Monday, May 15, 2000  6:00 am Eastern Time

Company Press Release - Subject of Jeff Rense Interview on May 23, 2000

Dell Financial Practices Lead to "Watered Stock"

Unlike Microsoft, Cisco Systems and Intel, Dell is primarily an assembler of other products and is therefore limited in the margins it can earn in a progressively more competitive environment.  For Dell, total revenue increases are not nearly as important as increases in total gross margin dollars. What also makes Dell unique compared to these other companies is the extent to which Michael Dell is rewarding himself.

The following chart summarizes Dell's key financial results based upon reports filed with the Securities and Exchange Commission.  The stock price used to reflect the wage debt for the fiscal year 1999 ending January 31, 2000 is the price on May 12, 2000.  This was done to make the analysis current.  Although fiscal 1999 looks better in terms of wage debt outstanding not booked at year-end, because the stock price remained flat, the company's wage expense not charged to earnings actually accelerated as outlined in the text following the chart.

Even though Dell's gross margin dollars are increasing, this increase is being more than offset by the granting of excessive employee stock options that has placed investors in a mathematical vice.  With 320 million shares now owed to employees, this wage debt increases $320 million for every one dollar increase in Dell's stock price.  A mere $5 increase would erase there entire reported net income for the most recent year.  More significant, however, is that Dell now has 3 billion shares outstanding, including the employee stock options.  The entire gross margin for the most current year is therefore equivalent to a $2 change in the stock price. Dell has clearly become a "watered stock."

What few investors realize is that, based upon a review of Dell's SEC filings for the fiscal year 1999 ending on January 28, 2000, the company took a tax deduction for wages on its tax return for options exercised and retired in excess of $3 billion, not a dime of which is charged to the publicly disclosed earnings we see.  Earnings are therefore a mirage as Dell has effectively removed its biggest cost of doing business from the earnings statement via a legal accounting loophole.

This wage expense deduction has also allowed the company to eliminate its federal income tax liability on current product sales, conserving more than $1 billion in cash in the most recent year.  This is because this wage deduction for stock options exercised and retired now exceeds the taxable income from product sales.  Since employees are taxed on options exercised as normal wage income, even if the stock is not sold, the IRS correspondingly allows the company to take a tax deduction.  Most technology companies do not have adequate profits to fully utilize this deduction yet Dell, with its large profits, can utilize most of the deduction.

Completely independent of the options cashed in and retired is a remaining wage debt in excess of $12 billion based upon the market price of $49 on May 12, 2000.  This is computed as the market price of $49 less the average exercise price of $11.40 times the 320 million remaining options owed outstanding.  Investors are in a mathematical vice because this liability increases $320 million for every $1 increase in the stock price.

For the quarter just ended on 4/30/2000 Dell did post impressive sales gains yet beneath the surface are other significant issues that most  investors cannot fully see.  Again, what is critical for Dell are gross margin dollars, not total revenues.

The first additional area of concern is that the $125 million of investment gains taken represents 20 percent of the entire operating income. On Sunday the NY Times did a feature titled "Levitating Earnings, An Act or a Fact" and highlighted companies that are meeting expectations by selling investments.  Strangely, Dell was not cited in the article.

Another little understood unique risk to Dell not seen at most other high technology firms is that the company is speculating on its own stock in the options market, betting both that it won't go above a certain price and also betting that it won't fall below a certain price.  These are two separate speculations. The company's assumption is that the stock will trade within a certain range and that they will be able to pocket cash from premiums paid by these investors when the options expire worthless.

The company justifies this activity by saying it is a good way to generate cash to contribute to financing the needed stock buybacks to reduce dilution from the effect of the employee stock option program.  If losses are incurred the company will cover such losses by simply issuing more shares and by doing so not be required to reflect a liability on the balance sheet nor a cost to the income statement for such losses.

Even more unusual is that while the company is aggressively buying back stock, in part financed from taking high risk speculations on its own stock in the options market, the founder, Michael Dell, is aggressively selling stock according to a recent Barron's article.  Mr. Dell has sold more than $800 million in stock during the 6 months ended March 31, 2000 while the company has repurchased more than $500 million in the 3 months ending April 30th.

Mr. Dell also received a significant grant of new options during the same year. An obvious question for him might be, aren't your massive stock holdings incentive enough to perform well?  As Newsweek noted in a November 1999 story titled "Clean Up Time, Is any useful corporate purpose served by heaping options on top of already massive stock holdings-what Wall Street calls piling pig on pork?"
 
The Dell Corporation is also issuing significant amounts of restricted stock for various purposes, causing further dilution of existing shares, as noted in its SEC filing available at www.edgar.gov.

Another important trend is that the company has doubled the amount of sales for which it is providing financing, $1.8 billion for the most recent year ended.  This implies new risks, especially given Dell's focus on high end Windows NT based web server products.  Dell has been slow to offer Linux based systems which now enjoy broad acceptance in this key market and offer significant cost savings advantages to customers.

According to Yahoo, the largest holders of Dell stock are AXA Financial Inc.which owns 126 million shares valued at more than $6.5 billion followed by Barclays Bank Plc, Janus Capital Corporation, Fidelity Investments, State Street, Vanguard, Taunus Corporation and Goldman Sachs.

Although Dell had a bright beginning, it has clearly compromised its financial future due to the use of these financial practices, resulting in a "watered stock."  Parish & Company would strongly support any efforts by the SEC to prohibit companies like Dell from conducting stock buybacks while they are simultaneously engaging on speculations on there own stock in the options markets.
 
Bill Parish, President of Parish & Company, has been quoted extensively in a variety of major news publications, as well as The Tech Review, a Canadian investment journal, Bild, the largest paper in Germany, The Fleet Street Letter, a prestigious investment publication, The Spotlight, a conservative newspaper and free market advocate and The Independent, a major British newspaper. He has been interviewed by the New York Times, Infoworld, ZD Net, Wall Street Journal, Newsweek and USA Today in addition to appearing on ABC news and various radio stations including KUIK in Portland,  KIRO in Seattle and Aspen Public Radio in Colorado.

Mr. Parish is a Registered Investment Advisor and former CPA providing fee based investment management services in addition to assisting companies structure their 401k plans to meet their fiduciary obligations and provide top quality well diversified investment choices at the lowest cost. Please consider hiring Bill to be a permanent member of your 401K committee and thereby utilize the services of a top investment professional in order to clearly communicate your commitment to managing your employees’ 401K plan or what can now be called there "Mutual Savings Bank."