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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 JULY 31, 1994
COMMISSION FILE NUMBER:0-17017
DELL COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
9505 ARBORETUM BOULEVARD
AUSTIN, TEXAS 78759-7299
(512) 338-4400
(Address, zip code and telephone number of registrant's
principal executive offices)
A DELAWARE CORPORATION IRS EMPLOYER ID NO. 74-2487834
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING TWELVE MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
AS OF SEPTEMBER 7, 1994, 38,585,820 SHARES OF THE REGISTRANT'S COMMON
STOCK, PAR VALUE $.01 PER SHARE, WERE OUTSTANDING.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
JULY 31, JANUARY 30,
1994 1994
-------------- --------------
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,401 $ 3,355
Short-term investments . . . . . . . . . . . . . . . . . . 297,882 333,667
Accounts receivable, net . . . . . . . . . . . . . . . . . 435,165 410,774
Inventories, net . . . . . . . . . . . . . . . . . . . . . 238,906 220,265
Other current assets . . . . . . . . . . . . . . . . . . . 123,555 80,323
-------------- --------------
Total current assets . . . . . . . . . . . . . . . . 1,130,909 1,048,384
Property and equipment, net . . . . . . . . . . . . . . . . . 104,661 86,892
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 4,995 5,204
-------------- --------------
$ 1,240,565 $ 1,140,480
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 302,191 $ 282,708
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 247,827 237,651
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 22,207 17,628
-------------- --------------
Total current liabilities . . . . . . . . . . . . . 572,225 537,987
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 42,193 31,385
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value; shares authorized: 5,000,000;
shares issued and outstanding: 1,250,000 . . . . . . . . 13 13
Common stock: $.01 par value; shares authorized:
100,000,000; shares issued and outstanding: 385 379
38,516,013 and 37,929,031, respectively . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . 332,849 320,041
Unrealized gain (loss) on short-term investments . . . . . . (2,787) 3,230
Retained earnings . . . . . . . . . . . . . . . . . . . . . 213,947 170,790
Cumulative translation adjustment . . . . . . . . . . . . . (18,260) (23,345)
-------------- --------------
Total stockholders' equity . . . . . . . . . . . . . 526,147 471,108
-------------- --------------
$ 1,240,565 $ 1,140,480
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
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DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -------------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
1994 1993 1994 1993
--------- ---------- ---------- ----------
Net sales . . . . . . . . . . . . . . . . . . . $ 791,496 $ 700,569 $1,558,128 $1,372,933
Cost of sales . . . . . . . . . . . . . . . . . 621,859 654,795 1,218,659 1,214,035
---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . 169,637 45,774 339,469 158,898
Operating expenses:
Selling, general and administrative . . . . 102,646 131,966 197,523 219,500
Research, development and engineering . . . 15,930 11,926 30,900 23,367
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . . 118,576 143,892 228,423 242,867
---------- ---------- ---------- ----------
Operating income (loss) . . . . . . . . . . . . 51,061 (98,118) 111,046 (83,969)
Financing and other income (expense), net . . . (9,671) (2,830) (42,202) (2,002)
---------- ---------- ---------- ----------
Income before income taxes (benefit) . . . 41,390 (100,948) 68,844 (85,971)
Provision for income taxes (benefit). . . . . . 12,831 (25,240) 21,312 (20,448)
---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . 28,559 (75,708) 47,532 (65,523)
Preferred stock dividends . . . . . . . . . . . 2,188 -- 4,375 --
---------- ---------- ---------- ----------
Net income (loss) applicable to common
stockholders . . . . . . . . . . . . . . . . $ 26,371 $ (75,708) $ 43,157 $ (65,523)
========== ========== ========== ==========
Primary earnings (loss) per common share . . . $ 0.65 $ (2.03) $ 1.06 $ (1.76)
========== ========== ========== ==========
Fully diluted earnings per common share . . . . $ 0.62 $ -- $ 1.03 $ --
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
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DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
JULY 31, AUGUST 1,
1994 1993
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Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 47,532 $ (65,523)
Charges to income not requiring cash outlays:
Depreciation and amortization . . . . . . . . . . . . . 15,354 14,097
Loss on short-term investments . . . . . . . . . . . . . 21,218 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . 996 94
Changes in:
Operating working capital . . . . . . . . . . . . . . . (44,929) (27,347)
Non-current assets and liabilities . . . . . . . . . . . 10,198 10,334
-------------- -------------
Net cash provided by (used in) operating activities
before sale of receivables . . . . . . . . . . . . 50,369 (68,345)
Sale of receivables . . . . . . . . . . . . . . . . . -- 74,766
-------------- -------------
Net cash provided by operating activities . . . . . . 50,369 6,421
Cash flows from investing activities:
Short-term investments:
Purchases . . . . . . . . . . . . . . . . . . . . . . . (1,925,730) (872,555)
Maturities and other redemptions . . . . . . . . . . . . 1,824,635 840,468
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . 106,406 36,260
Capital expenditures . . . . . . . . . . . . . . . . . . . (32,535) (30,165)
-------------- -------------
Net cash used in investing activities . . . . . . . . (27,224) (25,992)
Cash flows from financing activities:
Net (payments for) proceeds from short-term borrowings . . (503) 71,051
Borrowings (repayments) from long-term debt . . . . . . . . (48,847)
Preferred stock dividends paid . . . . . . . . . . . . . . (4,375)
Issuance of common stock under employee plans . . . . . . . 12,006 12,738
-------------- -------------
Net cash provided by financing activities . . . . . 7,128 34,942
Effect of exchange rate changes on cash . . . . . . . . . . . 1,773 (753)
-------------- -------------
Net increase in cash . . . . . . . . . . . . . . . . . . . . . 32,046 14,618
Cash at beginning of period . . . . . . . . . . . . . . . . . 3,355 14,948
-------------- -------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . $ 35,401 $ 29,566
============== =============
See Note 6 for Supplemental Statement of Cash Flow information.
The accompanying notes are an integral part of these financial statements.
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DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements should be read in context of
the consolidated financial statements and notes thereto filed with the
Commission in the Company's fiscal 1994 Annual Report on Form 10-K. In the
opinion of management, the accompanying consolidated financial statements
reflect all adjustments (consisting only of normal recurring accruals)
considered necessary to present fairly the financial position of Dell Computer
Corporation and its consolidated subsidiaries at July 31, 1994, and January 30,
1994, and the results of operations for the three-month and six-month periods
ended July 31, 1994, and August 1, 1993. Operating results for the three-month
and six-month periods ended July 31, 1994, are not necessarily indicative of
the results that may be expected for the year ending January 29, 1995. Certain
prior-period amounts have been reclassified for comparative purposes.
Unless otherwise indicated, all references to years in connection with
financial information refer to the Company's fiscal years and all references to
quarters in connection with financial information refer to the Company's fiscal
quarters.
NOTE 2 - SHORT TERM INVESTMENTS
The Company recognized investment losses of $7.6 million during the second
quarter of 1995 and $23.1 million for the first six months of 1995 on certain
of the Company's short-term investments. Additionally, other unrealized
losses on short-term investments in the amount of $4.3 million ($2.8 million
net of tax) at July 31, 1994, were assessed to be temporary and recorded as a
separate component of stockholders' equity. The investment losses are
primarily a result of interest rate increases in the United States, Canadian,
Japanese, and European interest rate markets.
NOTE 3 - INVESTMENT DERIVATIVES
The Company recognized net losses on interest rate derivatives of $1.3 million
in the second quarter of 1995 and $23.9 million for the first six months of
1995. The losses recognized in the first half of 1995 primarily resulted from
increases in the United States, Canadian, Japanese, and European interest rate
markets.
NOTE 4 - WITHDRAWAL FROM THE CONSUMER RETAILER CHANNEL
In July, 1994, the Company adopted a plan to discontinue traditional sales
through consumer retailers. Accordingly, the Company has recorded a $3.0
million charge for estimated losses and operating expenses that were a direct
result of the decision to exit this market. Revenue from consumer retailers
represented 3% and 5% of consolidated net sales in the second quarter and the
first six months of 1995, respectively, compared with 9% and 10% for the
comparable prior-year periods.
NOTE 5 - EARNINGS (LOSS) PER COMMON SHARE
Earnings or loss per common share are computed by dividing net income available
to common stockholders by the weighted average number of common shares and
common share equivalents outstanding (if dilutive) during each period. Common
share equivalents include stock options. The Series A Convertible Preferred
Stock is not a common share equivalent for purposes of computing earnings or
loss per common share. The number of common equivalent shares outstanding
relating to stock options is computed using the treasury stock method for the
primary and fully diluted earnings per share. Shares used in the fully diluted
earnings per share have been adjusted for the assumed conversion of the
Company's Series A Convertible Preferred Stock.
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NOTE 6 - SUPPLEMENTAL FINANCIAL INFORMATION (IN THOUSANDS)
Supplemental Statement of Financial Position Information:
JULY 31, JANUARY 30,
1994 1994
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Inventories:
Production materials . . . . . . . . . . . . . . . . . . . . $ 213,509 $ 195,744
Work-in-process and finished goods . . . . . . . . . . . . . 25,397 24,521
-------------- -------------
$ 238,906 $ 220,265
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Supplemental Statement of Operations Information:
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- -----------------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
1994 1993 1994 1993
------------ ------------ ------------- --------------
Financing and other income (expense):
Investment income:
Short-term investment income, net . . . . . $ (5,323) $ 530 $ (16,073) $ 3,179
Interest rate derivatives . . . . . . . . . (1,341) 1,104 (23,948) 1,777
----------- ----------- ---------- ----------
Total investment income . . . . . . . . . (6,664) 1,634 (40,021) 4,956
Interest expense. . . . . . . . . . . . . . . (2,388) (2,047) (4,558) (3,466)
Foreign currency transaction gains. . . . . . 64 (211) 2,604 57
Other . . . . . . . . . . . . . . . . . . . . (683) (2,206) (227) (3,549)
----------- ----------- --------- ----------
$ (9,671) $ (2,830) $ (42,202) $ (2,002)
=========== =========== ========= ==========
Weighted average shares used to compute
earnings per share:
Primary . . . . . . . . . . . . . . . . . . 40,620 37,229 40,533 37,136
=========== =========== ========= ==========
Fully diluted . . . . . . . . . . . . . . . 46,047 -- 46,056 --
=========== =========== ========= ==========
Supplemental Statement of Cash Flows Information:
SIX MONTHS ENDED
-----------------------------------
JULY 31, AUGUST 1,
1994 1993
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Changes in operating working capital accounts:
Accounts receivable, net . . . . . . . . . . . . . . . . . $ (17,356) $ (46,698)
Inventories, net . . . . . . . . . . . . . . . . . . . . . (18,199) 5,109
Accounts payable . . . . . . . . . . . . . . . . . . . . . 15,751 20,509
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 10,925 41,653
Other current assets . . . . . . . . . . . . . . . . . . . (39,961) (21,346)
Income taxes payable . . . . . . . . . . . . . . . . . . . 3,911 (26,574)
------------- -------------
$ (44,929) $ (27,347)
============= =============
Changes in non-current assets and liabilities:
Other assets . . . . . . . . . . . . . . . . . . . . . . . $ 231 $ 700
Other liabilities . . . . . . . . . . . . . . . . . . . . . 9,967 9,634
------------- -------------
$ 10,198 $ 10,334
============= =============
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
Unless otherwise indicated, all references to years in connection with
financial information refer to the Company's fiscal years and all references to
quarters in connection with financial information refer to the Company's fiscal
quarters.
RESULTS OF OPERATIONS
The Company reported net income for the second quarter of 1995 of
$28.6 million or $.65 per common share compared with a net loss of $75.7
million or $2.03 per common share for the comparable period in 1994. Net income
for the first six months of 1995 was $47.5 million or $1.06 per common share
for the first six months of 1995 compared with a net loss of $65.5 million or
$1.76 per common share for the first six months of 1994. Net income was
adversely affected by after-tax losses on certain investment derivatives and
short-term investments aggregating $6.2 million for the second quarter of 1995
and $32.5 million for the first six months of 1995.
The following table sets forth for the periods indicated the
percentage of consolidated net sales represented by certain items in the
Company's consolidated statements of income.
PERCENTAGE OF CONSOLIDATED NET SALES
------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -------------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
1994 1993 1994 1993
--------- ---------- --------- ----------
Net sales:
North America (U.S. and Canada) . . . . 67.6% 67.7% 66.1% 67.7%
Europe . . . . . . . . . . . . . . . . 27.0 27.1 28.7 27.9
Other international . . . . . . . . . . 5.4 5.2 5.2 4.4
------ ------ ------ ------
Consolidated net sales . . . . . . . 100.0 100.0 100.0 100.0
Cost of sales . . . . . . . . . . . . . 78.6 93.5 78.2 88.4
------ ------ ------ ------
Gross profit . . . . . . . . . . . . 21.4 6.5 21.8 11.6
Operating expenses:
Selling, general and administrative. . . 13.0 18.8 12.7 16.0
Research, development and engineering. . 2.0 1.7 2.0 1.7
------ ------ ------ ------
Total operating expenses . . . . . . 15.0 20.5 14.7 17.7
------ ------ ------ ------
Operating income . . . . . . . . 6.4 (14.0) 7.1 (6.1)
Financing and other income (expense),
net . . . . . . . . . . . . . . . . . . (1.2) (0.4) (2.7) (0.2)
------ ------ ------ ------
Income before income taxes . . . . . . 5.2 (14.4) 4.4 (6.3)
Provision for income taxes. . . . . . . . 1.6 (3.6) 1.4 (1.5)
------ ------ ------ ------
Net income . . . . . . . . . . . . . . 3.6 (10.8) 3.0 (4.8)
Preferred stock dividends . . . . . . . . .3 -- .3 --
------ ------ ------ ------
Net income applicable to common
stockholders . . . . . . . . . . . . . 3.3% (10.8%) 2.7% (4.8%)
====== ====== ====== ======
Net Sales
Consolidated net sales increased 13% to $791.5 million for the second
quarter of 1995 and increased 13% to $1.56 billion for the first six months of
1995. In July 1994, the Company adopted a plan to discontinue traditional sales
through consumer retailers. Revenue to consumer retailers was 3% and 5% of
consolidated net sales in the second quarter and the first six months of 1995,
respectively, and 9% and 10% for the comparable prior-year periods. Revenue
from this channel declined sequentially from $61.4 million in the first quarter
of 1995 to $22.7 million in the second quarter of 1995. Excluding consumer
retailer sales, worldwide sales increased 19% for the first six months of 1995
over the comparable prior-year period.
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Average revenue per unit increased 12% for the second quarter of 1995
and 11% for the first six months of 1995 over average revenue per unit for the
comparable periods of 1994. Unit volumes for the second quarter and the first
six months of 1995 increased less than 2% from the comparable periods of 1994.
The increase in average revenue per unit was primarily due to increased sales
of higher priced products such as Pentium-based systems.
The Company's consolidated net sales (expressed in United States
dollars) were reduced by .9% in the second quarter of 1995 and .8% for the
first six months of 1995 by fluctuations in the average value of the United
States dollar relative to its average value in the comparable periods of the
prior year, particularly because of the strengthening of the U.S. dollar.
Based in part on this information, the Company believes that the increase in
consolidated net sales was primarily driven by an increase in average revenue
per unit which was partially offset by changes in foreign currency exchange
rates.
Consolidated net sales from the Company's Pentium-based products,
which were initially introduced in May 1993, continued to increase and
represented 21% and 15% of consolidated net sales in the second quarter and the
first six months of 1995, respectively. Sales of the Company's 486-based
desktop systems reflected the shift in demand toward Pentium systems and
decreased to 67% and 72% of consolidated net sales for the second quarter and
the first six months of 1995, respectively, compared with 80% and 78% of
consolidated net sales for the second quarter and the first six months of 1994,
respectively.
The Company's mid-size and small-chassis desktop systems represented
69% and 70% of consolidated net sales for the second quarter and the first six
months of 1995, respectively, compared with 71% of consolidated net sales for
each of the comparable periods in 1994. Sales of servers and workstations
accounted for 15% of consolidated net revenue for the second quarter of 1995
and 14% for the first six months of 1995, respectively, compared with 13% for
each of the second quarter and the first six months of 1994. Sales of notebook
computers were 4% and 3% of consolidated net sales in the second quarter and
the first six months of 1995, respectively, compared with 3% and 4% of
consolidated net sales for the respective prior year periods.
The Company believes that the absence of a full notebook computer
product line during the last half of 1994 and in the first half of 1995 was a
contributing factor to the Company's decreased sales growth and that the
Company's re-entry into the notebook market represents a significant growth
opportunity. Since January 30, 1994, the Company has introduced the Latitude
(TM) and Latitude XP (TM) notebook computer product lines and the PowerEdge (TM)
server product line. The Latitude product line and the PowerEdge server line
were introduced in February 1994. In August 1994, the Dell-designed Latitude XP
product line and an enhanced Dell-designed Latitude product line were
introduced. There can be no assurance that the Company's notebook, server, or
other development activities will be successful, that product technologies will
be available to the Company, that the Company will be able to deliver
commercial quantities of computer products in a timely manner, or that such
products will achieve market acceptance.
Despite the decline in consumer retailer revenue, North American sales
increased 13% to $534.7 million for the second quarter of 1995 and increased
11% to $1.03 billion for the first six months of 1995. Although the Company
experienced a seasonal decline in European government sales, net revenue from
the Company's European operations increased 13% to $214.2 million for the
second quarter of 1995 and increased 17% to $447.1 million for first six months
of 1995. Other international sales increased 18% to $42.6 million for the
second quarter of 1995 and increased 35% to $81.0 million for the first six
months of 1995.
Consolidated net sales to major corporate, government and education
accounts increased 29% to $445.8 million for the second quarter of 1995 and
increased 24% to $829.9 million for the first six months of 1995. Sales to
medium- and small-sized businesses and individuals decreased 2% to $245.2
million for the second quarter of 1995 and decreased 2% to $521.4 million for
the first six months of 1995, primarily as a result of declining sales to
consumer retailers.
The Company does not believe that backlog is a meaningful indicator of
sales that can be expected for any period. Although the Company will continue
efforts to minimize the time between customer order and product delivery, the
Company expects backlog to increase at the end of the third quarter of 1995 as
the Company attempts
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to balance the cost of maintaining minimal levels of backlog while controlling
manufacturing costs. Backlog represented approximately $29.4 million at July
31, 1994. Consistent with the Company's unconditional return policy, customers
may cancel or reschedule orders without penalty prior to commencement of
manufacturing.
Gross Profit
The Company's gross profit as a percentage of consolidated net sales
increased to 21.4% for the second quarter of 1995 from 6.5% for the second
quarter of 1994 and increased to 21.8% for the first six months of 1995 from
11.6% for the comparable period a year ago. Gross profit would have been 13.6%
for the second quarter of 1994 and 16.7% for the first six months of 1994, but
was reduced by pre-tax charges of over $50 million for the second quarter and
$71 million for the first six months of 1994 for charges related to notebook
computers and other costs, consisting mostly of inventory writedowns and
related costs. The increase in gross profit from 13.6% to 21.4% for the
second quarters of 1994 and 1995, respectively, and from 16.7% to 21.8% for the
first six months of 1994 and 1995, respectively, is primarily due to
improvements in component costs and quality due to the Company's vendor
certification and vendor consolidation programs, as well as improved sales mix
toward higher margin products driven by changes in the Company's sales
incentive programs and pricing strategies, offset in part by $3.0 million of
costs accrued relating to the decision to exit the traditional consumer
retailer channel.
Late in the first quarter of 1995 and throughout the second quarter of
1995, the Company took pricing actions in the U.S. to stimulate demand on
selected products. The Company broadened its pricing actions to Europe and
other international regions late in the second quarter of 1995. Additional
pricing actions will occur as the Company attempts to stimulate demand and
maintain a competitive mix of price, performance and customer support services.
The Company attempts to mitigate the effect of its pricing actions through
improvements in the product mix, reduced component costs, manufacturing
efficiencies and operating expense controls. There can be no assurance that
further pricing actions will be effective in stimulating higher levels of sales
or that cost reduction efforts will offset the effects of pricing actions on
the Company's gross margins.
Dell's manufacturing process requires a high volume of quality
components. Several microprocessors used in the Company's products are
currently available only from Intel Corporation. In addition, the Company has
certain single supplier relationships that are considered advantageous for
reasons including performance, quality, support, delivery and price
considerations. Reliance on those vendors, as well as industry supply
conditions, generally involves several risks, including the possibility of a
shortage of components, increases in component costs and reduced control over
delivery schedules, which could adversely affect the Company's financial
results. The Company occasionally experiences delays in receiving certain
components, which can cause delays in the shipment of some products to
customers. For example, if sales of the recently introduced Latitude XP
notebook computer exceed forecasted sales, the Company may experience supply
constraints for its sole-sourced active-matrix color screens. There can be no
assurance that the Company will be able to continue to obtain additional
supplies in a timely or cost-effective manner.
The results of the Company's international operations are subject to
currency fluctuations. However, the Company attempts to reduce its exposure to
currency fluctuations through the use of foreign currency option contracts for
periods not exceeding twelve months and, to a lesser extent, through the use of
forward contracts, generally for periods not exceeding three months, which
hedge certain anticipated intercompany shipments to foreign subsidiaries.
Forward contracts entered into to hedge anticipated intercompany shipments,
none of which were outstanding at the end of the second quarter of 1995, are
accounted for on a mark-to-market basis. The Company has purchased options to
hedge a portion of its anticipated, but not firmly committed, intercompany
sales for 1995 and may enter into additional hedging transactions as management
considers appropriate. Based upon foreign currency exchange rates at the end
of the second quarter of 1995, option contracts that hedge anticipated
shipments to international subsidiaries for the last six months of 1995 had a
combined net realized and unrealized deferred loss of $7.9 million.
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Operating Expenses
Operating expenses for the second quarter of 1995 decreased 18% to
$118.6 million for the second quarter of 1995 and decreased 6% to $228.4
million for the first six months of 1995. Operating expenses as a percentage
of sales decreased to 15.0% for the second quarter of 1995 from 20.5% for the
second quarter of 1994 and decreased to 14.7% for the first six months of 1995
from 17.7% for the first six months of 1994. Operating expenses for the second
quarter of 1994 included $21 million of restructuring charges for consolidating
operations, write-offs of certain assets and employee severance payments. The
Company believes that its ability to manage operating costs is an important
factor in its ability to remain price competitive. No assurance can be given
that the Company's efforts to manage operating expenses will be successful.
Net Financing and Other Income (Expense)
Net financing and other income (expense) was $(9.7) million in the
second quarter of 1995 compared with ($2.8) million for the second quarter of
1994 and was ($42.2) million for the first six months of 1995 compared with
($2.0) million for the first six months of 1994.
Short-term investment income (loss) was ($5.3) million in the second
quarter of 1995 compared with $.5 million in the second quarter of 1994 and was
($16.1) million for the first six months of 1995 compared with $3.2 million for
the first six months of 1994. Investment losses were primarily due to
recognized losses of $7.6 million for the second quarter of 1995 and $23.1 for
the first six months of 1995 on certain of the Company's short-term
investments. Additionally, other unrealized losses on short-term investments
in the amount of $4.3 million ($2.8 million net of tax) at July 31, 1994, were
assessed to be temporary and recorded as a separate component of stockholders'
equity. The investment losses are primarily a result of interest rate
increases in the United States, Canadian, Japanese, and European interest rate
markets.
In the normal course of business, the Company has historically
employed a variety of interest rate derivative instruments to more efficiently
manage its principal, market and credit risks as well as to enhance its
investment yield. Derivative instruments utilized included interest rate
swaps, written and purchased interest rate options and swaptions (options to
enter into interest rate swaps). The Company structured derivative instruments
in interest rate markets where it has foreign operations. Interest rate
derivatives generally involve exchanges of interest payments based upon fixed
and floating interest rates without exchanges of underlying notional amounts.
Realized and unrealized net gains (losses) on interest rate derivatives
recognized in income were ($1.3) million in the second quarter of 1995 compared
with $1.1 million in the second quarter of 1994 and ($23.9) million for the
first six months of 1995 compared with $1.8 million for the first six months of
1994. The losses recognized in the first half of 1995 primarily resulted from
increases in the United States, Canadian, Japanese, and European interest rate
markets. During the second quarter, the Company closed all remaining
investment derivatives. In the future, the Company intends to use derivative
contracts only to manage components of its capital structure.
Interest expense in the second quarter of 1995 increased to $2.4
million from $2.0 million in the second quarter of 1994 and to $4.6 million for
the first six months of 1995 compared with $3.5 million for the first six
months of 1994. The increase in interest expense in 1995 was primarily due to
higher effective borrowing rates associated with the 11% Senior Notes (the
"Notes") issued in the third quarter of 1994 relative to the borrowings
outstanding during the second quarter of 1994. Concurrently with the issuance
of the Notes, the Company entered into interest rate swap agreements to manage
the interest costs associated with the Notes. The swap agreements effectively
changed the Company's interest rate exposure from a fixed-rate to a
floating-rate basis and resulted in a weighted average interest rate of 10.81%
and 10.06% on the Notes for the second quarter and the first six months of
1995. In August 1994, the Company entered into swap agreements to effectively
change its interest rate exposure from a floating-rate basis to a fixed-rate
basis with a one-time reset on December 19, 1994. As a result of the swap
agreements, the Company is currently paying a net interest cost of 13.21% on
the Notes. Pursuant to the terms of the swap agreements, the counterparties
may reset the swap rate differential up to a maximum net interest cost of
13.81% on the Notes if market rates have increased on the reset date or, if
interest rates have decreased, the Company may proportionately reduce the net
interest cost on an unlimited basis.
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Financing fees and other income (expense) were ($.7) million in the
second quarter of 1995 compared with ($2.2) million in the second quarter of
1994 and ($.2) million for the first six months of 1995 compared with ($3.5)
million for the first six months of 1994. The improvement in financing fees
and other costs for the second quarter and the first six months of 1995 were
primarily due to higher financing-related expenses incurred in 1994 in
connection with refinancing of debt and credit facilities during the second
quarter of 1994.
Income Tax
The Company's effective tax rate was 31.0% for the second quarter and
first six months of 1995 compared with 25.0% and 23.8% for the same periods in
1994. The effective tax rate in the prior year periods were lower as a result
of the reduction in tax benefit resulting from the geographical distribution of
prior year losses.
HEDGING ACTIVITIES
The results of the Company's international operations are affected by
changes in exchange rates between certain foreign currencies and the United
States dollar. The Company's exposure to currency fluctuations has increased
as a result of the expansion of its international operations. The functional
currency for most of the Company's international subsidiaries is the local
currency of the subsidiary. An increase in the value of the United States
dollar increases costs incurred by the Company's international operations
because many of its international subsidiaries' component purchases are
denominated in the United States dollar. Changes in exchange rates may
negatively affect the Company's consolidated net sales (as expressed in United
States dollars) and gross profit margins from international operations. The
Company monitors this exposure and attempts to mitigate the exposure through
hedging transactions.
Because of the significant growth in the Company's international
operations in recent years, the Company has attempted through various means to
mitigate the effects of currency fluctuations. The purpose of the Company's
hedging program is to protect the Company from the risk that the
dollar-equivalent price of anticipated cash flows resulting from sale of
products from its manufacturing subsidiaries to its international sales
subsidiaries will be adversely affected by changes in foreign currency exchange
rates. The Company's hedging activities consist primarily of hedging
anticipated intercompany sales to its international subsidiaries and resulting
intercompany balances through the use of purchased options for periods not
exceeding twelve months and, to a lesser extent, forward contracts, generally
for periods not exceeding three months. The risk of loss associated with
purchased options is limited to the amount of premiums paid for the option
contracts, which could be significant. The premium amounts paid on purchased
options are amortized over the period of the hedged transaction. Gains and
losses incurred on purchased option contracts are deferred until occurrence of
the hedged transaction and recognized as a component of the cost of the hedged
transaction. Gains and losses incurred on forward contracts designated as
hedging contracts of anticipated intercompany shipments are marked-to-market
and recognized as a component of cost of sales in the current period.
On November 30, 1992, the SEC's Division of Enforcement notified the
Company that it was beginning an informal inquiry, which is continuing,
regarding the Company's accounting practices for foreign currency hedging and
trading activities and the completeness of the Company's public disclosure
about those activities. The Company and its independent accountants are
voluntarily cooperating with the SEC in this informal inquiry. The SEC's
Division of Corporation Finance has also indicated it has concerns about the
deferred accounting treatment the Company afforded gains and losses on forward
and option contracts entered into to hedge anticipated transactions and has not
expressed its definitive views about whether the Company's accounting for these
forward and option contracts complies with generally accepted accounting
principles in all material respects.
The table below shows the effect on income before income taxes, net
income and earnings per common share for the second quarters and the first six
months of 1995 and 1994, if gains and losses on hedging contracts had been
accounted for on a mark-to-market basis.
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THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ---------------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
1994 1993 1994 1993
----------- ----------- ---------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
EFFECT ON INCOME BEFORE INCOME TAXES:
Forward contracts . . . . . . . . . . . . . $ -- $ -- $ -- $ --
Synthetic forward contracts . . . . . . . . -- -- -- --
Other option contracts. . . . . . . . . . . (8.2) 5.3 (10.2) 5.0
--------- -------- --------- --------
Total effect on income before income
taxes . . . . . . . . . . . . . . . . . . $ (8.2) $ 5.3 $ (10.2) $ 5.0
========= ======== ========= ========
DEFERRED REALIZED AND UNREALIZED GAIN
(LOSS) . . . . . . . . . . . . . . . . . $ (7.9) $ 7.0 $ (7.9) $ 7.0
========= ======== ========= ========
EFFECT ON NET INCOME AND EARNINGS PER
SHARE:
Net income on a mark-to-market basis. . . . $ 22.9 $ (71.8) $ 40.5 $ (61.7)
Net income as reported. . . . . . . . . . . $ 28.6 $ (75.8) $ 47.5 $ (65.5)
Primary earnings per share on a
mark-to-market basis. . . . . . . . . . . $ .51 $ (1.93) $ .89 $ (1.66)
Primary earnings per share as reported. . . $ .65 $ (2.03) $ 1.06 $ (1.76)
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities for the first six
months of 1995 was $50.4 million, which represented the Company's primary
source of cash. The Company experienced a decrease in days in accounts
receivable to 49 days at the end of the second quarter of 1995 from 50 days at
the end of 1994. Inventory levels increased slightly to 35 days of supply at
the end of the second quarter of 1995 from 33 days at the end of 1994. Days in
accounts payable increased to 44 days at the end of the second quarter of 1995
from 42 days at the end of 1994. Although the Company made significant
progress in reducing inventory levels during the past twelve months,
maintaining this inventory level is dependent upon the Company's ability to
achieve targeted revenue and product mix, to further reduce complexities in its
product line, and to increase commonality of parts. There can be no assurance
that the Company will be able to maintain these low inventory levels in future
periods.
Approximately $32.5 million of cash was used for capital expenditures
during the first six months of 1995 to construct facilities and to acquire
information systems and personal computer office equipment. Capital
expenditures for the last half of 1995 are expected to be approximately $35
million.
Effective June 10, 1994, the Company entered into a new line of credit
facility which bears interest at a defined Base Rate or Eurocurrency Rate with
covenants based on quarterly income, maintenance of net worth, a maximum ratio
of total liabilities to tangible net worth, and a maximum inventory level.
Maximum amounts available under the credit facility are limited to $90 million
less the aggregate of outstanding letters of credit. During the commitment
period, the Company is obligated to pay a fee on the unused portion of the
credit facility. No amounts are outstanding under this credit facility, and the
maximum available totaled $83.5 million as of July 31, 1994.
The Company's subsidiary, Dell Receivables Corporation, has a
Receivables Purchase Agreement, which was renewed effective May 24, 1994,
pursuant to which the Company may raise up to $100 million through the sale of
interests in certain of its accounts receivable. The Company is obligated to
pay a commitment fee based on the unused portion of the amount available under
the Receivable Purchase Agreement. As of July 31, 1994, this facility was
unused.
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Repayment of the Company's $100 million in 11% Senior Notes due August
15, 2000, together with operating lease commitments, constitute the Company's
long-term commitments to use cash.
The Company is a defendant in several consolidated lawsuits brought by
certain of its stockholders. An unfavorable outcome in these lawsuits could
have a material adverse effect on the Company's financial condition and results
of operations. See "Legal Proceedings."
Management believes that sufficient resources will be available to
meet the Company's cash requirements through at least the next twelve months.
Cash requirements for periods beyond the next twelve months depend on the
Company's profitability, its ability to manage working capital requirements,
and its rate of growth.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its Chairman, Michael S. Dell, are defendants in
nineteen lawsuits filed between May and November 1993, in the United States
District Court for the Western District of Texas, Austin Division. The suits
have been consolidated, an amended and consolidated complaint has been filed,
and the plaintiffs have requested class certification for a class of persons
who purchased or held the Company's common stock between February 24, 1993, and
July 14, 1993. In general, the plaintiffs have alleged that the Company made
overly optimistic forecasts about the Company's prospects without a reasonable
basis and failed to disclose adverse material information about the Company's
business (particularly with regard to problems in its notebook business) on a
timely basis, thereby inducing the plaintiffs to buy Company common stock at
artificially high prices. The plaintiffs also have alleged that Mr. Dell sold
securities of the Company while in the possession of material, non-public
information about the Company. The consolidated complaint asserts that these
actions or omissions violated various provisions of the federal securities
laws, particularly Section 10(b) of the Exchange Act and Rule 10b-5; that Mr.
Dell's trades violated Section 20A of the Exchange Act; and that the defendants
violated provisions of Texas statutes and common law principles against
negligent misrepresentation and deceit. The complaint seeks unspecified
damages. The Company is vigorously defending itself and Mr. Dell. It is the
Company's policy to make accruals for potential liability or settlement of
litigated matters as appropriate. The Company believes that its current
accruals in connection with this matter are adequate.
Since August 1992, the Company has been named as a defendant in
seventeen repetitive stress injury lawsuits, fifteen of which are in New York
state courts or United States District Courts for the New York City area. One
is in the Federal District Court for the State of Pennsylvania and one is in
the Federal District Court for the State of Tennessee. The allegations in all
of these lawsuits are similar: each plaintiff alleges that he or she suffers
from symptoms generally known as "repetitive stress injury," which allegedly
were caused by the design or manufacture of the keyboard supplied with the
computer the plaintiff used. The Company has denied or is in the process of
denying the claims and intends to vigorously defend the suits. The suits
naming the Company are just a few of many lawsuits of this type which have been
filed, often naming IBM, Atex, Keytronic and other major suppliers of keyboard
products. The Company currently is not able to predict the outcome of these
suits. It is possible that the Company may be named in additional suits, but it
is impossible to predict how many may be filed. Ultimate resolution of the
litigation against the Company may depend on progress in resolving this type of
litigation overall.
For information about a pending Securities and Exchange Commission
informal inquiry relating to foreign currency hedging and trading activities,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Hedging Activities." By letter dated July 21, 1993, the
Commission notified the Company that it was extending the informal inquiry to
the circumstances and events surrounding the public announcement on
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July 14, 1993, about the Company's expected losses for its second quarter of
1994 and into the Company's procedures for estimating sales. The Company and
its independent accountants are voluntarily cooperating with the Commission in
its informal inquiry.
On August 11, 1993, the Company received a subpoena from the United
States Department of Commerce, Office of Export Enforcement of the Bureau of
Export Administration, requiring the Company to provide all documents relative
to any and all exports of 486/66 personal computers or related components to
Russia, Ireland, Iran or Iraq during the period from January 1992 through
August 1993 in connection with an investigation to enforce regulations under
the Export Administration Act of 1979, as amended. If the Office of Export
Enforcement's investigators determine that the Company has violated applicable
regulations, the government could potentially file civil or criminal charges.
The Company is cooperating in the investigation. The Company does not believe
this investigation or its outcome will have a material adverse effect on the
Company's financial condition or results of operations.
The Company has received a request from the Federal Trade Commission
("FTC") dated January 5, 1994, to provide documents and other information in
connection with the FTC's inquiry into the computer industry to determine
whether the Company's advertising and marketing claims regarding cathode ray
tube ("CRT") monitor screen sizes are in violation of the Federal Trade
Commission Act. In general, the inquiry focuses on differences between
advertising and marketing claims as to the size of CRT monitor screen sizes,
and the size of the display area actually viewable by the consumer. The
Company is cooperating with the FTC in this inquiry. The Company does not
believe that the inquiry or its outcome will have a material adverse effect on
the Company's financial condition or results of operations.
In April 1994 the California Attorney General notified Dell and 12
other PC manufacturers that certain of their advertisements with regard to
monitor screen sizes were believed to be deceptive and misleading, based on the
same concepts expressed by the FTC. The Company is responding to this
investigation in coordination with other companies in the industry. The
Company does not believe that the inquiry or its outcome will have a material
adverse effect on the Company's financial condition or results of operations.
The Company has received a subpoena from the FTC dated July 18, 1994,
in connection with an inquiry with respect to whether the Company may have
misrepresented or improperly failed to disclose patent rights that would
conflict with open use of a local high-speed personal computer bus standard
promulgated by the Video Electronics Standards Association (VESA). The Company
is cooperating in this inquiry. The Company does not believe that the inquiry
or its outcome will have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
The Company held its Annual Meeting of Stockholders on June 22, 1994.
Approximately 37,265,213 shares, or 97.3% of the Common Stock issued and
outstanding as of the record date, were represented at the meeting in person or
by proxy. Set forth below is a brief description of each matter voted upon at
the meeting and the voting results with respect to each matter.
1. A proposal to elect the following persons to serve as Class III
members of the Company's Board of Directors for three-year terms:
NAME FOR WITHHELD
---- --- --------
George Kozmetsky 37,086,244 178,969
Claudine Malone 37,087,734 177,479
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2. A proposal to approve the selection of Price Waterhouse as the
Company's independent auditors for fiscal 1995:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
37,024,027 143,694 97,492 --
3. A proposal to approve the Company's Incentive Plan, reserve
4,490,207 shares (subject to adjustment) of Common Stock of the
Company for issuance under it, and to cancel the reservation of
the same number of shares reserved for issuance under the Company's
1989 and 1993 Stock Incentive Plans:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
20,152,705 6,035,372 222,163 10,854,973
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- - ------- ----------------------
10.1* $90,000,000 Credit Agreement among Dell Computer Corporation and its Wholly-Owned
Subsidiaries, as borrowers, the Banks Parties Thereto, and Citibank, N.A., as Agent,
Dated as of June 10, 1994
10.2* Amendment No. 1 to the Dell Computer Corporation Deferred Compensation Plan dated April 29,
1994
10.3* Amendment No. 3 to the Dell Computer Corporation 401(k) Plan dated February 24, 1993
10.4* Dell Computer Corporation Deferred Compensation Plan for Non-Employee Directors dated May
20, 1994
10.5* Agreement dated June 1, 1994, between Dell Computer Corporation and Morton Topfer
10.6* Dell Computer Corporation Employment Agreement dated July 21, 1994, between Dell Computer
Corporation and Thomas B. Green
10.7 Dell Computer Corporation Incentive Plan dated June 22, 1994 (incorporated by reference to
Exhibit 4.6 of the Company's Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on July 14, 1994, Registration No. 33-54577)
27* Financial Data Schedule
_____________________
* Filed herewith.
(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 12, 1994 /s/ THOMAS J. MEREDITH
-----------------------------
Thomas J. Meredith
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- - ------- ----------------------
10.1* $90,000,000 Credit Agreement among Dell Computer Corporation and its Wholly-Owned
Subsidiaries, as borrowers, the Banks Parties Thereto, and Citibank, N.A., as Agent,
Dated as of June 10, 1994
10.2* Amendment No. 1 to the Dell Computer Corporation Deferred Compensation Plan dated April 29,
1994
10.3* Amendment No. 3 to the Dell Computer Corporation 401(k) Plan dated February 24, 1993
10.4* Dell Computer Corporation Deferred Compensation Plan for Non-Employee Directors dated May
20, 1994
10.5* Agreement dated June 1, 1994, between Dell Computer Corporation and Morton Topfer
10.6* Dell Computer Corporation Employment Agreement dated July 21, 1994, between Dell Computer
Corporation and Thomas B. Green
10.7 Dell Computer Corporation Incentive Plan dated June 22, 1994 (incorporated by reference to
Exhibit 4.6 of the Company's Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on July 14, 1994, Registration No. 33-54577)
27* Financial Data Schedule
_____________________
* Filed herewith.
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