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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 29, 1995
COMMISSION FILE NUMBER:0-17017
DELL COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-2487834
(State of incorporation) (I.R.S. Employer ID No.)
2214 WEST BRAKER LANE, SUITE D
AUSTIN, TEXAS 78758-4053
(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 [X] NO [ ]
AS OF DECEMBER 6, 1995, 93,081,168 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR
VALUE $.01 PER SHARE, WERE OUTSTANDING.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELL COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
OCTOBER 29, JANUARY 29,
1995 1995
----------------- -----------------
Current assets:
Cash $ 69,586 $ 42,953
Short-term investments 501,186 484,294
Accounts receivable, net 772,835 537,974
Inventories 463,640 292,925
Other current assets 135,892 112,215
----------------- -----------------
Total current assets 1,943,139 1,470,361
Property, plant and equipment, net 158,534 116,981
Other assets 11,250 6,658
----------------- -----------------
$ 2,112,923 $ 1,594,000
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 531,739 $ 402,682
Accrued and other liabilities 431,538 323,791
Income taxes 33,919 24,937
----------------- -----------------
Total current liabilities 997,196 751,410
Long-term debt 113,242 113,429
Other liabilities 109,189 77,425
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value; shares authorized: 5,000,000;
shares issued and outstanding: 60,000 and 1,250,000, respectively 1 13
Common stock: $.01 par value; shares authorized:
300,000,000 and 100,000,000, respectively; shares issued and
outstanding: 92,999,232 and 79,359,276, respectively 930 794
Additional paid-in capital 420,824 360,784
Unrealized loss on short-term investments (383) (2,628)
Retained earnings 500,663 311,217
Unearned compensation (18,585) (4,413)
Cumulative translation adjustment (10,154) (14,031)
----------------- -----------------
Total stockholders' equity 893,296 651,736
----------------- -----------------
$ 2,112,923 $ 1,594,000
================= =================
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 THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
OCTOBER 29, OCTOBER 30, OCTOBER 29, OCTOBER 30,
1995 1994 1995 1994
------------- ------------- ------------- -------------
Net sales $ 1,415,699 $ 884,552 $ 3,757,225 $ 2,442,680
Cost of sales 1,125,175 703,129 2,967,907 1,921,788
------------- ------------- ------------- -------------
Gross margin 290,524 181,423 789,318 520,892
Operating expenses:
Selling, general and administrative 160,060 104,861 434,998 302,384
Research, development and engineering 25,980 17,016 71,506 47,916
------------- ------------- ------------- -------------
Total operating expenses 186,040 121,877 506,504 350,300
------------- ------------- ------------- -------------
Operating income 104,484 59,546 282,814 170,592
Financing and other income (expense), net 1,735 (1,418) 1,954 (43,620)
------------- ------------- ------------- -------------
Income before income taxes 106,219 58,128 284,768 126,972
Provision for income taxes 30,803 16,774 82,579 38,086
------------- ------------- ------------- -------------
Net income 75,416 41,354 202,189 88,886
Preferred stock dividends 105 2,187 11,848 6,562
------------- ------------- ------------- -------------
Net income available to common
stockholders $ 75,311 $ 39,167 $ 190,341 $ 82,324
============= ============= ============= =============
Earnings per common share:
Primary $ 0.75 $ 0.47 $ 1.98 $ 1.00
============= ============= ============= =============
Fully diluted $ 0.75 $ 0.43 $ 1.92 $ 0.95
============= ============= ============= =============
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 THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
------------------------------------
OCTOBER 29, OCTOBER 30,
1995 1994
---------------- ----------------
Cash flows from operating activities:
Net income $ 202,189 $ 88,886
Charges to income not requiring cash outlays:
Depreciation and amortization 27,708 23,624
Net (gain) loss on short-term investments (302) 21,218
Other 3,977 1,825
Changes in:
Operating working capital (179,819) (34,389)
Non-current assets and liabilities 23,185 21,257
---------------- ----------------
Net cash provided by operating activities 76,938 122,421
Cash flows from investing activities:
Short-term investments:
Purchases (3,036,884) (3,202,716)
Maturities and other redemptions 2,996,090 3,011,348
Sales 28,651 113,406
Capital expenditures (66,501) (47,007)
---------------- ----------------
Net cash used in investing activities (78,644) (124,969)
Cash flows from financing activities:
Preferred stock dividends paid (12,743) (6,562)
Issuance of common stock under employee plans 42,146 21,580
Other (502) (147)
---------------- ----------------
Net cash provided by financing activities 28,901 14,871
Effect of exchange rate changes on cash (562) 2,476
---------------- ----------------
Net increase in cash 26,633 14,799
Cash at beginning of period 42,953 3,355
---------------- ----------------
Cash at end of period $ 69,586 $ 18,154
================ ================
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
should be read in conjunction with the consolidated financial statements and
notes thereto filed with the Securities and Exchange Commission (the
"Commission") in the Company's Annual Report on Form 10-K for the fiscal year
ended January 29, 1995, as amended. In the opinion of management, the
accompanying condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring accruals) considered necessary
to present fairly the financial position of Dell Computer Corporation and its
consolidated subsidiaries at October 29, 1995 and January 29, 1995 and the
results of their operations for the three-month and nine-month periods ended
October 29, 1995 and October 30, 1994. Reclassification of certain prior
period amounts has been made for comparative purposes.
NOTE 2 -- STOCK SPLIT
On October 9, 1995, the Company's Board of Directors declared a 2-for-1
stock split of the Company's common stock in the form of a 100% stock dividend
to stockholders of record as of October 20, 1995. The distribution of such
dividend occurred on October 27, 1995. All share and per share information has
been retroactively restated in the condensed consolidated financial statements
to reflect the stock split.
NOTE 3 -- PREFERRED SHARE PURCHASE RIGHTS
On November 29, 1995, the Company's Board of Directors declared a dividend
of one Preferred Share Purchase Right (a "Right") for each outstanding share of
the Company's common stock. The distribution of the Rights will be made on
December 13, 1995 to the stockholders of record on that date. Each Right
entitles the holder to purchase one one-thousandth of a share of a new series
of preferred stock at an exercise price of $225. The Rights will be
exercisable only if a person or group acquires 15% or more of the Company's
common stock or announces a tender offer, the consummation of which would
result in such person or group owning 15% or more of the Company's common
stock.
If a person or group acquires 15% or more of the outstanding Company common
stock, each Right will entitle all the holders (other than such person or any
member of such group) to purchase, at the Right's then current exercise price,
a number of shares of the Company's common stock having a market value of twice
the exercise price of the Right. In addition, if the Company is involved in a
merger or other business combination transaction at any time after the Rights
have become exercisable, each Right will entitle its holder to purchase, at the
Right's then current exercise price, a number of the acquiring company's common
shares having a market value at that time of twice the exercise price of the
Right. Furthermore, at any time after a person or group acquires 15% or more
of the outstanding Company common stock but prior to the acquisition of 50% of
such stock, the Board of Directors may, at its option, exchange part or all of
the Rights (other than Rights held by the acquiring person or group) for shares
of the Company's common stock at an exchange rate of one share of common stock
for each Right.
The Company will be entitled to redeem the Rights at $.001 per Right at any
time before a 15% or greater position has been acquired by any person or group.
Additionally, the Company may lower the 15% threshold to not less than the
greater of (a) any percentage greater than the largest percentage of common
stock known by the Company to be owned by any person (other than Michael S.
Dell) or (b) 10%. The Rights expire on November 29, 2005.
Neither the ownership nor the further acquisition of Company common stock
by Michael S. Dell will cause the Rights to become exercisable or nonredeemable
or will trigger the other features of the Rights.
The Company has 5,000,000 shares of $.01 par value preferred stock
authorized for issuance, of which 200,000 shares have been designated by the
Board of Directors as Series A Junior Participating Preferred Stock
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and reserved for issuance upon exercise of the Rights. Each of such preferred
shares will be entitled to an aggregate dividend equal to the greater of $1.00
per share or 1,000 times the dividend declared on the common stock. Upon
liquidation, the holders of such preferred shares will be entitled to receive
an aggregate liquidation payment equal to the greater of $1,000 or 1,000 times
the payment made per share of common stock. Each of such preferred shares will
have 1,000 votes, voting together with the common shares. In the event of any
merger, consolidation or other transaction in which common stock is exchanged,
each of such preferred shares will be entitled to receive 1,000 times the
amount received per common share. Such preferred shares will be nonredeemable.
At December 7, 1995, none of these preferred shares was issued or outstanding.
NOTE 4 -- PREFERRED STOCK CONVERSION
On February 21, 1995, the Company offered to pay a cash premium of $8.25
for each outstanding share of its Series A Convertible Preferred Stock (the
"Convertible Preferred Stock") that was converted to common stock. The offer
of premium upon conversion was available to holders of the Convertible
Preferred Stock through the closing of the special conversion period on March
22, 1995. The Company also offered to register the resale of the shares of
common stock issued upon conversion of the Convertible Preferred Stock with the
Commission for a 50-day period, which ended June 15, 1995. Holders of
1,190,000 shares of Convertible Preferred Stock elected to convert and, as a
result, received an aggregate of approximately 10.0 million shares of common
stock and $9.8 million in cash during the first quarter of fiscal 1996. The
$9.8 million conversion premium and $0.5 million of expenses of the conversion
offer were treated as an additional dividend on the Convertible Preferred Stock
for financial reporting purposes. Accordingly, $11.8 million, comprised of the
conversion premium, conversion offer expenses and dividends, were deducted from
net income for the first nine months of fiscal 1996 to determine the net income
available to common stockholders. In addition, the weighted average shares
outstanding used to compute primary earnings per common share for the first
nine months of fiscal 1996 includes the shares of common stock issued upon
conversion from the closing of the conversion period until the end of the
nine-month period.
NOTE 5 -- INCREASE IN THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
On July 21, 1995, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the number of shares of
common stock, par value $.01 per share, that the Company is authorized to issue
from 100 million to 300 million. The amendment was filed in the office of the
Secretary of State of the State of Delaware on August 3, 1995. In accordance
with the provisions of the Delaware General Corporation Law, such amendment
became effective upon filing.
NOTE 6 -- RESTRICTED STOCK
As discussed in the Company's Annual Report on Form 10-K for the fiscal
year ended January 29, 1995, as amended, the Company granted certain restricted
stock during fiscal 1995 that typically vests over a seven-year period. During
the first nine months of fiscal 1996, the Company granted approximately 660,000
additional shares of restricted stock to employees pursuant to its long-term
incentive plan. The unearned compensation associated with restricted stock at
October 29, 1995 has been presented separately in the Condensed Consolidated
Statement of Financial Position. Prior to the second quarter of fiscal 1996,
the unearned compensation was combined with additional paid-in capital, but the
amount at January 29, 1995 has been reclassified in the accompanying Condensed
Consolidated Statement of Financial Position to conform with the current period
presentation.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
The Company has been named as a defendant in approximately 30 repetitive
stress injury lawsuits, most of which are in New York state courts or United
States District Courts for the New York City area. Several are in state courts
in New Jersey. One is in the Federal District Court for the Eastern District
of Pennsylvania, and one is in Federal District Court in Kansas. Two cases
have been dismissed; the remainder are at various stages of the process leading
to trial. 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
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few of many lawsuits of this type that have been filed, often naming Apple,
Atex, Compaq, IBM, 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. Ultimate
resolution of the litigation against the Company may depend on progress in
resolving this type of litigation overall. However, the Company does not
believe that the outcome of these matters will have a material adverse effect
on the Company's financial condition or results of operations.
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. In September 1995, the Company
received a letter from the Dallas Field Office of the Department of Commerce
closing out the investigation into the shipments to Russia and Ireland. The
Department of Commerce found no wrongdoing by the Company with regard to these
destinations. The Company is still awaiting a response from the Department of
Commerce regarding its voluntary self disclosure of certain shipments to Iran
in June 1992. 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 has fully responded to
the subpoena and, in accordance with its policy to comply fully with export
laws and regulations, intends to cooperate with the Office of Export
Enforcement. The Company does not believe that this investigation or its
outcome will have a material adverse effect on the Company's financial
condition or results of operations.
The Company received a subpoena from the Federal Trade Commission (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. On November 2, 1995, the Company and the FTC announced that they
had entered into a consent agreement under which the Company will ensure that
any Company employees who are members of standards committees fully understand
and disclose patents that may be related to standards under consideration by
those committees. In agreeing to the consent decree, the Company did not admit
to any wrongdoing, nor did the FTC find that the Company had violated any law
or regulation. In addition, the FTC did not impose any fines or sanctions
against the Company. The consent decree is subject to public comment until
January 1996 before it becomes final.
In March 1995, the Company was named along with twelve other personal
computer or computer monitor manufacturers in a complaint filed by the District
Attorney for Merced County, California. The complaint alleges that each of the
defendants has engaged in false or misleading advertising with regard to the
size of computer monitor screens and seeks unspecified damages and injunctive
relief. In May 1995, several other district attorneys in other California
counties joined this lawsuit as co-plaintiffs. On September 27, 1995, a
settlement was reached and a Stipulated Judgment was entered by the court under
which the Company and the other defendants have agreed to new guidelines in
future monitor screen size advertising and to pay an aggregate amount of $1.5
million in retail value of computer equipment and $200,000 in aggregate cash
payments to the State of California. The Company's share of the settlement
costs has not had, and the cost of adopting and following the new advertising
guidelines will not have, a material adverse effect on the Company's financial
condition or results of operations.
In May 1995, the Company was named, along with two other personal computer
manufacturers and one computer monitor vendor, in a class action complaint
filed in the California Superior Court for Marin County. The case has been
transferred to Orange County, California. A second class action complaint,
naming the Company and 47 other manufacturers or vendors of personal computer
monitors, was filed in Santa Clara County, California and was served on the
Company in August 1995. Two other similar class action complaints naming the
Company and others as defendants have been filed in Orange County, California.
A motion has been filed by all defendants in all of the cases to consolidate
all of the cases before a single judge in Santa Clara County, California. All
proceedings in all of the cases have been stayed pending resolution of the
motion to consolidate. The complaints allege that each of the defendants has
engaged in false or misleading advertising with regard to the size of computer
monitor screens. The plaintiffs seek restitution in the form of refunds or
product exchange, damages, punitive damages and attorneys' fees. The Company
plans to vigorously contest the allegations of the complaints.
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This litigation is currently at a preliminary stage and no discovery has
occurred to date. As such, it is too early for the Company to adequately
evaluate the likelihood of the plaintiffs prevailing on their claims. There
can be no assurance that an adverse determination in this litigation would not
have a material adverse effect on the Company's financial condition or results
of operations.
In June 1995, the Company was served with a class action complaint filed in
State District Court in Travis County, Texas. The complaint alleges that the
Company has included "used parts" in its "new" computer systems and has failed
to adequately inform its customers and prospective customers of that practice.
According to the complaint, these facts constitute fraud, negligent
misrepresentation, breach of contract and breach of warranty. The plaintiffs
seek refund of the purchase price for computer systems purchased from the
Company, damages in an unspecified amount, injunctive relief, interest and
attorneys' fees. The Company plans to vigorously contest the allegations of
the complaint. This litigation is currently at a preliminary stage, and no
discovery has occurred to date. As such, it is too early for the Company to
adequately evaluate the likelihood of the plaintiffs prevailing on their
claims. There can be no assurance that an adverse determination in this
litigation would not have a material adverse effect on the Company's financial
condition or results of operations.
NOTE 8 -- EARNINGS PER COMMON SHARE
Primary earnings per common share are computed by dividing net income
available to common stockholders by the weighted average number of common
shares and common stock equivalents (if dilutive) outstanding during each
period. Common stock equivalents include stock options. The Convertible
Preferred Stock is not a common stock equivalent for purposes of computing
earnings per common share. The number of common stock equivalents outstanding
is computed using the treasury stock method. The weighted average shares
outstanding used to compute primary earnings per common share for the first
nine months of fiscal 1996 includes the shares of common stock issued upon
conversion of the Convertible Preferred Stock from the closing of the
conversion period until the end of the nine-month period. Shares used in the
calculation of fully diluted earnings per common share have been adjusted for
the assumed conversion of all of the Company's outstanding Convertible
Preferred Stock for all periods presented.
NOTE 9 -- SUPPLEMENTAL FINANCIAL INFORMATION (IN THOUSANDS)
Supplemental Condensed Consolidated Statement of Financial Position
Information:
OCTOBER 29, JANUARY 29,
1995 1995
------------- -------------
Inventories:
Production materials $ 416,932 $ 262,150
Work-in-process and finished goods 46,708 30,775
------------- -------------
$ 463,640 $ 292,925
============= =============
Accrued and other liabilities:
Accrued warranty costs $ 79,218 $ 65,468
Royalties and licensing 81,107 34,815
Taxes other than income taxes 63,411 39,873
Book overdraft 48,697 44,389
Other liabilities 159,105 139,246
------------- -------------
$ 431,538 $ 323,791
============= =============
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Supplemental Condensed Consolidated Statement of Income Information:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 29, OCTOBER 30, OCTOBER 29, OCTOBER 30,
1995 1994 1995 1994
----------- ----------- ----------- -----------
Financing and other income (expense), net:
Investment income (loss), net:
Short-term investments $ 6,558 $ 3,679 $ 17,708 $ (12,393)
Investment derivatives -- -- -- (23,948)
Interest expense (3,493) (3,450) (11,331) (8,008)
Foreign currency transactions (406) (605) (2,493) 1,999
Other (924) (1,042) (1,930) (1,270)
----------- ---------- ---------- ----------
$ 1,735 $ (1,418) $ 1,954 $ (43,620)
=========== ========== ========== ==========
Weighted average shares used to compute
earnings per common share:
Primary 100,060 84,182 96,338 82,018
=========== ========== ========== ==========
Fully diluted 100,976 95,680 99,804 93,888
=========== ========== ========== ==========
Supplemental Condensed Consolidated Statement of Cash Flows Information:
NINE MONTHS ENDED
-----------------------------------
OCTOBER 29, OCTOBER 30,
1995 1994
-------------- ---------------
Changes in operating working capital accounts:
Accounts receivable, net $ (218,608) $ (69,520)
Inventories (171,067) (53,486)
Accounts payable 127,315 78,822
Accrued and other liabilities 97,674 12,820
Other current assets (24,441) (26,858)
Income taxes payable 9,048 15,954
Other, net 260 7,879
-------------- ---------------
$ (179,819) $ (34,389)
============== ===============
Changes in non-current assets and liabilities:
Other assets $ (4,370) $ 55
Other liabilities 27,555 21,202
-------------- ---------------
$ 23,185 $ 21,257
============== ===============
The Company accounts for highly liquid investments with maturities of three
months or less at date of acquisition as short-term investments and reflects
the related cash flows as investing cash flows. As a result, significant
portions of the Company's gross investment maturities and purchases disclosed
as investing cash flows are related to highly liquid investments.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All percentage amounts used in describing operating results are based on the
related dollar amounts rounded to the nearest thousand which are set forth in
the Condensed Consolidated Financial Statements and related notes thereto.
Operating results for the three-month and nine-month periods ended October 29,
1995 are not necessarily indicative of the results that may be expected for the
full fiscal year.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of consolidated net sales represented by certain items in the Company's
condensed consolidated statement of income.
PERCENTAGE OF CONSOLIDATED NET SALES
-----------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- --------------------------
OCTOBER 29, OCTOBER 30, OCTOBER 29, OCTOBER 30,
1995 1994 1995 1994
----------- ----------- ----------- -----------
Net sales:
Americas 70.4% 72.3% 66.1% 70.0%
Europe 24.1 23.5 27.0 26.8
Other international 5.5 4.2 6.9 3.2
----- ----- ----- -----
Consolidated net sales 100.0 100.0 100.0 100.0
Cost of sales 79.5 79.5 79.0 78.7
----- ----- ----- -----
Gross margin 20.5 20.5 21.0 21.3
Operating expenses:
Selling, general and administrative 11.3 11.9 11.6 12.4
Research, development and engineering 1.8 1.9 1.9 2.0
----- ----- ----- -----
Total operating expenses 13.1 13.8 13.5 14.4
----- ----- ----- -----
Operating income 7.4 6.7 7.5 6.9
Financing and other income (expense), net 0.1 (0.2) 0.1 (1.8)
----- ----- ----- -----
Income before income taxes 7.5 6.5 7.6 5.2
Provision for income taxes 2.2 1.9 2.2 1.6
----- ----- ----- -----
Net income 5.3 4.6 5.4 3.6
Preferred stock dividends 0.0 0.2 0.3 0.3
----- ----- ----- -----
Net income available to common
stockholders 5.3% 4.4% 5.1% 3.3%
===== ===== ===== =====
Net Sales
The third quarter of fiscal 1996 marked the Company's seventh consecutive
quarter of sequential growth in consolidated net sales. Consolidated net sales
increased 60% and 54% in the third quarter and the first nine months,
respectively, of fiscal 1996 over the comparable periods of fiscal 1995, and
increased 17% over the second quarter of fiscal 1996. These increases were due
primarily to an increase in units sold. Unit volumes increased 57% in the
third quarter and 47% in the first nine months of fiscal 1996 over the
comparable periods of the prior year mainly as a result of strong demand for
the Company's Pentium(R) processor-based products, its desktop product
offerings and its Latitude(TM) family of notebook computers. Additionally,
because the Company's Pentium processor-based products are generally higher
priced than its 486-based products, and the Company's notebook products are
generally higher priced than the rest of the Company's product portfolio
(excluding servers which account for a relatively small percentage of system
revenue), average total revenue per unit increased 2% in the third quarter and
5% in the first nine months of fiscal 1996 as compared with the respective
periods of fiscal 1995.
The Company believes that its future success is largely dependent upon
continued expansion of its notebook product line, its ability to expand its
presence in the network server market and its ability to continue to
efficiently manage the transition to Pentium processor-based computers and
other technological advancements as they become commercially available. There
can be no assurance that the Company's 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. Some
new products introduced by the Company are intended to replace existing
products. Although
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the Company monitors the products that are intended to be replaced and attempts
to phase out the manufacture of those products in a timely manner, there can be
no assurance that such transitions will be executed without adversely affecting
the Company's results of operations or financial condition.
Growth in consolidated net sales was experienced in all geographic
regions, with other international net sales comprising a significantly
increased percentage of consolidated net sales during the third quarter and the
first nine months of fiscal 1996 compared with the same periods of fiscal 1995.
Sequential growth was experienced in both the Americas and in Europe, but other
international net sales declined from the prior quarter due in part to a more
competitive pricing environment in Japan. After taking into account the
results of the Company's foreign currency hedging activities, consolidated net
sales (expressed in United States dollars) were not significantly affected in
the third quarter or in the first nine months of fiscal 1996 as a result of
fluctuations in foreign currency exchange rates from the comparable periods of
the prior year.
The Company believes that a significant opportunity exists for continued
growth in international operations. In October 1995, the Company completed
construction of a 238,000 square foot combination office and manufacturing
facility on a nine-acre site in Penang, Malaysia to meet the needs of its
expanding Asia-Pacific business. This manufacturing facility began production
in November 1995. The Company intends to continue to expand its international
activities by increasing its market presence in existing markets through
ongoing revisions and improvement of its marketing and sales compensation
programs to more effectively reach its customers, by improving its support
systems, by pursuing additional distribution opportunities and by entering new
markets. There can be no assurance that the Company will be successful in its
efforts to expand its international activities.
The Company was affected by component shortages during the third quarter
and by demand levels that exceeded its internal forecasts, which contributed to
the backlog of $179.0 million at quarter-end. Backlog was $186.5 million at
the end of the second quarter of fiscal 1996 and was $78.2 million at the end
of the third quarter of fiscal 1995. There can be no assurance that the
backlog at the end of a quarter will translate into sales in any subsequent
quarter, particularly in light of the Company's policy of allowing customers to
cancel or reschedule orders without penalty prior to commencement of
manufacturing. The Company anticipates that industry-wide shortages of
component parts will continue to be a factor affecting its business operations.
In early November, Sony Corporation, the Company's sole supplier of lithium ion
batteries used in Latitude XP and XPi notebook computers, had a fire in the
testing area of its lithium ion battery plant in Koriyama, Japan. The Company
currently has an inventory of lithium ion batteries on hand and in transit and
is actively managing its current battery supply. The Company believes that
Sony Corporation is aggressively working its recovery plan for the plant, but
at this time the Company is not certain what impact the plant fire will have on
its sales of notebook computers during the fourth quarter. In the third
quarter of fiscal 1996, approximately 80% of notebook computer sales, or 12% of
consolidated net sales, were attributable to notebook computers utilizing
lithium ion batteries.
Gross Margin
Gross margin increased $109.1 million in the third quarter of fiscal 1996
and $268.4 million in the first nine months of fiscal 1996 from the comparable
periods in the prior year primarily as a result of the increase in unit
volumes. The Company's gross margin as a percentage of consolidated net sales
remained relatively stable at 20.5% and 21.0% for the third quarter and the
first nine months of fiscal 1996, respectively, compared to 20.5% and 21.3% in
the third quarter and the first nine months of fiscal 1995, respectively. The
third quarter gross margin percentage decreased, however, from the 21.8%
reported in the second quarter of fiscal 1996 due primarily to a more
aggressive pricing environment in Europe in the third quarter, an unfavorable
shift in the desktop mix to lower margin desktops and an unfavorable seasonal
shift in the geographic mix of the Company's net sales from Europe, where
margins are generally higher, to the Americas. This seasonal shift in
geographic mix is the result of increased sales in the United States to the
government sector in the third fiscal quarter, which the Company believes
reflects the budgetary spending practices of the U.S. federal government, and
decreased sales in Europe in the third fiscal quarter, which the Company
believes is the result of the holiday schedule in European countries in the
late summer months. The gross margin percentages for the third quarter and the
first nine months of fiscal 1996 were negatively impacted by the Company's more
aggressive pricing strategy in comparison to the prior year, offset by lower
warranty and inventory obsolescence costs and certain economies of scale.
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The Company may take pricing actions as it attempts to maintain a
competitive mix of price, performance and customer services while managing its
liquidity, profitability and growth. The Company attempts to mitigate the
effects of price reductions by improving product mix, further reducing
component costs and lowering operating costs. There can be no assurance that
pricing actions, if taken, 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.
The Company's manufacturing process requires a high volume of quality
components that are procured from third party suppliers. Reliance on
suppliers, as well as industry supply conditions, generally involves several
risks, including the possibility of defective parts, a shortage of components,
increases in component costs and reduced control over delivery schedules, any
or all of which could have a material adverse effect on the Company's financial
results. The Company has several single supplier relationships, and the lack
of availability of timely and reliable supply of components from any of these
sources could have a material adverse effect on the Company's business.
Alternative sources of supply are not available for some of the Company's
single sourced components. Even when multiple suppliers are available, the
Company may establish a working relationship with a single source when the
Company believes it is advantageous due to performance, quality, support,
delivery, capacity or price considerations. While the Company has supply
agreements with certain suppliers, such agreements typically only specify
general terms and conditions, subject to release of purchase orders by the
Company and acceptance thereof by the component supplier. Where alternative
sources are available, qualification of the alternative suppliers and
establishment of reliable supplies of components from such sources may result
in delays and could have a material adverse effect on the Company's
manufacturing processes and results of operations. The Company occasionally
experiences delays in receiving certain components, which can cause delays in
the shipment of some products to customers, thereby increasing backlog.
Additionally, the Company has occasionally experienced certain defective
components, which can affect the reliability and reputation of its products.
There can be no assurance that the Company will be able to continue to obtain
supplies of reliable components in a timely or cost-effective manner. In
particular, the Company obtains its supply of microprocessors from Intel
Corporation, although certain comparable microprocessors are available from
other sources.
Operating Expenses
The Company's goal is to manage operating expenses, over time, relative to
gross margin. Over the last year, the Company has strengthened its management
team and increased staffing worldwide to meet the demands of its growth and to
expand its international presence, resulting in increased compensation-related
expenses. The Company also expended additional resources relating to its
investment in global information systems. These infrastructure expenditures
resulted in an increase in selling, general and administrative expenses of 53%
and 44% in the third quarter and the first nine months, respectively, of fiscal
1996 from the comparable periods of the prior year. However, selling, general
and administrative expenses as a percentage of consolidated net sales decreased
in both the third quarter and the first nine months of fiscal 1996 over the
same periods of the prior year. The Company increased headcount to support
increased product development activities and improved quality and
time-to-market of its products as well as to support the growth of its
business. Furthermore, the Company incurred additional development costs in
conjunction with the development of new notebook computer products. These
expenditures resulted in an increase in research, development and engineering
expenses of 53% and 49% in the third quarter and the first nine months,
respectively, of fiscal 1996 over the comparable periods of the prior year.
The Company believes that its ability to manage operating costs is an
important factor in its ability to remain price competitive. However, the
Company will continue to invest in information systems and infrastructure to
manage and support its growth. The Company is currently investing in a key
global information systems project which it expects to complete in fiscal 1999.
No assurance can be given that the Company's efforts to manage future operating
expenses will be successful.
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Financing and Other Income (Expense), net
Financing and other income (expense), net was $1.8 million for the third
quarter of fiscal 1996 compared with ($1.4) million for the third quarter of
fiscal 1995 and was $2.0 million for the first nine months of fiscal 1996
compared with ($43.6) million for the comparable period in the prior year. The
table below sets forth for the periods indicated the components of financing
and other income (expense), net (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- --------------------------
OCTOBER 29, OCTOBER 30, OCTOBER 29, OCTOBER 30,
1995 1994 1995 1994
----------- ----------- ----------- -----------
Financing and other income (expense), net:
Investment income (loss), net:
Short-term investments $ 6,558 $ 3,679 $ 17,708 $ (12,393)
Investment derivatives -- -- -- (23,948)
Interest expense (3,493) (3,450) (11,331) (8,008)
Foreign currency transactions (406) (605) (2,493) 1,999
Other (924) (1,042) (1,930) (1,270)
---------- ---------- ---------- ----------
$ 1,735 $ (1,418) $ 1,954 $ (43,620)
========== ========== ========== ==========
The short-term investment losses for the first nine months of fiscal 1995
were primarily due to recognized losses during the first half of fiscal 1995 of
$23.1 million on certain of the Company's short-term investments as a result of
interest rate increases in the United States, Canadian, Japanese and European
interest rate markets, partially offset by investment income of approximately
$10.7 million for the first nine months of fiscal 1995. The increase in
investment income in the first nine months of fiscal 1996 over the $10.7
million for the comparable period of the prior year was primarily due to higher
average investment balances and higher effective yields.
Realized and unrealized net losses on interest rate derivatives recognized
in the first nine months of fiscal 1995 were primarily a result of interest
rate increases in the United States, Canadian, Japanese and European interest
rate markets. The Company closed all remaining investment derivatives during
the second quarter of fiscal 1995. Consequently, no gains or losses associated
with investment derivatives have been recognized in fiscal 1996. The Company
intends to use derivative financial instruments only to manage its exposure to
fluctuations in foreign currency exchange rates and to manage market risk on
components of its debt and equity.
All of the Company's foreign exchange and interest rate derivative
instruments involve elements of market and credit risk in excess of the amounts
recognized in the financial statements. The counterparties to financial
instruments consist of a number of major financial institutions. In addition
to limiting the amount of agreements and contracts it enters into with any one
party, the Company regularly monitors the credit quality of the financial
institutions that are counterparties to these financial instruments. The
Company does not anticipate nonperformance by the counterparties.
Interest expense in the third quarter of fiscal 1996 was relatively flat in
comparison with the third quarter of fiscal 1995. Interest expense increased
in the first nine months of fiscal 1996 from the comparable period of the prior
year primarily due to higher borrowings and higher interest rates in fiscal
1996. Concurrently with the issuance of the 11% Senior Notes Due August 15,
2000 (the "Notes") in the third quarter of fiscal 1994, 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. However, in response to
increasing interest rates, in August 1994, the Company entered into offsetting
swap agreements to effectively change its interest rate exposure back to a
fixed-rate basis. The interest rate swap agreements mature on August 15, 1998,
the first available redemption date of the Notes. At the end of the third
quarter of fiscal 1996, the Company had outstanding receive fixed/pay floating
interest rate swaps with an aggregate notional amount of $100 million offset by
receive floating/pay fixed interest rate swaps with an aggregate notional
amount of $100 million. The weighted average interest rate on the Notes,
adjusted by the swaps, was 13.8% for the third quarter and the first nine
months of fiscal 1996 compared with 12.9% and 11.4% for the third quarter and
the first nine months of fiscal 1995, respectively.
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Income Tax
The Company's effective tax rate was 29% for the third quarter and the
first nine months of fiscal 1996 compared with 29% for the third quarter and
30% for the first nine months of fiscal 1995. The change in the effective tax
rate resulted from changes in the geographical distribution of income and
losses.
Fluctuations in Operating Results
The Company's operating results may fluctuate from period to period and
will depend on numerous factors, including customer demand and market
acceptance of the Company's products, new product introductions, product
obsolescence, component supply, component price fluctuations, varying product
mix, foreign currency exchange rates, foreign currency and interest rate
hedging and other factors. Net sales in a given quarter are primarily
dependent on customer orders received in that quarter, and operating
expenditures are primarily based on forecasts of customer demand. As a result,
if demand does not meet the Company's expectations in any given period, the
sales shortfall may result in an increased adverse effect on operating results
due to the Company's inability to adjust operating expenditures quickly enough
to compensate for the shortfall. The Company's business is sensitive to the
spending patterns of its customers, which in turn are subject to prevailing
economic conditions and other factors beyond the Company's control. Changes in
economic conditions or customer spending patterns for personal computer
products could have a material adverse effect on the Company's results of
operations.
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 financial statements of the Company's international sales
subsidiaries have generally been measured using the local currency as the
functional currency. An increase in the value of the United States dollar
increases costs incurred by the Company's international operations because many
of its 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 margins from
international operations. Effective January 30, 1995, most of the Company's
European sales are made from a U.S. dollar functional currency entity.
The purpose of the Company's hedging program is to reduce the Company's
exposure to the risk that the dollar-value equivalent of anticipated cash flows
will be adversely affected by changes in foreign currency exchange rates. The
Company attempts to reduce its exposure to currency fluctuations involving
anticipated, but not firmly committed, transactions and involving transactions
with firm foreign currency commitments through the use of purchased foreign
currency option contracts and forward contracts.
Realized and unrealized gains or losses and premiums on foreign currency
purchased option contracts that are designated and effective as hedges of
probable anticipated, but not firmly committed, foreign currency transactions
are deferred and recognized in income in the same period as the hedged
transaction. The risk of loss associated with purchased options is limited to
premium amounts paid for the option contracts, which could be significant.
Forward contracts designated as hedges of anticipated transactions are
accounted for on a mark-to-market basis and included in income as a component
of net sales or cost of sales, depending upon which transaction is hedged.
Transaction exposures representing firm foreign currency commitments are
generally hedged using foreign exchange forward contracts. Forward contracts
related to transaction exposures are accounted for on a mark-to-market basis
with realized and unrealized gains or losses included in financing and other
income (expense) as an offset to the underlying hedged transaction. The risk
of loss associated with forward contracts is limited to the exchange rate
differential from the time the contract is made until the time it is settled.
The Company enters into foreign currency purchased options and, to a lesser
extent, forward contracts to hedge a portion of its anticipated, but not firmly
committed, transactions including sales by international subsidiaries, which
includes international sales by a U.S. dollar functional currency entity and
intercompany shipments to certain international subsidiaries, and foreign
currency denominated purchases of certain components. Foreign currency
purchased options generally expire in twelve months or less and forward
contracts
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generally mature in three months or less. The principal hedge currencies are
the German mark, the British pound and the Japanese yen. At October 29, 1995,
the Company held purchased option contracts that were designated and effective
as hedges of anticipated sales by international subsidiaries with a total
notional amount of $826.2 million and a combined net realized and unrealized
loss of $11.4 million. During the third quarter of fiscal 1996, the Company
closed option contracts that were designated and effective as hedges of
anticipated foreign currency denominated purchases. At October 29, 1995, the
net realized loss relating to these contracts was $4.9 million. Forward
contracts with maturity dates of less than three months designated to hedge
foreign currency transaction exposures of $167.2 million were outstanding at
October 29, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities for the first nine
months of fiscal 1996 was $76.9 million and represented the Company's primary
source of cash during the nine-month period, along with $42.1 million from the
issuance of common stock under employee plans. Working capital totaled $945.9
million at October 29, 1995 compared with $719.0 million at January 29, 1995.
Days in accounts receivable at the end of the third quarter of fiscal 1996
increased to 49 days from 47 days at the end of fiscal 1995. Days in accounts
payable decreased slightly to 43 days at the end of the third quarter of fiscal
1996 from 44 days at the end of fiscal 1995. Inventory levels increased to 37
days of supply at the end of the third quarter of fiscal 1996 from 32 days at
the end of fiscal 1995. Maintaining a low inventory level is dependent upon
the Company's ability to achieve targeted revenue and product mix, to further
minimize complexities in its product line and to maximize commonality of parts.
There can be no assurance that the Company will be able to maintain low
inventory levels in future periods.
The Company used $66.5 million of cash during the first nine months of
fiscal 1996 to construct facilities and to acquire information systems and
personal computer office equipment. Capital expenditures for the fourth
quarter of fiscal 1996 are expected to be approximately $20 million, primarily
related to the construction of facilities, the acquisition and development of
an integrated management information system and the acquisition of equipment,
including computer equipment for internal use. The Company believes that its
cash and short-term investments and its cash flow from operating activities
will be adequate to fund its capital expenditures planned for the remainder of
fiscal 1996.
The Company has entered into a series of line of credit facilities,
each of which bears interest at a defined Base Rate or Eurocurrency Rate and
has a covenant based on quarterly maintenance of net worth. Maximum aggregate
amounts available under the new credit facilities are limited to $200 million
less the aggregate of outstanding letters of credit under these facilities.
During the commitment period, the Company is obligated to pay a fee on the
unused portion of the credit facilities. No borrowings or letters of credit
were outstanding under these credit facilities as of October 29, 1995, and the
maximum available totaled $200 million.
On November 30, 1995, several of the Company's subsidiaries entered
into a transaction pursuant to which Dell Receivables L.P. ("Dell
Receivables"), a newly-formed wholly-owned subsidiary of the Company, purchases
certain accounts receivable and related assets from other Company subsidiaries
and in turn transfers such accounts receivable and related assets to the Dell
Trade Receivables Master Trust (the "Master Trust"). The Master Trust will
issue certificates evidencing fractional undivided interests therein, which
certificates may be sold to investors. This arrangement will give Dell
Receivables the ability to raise up to $150 million through the sale of
certificates of interest in the Master Trust and replaces the Company's
receivables securitization arrangement that was scheduled to expire on June 22,
1996. At December 7, 1995, this facility was unused. Dell Receivables is
obligated to pay a commitment fee on the unused portion of the facility.
On October 9, 1995, the Company's Board of Directors declared a 2-for-1
stock split of the Company's common stock in the form of a 100% stock dividend
to stockholders of record as of October 20, 1995. The distribution of such
dividend occurred on October 27, 1995.
On November 29, 1995, the Company's Board of Directors declared a dividend
of one Preferred Share Purchase Right (a "Right") for each outstanding share of
the Company's common stock. The distribution of the Rights will be made on
December 13, 1995 to the stockholders of record on that date. Each Right
entitles the holder to purchase one one-thousandth of a share of a new series
of preferred stock at an exercise price of $225.
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The Rights will be exercisable only if a person or group acquires 15% or more
of the Company's common stock or announces a tender offer, the consummation of
which would result in such person or group owning 15% or more of the Company's
common stock. Once exercisable and under specified circumstances, each Right
(a) may be exercised to purchase one one-thousandth of a share of a new series
of preferred stock at an exercise price of $225, (b) may be exercised to
purchase a number of the Company's common shares having a market value of twice
the exercise price, (c) may be exercised to purchase common stock of any
acquiring company having a market value of twice the exercise price or (d) may
be exchanged for the Company's common stock on the basis of one common share
for each Right. The Rights expire on November 29, 2005 and may be redeemed by
the Company under certain circumstances at a price of $.001 per Right. Neither
the ownership nor the further acquisition of Company common stock by Michael S.
Dell, the Company's founder, Chairman and Chief Executive Officer and largest
stockholder, will cause the Rights to become exercisable or nonredeemable or
will trigger the other features of the Rights. The Rights are designed to
protect the Company's stockholders in the event of an unsolicited attempt to
acquire the Company.
On July 21, 1995, the Company's stockholders approved a proposed amendment
to the Company's Certificate of Incorporation to increase the number of shares
of common stock, par value $.01 per share, that the Company is authorized to
issue from 100 million to 300 million. The additional authorized shares can be
used for any proper purpose approved by the Company's Board of Directors and
will provide the Company with the flexibility it may need in the future to
raise capital, negotiate acquisitions, restructure debt, issue stock dividends,
consummate stock splits or for other corporate purposes.
On February 21, 1995, the Company offered to pay a cash premium of
$8.25 for each outstanding share of its Convertible Preferred Stock that was
converted to common stock. The offer of premium upon conversion was available
to holders of the Convertible Preferred Stock through the closing of the
special conversion period on March 22, 1995. The Company also offered to
register the resale of the shares of common stock issued upon conversion of the
Convertible Preferred Stock with the Securities and Exchange Commission for a
50-day period, which ended June 15, 1995. Holders of 1,190,000 shares of
Convertible Preferred Stock elected to convert and, as a result, received an
aggregate of approximately 10.0 million shares of common stock and $9.8 million
in cash during the first quarter of fiscal 1996. The $9.8 million conversion
premium and $0.5 million of expenses of the conversion offer were treated as an
additional dividend on the Convertible Preferred Stock for financial reporting
purposes.
During the first nine months of fiscal 1996, the Company granted
approximately 660,000 shares of restricted stock to employees pursuant to its
long-term incentive plan. Due to the granting of these additional shares, the
unearned compensation associated with restricted stock grants has increased
from $4.4 million at January 29, 1995 to $18.6 million at October 29, 1995.
Such unearned compensation is being amortized to expense over the vesting
period of the underlying restricted stock.
Repayment of the Company's $100 million in Notes, repayment of a loan
in the original amount of $14 million secured by one of its facilities in Round
Rock, Texas and payment of its operating lease commitments constitute the
Company's long-term commitments to use cash.
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.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as a defendant in approximately 30
repetitive stress injury lawsuits, most of which are in New York state courts
or United States District Courts for the New York City area. Several are in
state courts in New Jersey. One is in the Federal District Court for the
Eastern District of Pennsylvania, and one is in Federal District Court in
Kansas. Two cases have been dismissed; the remainder are at various stages of
the process leading to trial. 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 that have been filed, often naming Apple, Atex,
Compaq, IBM, 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. Ultimate
resolution of the litigation against the Company may depend on progress in
resolving this type of litigation overall. However, the Company does not
believe that the outcome of these matters will have a material adverse effect
on the Company's financial condition or results of operations.
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. In September 1995, the
Company received a letter from the Dallas Field Office of the Department of
Commerce closing out the investigation into the shipments to Russia and
Ireland. The Department of Commerce found no wrongdoing by the Company with
regard to these destinations. The Company is still awaiting a response from
the Department of Commerce regarding its voluntary self disclosure of certain
shipments to Iran in June 1992. 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
has fully responded to the subpoena and, in accordance with its policy to
comply fully with export laws and regulations, intends to cooperate with the
Office of Export Enforcement. The Company does not believe that this
investigation or its outcome will have a material adverse effect on the
Company's financial condition or results of operations.
The Company received a subpoena from the Federal Trade Commission (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. On November 2, 1995, the Company and the FTC announced that they
had entered into a consent agreement under which the Company will ensure that
any Company employees who are members of standards committees fully understand
and disclose patents that may be related to standards under consideration by
those committees. In agreeing to the consent decree, the Company did not admit
to any wrongdoing, nor did the FTC find that the Company had violated any law
or regulation. In addition, the FTC did not impose any fines or sanctions
against the Company. The consent decree is subject to public comment until
January 1996 before it becomes final.
In March 1995, the Company was named along with twelve other personal
computer or computer monitor manufacturers in a complaint filed by the District
Attorney for Merced County, California. The complaint alleges that each of the
defendants has engaged in false or misleading advertising with regard to the
size of computer monitor screens and seeks unspecified damages and injunctive
relief. In May 1995, several other district attorneys in other California
counties joined this lawsuit as co-plaintiffs. On September 27, 1995, a
settlement was reached and a Stipulated Judgment was entered by the court under
which the Company and the other defendants have agreed to new guidelines in
future monitor screen size advertising and to pay an aggregate amount of $1.5
million in retail value of computer equipment and $200,000 in aggregate cash
payments to the State of California. The Company's share of the settlement
costs has not had, and the cost of adopting and following the new advertising
guidelines will not have, a material adverse effect on the Company's financial
condition or results of operations.
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In May 1995, the Company was named, along with two other personal
computer manufacturers and one computer monitor vendor, in a class action
complaint filed in the California Superior Court for Marin County. The case
has been transferred to Orange County, California. A second class action
complaint, naming the Company and 47 other manufacturers or vendors of personal
computer monitors, was filed in Santa Clara County, California and was served
on the Company in August 1995. Two other similar class action complaints
naming the Company and others as defendants have been filed in Orange County,
California. A motion has been filed by all defendants in all of the cases to
consolidate all of the cases before a single judge in Santa Clara County,
California. All proceedings in all of the cases have been stayed pending
resolution of the motion to consolidate. The complaints allege that each of
the defendants has engaged in false or misleading advertising with regard to
the size of computer monitor screens. The plaintiffs seek restitution in the
form of refunds or product exchange, damages, punitive damages and attorneys'
fees. The Company plans to vigorously contest the allegations of the
complaints. This litigation is currently at a preliminary stage and no
discovery has occurred to date. As such, it is too early for the Company to
adequately evaluate the likelihood of the plaintiffs prevailing on their
claims. There can be no assurance that an adverse determination in this
litigation would not have a material adverse effect on the Company's financial
condition or results of operations.
In June 1995, the Company was served with a class action complaint
filed in State District Court in Travis County, Texas. The complaint alleges
that the Company has included "used parts" in its "new" computer systems and
has failed to adequately inform its customers and prospective customers of that
practice. According to the complaint, these facts constitute fraud, negligent
misrepresentation, breach of contract and breach of warranty. The plaintiffs
seek refund of the purchase price for computer systems purchased from the
Company, damages in an unspecified amount, injunctive relief, interest and
attorneys' fees. The Company plans to vigorously contest the allegations of
the complaint. This litigation is currently at a preliminary stage, and no
discovery has occurred to date. As such, it is too early for the Company to
adequately evaluate the likelihood of the plaintiffs prevailing on their
claims. There can be no assurance that an adverse determination in this
litigation would not have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 2. CHANGES IN SECURITIES
Adoption of Rights Plan. On November 29, 1995, the Company's Board of
Directors adopted a Preferred Share Purchase Rights Plan that is designed to
protect the Company's stockholders in the event of an unsolicited attempt to
acquire the Company. The terms of such plan, the Preferred Share Purchase
Rights that will be issued in connection with the implementation of such plan
and the new series of preferred stock that was created in connection therewith
are described in the Company's Current Report on Form 8-K, dated November 29,
1995 and filed with the Securities and Exchange Commission on November 30,
1995, which description is incorporated herein by reference.
Amendments to Bylaws. On November 29, 1995, the Board of Directors
approved certain amendments to the Company's Bylaws. Such amendments (a)
permit the Board of Directors to postpone a previously scheduled meeting of
stockholders by giving public notice of such postponement prior to the date
previously scheduled for such meeting, (b) permit the chairman of a meeting of
stockholders to fix and announce the date and time of the opening and closing
of the polls for each matter upon which the stockholders will vote at the
meeting, (c) permit the Board of Directors to designate the chairman of any
meeting of stockholders and (d) permit the chairman of a meeting of
stockholders to determine the rules of order and procedure to be followed in
the conduct of such meeting. The complete text of such amendments is filed as
Exhibit 3.2 to this Report.
In addition, the Board of Directors, on November 29, 1995, adopted Restated
Bylaws for the Company, which Restated Bylaws incorporate the amendments
described above, as well as other Bylaw amendments previously approved by the
Board since the original adoption of the Bylaws. The complete text of the
Restated Bylaws is filed as Exhibit 3.3 to this Report.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as a part of this Report:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
3.1 Certificate of Designations of Series A Junior Participating Preferred Stock, dated November
29, 1995 and filed December 4, 1995
3.2 Amendments to Bylaws, adopted November 29, 1995
3.3 Restated Bylaws, as adopted on November 29, 1995
4 Rights Agreement, dated as of November 29, 1995, between the Company and Chemical Bank, as
Rights Agent (incorporated by reference to Exhibit 4 to the Company's Current Report on Form
8-K, dated November 29, 1995 and filed with the Securities and Exchange Commission on
November 30, 1995, Commission File No. 0-17017)
10 Supplement to Schedule of Similar Agreements, listing additional agreements substantially
identical to the Committed Credit Line Agreement filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 1995
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
fiscal quarter to which this Report relates. On November 30, 1995, the Company
filed a Current Report on Form 8-K reporting under Item 5 the adoption by the
Board of Directors of the Preferred Share Purchase Rights Plan referred to in
Item 2 of this Report.
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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, 1995 /s/ Thomas J. Meredith
----------------------------------------
Thomas J. Meredith
Senior Vice President
(On behalf of the registrant and as
principal financial officer)
19
21
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
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3.1 Certificate of Designations of Series A Junior Participating Preferred Stock, dated November
29, 1995 and filed December 4, 1995
3.2 Amendments to Bylaws, adopted November 29, 1995
3.3 Restated Bylaws, as adopted on November 29, 1995
4 Rights Agreement, dated as of November 29, 1995, between the Company and Chemical Bank, as
Rights Agent (incorporated by reference to Exhibit 4 to the Company's Current Report on Form
8-K, dated November 29, 1995 and filed with the Securities and Exchange Commission on
November 30, 1995, Commission File No. 0-17017)
10 Supplement to Schedule of Similar Agreements, listing additional agreements substantially
identical to the Committed Credit Line Agreement filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 1995
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule