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UNITED STATES

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

For the Quarterly Period Ended July 28, 2000

Commission File Number: 0-17017

Dell Computer Corporation

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 August 31, 2000, 2,616,768,407 shares of the registrant’s common stock, par value $.01 per share, were outstanding.

PART I — FINANCIAL INFORMATION

DELL COMPUTER CORPORATION

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DELL COMPUTER CORPORATION

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DELL COMPUTER CORPORATION

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 Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2000. 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 July 28, 2000 and January 28, 2000 and the results of their operations and their cash flows for the three and six month periods ended July 28, 2000 and July 30, 1999. Certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE 2 — INVENTORIES (in millions)

NOTE 3 — 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 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):

NOTE 4 — COMPREHENSIVE INCOME

The Company’s 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 $973 million and $522 million for the three-month periods ended July 28, 2000 and July 30, 1999, respectively, and $1,403 million and $970 million for the six-month periods ended July 28, 2000 and July 30, 1999, respectively.

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NOTE 5 — RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (“SAB 101”), providing the SEC’s view with respect to the application of generally accepted accounting principles to selected revenue recognition issues. As amended, SAB 101 will become effective for the fourth quarter of fiscal 2001. The Company is currently assessing the impact of SAB 101 and currently believes that the effect, if any, will not have a material effect on the Company’s financial position or overall trends in results of operations.

NOTE 6 — SEGMENT INFORMATION

The Company has three reportable business segments: the Americas, Europe and Asia-Pacific and Japan regions.

The accounting policies of the geographic segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2000. The Company allocates resources to and evaluates performance of its geographic segments based on balanced priorities of liquidity, profitability and growth. Transfers between geographic areas are recorded using internal transfer prices set by the Company.

The table below presents information about the Company’s reportable segments for the three and six month periods ended July 28, 2000 and July 30, 1999:

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NOTE 7 — LEGAL MATTERS

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Company’s management does not expect that the outcome in any of these legal proceedings, individually or collectively, will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Statements in this Report that relate to future results and events are based on the Company’s 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 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, 2000.

All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for the three and six month periods ended July 28, 2000, are not necessarily indicative of the results that may be expected for the full fiscal year.

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Results of Operations

The following table sets forth for the periods indicated the percentage of consolidated net revenue represented by certain items in the Company’s condensed consolidated statement of income.

Net Revenue

During the second quarter of fiscal 2001, the Company generated record performance in terms of net revenues, unit sales, net income and earnings per share. Consolidated net revenue increased 25% and 28% in the second quarter and first six months of fiscal 2001, respectively, over the comparable periods of fiscal 2000, and increased 5% over the first quarter of fiscal 2001. The increase in consolidated net revenue was primarily attributable to increased units sold. Unit sales increased 22% and 26% in the second quarter and first six months of fiscal year 2001, respectively, as compared to the same periods of fiscal 2000.

In the Americas region, net revenue grew 27% in the second quarter of fiscal 2001 compared to the same quarter of fiscal 2000. Net revenue in the Europe region increased 10% during the second quarter of fiscal 2001 compared to the same period of the prior fiscal year, and Asia-Pacific and Japan net revenue increased 48% during the second quarter of fiscal 2001 compared to the same period of the prior fiscal year.

Average revenue per unit sold increased 2% for the second fiscal quarter of 2001 compared to the prior year and decreased 2% on a sequential basis, primarily resulting from the Company’s efforts to balance competitive pricing with a focus on increased profitability, while operating in an environment of variable component pricing and availability.

Unit sales increased across all product lines for the second quarter and first six months of fiscal 2001 over the comparable periods of fiscal 2000. Supplementing its already strong traditional desktop PC business, the Company continues to generate more of its unit sales mix from high-end products at both the core and the edge of the Internet Infrastructure build-out. The Company’s enterprise systems, including servers, workstations and storage products, address needs at the core of the Internet Infrastructure, where companies are installing robust server and storage systems that power online commerce and store information for retrieval. Enterprise systems sales grew 46% during the second quarter of fiscal 2001 compared to the second quarter of fiscal 2000, and 8% on a sequential basis. At the edge of the Internet Infrastructure, users are buying a variety of devices to access and leverage the core. The Company’s notebook computers address the mobile computing needs of users, and its desktop computers continue to represent an important part of the Company’s product offerings. During the second quarter of fiscal 2000, notebook computer unit sales increased 60% compared to the same period for fiscal 2000, and 8% on a sequential basis. Desktop computer unit sales increased 7% compared to the prior year period, and increased 1% sequentially. During the second quarter of fiscal 2001,

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Additionally, as the Internet continues to pull a number of products and services into an online environment, the Company has begun to broaden its revenue base beyond the core system, commonly referred to as “beyond the box” revenues. These offerings, which include warranty services, product integration and installation services, Internet access, web-hosting services, DellWare, Gigabuys, peripherals, technology consulting and other offerings, enhance the Company’s core system offerings. Beyond the box revenues comprised approximately 17% and 16% of net revenues during the second quarter of fiscal 2001 and 2000, respectively.

Gross Margin

As a percentage of consolidated net revenue, gross margin increased on a sequential basis from 20.5% in the first quarter of fiscal 2001 to 21.3% in the second quarter of fiscal 2001. As compared to the second quarter of fiscal 2000, gross margin decreased from 22.0%. On a year to date basis, gross margin decreased from 21.8% during the first six months of fiscal 2000 to 20.9% during the first six months of fiscal 2001. The relatively stable margins are primarily the result of the factors, referred to above, affecting average revenue per unit.

Operating Expenses

Selling, general and administrative expenses increased in absolute dollar amounts for the second quarter and first half of fiscal 2001 and increased as a percentage of consolidated net revenue from the same periods in fiscal 2000. The increase in absolute dollars was due primarily to the Company’s increase in staffing and increased infrastructure expenses, including information systems, to support the Company’s continued growth.

The Company continues to invest in research, development and engineering activities to develop and introduce new products and to support its continued goal of improving and developing efficient procurement, manufacturing and distribution processes. As a result, research, development and engineering expenses have increased each year in absolute dollars due to increased staffing levels and product development costs, although, as a percent of revenue, these costs have remained level. The Company expects to continue to increase its research, development and engineering spending in absolute dollar amounts.

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 Company’s goal to manage operating expenses, over time, relative to its net revenue and gross margin.

Income Taxes

The Company’s effective tax rate was approximately 30% for the second quarter and first six months of fiscal 2001 and fiscal 2000.

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Liquidity and Capital Resources

The following table presents selected financial statistics and information:

During the first six months of fiscal 2001, the Company generated approximately $2 billion in cash flows from operating activities, which represents the Company’s principal source of cash. Cash flows from operating activities resulted primarily from the Company’s net income, adjusted for income tax benefits resulting from the exercise of employee stock options, and changes in operating working capital.

At July 28, 2000, the Company had approximately $8.3 billion of cash and investments. Of that amount, strategic investments totaled approximately $2.2 billion, an increase in total value of approximately $707 million compared to January 28, 2000. The increase in value was due to additional investments and net appreciation, and was partially offset by sales of equity securities. Of the total value at July 28, 2000, approximately $1.3 billion represented unrealized appreciation. The Company expects to continue to make strategic investments in order to enhance and extend the company’s strategic initiatives.

As compared to the second quarter of fiscal 2000, both days of sales in accounts receivable and days in accounts payable decreased by one day, whereas days of supply in inventory increased by one day. The company’s cash conversion cycle changed to a negative 14 days in the second quarter of fiscal 2001 from a negative 15 days in the second quarter of fiscal 2000. The Company’s return on invested capital, a key indicator of efficient asset management, increased to 294% for the second quarter of fiscal year 2001, from 292% for the first quarter of fiscal 2001, and from 260% for the second quarter of the prior year.

During the second quarter of fiscal 2001, the Company repurchased 11.9 million shares of common stock for an aggregate cost of $521 million, primarily to manage the dilution resulting from shares issued under the Company’s employee stock plans. By the end of the quarter, the Company had repurchased 829 million shares out of its authorized 1 billion share repurchase program. At July 28, 2000, the Company held equity options and forwards that allow for the purchase of 90 million shares of common stock at various times through the first quarter of fiscal 2004, at an average price of $51 per share. At July 28, 2000, the Company also had outstanding put obligations covering 107 million shares with an average exercise price of $46 per share. The Company anticipates that it will continue to use excess liquidity to repurchase common stock.

The Company utilized $236 million in cash during the first six months of fiscal 2001 to improve and equip its manufacturing and office facilities as the Company continues to grow. Cash flows for similar capital expenditures for the full fiscal year are expected to total approximately $500 million.

The Company maintains master lease facilities providing the capacity to fund up to $1.3 billion. The combined facilities provide for the ability of the Company to lease certain real property, buildings and equipment to be constructed or acquired. At July 28, 2000, $458 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.

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Factors Affecting the Company’s Business and Prospects

There are numerous factors that affect the Company’s business and the results of its operations. These factors include general economic and business conditions; the level of demand for the Company’s products and services; 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 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, 2000.

For a description of the Company’s market risks, see “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2000.

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PART II — OTHER INFORMATION

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Company’s management does not expect that the results in any of these legal proceedings will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Reference is made to the information on the Company’s stock repurchase program contained in “Part I — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” As a part of this program, during the second quarter of fiscal 2001, the Company sold 7 million put options, each of which entitles the holder to sell stock to the Company at a specified price on a specified date. These put options expire on various dates through March 2003 and have exercise prices ranging from $45 to $53 per share with an average exercise price of $49 per share. 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 solicitation was made by the Company in the placement of these securities.

The annual meeting of the Company’s stockholders was held on July 20, 2000. At that meeting, one proposal was submitted to a vote of the Company’s stockholders — to elect one Class II director (with Samuel A. Nunn, Jr. being the nominee) and three Class III directors (with Alex J. Mandl, Michael A. Miles and Morton L. Topfer being the nominees). At the close of business on the record date for the meeting (which was May 23, 2000), there were 2,589,696,545 shares of common stock outstanding and entitled to be voted at the meeting. Holders of 2,209,678,290 shares of common stock (representing a like number of votes) were present at the meeting, either in person or by proxy. The following table sets forth the results of the voting:

Consequently, the stockholders elected each of the directors nominated by the Board.

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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

September 8, 2000

	/s/ JAMES M. SCHNEIDER
	James M. Schneider
	Senior Vice President and Chief
	Financial Officer
	(On behalf of the registrant and as principal financial and accounting officer)

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INDEX TO EXHIBIT

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