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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 OCTOBER 27, 1996
COMMISSION FILE NUMBER: 0-17017
DELL COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-2487834
(State of incorporation) (I.R.S. Employer ID No.)
ONE DELL WAY
ROUND ROCK, TEXAS 78682
(Address of principal executive offices)
(512) 338-4400
(Telephone number)
2214 WEST BRAKER LANE, SUITE D
AUSTIN, TEXAS 78758-4053
( Former address of principal executive offices)
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 THE CLOSE OF BUSINESS ON DECEMBER 6, 1996, 175,084,128 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
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 27, JANUARY 28,
ASSETS 1996 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash ................................................................ $ 87 $ 55
Marketable securities ............................................... 1,096 591
Accounts receivable, net ............................................ 915 726
Inventories ......................................................... 216 429
Other current assets ................................................ 177 156
------------ ------------
Total current assets ......................................... 2,491 1,957
Property, plant and equipment, net ..................................... 223 179
Other assets ........................................................... 10 12
============ ============
$ 2,724 $ 2,148
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 911 $ 466
Accrued and other liabilities ....................................... 557 473
------------ ------------
Total current liabilities .................................... 1,468 939
Long-term debt ......................................................... 18 113
Deferred profit on warranty contracts .................................. 203 116
Other liabilities ...................................................... 13 7
Commitments and contingencies .......................................... -- --
------------ ------------
Total liabilities ............................................ 1,702 1,175
------------ ------------
Put options ............................................................ 171 --
------------ ------------
Stockholders' equity:
Preferred stock and capital in excess of $.01 par value; shares
authorized: 5,000,000; shares issued and outstanding: 0 and ..... -- 6
60,000, respectively
Common stock and capital in excess of $.01 par value; shares
authorized: 300,000,000; shares issued: 187,146,574 and
186,893,214, respectively ........................................ 293 430
Retained earnings ................................................... 848 570
Common treasury stock, at cost: 11,304,830 shares .................. (244) --
Other ............................................................... (46) (33)
------------ ------------
Total stockholders' equity ................................... 851 973
============ ============
$ 2,724 $ 2,148
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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DELL COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 27, OCTOBER 29, OCTOBER 27, OCTOBER 29,
1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales ............................... $ 2,019 $ 1,415 $ 5,347 $ 3,757
Cost of sales ........................... 1,569 1,125 4,205 2,968
----------- ----------- ----------- -----------
Gross margin .......................... 450 290 1,142 789
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative ... 215 160 592 434
Research, development and engineering . 33 26 86 72
----------- ----------- ----------- -----------
Total operating expenses ............ 248 186 678 506
----------- ----------- ----------- -----------
Operating income .................... 202 104 464 283
Financing and other income (expense), net 8 2 19 2
----------- ----------- ----------- -----------
Income before income taxes and
extraordinary loss .................. 210 106 483 285
Provision for income taxes .............. 61 31 140 83
----------- ----------- ----------- -----------
Income before extraordinary loss ...... 149 75 343 202
Extraordinary loss, net of taxes ........ (4) -- (13) --
----------- ----------- ----------- -----------
Net income ............................ 145 75 330 202
Preferred stock dividends ............... -- -- -- 12
----------- ----------- ----------- -----------
Net income available to common
stockholders ......................... $ 145 $ 75 $ 330 $ 190
=========== =========== =========== ===========
Primary earnings per common share:
Income before extraordinary loss ...... $ .78 $ .38 $ 1.77 $ .99
Extraordinary loss, net of taxes ...... (.02) -- (.07) --
=========== =========== =========== ===========
Earnings per common share ............. $ .76 $ .38 $ 1.70 $ .99
=========== =========== =========== ===========
Fully diluted earnings per common share:
Income before extraordinary loss ...... $ .78 $ .37 $ 1.73 $ .96
Extraordinary loss, net of taxes ...... (.02) -- (.06) --
----------- ----------- ----------- -----------
Earnings per common share ............. $ .76 $ .37 $ 1.67 $ .96
=========== =========== =========== ===========
Weighted average shares outstanding:
Primary ............................. 191.0 200.1 194.0 192.7
Fully diluted ....................... 192.0 202.0 198.0 199.6
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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DELL COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
OCTOBER 27, OCTOBER 29,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 330 $ 202
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................... 34 28
Other .................................................. 18 16
Changes in:
Operating working capital .............................. 549 (192)
Non-current assets and liabilities ..................... 94 23
----------- -----------
Net cash provided by operating activities .......... 1,025 77
----------- -----------
Cash flows from investing activities:
Marketable securities:
Purchases .............................................. (6,564) (3,037)
Maturities and other redemptions ....................... 4,960 2,996
Sales .................................................. 1,100 29
Capital expenditures ...................................... (82) (67)
----------- -----------
Net cash used in investing activities .............. (586) (79)
----------- -----------
Cash flows from financing activities:
Repurchase of 11% Senior Notes ............................ (95) --
Preferred stock dividends paid ............................ -- (13)
Issuance of common stock under employee plans ............. 37 42
Purchases of treasury stock ............................... (336) --
Cash paid on purchase of equity options ................... (7) --
----------- -----------
Net cash (used in) provided by financing activities (401) 29
----------- -----------
Effect of exchange rate changes on cash ...................... (6) --
----------- -----------
Net increase in cash ......................................... 32 27
Cash at beginning of period .................................. 55 43
----------- -----------
Cash at end of period ........................................ $ 87 $ 70
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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DELL COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Dell Computer Corporation (the "Company") should be read in conjunction with
the consolidated financial statements and notes thereto filed with the
Securities and Exchange Commission in the Company's Annual Report on Form 10-K
for the fiscal year ended January 28, 1996. In the opinion of management, the
accompanying condensed 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 October 27, 1996 and January 28, 1996 and the
results of their operations for the three-month and nine-month periods ended
October 27, 1996 and October 29, 1995. Certain amounts from prior periods have
been reclassified to conform to current period presentation.
NOTE 2 -- STOCK SPLIT
On November 12, 1996, the Company's Board of Directors declared a
two-for-one stock split of the Company's common stock in the form of a 100%
stock dividend to stockholders of record as of November 25, 1996. The
distribution of such dividend occurred on December 6, 1996. All share and per
share information included in the accompanying condensed consolidated financial
statements and related notes reflect the stock split.
NOTE 3 -- REPURCHASE OF DEBT
During the second quarter of fiscal 1997, the Company repurchased $68
million principal amount of its outstanding $100 million 11% Senior Notes Due
August 15, 2000 (the "Senior Notes"). Also, during the third quarter of fiscal
1997 the Company repurchased an additional $27 million principal amount of
Senior Notes. As a result of these repurchases, the Company recorded an
extraordinary loss of $9.3 million (net of tax benefit of $5.0 million) during
the second quarter of fiscal 1997 and an additional extraordinary loss of $3.6
million (net of tax benefit of $1.9 million) during the third quarter of fiscal
1997. Additionally, in connection with the second repurchase, the indenture
under which the Senior Notes were issued (and which will continue to govern the
remaining $5 million principal amount) was amended to eliminate certain
covenants, including restrictive financial and operating covenants.
NOTE 4 -- CONVERSION OF PREFERRED STOCK
During the third quarter of fiscal 1997, all 60,000 outstanding shares of
Series A Convertible Preferred Stock were converted into common stock in
accordance with their terms, resulting in the issuance of an additional 1.0
million shares of common stock.
NOTE 5 -- STOCK REPURCHASE PROGRAM
From inception on February 22, 1996 through October 27, 1996, the Company
has repurchased a total of 16.0 million shares of common stock under its stock
repurchase program for an aggregate purchase price of $336 million. The shares
were acquired by exercising equity options for 5.6 million shares, while the
remaining shares were purchased in open market transactions. Approximately 3.7
million shares of stock repurchased under this program were re-issued in
connection with employee stock-based benefit plans and 1.0 million shares were
re-issued for the preferred stock conversion.
At October 27, 1996, the Company held equity option arrangements with
respect to an aggregate of 9.5 million additional shares of common stock. These
arrangements provide the Company the ability to purchase shares at an average
cost of $27 per share. For the nine month period ending October 27, 1996, the
premiums for equity options purchased exceeded the premiums for equity options
sold, requiring the payment of $7 million in cash. Certain of the options give
the Company the choice of net cash settlement or physical settlement. The
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Company's potential repurchase obligation under put options issued in these
arrangements, which totaled $171 million at October 27, 1996, has been
reclassified from stockholders' equity to put options. The remaining options
may also be settled in additional shares of common stock. Each option is
exercisable only at expiration, and the various expiration dates range from the
fourth quarter of fiscal 1997 to the third quarter of fiscal 1998. The put
options did not have a materially dilutive effect on earnings per common share
for the third quarter and first nine months of fiscal 1997.
NOTE 6 -- FINANCING ARRANGEMENTS
During the second quarter of fiscal 1997, the Company entered into a $100
million 364-day revolving credit facility and a $150 million 3-year revolving
credit facility. These facilities replace the Company's $200 million bilateral
lines of credit, which expired or were terminated during the second quarter of
fiscal 1997. Under the new credit agreements, the Company is subject to
covenants based on net debt-to-capitalization and interest coverage ratios.
Advances under the facilities bear interest at a defined "Base Rate" or at a
specified margin over a defined "Eurodollar Rate," depending on the type of
advance. Both facility fees and the specified margin on Eurodollar Rate
advances vary from time to time depending on the Company's credit ratings and
cash conversion rates. No borrowings were outstanding under these facilities
since inception of the credit facilities through the end of the third quarter
of fiscal 1997.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
The Company has been named as a defendant in approximately 30 repetitive
stress injury lawsuits, most of which are in New York state courts or U.S.
District Courts for the New York City area. Several are in state courts in New
Jersey, one is in the U.S. District Court for the Eastern District of
Pennsylvania and one is in U.S. District Court in Kansas. 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 is
vigorously defending the suits, which are just a few of many lawsuits of this
type that have been filed against various suppliers of keyboards. On August 1,
1996, an appellate court in New York ruled that the applicable statute of
limitations had expired with respect to any suit that was filed more than three
years after the plaintiff first used the keyboard. If the ruling is upheld on
appeal, more than half of these cases against the Company will probably be
dismissed. Overall, the Company does not believe that the outcome of these
suits will have a material adverse effect on the Company's financial condition
or results of operations.
In August 1993, the Company received a subpoena from the United States
Department of Commerce (the "DOC") requiring the Company to provide documents
relating to exports of 486/66 computers or related components to Russia,
Ireland, Iran or Iraq from January 1992 through August 1993. The subpoena was
issued in connection with an investigation to enforce regulations under the
Export Administration Act of 1979. The Company has cooperated fully with the
DOC. The investigation has been closed, with no findings of wrongdoing by the
Company, with respect to the Company's shipments to Russia, Ireland and Iraq,
and the Company is awaiting a response from the DOC regarding shipments to
Iran. While the government could file civil or criminal charges against the
Company if the DOC alleges that the Company violated applicable export
regulations, the Company does not believe that the investigation or its outcome
will have a material adverse effect on the Company's financial condition or
results of operations.
In May 1995, the Company was named, along with two other computer
manufacturers and one computer monitor vendor, in a class action complaint
filed in the California Superior Court for Marin County. Subsequently, several
other similar actions were filed in California Superior Courts for other
counties, naming a total of 48 defendants, including the Company. The
complaints in all of these cases allege that each of the defendants has engaged
in false or misleading advertising with regard to the size of computer monitor
screens. The plaintiffs seek restitution in the form of refunds or product
exchange, damages, punitive damages and attorneys' fees. The cases have been
consolidated before a single judge. In July 1996, that judge dismissed
virtually all of the plaintiffs' claims, ruling that a previously concluded
investigation by the California Attorney General's office superseded private
causes of action under California law. Some of the same plaintiffs, with
others, have filed a similar action
5
<PAGE> 7
in New Jersey. There can be no assurance that an adverse determination would
not have a material adverse effect on the Company's financial condition or
results of operations.
In June 1995, the Company was named in a class action complaint filed in
State District Court in Travis County, Texas. The complaint alleges that the
Company has included "used parts" in its "new" computer systems and has failed
to adequately inform its customers and prospective customers of that practice.
According to the complaint, these facts constitute fraud, negligent
misrepresentation, breach of contract and breach of warranty. The plaintiffs
seek refund of the purchase price for computer systems purchased from the
Company, damages in an unspecified amount, injunctive relief, interest and
attorneys' fees. The Company plans to vigorously contest the allegations of the
complaint. To date, no discovery has occurred and it is too early for the
Company to adequately evaluate the likelihood of the plaintiffs' prevailing on
their claims. There can be no assurance that an adverse determination in this
litigation would not have a material adverse effect on the Company's financial
condition or results of operations.
NOTE 8 -- 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
stock equivalents (if dilutive) outstanding during each period. Common stock
equivalents include stock options and equity option instruments. The Series A
Convertible Preferred Stock is not a common stock equivalent for purposes of
computing earnings per common share. The number of common stock equivalents
outstanding is computed using the treasury stock method.
NOTE 9 -- SUPPLEMENTAL FINANCIAL INFORMATION (IN MILLIONS)
Supplemental Condensed Consolidated Statement of Financial Position
Information:
<TABLE>
<CAPTION>
OCTOBER 27, JANUARY 28,
1996 1996
----------- -----------
<S> <C> <C>
Inventories:
Production materials ................ $ 181 $ 390
Work-in-process and finished goods .. 35 39
----------- -----------
$ 216 $ 429
=========== ===========
Accrued and other liabilities:
Royalties and licensing ............. $ 53 $ 51
Accrued compensation ................ 104 52
Accrued warranty costs .............. 105 78
Taxes other than income taxes ....... 67 76
Deferred profit on warranty contracts 104 67
Book overdrafts ..................... 7 59
Other ............................... 117 90
----------- -----------
$ 557 $ 473
=========== ===========
</TABLE>
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Supplemental Condensed Consolidated Statement of Income Information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 27, OCTOBER 29, OCTOBER 27, OCTOBER 29,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C>
Financing and other income (expense), net:
Investment income, net ................ 10 7 27 18
Interest expense ...................... (1) (4) (6) (11)
Foreign currency transactions ......... -- -- 1 (3)
Other ................................. (1) (1) (3) (2)
=========== =========== =========== ===========
$ 8 $ 2 $ 19 $ 2
=========== =========== =========== ===========
</TABLE>
Supplemental Condensed Consolidated Statement of Cash Flows Information:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
OCTOBER 27, OCTOBER 29,
1996 1995
----------- -----------
<S> <C> <C>
Changes in operating working capital accounts:
Accounts receivable, net .................. $ (197) $ (231)
Inventories ............................... 213 (171)
Accounts payable .......................... 448 127
Accrued and other liabilities ............. 74 107
Other, net ................................ 11 (24)
----------- -----------
$ 549 $ (192)
=========== ===========
Changes in non-current assets and liabilities:
Other assets .............................. $ 2 $ (4)
Other liabilities ......................... 92 27
----------- -----------
$ 94 $ 23
=========== ===========
</TABLE>
The Company accounts for highly liquid investments with maturities of
three months or less at date of acquisition as marketable securities and
reflects the related cash flows as investing cash flows. As a result, a
significant portion of its gross marketable securities purchases and maturities
disclosed as investing cash flows is related to highly liquid investments.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All percentage amounts and ratios were calculated using the underlying data in
thousands. Operating results for the three-month and nine-month periods ended
October 27, 1996 are not necessarily indicative of the results that may be
expected for the full fiscal year.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
consolidated net sales represented by certain items in the Company's condensed
consolidated statement of income.
<TABLE>
<CAPTION>
PERCENTAGE OF CONSOLIDATED NET SALES
----------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 27, OCTOBER 29, OCTOBER 27, OCTOBER 29,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales:
Americas ........................................ 69.9% 70.4% 67.7% 66.1%
Europe .......................................... 23.9 24.1 25.9 27.0
Asia Pacific and Japan .......................... 6.2 5.5 6.4 6.9
----------- ----------- ----------- -----------
Consolidated net sales ....................... 100.0 100.0 100.0 100.0
Cost of sales ..................................... 77.7 79.5 78.6 79.0
----------- ----------- ----------- -----------
Gross margin ................................. 22.3 20.5 21.4 21.0
Operating expenses:
Selling, general and administrative ............. 10.7 11.3 11.1 11.6
Research, development and engineering ........... 1.6 1.8 1.6 1.9
----------- ----------- ----------- -----------
Total operating expenses ..................... 12.3 13.1 12.7 13.5
----------- ----------- ----------- -----------
Operating income ............................. 10.0 7.4 8.7 7.5
Financing and other income (expense), net ......... 0.4 0.1 0.3 0.1
----------- ----------- ----------- -----------
Income before income taxes and extraordinary loss 10.4 7.5 9.0 7.6
Provision for income taxes ........................ 3.0 2.2 2.6 2.2
----------- ----------- ----------- -----------
Income before extraordinary loss ................ 7.4 5.3 6.4 5.4
Extraordinary loss, net of taxes .................. (0.2) -- (0.2) --
----------- ----------- ----------- -----------
Net income ...................................... 7.2 5.3 6.2 5.4
Preferred stock dividends ......................... -- -- -- 0.3
=========== =========== =========== ===========
Net income available to common stockholders ....... 7.2% 5.3% 6.2% 5.1%
=========== =========== =========== ===========
</TABLE>
Net Sales. The third quarter of fiscal 1997 marked the Company's eleventh
consecutive quarter of sequential growth in consolidated net sales, increasing
19% over the second quarter of fiscal 1997. Consolidated net sales increased
43% and 42% in the third quarter and the first nine months, respectively, of
fiscal 1997 over the comparable periods of fiscal 1996.. The increases are
attributable to increased units sold. Unit volumes increased 57% and 51%,
respectively, for the third quarter and first nine months of fiscal 1997 over
the comparable periods of fiscal 1996, and increased 22% on a quarterly
sequential basis. The increase in units sold primarily resulted from strong
demand for the Company's products across all product lines. Desktop products
remain the primary driver of unit volumes. However, during the third quarter of
fiscal 1997, unit growth rates in both the server and notebook product lines
exceeded growth rates in desktops, resulting in a slight shift in product mix.
Unit volumes in the server product line increased 137% and 100% for the third
quarter and first nine months, respectively, of fiscal 1997 over the comparable
periods of fiscal 1996, and 44% on a quarterly sequential basis. This growth
reflects the Company's aggressive implementation of its server strategy. Unit
volumes in the notebook product line also grew significantly, increasing 80%
and 63% for the third quarter and first nine months, respectively, of fiscal
1997 over the comparable periods of fiscal 1996, and 40% on a quarterly
sequential basis. Growth in unit volumes again reflect the Company's aggressive
sales efforts, including pricing actions aimed at winning new customer accounts
and increasing the penetration of existing customer accounts. The effect of the
increased unit volumes on net sales was partially offset by a decline in
average revenue per unit, which decreased 2% on a quarterly sequential basis,
9% when comparing the third quarter of fiscal 1997 to the third quarter of
fiscal 1996 and 6% when comparing the first nine months of fiscal 1997 to the
comparable period of fiscal 1996.
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The decline in average revenue per unit resulted primarily from the Company's
pricing actions following significant component cost declines. However, the
Company's revenue growth benefited from the slight shift in product mix from
desktops to notebook and server product lines during the third quarter of
fiscal 1997 versus the second quarter of fiscal 1997 and the third quarter of
fiscal 1996.
Net sales grew in all geographic regions for the third quarter and first
nine months of fiscal 1997 compared with the same periods of fiscal 1996, and
sequentially over the second quarter of fiscal 1997. After incorporating the
results of the Company's foreign currency hedging activities, consolidated net
sales (expressed in United States dollars) were not significantly affected in
the third quarter or first nine months of fiscal 1997 as a result of
fluctuations in foreign currency exchange rates from the comparable periods of
the prior fiscal year.
At October 27, 1996, backlog was $239 million, compared with $161 million
at the end of the second quarter of fiscal 1997 and $179 million at the end of
the third quarter of fiscal 1996. The Company does not believe that backlog is
a meaningful indicator of sales that can be expected for any period, and there
can be no assurance that the backlog at any point in time will translate into
sales in any subsequent period, particularly in light of the Company's policy
of allowing customers to cancel or reschedule orders without penalty prior to
commencement of manufacturing.
Gross Margin. Gross margin increased $159 million in the third quarter of
fiscal 1997 and $353 million in the first nine months of fiscal 1997 from the
comparable periods in the prior fiscal year primarily as a result of increased
unit volumes. The Company's gross margin as a percentage of consolidated net
sales increased to 22.3% and 21.4% for the third quarter and first nine months
of fiscal 1997, respectively, compared to 20.5% and 21.0% for the comparable
periods of the prior fiscal year and from 22.1% for the second quarter of
fiscal 1997. The increase in gross margins is the result of several factors,
including component cost declines, partially offset by price reductions, and
product mix shift to notebooks, servers and higher-end desktop products. During
the third quarter of fiscal 1997, the Company continued to improve its
inventory position, reducing its days in inventory to 12 days at the end of the
third quarter of fiscal 1997 compared to 14 and 17 days at the end of the
second and first quarter, respectively, of fiscal 1997. This enabled the
Company to continue to capitalize on significant cost declines of certain
components, such as memory, during the first nine months of fiscal 1997.
Operating Expenses. Selling, general and administrative expenses increased
$56 million and $157 million in the third quarter and first nine months,
respectively, of fiscal 1997 from the comparable periods of the prior fiscal
year. However, selling, general and administrative expenses as a percentage of
consolidated net sales decreased to 10.7% and 11.1% in the third quarter and
first nine months of fiscal 1997 from 11.3% and 11.6%, respectively, of the
comparable periods of the prior fiscal year. Additionally, selling, general and
administrative expenses increased $21 million in the third quarter of fiscal
1997 compared to the second quarter of fiscal 1997, while as a percentage of
sales decreased to 10.7% from 11.5% over the same period. Throughout the past
year, the Company has continued to increase staffing worldwide to meet the
demands of its growth and to expand its international presence, resulting in
increased compensation-related expenses. Furthermore, the Company has increased
spending related to key global information needs. Selling, general, and
administrative expenses declined as a percentage of consolidated net sales as a
result of the significant net sales growth. Although spending may continue to
increase in absolute dollar terms, the Company's goal is to manage operating
expenses, over time, relative to our net sales and gross margin.
Research, development and engineering expenses increased $7 million and
$14 million, respectively, in the third quarter and first nine months of fiscal
1997 over the comparable periods in the prior year, primarily as a result of
the Company's increased staffing levels and prototype costs to support
increased product development activities.
Financing and Other Income (Expense), Net. The increase in financing and
other income (expense), net in the third quarter and first nine months of
fiscal 1997 from the comparable periods of the prior fiscal year was primarily
due to increased investment income resulting from higher average investment
balances and decreased interest expense resulting from the Company's repurchase
of $95 million of principal amount of its 11% Senior Notes Due August 15, 2000
(the "Senior Notes") during the second and third quarters of fiscal 1997. See
Note 9 of Notes to Condensed Consolidated Financial Statements for detail
regarding financing and other income (expense),
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<PAGE> 11
net. See Note 3 of Notes to Condensed Consolidated Financial Statements for
additional information regarding the repurchase of the Senior Notes.
Income Tax. The Company's effective tax rate for the third quarter and
first nine months of both fiscal 1997 and 1996 was 29%.
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. Consequently, the Company conducts a foreign currency hedging
program to reduce its exposure to the risk that the dollar-value equivalent of
anticipated cash flows will be adversely affected by changes in foreign
currency exchange rates. The Company uses foreign currency purchased option
contracts and forward contracts in an effort to reduce its exposure to currency
fluctuations involving anticipated, but not firmly committed, transactions and
transactions with firm foreign currency commitments. Currently, hedges of
firmly committed transactions and anticipated, but not firmly committed
transactions, do not extend beyond one year. For a discussion regarding how the
results of the Company's international operations are affected by changes in
exchange rates between certain foreign currencies and the U.S. dollar and a
discussion regarding the Company's hedging program, including the accounting
for transactions conducted under such program, see Note 1 and Note 4 included
in "Item 8 -- Financial Statements and Supplementary Data" and "Hedging
Activities" in "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Annual Report on Form
10-K for the fiscal year ended January 28, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operating activities were $1.02 billion for the
first nine months of fiscal 1997. Operating cash flows for the first nine
months of fiscal 1997 benefited from the decline in inventory levels to 12 days
at the end of the third quarter of fiscal 1997 compared to 31 days at the end
of fiscal 1996 and an increase in accounts payable for the third quarter fiscal
1997 to 52 days from 33 days at the end of fiscal 1996. Additionally, operating
cash flows benefited from the decrease in days in accounts receivable to 41
days at the end of the third quarter of fiscal 1997 compared to 42 days at the
end of fiscal 1996.
The Company incurred $82 million of capital expenditures during the first
nine months of fiscal 1997, primarily to construct and fit-up facilities and
personal computer office equipment. Capital expenditures for fiscal 1997 are
expected to be approximately $120 million. The Company believes that its cash
and marketable securities and cash flows from operating activities will be
adequate to fund its planned fiscal 1997 capital expenditures.
The Company instituted a stock repurchase program during the first quarter
of fiscal 1997, and through the end of the third quarter of fiscal 1997, had
repurchased a total of 16.0 million shares of common stock (adjusted to take
into account the two-for-one stock split paid on December 6, 1996) for an
aggregate purchase price of $336 million. For further discussion regarding the
Company's stock repurchase program, see Note 5 of Notes to Condensed
Consolidated Financial Statements.
During the second and third quarters of fiscal 1997, the Company
repurchased $95 million principal amount of its Senior Notes. As a result, the
Company recorded an extraordinary loss of $9.3 million (net of tax benefit of
$5.0 million) during the second quarter of fiscal 1997 and an additional
extraordinary loss of $3.6 million (net of tax benefit of $1.9 million) during
the third quarter of fiscal 1997. For further discussion, see Note 3 of Notes
to Condensed Consolidated Financial Statements.
During the second quarter of fiscal 1997, the Company entered into a $100
million 364-day revolving credit facility and a $150 million 3-year revolving
credit facility. These facilities replace the Company's $200 million bilateral
lines of credit, which expired or were terminated during the second quarter of
fiscal 1997. Under the new credit agreements, the Company is subject to
covenants based on net debt-to-capitalization and interest coverage ratios.
Advances under the facilities bear interest at a defined "Base Rate" or at a
specified margin over a defined "Eurodollar Rate," depending on the type of
advance. Both facility fees and the specified margin on Eurodollar Rate
advances vary from time to time depending on the Company's credit ratings and
cash conversion
10
<PAGE> 12
rates. No borrowings were outstanding under these facilities since inception of
the credit facilities through the end of the third quarter of fiscal 1997.
Several of the Company's subsidiaries sell certain accounts receivable and
related assets to Dell Receivables L.P. ("Dell Receivables"), a wholly-owned
subsidiary of the Company. Dell Receivables transfers such accounts receivable
and related assets to the Dell Trade Receivables Master Trust (the "Master
Trust"). The Master Trust issues certificates evidencing fractional undivided
interests therein, which certificates may be sold to investors. This
arrangement gives Dell Receivables the ability to raise up to $150 million
through the sale of certificates of interest in the Master Trust. Dell
Receivables is obligated to pay a commitment fee on the unused portion of the
facility. During the third quarter of fiscal 1997, this facility was unused.
The Company's commitments to use cash include the remaining $5 million
outstanding principal amount on its Senior Notes, the repayment of the
outstanding balance of a $14 million secured loan, the payment of operating
lease commitments and the Company's potential obligation under its stock
repurchase program.
Management believes that the Company will have sufficient resources
available to meet its 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.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
Statements in this Report that relate to future results or events are
based on the Company's current expectations. There are many factors that affect
the Company's business and the results of its operations and may cause the
actual results of operations in future periods to differ materially from those
currently expected or desired. These factors include general economic and
business conditions; the level of demand for personal computers; the level and
intensity of competition in the personal computer industry and the pricing
pressures that may result; the ability of the Company to timely and effectively
manage periodic product transitions and component availability; the ability of
the Company to develop new products based on new or evolving technology and the
market's acceptance of those products; the ability of the Company to manage its
inventory levels to minimize excess inventory, declining inventory values and
obsolescence; the product, customer and geographic sales mix of any particular
period; and the Company's ability to continue to improve its infrastructure
(including personnel and systems) to keep pace with the growth in its overall
business activities. For a discussion of these and other factors affecting the
Company's business and prospects, see "Item 1 -- Business -Factors Affecting
the Company's Business and Prospects" in the Company's Annual Report on Form
10-K for the fiscal year ended January 28, 1996.
The computer industry is characterized by continuing improvements in
technology, which result in the frequent introduction of new products, short
product life cycles and continual improvement in product price/performance
characteristics. Achieving a successful product transition is one of the
biggest challenges facing computer companies, and the Company will experience
several significant product transitions during the fourth quarter of fiscal
1997. Although the Company has instituted several refinements to its internal
processes in an attempt to avoid the types of product transition problems it
experienced during the fourth quarter of fiscal 1996, there can be no assurance
that the Company will not experience similar problems in the upcoming product
transitions. A failure on the part of the Company to effectively manage the
periodic transitions will directly affect the demand for the Company's products
and the profitability of the Company's operations.
The Company's ability to maintain a low inventory level and achieve a high
number of inventory turns is dependent on many factors, including market demand
for the Company's products and the price and availability of component
supplies. Some of these factors are beyond the Company's control. Although the
Company was successful in managing its inventory to low levels during the first
nine months of fiscal 1997, there can be no assurance that the Company will be
able to achieve similar success in future periods.
The Company's ability to maintain low inventory levels during the first
nine months of fiscal 1997 enabled the Company to capitalize on significant
declines in the cost of certain components, such as memory,
11
<PAGE> 13
which, among other things, has contributed to sequential increases in gross
margin percentages through fiscal 1997 despite aggressive pricing. However, as
competitors continue to realize the effects of decreased component costs and
pass the cost savings to customers through price reductions, the Company may
experience some future gross margin pressure.
The Company has grown, and continues to grow, at a rapid pace. This growth
has required the Company to enhance and expand its infrastructure, including
its management information systems. The Company's continued success and
profitability partly depend on its ability to continue to improve its
infrastructure to keep pace with the growth in its overall business activities.
Although the Company has spent, and continues to spend, significant amounts on
its global information needs, there can be no assurance that the needed
enhancements to the Company's management information systems will be completed
before the growth of the Company's business outstrips the abilities of the
current systems.
12
<PAGE> 14
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as a defendant in approximately 30 repetitive
stress injury lawsuits, most of which are in New York state courts or U.S.
District Courts for the New York City area. Several are in state courts in New
Jersey, one is in the U.S. District Court for the Eastern District of
Pennsylvania and one is in U.S. District Court in Kansas. 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 is
vigorously defending the suits, which are just a few of many lawsuits of this
type that have been filed against various suppliers of keyboards. On August 1,
1996, an appellate court in New York ruled that the applicable statute of
limitations had expired with respect to any suit that was filed more than three
years after the plaintiff first used the keyboard. If the ruling is upheld on
appeal, more than half of these cases against the Company will probably be
dismissed. Overall, the Company does not believe that the outcome of these
suits will have a material adverse effect on the Company's financial condition
or results of operations.
In August 1993, the Company received a subpoena from the United States
Department of Commerce (the "DOC") requiring the Company to provide documents
relating to exports of 486/66 computers or related components to Russia,
Ireland, Iran or Iraq from January 1992 through August 1993. The subpoena was
issued in connection with an investigation to enforce regulations under the
Export Administration Act of 1979. The Company has cooperated fully with the
DOC. The investigation has been closed, with no findings of wrongdoing by the
Company, with respect to the Company's shipments to Russia, Ireland and Iraq,
and the Company is awaiting a response from the DOC regarding shipments to
Iran. While the government could file civil or criminal charges against the
Company if the DOC alleges that the Company violated applicable export
regulations, the Company does not believe that the investigation or its outcome
will have a material adverse effect on the Company's financial condition or
results of operations.
In May 1995, the Company was named, along with two other computer
manufacturers and one computer monitor vendor, in a class action complaint
filed in the California Superior Court for Marin County. Subsequently, several
other similar actions were filed in California Superior Courts for other
counties, naming a total of 48 defendants, including the Company. The
complaints in all of these cases allege that each of the defendants has engaged
in false or misleading advertising with regard to the size of computer monitor
screens. The plaintiffs seek restitution in the form of refunds or product
exchange, damages, punitive damages and attorneys' fees. The cases have been
consolidated before a single judge. In July 1996, that judge dismissed
virtually all of the plaintiffs' claims, ruling that a previously concluded
investigation by the California Attorney General's office superseded private
causes of action under California law. Some of the same plaintiffs, with
others, have filed a similar action in New Jersey. There can be no assurance
that an adverse determination would not have a material adverse effect on the
Company's financial condition or results of operations.
In June 1995, the Company was named in a class action complaint filed in
State District Court in Travis County, Texas. The complaint alleges that the
Company has included "used parts" in its "new" computer systems and has failed
to adequately inform its customers and prospective customers of that practice.
According to the complaint, these facts constitute fraud, negligent
misrepresentation, breach of contract and breach of warranty. The plaintiffs
seek refund of the purchase price for computer systems purchased from the
Company, damages in an unspecified amount, injunctive relief, interest and
attorneys' fees. The Company plans to vigorously contest the allegations of the
complaint. To date, no discovery has occurred and it is too early for the
Company to adequately evaluate the likelihood of the plaintiffs' prevailing on
their claims. There can be no assurance that an adverse determination in this
litigation would not have a material adverse effect on the Company's financial
condition or results of operations.
13
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as part of this Report:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
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
December 9, 1996 /s/ James M. Schneider
----------------------------------------
James M. Schneider
Vice President, Finance
(On behalf of the registrant and as chief
accounting officer)
15
<PAGE> 17
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule
16
<PAGE> 1
EXHIBIT 11
DELL COMPUTER CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
OCTOBER 27, OCTOBER 29, OCTOBER 27, OCTOBER 29,
1996 1995 1996 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Primary earnings per common share:
Calculation of weighted average shares (a):
Weighted average shares of common stock
outstanding 176.1 184.2 180.4 177.8
Weighted average shares of common stock
equivalents, utilizing the treasury stock method 14.9 15.9 13.6 14.9
----------- ---------- ----------- -----------
Weighted average shares outstanding 191.0 200.1 194.0 192.7
=========== ========== =========== ===========
Earnings:
Net income available to common stockholders $ 145 $ 75 $ 330 $ 190
=========== =========== =========== ===========
Earnings per common share (a)(b) $ .76 $ .38 $ 1.70 $ .99
=========== =========== =========== ===========
Fully diluted earnings per common share:
Calculation of weighted average shares (a):
Weighted average shares of common stock outstanding 176.1 184.2 180.4 177.8
Weighted average shares of common stock
equivalents, utilizing the treasury stock method 15.7 16.8 16.8 17.0
Assumed conversion of Convertible Preferred Stock 0.2(d) 1.0 0.8(d) 4.8(c)
----------- ----------- ----------- -----------
Weighted average shares outstanding 192.0 202.0 198.0 199.6
=========== =========== =========== ===========
Earnings:
Net income available to common stockholders $ 145 $ 75 $ 330 $ 190
Add: preferred dividends -- -- -- 2(e)
----------- ----------- ----------- -----------
Adjusted net income available to
common stockholders $ 145 $ 75 $ 330 $ 192
=========== =========== =========== ===========
Earnings per common share (a)(b) $ .76 $ .37 $ 1.67 $ .96
=========== =========== =========== ===========
</TABLE>
(a) All share and per share information for fiscal 1997 and fiscal 1996
reflects the two-for-one common stock split effected on December 6, 1996.
(b) Earnings per common share was calculated using the underlying data in
thousands.
(c) Assumes conversion, at the beginning of fiscal 1996, of the 60,000 shares
of outstanding Convertible Preferred Stock and assumes conversion of the
remaining Convertible Preferred Stock (those shares which were converted
in March 1995) for the period from the beginning of fiscal 1996 to the
actual conversion date.
(d) Assumes conversion of the 60,000 shares of outstanding convertible
preferred stock from the beginning of the third quarter and the nine-month
period to the actual conversion date.
(e) Preferred dividends are exclusive of the conversion premium and expenses
of the conversion offer.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DELL
COMPUTER CORPORATION FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTH PERIOD
ENDED OCTOBER 27, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-2-1997
<PERIOD-END> OCT-27-1996
<CASH> 87
<SECURITIES> 1,096
<RECEIVABLES> 915
<ALLOWANCES> 0
<INVENTORY> 216
<CURRENT-ASSETS> 2,491
<PP&E> 223
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,724
<CURRENT-LIABILITIES> 1,468
<BONDS> 18
0
0
<COMMON> 293
<OTHER-SE> 558
<TOTAL-LIABILITY-AND-EQUITY> 2,724
<SALES> 5,347
<TOTAL-REVENUES> 5,347
<CGS> 4,205
<TOTAL-COSTS> 4,205
<OTHER-EXPENSES> 86
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 483
<INCOME-TAX> 140
<INCOME-CONTINUING> 343
<DISCONTINUED> 0
<EXTRAORDINARY> (13)
<CHANGES> 0
<NET-INCOME> 330
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.67
</TABLE>
