Joan:
From the DELL 10K:
"...The Company has utilized equity instrument contracts to facilitate its repurchase of common stock, but has not entered into any new contracts subsequent to October of 2000. At February 1, 2002, the Company held equity options that allow for the purchase of 25 million shares of common stock at an average price of $58 per share. At February 1, 2002, the Company also had outstanding put obligations covering 51 million shares with an average exercise price of $45 per share for a total of $2.3 billion (compared to a total of $5.4 billion at February 2, 2001). The equity instruments are exercisable only at the date of expiration and expire at various dates through the first quarter of fiscal 2004. However, these instruments contain termination triggers that allow the holder to force settlement beginning at an $8 share price. The outstanding put obligations at February 1, 2002 permitted net share settlement at the Company’s option and, therefore, did not result in a liability on the accompanying Consolidated Statement of Financial Position included in “Item 8 — Financial Statements and Supplementary Data.” The Company’s practice has been to physically settle in-the-money put contracts as they mature by repurchasing the shares subject to the contracts and plans to continue to utilize this settlement option."
At this rate of decline, it does not appear likely that DELL will exercise the call options on 25 million shares because of the $58 strike price.
However the 51 million shares of put obligations with an average strike of $45 for an obligation of 2.3 BILLION dollars coming due between now and 3/31/04 will obligate them to buy at $45. Not only that, but if DELL gets priced by the market where their Real FCF says they ought to trade, the provision that kicks in when the share price hits $8 could put a real hurting on the cash situation.
I love the part taken from their 10K that I highlighted with bolding. Let's see if I understand the situation here. DELL buys back shares only to cover stock option dilution, so they don't have inventory. They claim they don't have liability because they can settle the put obligations with stock, so I guess their intention is to dilute shares by issuing more, thereby diluting ownership interest by $2.3 BILLION dollars?
"...Maybe I am missing something in your analysis ..."
My analysis was only a limited analysis related to their reported Cash Flow. I have not looked at their NetNet value, or anything else. Once I saw that the insiders got 90% of the money, it made me mad and it made me sick. I didn't look further.
Timba |
