the cost of the hedged
transaction. Gains and losses incurred on forward contracts designated as
hedging contracts of anticipated intercompany shipments are marked-to-market
and recognized as a component of cost of sales in the current period.
On November 30, 1992, the SEC's Division of Enforcement notified the
Company that it was beginning an informal inquiry, which is continuing,
regarding the Company's accounting practices for foreign currency hedging and
trading activities and the completeness of the Company's public disclosure
about those activities. The Company and its independent accountants are
voluntarily cooperating with the SEC in this informal inquiry. The SEC's
Division of Corporation Finance has also indicated it has concerns about the
deferred accounting treatment the Company afforded gains and losses on forward
and option contracts entered into to hedge anticipated transactions and has not
expressed its definitive views about whether the Company's accounting for these
forward and option contracts complies with generally accepted accounting
principles in all material respects.
The table below shows the effect on income before income taxes, net
income and earnings per common share for the first quarters of 1995 and 1994,
if gains and losses on hedging contracts had been accounted for on a
mark-to-market basis.
<TABLE>
<CAPTION>
MAY 1, 1994 MAY 2, 1993
----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
EFFECT ON INCOME BEFORE INCOME TAXES:
Forward contracts....................................... $ -- $ --
Synthetic forward contracts............................. -- --
Other option contracts.................................. (1.9) (.3)
------------ ------------
Total effect on income before income taxes.............. $ (1.9) $ (.3)
============ ============
DEFERRED REALIZED AND UNREALIZED GAIN (LOSS)............ $ .3 $ (1.7)
============ ============
EFFECT ON NET INCOME AND EARNINGS PER SHARE:
Net income on a mark-to-market basis.................... $ 17.7 $ 10.0
Net income as reported.................................. 19.0 10.2
Earnings per share on a mark-to-market basis............ .38 .25
Earnings per share as reported.......................... .42 .25
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities for the first
quarter of 1995 was $17.8 million, which represented the Company's primary
source of cash. The Company experienced an increase in days in accounts
receivable to 53 days at the end of the first quarter of 1995 from 50 days at
year end 1994. Days in accounts payable increased to 45 days at the end of the
first quarter of 1995 from 42 days at the end of 1994. Inventory levels
remained relatively flat at 32 days of supply at the end of 1995's first
quarter compared with 33 days at year-end 1994. Although the Company made
significant progress in reducing inventory during 1994 and the first quarter of
1995, maintaining this inventory level is dependent upon the Company's ability
to achieve targeted revenues, to further reduce complexities in its product
line, and to increase commonality of parts. There can be no assurance that the
Company will be able to maintain these historically low inventory levels in
future periods.
Capital expenditures for 1995 are expected to be $55 to $65 million.
Approximately $15.5 million of cash was used for capital expenditures during
the first quarter of 1995 to expand facilities and to acquire information
systems and personal computer office equipment.
The Company has a line of credit facility which bears interest at a
defined Base Rate or Eurocurrency Rate with covenants based on minimum pre-tax
earnings, a maximum ratio of total liabilities to tangible net worth, and a
maximum inventory level. Maximum amounts available under the credit facility
are limited to the lesser of $75
11
<PAGE> 13
million or eligible receivables as defined by the credit agreement. During the
commitment period, the Company is obligated to pay .375% per annum on the
unused portion of the credit facility. No amounts were outstanding under this
credit facility as of May 1, 1994. The maximum available under this credit
facility as of May 1, 1994, totaled $74 million.
The Company is currently negotiating the terms of a new line of credit
facility to replace the existing credit facility. The new credit facility is
expected to bear interest at a defined Base Rate or Eurocurrency Rate and
covenants are expected to be based on quarterly income, maintenance of net
worth, a maximum ratio of total liabilities to tangible net worth, and a
maximum inventory level. Maximum amounts available under this new credit
facility are expected to be $90 million. Dell expects to finalize these
documents and sign the new credit facility in June, 1994. Terms are subject to
change before signing the agreement.
The Company's subsidiary, Dell Receivables Corporation, has a
Receivables Purchase Agreement pursuant to which the Company may raise up to
$100 million through the sale of interests in certain of its accounts
receivable. As of May 1, 1994, this facility was unused. The Company is in
the process of renewing this asset securitization program.
Repayment of the Company's $100 million in 11% Senior Notes due August
15, 2000, together with operating lease commitments, constitute the Company's
long-term commitments to use cash.
The Company is a defendant in several consolidated lawsuits brought by
certain of its stockholders. An unfavorable outcome in these lawsuits could
have a material adverse effect on the Company's financial condition and results
of operations. See "Legal Proceedings."
Management believes that sufficient resources will be available to
meet the Company's cash requirements through at least the next twelve months.
Cash requirements for periods beyond the next twelve months depend on the
Company's profitability, its ability to manage working capital requirements,
and its rate of growth.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its Chairman, Michael S. Dell, are defendants in
nineteen lawsuits filed between May and November 1993, in the United States
District Court for the Western District of Texas, Austin Division. Thomas J.
Meredith, the Company's Chief Financial Officer, was also a defendant in seven
of the lawsuits. The suits have been consolidated, an amended and consolidated
complaint has been filed, and the plaintiffs have requested class certification
for a class of persons who purchased or held the Company's common stock between
February 24, 1993, and July 14, 1993. In general, the plaintiffs have alleged
that the Company made overly optimistic forecasts about the Company's prospects
without a reasonable basis and failed to disclose adverse material information
about the Company's business (particularly with regard to problems in its
notebook business) on a timely basis, thereby inducing the plaintiffs to buy
Company common stock at artificially high prices. The plaintiffs also have
alleged that Mr. Dell sold securities of the Company while in the possession of
material, non-public information about the Company. The consolidated complaint
asserts that these actions or omissions violated various provisions of the
federal securities laws, particularly Section 10(b) of the Exchange Act and
Rule 10b-5; that Mr. Dell's trades violated Section 20A of the Exchange Act;
and that the defendants violated provisions of Texas statutes and common law
principles against negligent misrepresentation and deceit. The complaint seeks
unspecified damages. The Company moved for dismissal of the complaint and
intends to defend itself and its officers vigorously.
On April 28, 1994, the Court dismissed all claims against Mr.
Meredith and all claims under the Texas Securities Act and limited the
potential class of plaintiffs eligible to make claims with regard to negligent
misrepresentation to "those persons who, as existing shareholders, received the
Quarterly Report, Annual Report
12
<PAGE> 14
and 'Letter to Shareholders' cited in the Consolidated Complaint" and
thereafter acted in reliance on statements in those documents. The Court also
asked the parties to file supplemental briefs with regard to some of the other
claims against Mr. Dell and the Company. The Company and Mr. Dell intend to
continue to vigorously defend the case. It is the Company's policy to make
accruals for potential liability or settlement of litigated matters as
appropriate. The Company believes that its current accruals in connection with
this matter are adequate.
Since August 1992, the Company has been named as a defendant in
seventeen repetitive stress injury lawsuits, fifteen of which are in New York
state courts or United States District Courts for the New York City area. One
is in the Federal District Court for the State of Pennsylvania and one is in
the Federal District Court for the State of Tennessee. The allegations in all
of these lawsuits are similar: each plaintiff alleges that he or she suffers
from symptoms generally known as "repetitive stress injury," which allegedly
were caused by the design or manufacture of the keyboard supplied with the
computer the plaintiff used. The Company has denied or is in the process of
denying the claims and intends to vigorously defend the suits. The suits naming
the Company are just a few of many lawsuits of this type which have been filed,
often naming IBM, Atex, Keytronic and other major suppliers of keyboard
products. To date, the courts assigned to hear several of the cases against
Dell have stayed most activity, pending resolution of several preliminary legal
issues related to the large numbers of cases which have been consolidated for
hearing before these courts. The Company currently is not able to predict the
outcome of these suits. It is possible that the Company may be named in
additional suits, but it is impossible to predict how many may be filed.
Ultimate resolution of the litigation against the Company may depend on
progress in resolving this type of litigation overall.
For information about a pending Securities and Exchange Commission
informal inquiry relating to foreign currency hedging and trading activities,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Hedging Activities." By letter dated July 21, 1993, the
Commission notified the Company that it was extending the informal inquiry to
the circumstances and events surrounding the public announcement on July 14,
1993, about the Company's expected losses for its second quarter of 1994 and
into the Company's procedures for estimating sales. The Company and its
independent accountants are voluntarily cooperating with the Commission in its
informal inquiry.
On August 11, 1993, the Company received a subpoena from the United
States Department of Commerce, Office of Export Enforcement of the Bureau of
Export Administration, requiring the Company to provide all documents relative
to any and all exports of 486/66 personal computers or related components to
Russia, Ireland, Iran or Iraq during the period from January 1992 through
August 1993 in connection with an investigation to enforce regulations under
the Export Administration Act of 1979, as amended. If the Office of Export
Enforcement's investigators determine that the Company has violated applicable
regulations, the government could potentially file civil or criminal charges.
The Company is cooperating in the investigation. The Company does not believe
this investigation or its outcome will have a material adverse effect on the
Company's financial condition or results of operations.
The Company has received a request from the Federal Trade Commission
("FTC") dated January 5, 1994, to provide documents and other information in
connection with the FTC's inquiry into the computer industry to determine
whether the Company's advertising and marketing claims regarding cathode ray
tube ("CRT") monitor screen sizes are in violation of the Federal Trade
Commission Act. In general, the inquiry focuses on differences between
advertising and marketing claims as to the size of CRT monitor screen sizes,
and the size of the display area actually viewable by the consumer. The
Company is cooperating with the FTC in this inquiry. The Company does not
believe that the inquiry or its outcome will have a material adverse effect on
the Company's financial condition or results of operations.
In April 1994 the California Attorney General notified Dell and 12
other PC manufacturers that certain of their advertisements with regard to
monitor screen sizes were believed to be deceptive and misleading, based on the
same concepts expressed by the FTC. The Company is responding to this
investigation in coordination with other companies in the industry. The
Company does not believe that the inquiry or its outcome will have a material
adverse effect on the Company's financial condition or results of operations.
13
<PAGE> 15
The Company has received a request from the FTC dated November 12,
1993, requesting the Company's cooperation in an inquiry with respect to
whether the Company may have misrepresented or improperly failed to disclose
patent rights that would conflict with open use of a local high-speed personal
computer bus standard promulgated by the Video Electronics Standards
Association (VESA). The Company intends to cooperate in this inquiry. The
Company does not believe that the inquiry or its outcome will have a material
adverse effect on the Company's financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certification of Correction dated April 27, 1994, filed to correct
certain errors in Certificates of Amendment of the Certificate of
Incorporation
(b) Reports on Form 8-K
Not applicable
14
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELL COMPUTER CORPORATION
June 7, 1994
/s/ THOMAS J. MEREDITH
-----------------------
Thomas J. Meredith
Chief Financial Officer
15
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
------- ----------------------- -------------
<S> <C> <C>
3.1 Certificate of Correction dated April 27, 1994, filed to
correct certain errors in Certificates of Amendment of the
Certificate of Incorporation
</TABLE>
16
<PAGE> 1
EXHIBIT 3.1
<PAGE> 2
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 11:45 AM 05/05/1994
944079447 - 2141541
CERTIFICATE OF CORRECTION
FILED TO CORRECT CERTAIN ERRORS
IN THE CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
FILED IN THE OFFICE OF THE
SECRETARY OF STATE OF DELAWARE ON MAY 9, 1988,
AND IN THE CERTIFICATE OF AMENDMENT OF CERTIFICATE OF
INCORPORATION FILED IN THE OFFICE OF THE
SECRETARY OF STATE OF DELAWARE ON JULY 10, 1992
Dell Computer Corporation, a corporation organized and existing
under the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
That in the Certificate of Amendment filed with the Secretary of
State of Delaware on May 9, 1988 (the "1988 Certificate of Amendment"), it was
incorrectly stated that:
"Article Fourth of the Certificate of Incorporation as amended
shall read in its entirety as follows:"
That such sentence in the 1988 Certificate of Amendment in its
corrected form is as follows:
"The first paragraph of Article Fourth of the Certificate of
Incorporation as amended shall read in its entirety as follows:"
That in the second sentence of Paragraph SECOND of the Certificate
of Amendment filed with the Secretary of State of Delaware on July 10, 1992
(the "1992 Certificate of Amendment"), it was incorrectly stated that:
"Article Fourth of the Certificate of Incorporation as amended
shall read in its entirety as follows:"
1
<PAGE> 3
That the second sentence of Paragraph SECOND of the 1992
Certificate of Amendment in its corrected form is as follows:
"The first paragraph of Article Fourth of the Certificate of
Incorporation as amended shall read in its entirety as follows:"
IN WITNESS WHEREOF, Dell Computer Corporation has caused its
corporate seal to be hereunto affixed, and this Certificate to be signed by
Michael S. Dell, its Chairman of the Board and Chief Executive Officer, and
attested by Roger Bailey, its Assistant Secretary this 27th day of April, 1994.
DELL COMPUTER CORPORATION
BY /s/ MICHAEL S. DELL
----------------------
Michael S. Dell
Chairman of the Board
Chief Executive Officer
ATTEST:
By /s/ ROGER BAILEY
- - -------------------
Roger Bailey
Assistant Secretary
2
