|
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
For the Quarterly Period Ended October 29, 1999
Commission File Number: 0-17017
Dell Computer Corporation
Delaware | 74-2487834 | |
(State of incorporation) | (I.R.S. Employer ID No.) |
One Dell Way
(512) 338-4400
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 8, 1999, 2,565,159,711 shares of the Registrants common stock, par value $.01 per share, were outstanding.
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
DELL COMPUTER CORPORATION
ASSETS
October 29, | January 29, | |||||||||
1999 | 1999 | |||||||||
Current assets: | ||||||||||
Cash | $ | 798 | $ | 520 | ||||||
Investments | 5,059 | 2,661 | ||||||||
Accounts receivable, net | 2,827 | 2,094 | ||||||||
Inventories | 374 | 273 | ||||||||
Other | 651 | 791 | ||||||||
Total current assets | 9,709 | 6,339 | ||||||||
Property, plant and equipment, net | 674 | 523 | ||||||||
Other | 183 | 15 | ||||||||
Total assets | $ | 10,566 | $ | 6,877 | ||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||
Current liabilities: | ||||||||||
Accounts payable | $ | 3,636 | $ | 2,397 | ||||||
Accrued and other | 1,688 | 1,298 | ||||||||
Total current liabilities | 5,324 | 3,695 | ||||||||
Long-term debt | 508 | 512 | ||||||||
Other | 425 | 349 | ||||||||
Total liabilities | 6,257 | 4,556 | ||||||||
Stockholders equity: | ||||||||||
Preferred stock and capital in excess of $.01 par value; shares authorized: 5; shares issued and outstanding: none | | | ||||||||
Common stock and capital in excess of $.01 par value; shares authorized: 7,000; shares issued and outstanding: 2,551 and 2,543, respectively | 3,005 | 1,781 | ||||||||
Retained earnings | 1,134 | 606 | ||||||||
Other | 170 | (66 | ) | |||||||
Total stockholders equity | 4,309 | 2,321 | ||||||||
Total liabilities and stockholders equity | $ | 10,566 | $ | 6,877 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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DELL COMPUTER CORPORATION
Three Months Ended | Nine Months Ended | |||||||||||||||||
October 29, | November 1, | October 29, | November 1, | |||||||||||||||
1999 | 1998 | 1999 | 1998 | |||||||||||||||
Net revenue | $ | 6,784 | $ | 4,818 | $ | 18,463 | $ | 13,070 | ||||||||||
Cost of revenue | 5,414 | 3,732 | 14,549 | 10,125 | ||||||||||||||
Gross margin | 1,370 | 1,086 | 3,914 | 2,945 | ||||||||||||||
Operating expenses: | ||||||||||||||||||
Selling, general and administrative | 622 | 471 | 1,699 | 1,296 | ||||||||||||||
Research, development and engineering | 98 | 76 | 271 | 198 | ||||||||||||||
Purchased research & development | 194 | | 194 | | ||||||||||||||
Total operating expenses | 914 | 547 | 2,164 | 1,494 | ||||||||||||||
Operating income | 456 | 539 | 1,750 | 1,451 | ||||||||||||||
Financing and other | 40 | 9 | 90 | 26 | ||||||||||||||
Income before income taxes | 496 | 548 | 1,840 | 1,477 | ||||||||||||||
Provision for income taxes | 207 | 164 | 610 | 442 | ||||||||||||||
Net income | $ | 289 | $ | 384 | $ | 1,230 | $ | 1,035 | ||||||||||
Basic earnings per common share (in whole dollars) | $ | .11 | $ | .15 | $ | .49 | $ | .41 | ||||||||||
Diluted earnings per common share (in whole dollars) | $ | .11 | $ | .14 | $ | .45 | $ | .37 | ||||||||||
Weighted average shares outstanding: | ||||||||||||||||||
Basic | 2,538 | 2,527 | 2,530 | 2,533 | ||||||||||||||
Diluted | 2,724 | 2,762 | 2,729 | 2,780 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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DELL COMPUTER CORPORATION
Nine Months Ended | |||||||||||
October 29, | November 1, | ||||||||||
1999 | 1998 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 1,230 | $ | 1,035 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 110 | 72 | |||||||||
Tax benefits of employee stock plans | 901 | 272 | |||||||||
Purchased research and development | 194 | | |||||||||
Other | 6 | (5 | ) | ||||||||
Changes in: | |||||||||||
Operating working capital | 614 | 248 | |||||||||
Non-current assets and liabilities | 36 | 62 | |||||||||
Net cash provided by operating activities | 3,091 | 1,684 | |||||||||
Cash flows from investing activities: | |||||||||||
Investments: | |||||||||||
Purchases | (20,102 | ) | (11,293 | ) | |||||||
Maturities and sales | 18,056 | 10,565 | |||||||||
Cash payments for acquisition, net of cash acquired | (4 | ) | | ||||||||
Capital expenditures | (271 | ) | (238 | ) | |||||||
Net cash used in investing activities | (2,321 | ) | (966 | ) | |||||||
Cash flows from financing activities: | |||||||||||
Proceeds from issuance of long-term debt, net of issuance costs | 2 | 494 | |||||||||
Repayments of borrowings | (6 | ) | | ||||||||
Purchase of common stock | (743 | ) | (1,128 | ) | |||||||
Issuance of common stock under employee plans | 186 | 130 | |||||||||
Cash received from sale of equity options | 56 | | |||||||||
Net cash used in financing activities | (505 | ) | (504 | ) | |||||||
Effect of exchange rate changes on cash | 13 | (15 | ) | ||||||||
Net increase in cash | 278 | 199 | |||||||||
Cash at beginning of period | 520 | 320 | |||||||||
Cash at end of period | $ | 798 | $ | 519 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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DELL COMPUTER CORPORATION
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 U.S. Securities and Exchange Commission in the Companys Annual Report on Form 10-K for the fiscal year ended January 29, 1999. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the financial position of the Company and its consolidated subsidiaries at October 29, 1999 and January 29, 1999, and the results of their operations and their cash flows for the three and nine month periods ended October 29, 1999 and November 1, 1998. Certain prior period amounts have been reclassified to conform to the current period presentation.
NOTE 2 BUSINESS COMBINATION
On October 20, 1999, the Company acquired all the outstanding shares of ConvergeNet Technologies, Inc. (ConvergeNet) in exchange for 6.9 million shares of the Companys common stock and $4.5 million cash for total purchase consideration of $332 million. ConvergeNet is a creator of storage domain management technology for enterprise storage area networks. The consolidated financial statements include the operating results of ConvergeNet from the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material.
The ConvergeNet acquisition was recorded under the purchase method of accounting. Accordingly, the purchase price was allocated to the net assets acquired based on their estimated fair values. The amount allocated to purchased research and development of $194 million was determined based on appraisals completed by an independent third party using established valuation techniques in the storage management industry and expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed. Research and development costs to bring ConvergeNet products to technological feasibility are not expected to have a material impact on the Companys future results from operations or cash flows.
The excess of cost over net assets acquired of $132 million was recorded as goodwill and included in other assets. Goodwill and other intangible assets arising from this combination will be amortized on a straight line basis over periods from three to eight years.
NOTE 3 INVENTORIES (in millions)
October 29, | January 29, | ||||||||
1999 | 1999 | ||||||||
Inventories: | |||||||||
Production materials | $ | 326 | $ | 234 | |||||
Work-in-process and finished goods | 48 | 39 | |||||||
$ | 374 | $ | 273 | ||||||
NOTE 4 EARNINGS PER COMMON SHARE
Basic earnings per share is based on the weighted effect of all common shares issued and outstanding and is calculated by dividing net income by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assuming conversion of all potentially dilutive common shares outstanding. The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share amounts):
Three Months Ended | Nine Months Ended | ||||||||||||||||
October 29, | November 1, | October 29, | November 1, | ||||||||||||||
1999 | 1998 | 1999 | 1998 | ||||||||||||||
Net income | $ | 289 | $ | 384 | $ | 1,230 | $ | 1,035 | |||||||||
Weighted average shares outstanding: | |||||||||||||||||
Weighted average shares outstanding Basic | 2,538 | 2,527 | 2,530 | 2,533 | |||||||||||||
Employee stock options and other | 186 | 235 | 199 | 247 | |||||||||||||
Weighted average shares outstanding Diluted | 2,724 | 2,762 | 2,729 | 2,780 | |||||||||||||
Earnings per common share: | |||||||||||||||||
Basic | $ | 0.11 | $ | 0.15 | $ | 0.49 | $ | 0.41 | |||||||||
Diluted | $ | 0.11 | $ | 0.14 | $ | 0.45 | $ | 0.37 |
NOTE 5 COMPREHENSIVE INCOME
The Companys comprehensive income is comprised of net income, foreign currency translation adjustments and unrealized gains and losses on marketable securities held as available-for-sale investments. Comprehensive income was $491 million and $374 million for the three month periods ended October 29, 1999 and November 1, 1998, respectively, and $1,462 million and $1,029 million for the nine month periods ended October 29, 1999 and November 1, 1998, respectively.
NOTE 6 SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, in fiscal 1999. The Company has three reportable business segments: the Americas, Europe and Asia-Pacific regions.
The accounting policies of the geographic segments are the same as those described in the summary of significant accounting policies in the Companys Annual Report on Form 10-K for the fiscal year ended January 29, 1999. The Company allocates resources to and evaluates performance of its geographic segments based on operating income. Transfers between geographic areas are recorded using internal transfer prices set by the Company.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents information about the Companys reportable segments for the three and nine month periods ended October 29, 1999 and November 1, 1998:
Three Months Ended October 29, 1999 | |||||||||||||||||||||
Eliminations/ | |||||||||||||||||||||
Asia Pacific | Purchased | ||||||||||||||||||||
Americas | Europe | and Japan | R&D | Consolidated | |||||||||||||||||
(in millions) | |||||||||||||||||||||
Net revenue from unaffiliated customers | $ | 4,875 | $ | 1,430 | $ | 479 | $ | | $ | 6,784 | |||||||||||
Transfers between geographic segments | 14 | 1 | | (15 | ) | | |||||||||||||||
Total net revenue | $ | 4,889 | $ | 1,431 | $ | 479 | $ | (15 | ) | $ | 6,784 | ||||||||||
Operating income | $ | 553 | $ | 107 | $ | 20 | $ | (194 | ) | $ | 486 | ||||||||||
Corporate expenses | (30 | ) | |||||||||||||||||||
Total operating income | $ | 456 | |||||||||||||||||||
Depreciation and amortization | $ | 17 | $ | 10 | $ | 4 | $ | | $ | 31 | |||||||||||
Corporate depreciation and amortization | 8 | ||||||||||||||||||||
Total depreciation and amortization | $ | 39 | |||||||||||||||||||
Identifiable assets | $ | 2,526 | $ | 1,200 | $ | 376 | $ | | $ | 4,102 | |||||||||||
General corporate assets | 6,464 | ||||||||||||||||||||
Total assets | $ | 10,566 | |||||||||||||||||||
Three Months Ended November 1, 1998 | |||||||||||||||||||||
Asia Pacific | |||||||||||||||||||||
Americas | Europe | and Japan | Eliminations | Consolidated | |||||||||||||||||
(in millions) | |||||||||||||||||||||
Net revenue from unaffiliated customers | $ | 3,360 | $ | 1,175 | $ | 283 | $ | | $ | 4,818 | |||||||||||
Transfers between geographic segments | 11 | 2 | | (13 | ) | | |||||||||||||||
Total net revenue | $ | 3,371 | $ | 1,177 | $ | 283 | $ | (13 | ) | $ | 4,818 | ||||||||||
Operating income | $ | 485 | $ | 103 | $ | 16 | $ | | $ | 604 | |||||||||||
Corporate expenses | (65 | ) | |||||||||||||||||||
Total operating income | $ | 539 | |||||||||||||||||||
Depreciation and amortization | $ | 10 | $ | 7 | $ | 2 | $ | | $ | 19 | |||||||||||
Corporate depreciation and amortization | 6 | ||||||||||||||||||||
Total depreciation and amortization | $ | 25 | |||||||||||||||||||
Identifiable assets | $ | 1,640 | $ | 1,017 | $ | 234 | $ | | $ | 2,891 | |||||||||||
General corporate assets | 3,986 | ||||||||||||||||||||
Total assets | $ | 6,877 | |||||||||||||||||||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Nine Months Ended October 29, 1999 | |||||||||||||||||||||
Eliminations/ | |||||||||||||||||||||
Asia Pacific | Purchased | ||||||||||||||||||||
Americas | Europe | and Japan | R&D | Consolidated | |||||||||||||||||
(in millions) | |||||||||||||||||||||
Net revenue from unaffiliated customers | $ | 13,057 | $ | 4,101 | $ | 1,305 | $ | | $ | 18,463 | |||||||||||
Transfers between geographic segments | 24 | 5 | 1 | (30 | ) | | |||||||||||||||
Total net revenue | $ | 13,081 | $ | 4,106 | $ | 1,306 | $ | (30 | ) | $ | 18,463 | ||||||||||
Operating income | $ | 1,681 | $ | 317 | $ | 78 | $ | (194 | ) | $ | 1,882 | ||||||||||
Corporate expenses | (132 | ) | |||||||||||||||||||
Total operating income | $ | 1,750 | |||||||||||||||||||
Depreciation and amortization | $ | 59 | $ | 29 | $ | 10 | $ | | $ | 98 | |||||||||||
Corporate depreciation and amortization | 12 | ||||||||||||||||||||
Total depreciation and amortization | $ | 110 | |||||||||||||||||||
Identifiable assets | $ | 2,526 | $ | 1,200 | $ | 376 | $ | | $ | 4,102 | |||||||||||
General corporate assets | 6,464 | ||||||||||||||||||||
Total assets | $ | 10,566 | |||||||||||||||||||
Nine Months Ended November 1, 1998 | |||||||||||||||||||||
Asia Pacific | |||||||||||||||||||||
Americas | Europe | and Japan | Eliminations | Consolidated | |||||||||||||||||
(in millions) | |||||||||||||||||||||
Net revenue from unaffiliated customers | $ | 8,948 | $ | 3,289 | $ | 833 | $ | | $ | 13,070 | |||||||||||
Transfers between geographic segments | 23 | 4 | | (27 | ) | | |||||||||||||||
Total net revenue | $ | 8,971 | $ | 3,293 | $ | 833 | $ | (27 | ) | $ | 13,070 | ||||||||||
Operating income | $ | 1,249 | $ | 314 | $ | 54 | $ | | $ | 1,617 | |||||||||||
Corporate expenses | (166 | ) | |||||||||||||||||||
Total operating income | $ | 1,451 | |||||||||||||||||||
Depreciation and amortization | $ | 34 | $ | 20 | $ | 5 | $ | | $ | 59 | |||||||||||
Corporate depreciation and amortization | 13 | ||||||||||||||||||||
Total depreciation and amortization | $ | 72 | |||||||||||||||||||
Identifiable assets | $ | 1,640 | $ | 1,017 | $ | 234 | $ | | $ | 2,891 | |||||||||||
General corporate assets | 3,986 | ||||||||||||||||||||
Total assets | $ | 6,877 | |||||||||||||||||||
NOTE 7 LEGAL MATTERS
The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Companys management does not expect that the outcome in any of these legal proceedings, individually or collectively, will have a material adverse effect on the Companys financial condition, results of operations or cash flows.
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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Statements in this Report that relate to future results and events are based on the Companys current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties. For a discussion of factors affecting the Companys business and prospects, see Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations Factors Affecting the Companys Business and Prospects.
All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for the three and nine month periods ended October 29, 1999, 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 revenue represented by certain items in the Companys condensed consolidated statement of income.
Percentage of Consolidated Net Revenue | ||||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||
October 29, | November 1, | October 29, | November 1, | |||||||||||||||
1999(a) | 1998 | 1999(a) | 1998 | |||||||||||||||
Net revenue: | ||||||||||||||||||
Americas | 71.9 | % | 69.7 | % | 70.7 | % | 68.5 | % | ||||||||||
Europe | 21.1 | 24.4 | 22.2 | 25.2 | ||||||||||||||
Asia Pacific and Japan | 7.0 | 5.9 | 7.1 | 6.3 | ||||||||||||||
Consolidated net revenue | 100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||||
Cost of revenue | 79.8 | 77.5 | 78.8 | 77.5 | ||||||||||||||
Gross margin | 20.2 | 22.5 | 21.2 | 22.5 | ||||||||||||||
Operating expenses: | ||||||||||||||||||
Selling, general and administrative | 9.2 | 9.7 | 9.2 | 10.0 | ||||||||||||||
Research, development and engineering | 1.4 | 1.6 | 1.5 | 1.5 | ||||||||||||||
Total operating expenses | 10.6 | 11.3 | 10.7 | 11.5 | ||||||||||||||
Operating income | 9.6 | 11.2 | 10.5 | 11.0 | ||||||||||||||
Financing and other | 0.6 | 0.2 | 0.5 | 0.2 | ||||||||||||||
Income before income taxes | 10.2 | 11.4 | 11.0 | 11.2 | ||||||||||||||
Provision for income taxes | 3.1 | 3.4 | 3.3 | 3.3 | ||||||||||||||
Net income | 7.1 | % | 8.0 | % | 7.7 | % | 7.9 | % | ||||||||||
(a) | Excludes $194 million charge for purchased research and development related to the acquisition of ConvergeNet Technologies, Inc. See Note 2 Business Combination in Notes to Condensed Consolidated Financial Statements. Including the $194 million charge, (i) research, development and engineering expense, as a percentage of net revenue, was 4.3% and 1.6% for the three month periods ended October 29, 1999 and November 1, 1998, respectively, and 2.5% and 1.5% for the nine month periods ended October 29, 1999 and November 1, 1998, respectively, (ii) total operating expense, as a percentage of net revenue, was 13.5% and 11.3% for the three month periods ended October 29, 1999 and November 1, 1998, respectively, and 11.7% and 11.5% for the nine month periods ended October 29, 1999 and November 1, 1998, respectively, and (iii) net income, as a percentage of net revenue, was 4.3% and 8.0% for the three month periods ended October 29, 1999 and November 1, 1998, respectively, and 6.7% and 7.9% for the nine month periods ended October 29, 1999 and November 1, 1998, respectively. |
Net Revenue |
Consolidated net revenue increased 41% in both the third quarter and first nine months of fiscal 2000, over the comparable periods of fiscal 1999, and increased 10% over the second quarter of fiscal 2000. The
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Unit sales increased across all product lines for the third quarter and first nine months of fiscal 2000, compared to the same periods of fiscal 1999. Desktop products continue to remain the primary component of unit sales, comprising 78% of total units sold during the third quarter and first nine months of fiscal 1999. Sales of enterprise systems, which include servers, workstations and storage products, grew 72% during the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999, and 15% on a sequential basis. Notebook computer unit sales increased 55% compared to the same period for fiscal 1999, and 12% on a sequential basis. These increases were primarily attributable to the Companys increased market penetration of new and higher-end products.
The effect of the increased unit sales on consolidated net revenue for the third quarter and first nine months of fiscal 2000 compared to the same periods of fiscal 1999 was partially offset by a decline in average revenue per unit sold of 11% and 9%, respectively. On a sequential basis, average revenue per unit sold declined 3% in the third quarter of fiscal 2000. The decrease in average revenue per unit sold was primarily attributable to the Companys aggressive pricing strategies.
In the Americas region, net revenue grew 45% in the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999. Net revenue in the Europe region increased 22% during the third quarter of fiscal 2000 compared to the same period of the prior fiscal year, and Asia-Pacific and Japan net revenue increased 69% during the third quarter of fiscal 2000, compared to the third quarter of fiscal 1999. These increases were due to increased unit sales across all customer groups.
Gross Margin |
During the third quarter of fiscal 2000, gross margin as a percentage of consolidated net revenue decreased by 2.3% compared to the margins obtained during the third quarter of fiscal 1999. The decrease was primarily attributable to an unexpected, significant increase, late in the third quarter of fiscal 2000, in the cost of random-access memory. During the third quarter of fiscal 2000, enterprise systems comprised 17% of system revenue, compared with 14% during the third quarter of fiscal 1999, while notebook computers comprised 24% of system revenue, compared with 22% during the same period of the prior fiscal year.
Operating Expenses |
Selling, general and administrative expenses increased in absolute dollar amounts for the third quarter and first nine months of fiscal 2000 but decreased as a percentage of consolidated net revenue from the same periods in fiscal 1999. The increase in absolute dollars was due primarily to the increased staffing and increased infrastructure expenses, including information systems, to support the Companys continued growth. The decline in selling, general and administrative expenses as a percentage of net revenue for the third quarter of fiscal 2000 results primarily from the Companys efforts to manage these expenses relative to its net revenue and gross margin.
The Company continues to invest in research, development and engineering activities to support its continued goal of improving and developing efficient procurement, manufacturing and distribution processes, and to develop and introduce new products. During the third quarter of fiscal 2000, the Company recorded a charge of $194 million for in-process research and development purchased as a part of the acquisition of ConvergeNet Technologies, Inc. The Company expects to continue to increase its research, development and engineering spending in absolute dollar amounts.
ConvergeNets enterprise data-storage technology will enable the Companys current and future storage products and systems to connect to a wide range of Intel Corp. or RISC (reduced instruction-set computing)-based servers running on a broad range of operating systems. The Company expects that products incorporating the technology acquired from ConvergeNet will be completed and begin to generate cash flows over the next 9 to 12 months. However, development of these technologies remains a significant risk to the
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The Company believes that its ability to manage operating expenses is an important factor in its ability to remain competitive and successful. The Company will continue to invest in personnel, information systems and other infrastructure, as well as in research, development and engineering activities to support its continued growth and to continue to develop new, competitive products and more efficient methods of delivery. It is the Companys goal to manage operating expenses, over time, relative to its net revenue and gross margin.
Income Taxes |
The Companys effective tax rates were approximately 42% and 33%, respectively, for the third quarter and first nine months of fiscal 2000, compared with 30% during the same periods in fiscal 1999. Absent the $194 million charge for purchased research and development, the Companys effective tax rates were 30% for both the third quarter and first nine months of fiscal 2000.
Liquidity and Capital Resources
The following table presents selected financial statistics and information:
October 29, | January 29, | ||||||||
1999 | 1999 | ||||||||
( dollars in millions) | |||||||||
Cash and investments | $ | 5,857 | $ | 3,181 | |||||
Working capital | $ | 4,385 | $ | 2,644 | |||||
Days of sales in accounts receivable | 37 | 36 | |||||||
Days of supply in inventory | 6 | 6 | |||||||
Days in accounts payable | 60 | 54 | |||||||
Cash conversion cycle | (17 | ) | (12 | ) | |||||
During the first nine months of fiscal 2000, the Company generated $3.1 billion in cash flows from operating activities, which represents the Companys principal source of cash. Cash flows from operating activities resulted primarily from the Companys net income, changes in operating working capital and income tax benefits resulting from the exercise of employee stock options.
During the third quarter of fiscal 2000, the Company continued to improve on its efficient asset management. Although days of sales in accounts receivable increased by one day and days of supply in inventory remained unchanged as compared to fiscal 1999, days in accounts payable increased by six days. This combination resulted in an improvement in the Companys cash conversion cycle to a negative 17 days in the third quarter of fiscal 2000 from a negative 12 days in fiscal 1999. The Companys return on invested capital (ROIC), a key indicator of efficient asset management, increased to 281% for the third quarter of fiscal 2000 from 260% for the second quarter of fiscal 2000. Including the $194 million charge for purchased research and development related to the acquisition of ConvergeNet, the Companys ROIC was 164% for the third quarter of fiscal 2000.
During the third quarter of fiscal 2000, the Company repurchased 15 million shares of common stock for an aggregate cost of $250 million, primarily to manage the dilution resulting from shares issued under the Companys employee stock plans. The Company is currently authorized to repurchase up to 201 million additional shares of its outstanding common stock and anticipates that repurchases will constitute a significant use of future cash resources. At October 29, 1999, the Company held equity options that entitled it to
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The Company utilized $271 million in cash during the first nine months of fiscal 2000 to improve and equip its manufacturing and office facilities as the Company continues to grow. Cash flows for similar capital expenditures for fiscal 2000 are expected to total approximately $400 million.
The Company maintains master lease facilities providing the capacity to fund up to $820 million. The combined facilities provide for the ability of the Company to lease certain real property, buildings and equipment to be constructed or acquired. At October 29, 1999, $389 million of the combined facilities had been utilized.
Management believes that the Company has sufficient resources from cash provided from operations and available borrowings to support its operations and capital requirements for at least the next 12 months.
Factors Affecting the Companys Business and Prospects
There are numerous factors that affect the Companys business and the results of its operations. These factors include general economic and business conditions; the level of demand for personal computers and enterprise systems; the level and intensity of competition in the computer industry and the pricing pressures that may result; the ability of the Company to timely and effectively manage periodic product transitions, as well as component availability and cost; the ability of the Company to develop new products based on new or evolving technology and the markets 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; the Companys ability to continue to improve its infrastructure (including personnel and systems) to keep pace with the growth in its overall business activities and to retain and integrate personnel from acquired companies; and the Companys ability to ensure its products and internal systems and devices will be Year 2000 ready and to assess the Year 2000 readiness and risk to the Company of its third party providers, and implement effective contingency plans where needed. For a discussion of these and other factors affecting the Companys business and prospects, see Item 1 Business Factors Affecting the Companys Business and Prospects in the Companys Annual Report on Form 10-K for the fiscal year ended January 29, 1999.
Year 2000
The following disclosure is a Year 2000 readiness disclosure statement pursuant to the Year 2000 Readiness and Disclosure Act.
State of Readiness |
The Company established a formal Year 2000 readiness program in February 1997. The Companys Year 2000 program consists of two separate initiatives, the Millennium Project and the Product Group Y2K Project.
The purpose of the Millennium Project is to assess the Year 2000 readiness of the Companys component and service providers and the Companys internal systems and devices. The Company identified and assessed its internal systems and devices and, where remedial steps were required to make those systems Year 2000 ready, prioritized the remedial steps to be taken. The Company has completed its assessment and renovation of all mission critical internal systems and devices and believes all are substantially Year 2000 ready. However, because the full ramifications of the Year 2000 issue will not be fully realized until after the Year 2000 date change, the Company can provide no assurances that its internal systems and devices will not be adversely affected by the Year 2000 date change.
The Company has also identified, through the Millennium Project, its critical component and service providers and is contacting each such vendor to assess that vendors Year 2000 readiness. The Company has assigned each such vendor a priority rating based on the criticality of the function it provides to the Company. Through December 9, 1999, the Company had assessed the readiness of 98% of its critical vendors. The
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Through the Product Group Y2K Project, the Company is analyzing the Year 2000 readiness status of the computer hardware manufactured by the Company to provide an effective means of communicating the readiness status to customers and to implement an ongoing testing and monitoring program to help enable all new Dell computer hardware offerings to meet the Companys Year 2000 readiness standards. The Company has analyzed and continues to analyze the Year 2000 status of the computer hardware manufactured by the Company. All Dell-branded hardware products shipped after January 1, 1997 meet the Companys Year 2000 readiness standards. Dell-branded hardware manufactured prior to that time can generally be updated to meet the Companys Year 2000 readiness standards through BIOS upgrades or software patches. The Company has created a Web site at www.dell.com/year2000, which contains detailed information about the Year 2000 issue, the Companys Year 2000 readiness standards and its Year 2000 program. Through the Web site, customers can assess the Year 2000 readiness of their hardware and can obtain software patches and BIOS upgrades from the Company, free of charge, to help prepare the hardware for the Year 2000 rollover. Customers without Internet access may request free copies of the software patches and BIOS upgrades by telephone or mail. The Companys Year 2000 readiness program applies only to Dell-branded hardware manufactured and Dell-branded software developed by the Company. Although the Company has attempted to ascertain the Year 2000 status of third party software and peripherals loaded on or distributed with Company computer systems, it does not and cannot guarantee the Year 2000 status of any software or peripherals provided by third parties.
Costs |
The Company currently does not expect that the total costs of its Year 2000 readiness program will be material to its financial condition or results of operation. All costs are charged to expense as incurred, and do not include potential costs related to any customers or other claims or the cost of internal software and hardware replaced in the normal course of business.
Risks/ Contingency Plans |
The Company believes that the most likely worst case scenarios would involve the interruption of crucial suppliers as a result of infrastructure failures or third party vendor failures. As of December 9, 1999, the Company had substantially completed contingency plans that address each of the most likely worst case scenarios. The Company believes that it is taking appropriate steps to assess and address its Year 2000 issues and currently does not expect that its business will be adversely affected by the Year 2000 issue in any material respect. Nevertheless, achieving Year 2000 readiness is dependent on many factors, some of which are not completely within the Companys control. Should either the Companys internal systems and devices or the internal systems and devices of one or more critical vendors fail to achieve Year 2000 readiness, the Companys business and its results of operations could be adversely affected.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
For a description of the Companys market risks, see Item II Managements Discussion and Analysis of Financial Condition and Results of Operations Market Risk in the Companys Annual Report on Form 10-K for the fiscal year ended January 29, 1999.
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PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Companys management does not expect that the results in any of these legal proceedings will have a material adverse effect on the Companys financial condition, results of operations or cash flows.
ITEM 2. Changes in Securities and Use of Proceeds
The Company has an active stock repurchase program. One element of such program is the sale of put options. During the third quarter of fiscal 2000, the Company sold 20,878,372 put options to third party financial intermediaries and received proceeds of $2.6 million in connection with such sales. Each put option entitles each holder to sell to the Company by physical delivery, cash delivery or net-share settlement, at the Companys option, one share of common stock at a specified price. The put options sold by the Company during the third quarter expire on various dates through September 2001 and have exercise prices ranging from $32 to $47 per share with an average exercise price of $41.
All of these transactions were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. Each transaction was privately negotiated, and each purchaser of options was an accredited investor and qualified institutional buyer. No public offering or public solicitation was made by the Company in the placement of these securities.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibit is filed as part of this Report:
Exhibit No. | Description of Exhibit | |||
27 | Financial Data Schedule |
(b) Reports on Form 8-K.
None.
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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 | |
/s/ JAMES M. SCHNEIDER |
|
|
James M. Schneider | |
Senior Vice President, Finance | |
(On behalf of the registrant | |
and as chief accounting officer) |
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INDEX TO EXHIBIT
Exhibit No. | Description of Exhibit | |||
27 | Financial Data Schedule |
|