Dell 10-Q 2001 Q3 Quarterly report

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, 2000

Commission File Number: 0-17017

Dell Computer Corporation

(Exact name of registrant as specified in its charter)

Delaware
(State of incorporation) 74-2487834
(I.R.S. Employer ID No.)

One Dell Way

Round Rock, Texas 78682

(Address of principal executive offices)

(512) 338-4400

(Telephone number)

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  No

As of the close of business on November 27, 2000, 2,586,906,150 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

DELL COMPUTER CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(in millions and unaudited)

			October 27,			January 28,
			2000			2000
ASSETS
Current assets:
	Cash and cash equivalents		$	3,976		$	3,809
	Short-term investments			638			323
	Accounts receivable, net			3,086			2,608
	Inventories			424			391
	Other			737			550
		Total current assets		8,861			7,681
Property, plant and equipment, net				955			765
Investments				3,146			2,721
Goodwill and other, net				362			304
		Total assets	$	13,324		$	11,471
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	3,950		$	3,538
	Accrued and other			2,141			1,654
		Total current liabilities		6,091			5,192
Long-term debt				510			508
Other				666			463
		Total liabilities		7,267			6,163
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: 2,590 and 2,575, respectively			4,527			3,583
	Retained earnings			1,285			1,260
	Accumulated other comprehensive income			333			533
	Other			(88	)		(68	)
		Total stockholders’ equity		6,057			5,308
		Total liabilities and stockholders’ equity	$	13,324		$	11,471

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 and unaudited)

			Three Months Ended				Nine Months Ended
			October 27,		October 29,		October 27,		October 29,
			2000		1999		2000		1999
Net revenue			$	8,264	$	6,784	$	23,214	$	18,463
Cost of revenue				6,506		5,414		18,330		14,549
	Gross margin			1,758		1,370		4,884		3,914
Operating expenses:
	Selling, general and administrative			814		622		2,338		1,699
	Research, development and engineering			126		98		367		271
	Purchased research & development			—		194		—		194
		Total operating expenses		940		914		2,705		2,164
		Operating income		818		456		2,179		1,750
Financing and other, net				145		40		395		90
	Income before income taxes			963		496		2,574		1,840
Provision for income taxes				289		207		772		610
	Net income		$	674	$	289	$	1,802	$	1,230
Basic earnings per common share (in whole dollars)			$	0.26	$	0.11	$	0.70	$	0.49
Diluted earnings per common share (in whole dollars)			$	0.25	$	0.11	$	0.66	$	0.45
Weighted average shares outstanding:
	Basic			2,586		2,538		2,581		2,530
	Diluted			2,739		2,724		2,734		2,729

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 and unaudited)

				Nine Months Ended
				October 27,			October 29,
				2000			1999
Cash flows from operating activities:
	Net income			$	1,802		$	1,230
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			172			110
		Tax benefits of employee stock plans			739			901
		Purchased research and development			—			194
		Gain on sale of investments			(244	)		—
		Other			144			6
Changes in:
	Operating working capital				173			614
	Non-current assets and liabilities				207			36
			Net cash provided by operating activities		2,993			3,091
Cash flows from investing activities:
	Investments:
		Purchases			(2,242	)		(2,435	)
		Maturities and sales			1,449			1,535
		Cash payments for acquisition, net of cash required			—			(4	)
	Capital expenditures				(375	)		(271	)
			Net cash used in investing activities		(1,168	)		(1,175	)
Cash flows from financing activities:
	Purchase of common stock				(1,845	)		(743	)
	Issuance of common stock under employee plans				239			186
	Cash received from sale of equity options and other				—			52
			Net cash used in financing activities		(1,606	)		(505	)
Effect of exchange rate changes on cash					(52	)		13
Net increase in cash					167			1,424
Cash and cash equivalents at beginning of period					3,809			1,726
Cash and cash equivalents at end of period				$	3,976		$	3,150

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 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 October 27, 2000 and January 28, 2000 and the results of their operations and their cash flows for the three and nine month periods ended October 27, 2000 and October 29, 1999. 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. in exchange for 6.9 million shares of the Company’s common stock and $4.5 million cash for total purchase consideration of $332 million. The acquisition was recorded under the purchase method of accounting, and accordingly, the purchase price was allocated to the net assets acquired based on their estimated fair values. Of the total purchase price, $194 million was allocated to purchased research and development.

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):

		Three Months Ended				Nine Months Ended
		October 27,		October 29,		October 27,		October 29,
		2000		1999		2000		1999
Net income		$	674	$	289	$	1,802	$	1,230
Weighted average shares outstanding:
	Weighted average shares outstanding — Basic		2,586		2,538		2,581		2,530
	Employee stock options and other		153		186		153		199
	Weighted average shares outstanding — Diluted		2,739		2,724		2,734		2,729
Earnings per common share:
	Basic	$	0.26	$	0.11	$	0.70	$	0.49
	Diluted	$	0.25	$	0.11	$	0.66	$	0.45

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NOTE 4 — COMPREHENSIVE INCOME

The Company’s comprehensive income is primarily comprised of net income, foreign currency translation adjustments and unrealized gains and losses on marketable securities held as available-for-sale investments. Comprehensive income for the three and nine month periods ended October 27, 2000 and October 29, 1999 was as follows (in millions):

			Three Months Ended						Nine Months Ended
			October 27,			October 29,			October 27,			October 29,
			2000			1999			2000			1999
Comprehensive income:
	Net income		$	674		$	289		$	1,802		$	1,230
	Foreign currency translation			7			(3	)		7			11
	Unrealized appreciation (depreciation) on investments			(482	)		205			(207	)		221
		Total comprehensive income	$	199		$	491		$	1,602		$	1,462

NOTE 5 — RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”), “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133, as amended, is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities, and it requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company will adopt SFAS No. 133 effective February 3, 2001, and is continuing to evaluate the effect such adoption may have on its consolidated results of operations and financial position. The impact of the adoption will be based on factors such as specific derivative and hedging activities, market conditions, and contractual agreements at the date of adoption.

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 be implemented in the fourth quarter of fiscal 2001 with adoption retroactive to the first quarter. The Company is currently assessing the impact of SAB 101 and currently believes that the effect, if any, will not be material to the Company’s financial position or trends in reported operating results.

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.

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The table below presents information about the Company’s reportable segments for the three and nine month periods ended October 27, 2000 and October 29, 1999 (in millions):

		Three Months Ended October 27, 2000
						Asia-Pacific
		Americas		Europe		and Japan		Eliminations			Consolidated
Net revenue from unaffiliated customers		$	6,064	$	1,537	$	663	$	—		$	8,264
Transfers between geographic segments			6		1		1		(8	)		—
	Total net revenues	$	6,070	$	1,538	$	664	$	(8	)	$	8,264
Operating income		$	750	$	94	$	44	$	—		$	888
Corporate expenses												(70	)
	Total operating income										$	818
Depreciation and amortization		$	28	$	11	$	3	$	—		$	42
Corporate depreciation and amortization												13
	Total depreciation and amortization										$	55
Identifiable assets		$	2,720	$	1,134	$	561	$	—		$	4,415
General corporate assets												8,909
	Total assets										$	13,324

		Three Months Ended October 29, 1999
						Asia-Pacific		Eliminations/
		Americas		Europe		and Japan		Purchased R&D			Consolidated
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

		Nine Months Ended October 27, 2000
						Asia-Pacific
		Americas		Europe		and Japan		Eliminations			Consolidated
Net revenue from unaffiliated customers		$	16,773	$	4,564	$	1,877	$	—		$	23,214
Transfers between geographic segments			35		4		3		(42	)		—
	Total net revenues	$	16,808	$	4,568	$	1,880	$	(42	)	$	23,214
Operating income		$	1,977	$	279	$	143	$	—		$	2,399
Corporate expenses												(220	)
	Total operating income										$	2,179
Depreciation and amortization		$	90	$	38	$	13	$	—		$	141
Corporate depreciation and amortization												31
	Total depreciation and amortization										$	172
Identifiable assets		$	2,720	$	1,134	$	561	$	—		$	4,415
General corporate assets												8,909
	Total assets										$	13,324

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		Nine Months Ended October 29, 1999
						Asia-Pacific		Eliminations/
		Americas		Europe		and Japan		Purchased R&D			Consolidated
Net revenue from unaffiliated customers		$	13,057	$	4,101	$	1,305	$	—		$	18,463
Transfers between geographic segments			24		5		1		(30	)		—
	Total net revenues	$	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

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.

ITEM 2. Management’s 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 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 nine month periods ended October 27, 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.

			Percentage of Consolidated Net Revenue
			Three Months Ended						Nine Months Ended
			October 27,			October 29,			October 27,			October 29,
			2000			1999(a)			2000			1999(a)
Net revenue:
	Americas			73.4	%		71.9	%		72.3	%		70.7	%
	Europe			18.6			21.1			19.6			22.2
	Asia Pacific and Japan			8.0			7.0			8.1			7.1
		Consolidated net revenue		100.0			100.0			100.0			100.0
Cost of revenue				78.7			79.8			79.0			78.8
		Gross margin		21.3			20.2			21.0			21.2
Operating expenses:
	Selling, general and administrative			9.9			9.2			10.1			9.2
	Research, development and engineering			1.5			1.4			1.6			1.5
		Total operating expenses		11.4			10.6			11.7			10.7
		Operating income		9.9			9.6			9.3			10.5
Financing and other, net				1.8			0.6			1.8			0.5
	Income before income taxes			11.7			10.2			11.1			11.0
Provision for income taxes				3.5			3.1			3.3			3.3
	Net income			8.2	%		7.1	%		7.8	%		7.7	%

(a) Excludes $194 million charge for purchased research and development related to the acquisition of ConvergeNet Technologies, Inc. Including the $194 million charge, (i) research, development and engineering expense, as a percentage of net revenue, was 4.3% for the three month period ended October 29, 1999 and 2.5% for the nine month period ended October 29, 1999, (ii) total operating expenses, as a percentage of net revenue, was 13.5% for the three month period ended October 29, 1999 and 11.7% for the nine month period ended October 29, 1999, and (iii) net income, as a percentage of net revenue, was 4.3% for the three month period ended October 29, 1999 and 6.7% for the nine month period ended October  29, 1999.

Net Revenue

During the third 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 22% and 26% in the third quarter and first nine months of fiscal 2001, respectively, over the comparable periods of fiscal 2000, and increased 8% sequentially from the second quarter of fiscal 2001. The increase in consolidated net revenue was primarily attributable to increased units sold. Unit sales increased 21% and 24% in the third quarter and first nine months of fiscal year 2001, respectively, as compared to the same periods of fiscal 2000.

In the Americas region, net revenue grew 24% in the third quarter of fiscal 2001, compared to the same quarter of fiscal 2000. Net revenue in the Europe region increased 7% during the third quarter of fiscal 2001 compared to the same period of the prior fiscal year, and Asia-Pacific and Japan net revenue increased 39% during the third quarter of fiscal 2001 compared to the same period of the prior fiscal year.

Average revenue per unit sold remained relatively flat for the third fiscal quarter of 2001 compared to the third quarter of the prior fiscal year and decreased 4% on a sequential basis. The sequential decline results primarily from the Company’s sharing component cost declines with its customers via lower pricing.

Unit sales increased across all product lines for the third quarter and first nine months of fiscal 2001 over the comparable periods of fiscal 2000. Supplementing its profitable 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. At the core of the Internet Infrastructure, companies are installing robust server and storage systems that power online commerce and store information for retrieval. The Company’s enterprise

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systems, including servers, workstations and storage products, address these needs. Enterprise systems sales grew 37% during the third quarter of fiscal 2001 compared to the third quarter of fiscal 2000. At the edge of the Internet Infrastructure, customers are buying a variety of mobile and stationary devices to access and leverage the core, including the Company’s notebook and traditional desktop computers. During the third quarter of fiscal 2001, notebook computer unit sales increased 45% compared to the same period for fiscal 2000. Desktop computer unit sales increased 11% compared to the prior year period. During the third quarter of fiscal 2001, enterprise systems comprised 19% of system revenue, compared with 17% during the third quarter of fiscal 2000; notebook computers comprised 29% of system revenue, compared with 24% during the same period of the prior fiscal year; and desktop computers comprised 52% of system revenues, compared with 59% during the same period in fiscal 2000.

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 include warranty services, product integration and installation services, Internet access, web-hosting services, DellWare, Gigabuys, peripherals, technology consulting and other offerings. Compared to the prior year period, beyond the box revenues increased 25% to more than 17% of net revenues during the third quarter of fiscal 2001 and remained relatively flat as a percentage of revenue. Of this total, services revenue was $665 million for the third quarter of fiscal 2001, compared to $577 million for the second quarter of fiscal 2001, and $509 million for the third quarter of fiscal 2000.

Gross Margin

As a percentage of consolidated net revenue, gross margin increased from 20.2% in the third quarter of fiscal 2000 to 21.3% in the third quarter of fiscal 2001. As compared to the second quarter of fiscal 2001, gross margin remained unchanged. On a year-to-date basis, gross margin decreased slightly from 21.2% during the first nine months of fiscal 2000 to 21.0% during the first nine months of fiscal 2001.

Operating Expenses

Selling, general and administrative expenses increased in both absolute dollar amounts and as a percentage of consolidated net revenue for the third quarter and first nine months of fiscal 2001 from the same periods in fiscal 2000. The increase in absolute dollar amounts was due primarily to the Company’s increase in staffing and increased infrastructure expenses, including information systems, to support the Company’s growth. The increase in percentage terms was due primarily to the Company having originally staffed for higher anticipated fiscal 2001 growth rates. Management has taken steps throughout the fiscal year to manage expenses relative to actual growth rates, and as a result selling, general and administrative expenses as a percentage of net revenues have declined on a quarter-to-quarter basis throughout fiscal 2001.

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 absolute dollar amount of research, development and engineering spending with an emphasis on enterprise products, including servers and storage.

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 rates were approximately 30% for the third quarter and first nine months of fiscal 2001, as compared to approximately 42% and 33%, respectively, for the fiscal 2000 periods. The effective tax rates in the prior year were higher due to non-deductible purchased research and development related to the acquisition of ConvergeNet Technologies, Inc.

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Financing and Other

Financing and other income increased in absolute dollar amounts for the fiscal 2001 periods compared to the fiscal 2000 periods. The increase is due primarily to gains on sales of investments and higher interest income.

Liquidity and Capital Resources

The following table presents selected financial statistics and information:

		October 27,			January 28,
		2000			2000
		(dollars in millions)
Cash and investments		$	7,760		$	6,853
Working capital		$	2,770		$	2,489
Days of sales in accounts receivable			34			34
Days of supply in inventory			6			6
Days in accounts payable			55			58
	Cash conversion cycle		(15	)		(18	)

During the first nine months of fiscal 2001, the Company generated approximately $3 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.

At October 27, 2000, the Company had approximately $7.8 billion of cash and investments. Of that amount, equity investments totaled approximately $1.5 billion. Of the total value at October 27, 2000, approximately $552 million represented unrealized appreciation. The Company expects to continue to make investments in order to enhance and extend the Company’s strategic initiatives.

As compared to the third quarter of fiscal 2000, days in accounts receivable and days in accounts payable for the third fiscal quarter of fiscal 2001 decreased by 3 and 5 days, respectively. Days of supply in inventory for the third quarter of fiscal 2001 remained unchanged as compared to the third quarter of fiscal 2000. The company’s cash conversion cycle changed to a negative 15 days in the third quarter of fiscal 2001 from a negative 17 days in the third quarter of fiscal 2000. The Company’s return on invested capital, a key indicator of efficient asset management, increased to 316% for the third quarter of fiscal year 2001, from 294% for the second quarter of fiscal 2001, and from 164% for the third quarter of the prior year.

The Company has a share repurchase program that it uses primarily to manage the dilution resulting from shares issued under the Company’s employee stock plans. As of the end of the third quarter of fiscal 2001, the Company had cumulatively repurchased 850 million shares over a four year period out of its authorized 1 billion share repurchase program, for an aggregate cost of $5.9 billion. During the third quarter of fiscal 2001, the Company repurchased 21 million shares of common stock for an aggregate cost of $823 million. The Company utilizes equity instrument contracts to facilitate its repurchase of common stock. At October 27, 2000, the Company held equity options and forwards that allow for the purchase of 100 million shares of common stock at an average price of $49 per share. At October 27, 2000, the Company also had outstanding put obligations covering 127 million shares with an average exercise price of $44 per share. The equity instruments are exercisable only at the date of expiration and expire at various dates through the first quarter of fiscal 2004. The outstanding put obligations at October 27, 2000 permitted net share settlement at the Company’s option and, therefore, did not result in a put obligation liability on the accompanying condensed consolidated statement of financial position.

The Company utilized $375 million in cash during the first nine 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 $1.2 billion. The combined facilities enable the Company to lease certain real property, buildings and equipment to be constructed or acquired. At October 27, 2000, $480 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. The

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Company anticipates that it will continue to utilize its strong liquidity to repurchase its common stock and make strategic minority investments in equity securities.

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 (including the effect of foreign currency exchange rates); 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.

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

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

ITEM 1. Legal Proceedings

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.

ITEM 2. Changes in Securities and Use of Proceeds

Sales of Unregistered Securities

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 third quarter of fiscal 2001, the Company sold 36 million put options to third party financial intermediaries. Each put option entitles the holder to sell common stock to the Company at a specified price on a specified date. These put options expire on various dates through June 2002 and have exercise prices ranging from $25 to $40 per share or an average price of $34 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 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, and each solicitation was made by the Company.

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

December 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

Exhibit No.		Description of Exhibit
	27	Financial Data Schedule

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