Instructions

You should begin working on the Stand-Alone Project early in the course. Each lesson provides a benchmark for completing the Stand-Alone Project in a timely manner while working through the course. You will find this information in the ?Stand-Alone Project Benchmark? section of each lesson.

Project Overview

This financial statement analysis requires you to make a specific decision about Apple Computer, Inc. in January 2003. You should base your decision on the information available through December 2002, which can be found in Supplement I and Supplement II, and Appendix A of your text. Use Dell?s and Gateway?s financial data to benchmark Apple?s performance in this case analysis.

Situation: You are a senior loan officer at a multinational bank. Apple Computer?s chief financial officer, authorized by the company?s Board of Directors, has applied for a ten-year note in the amount equal to one-fourth (25%) of existing shareholders? equity as of December 31, 2002. The company seeks financing for long-term asset expansion. Terms call for interest at the prime rate plus one percent payable annually at December 31, with principal repayment when the note comes due in ten years (January 2013).

Decision: Your task is to make a recommendation to approve or reject Apple?s application to the bank?s loan committee. Your recommendation should be based on a thorough examination of Apple?s financial statements, their components (e.g., cash flow analysis), related disclosures, performance relative to the competition, state of the economy, and industry conditions.

Decision Report Format: Your recommendation should include a comprehensive analysis of Apple Computer, its competitors (Dell and Gateway), and the industry. The first page of your paper should be a one-page ?executive summary? addressed to the loan committee containing your recommendation and its justification. The remainder of the paper should contain the analysis that led to your conclusion. There is no page limit on the paper?s appendices. The appendices should contain all worksheets, charts, tables, and so forth that support the positions and recommendations in your paper.

Your Stand-Alone Project responses should be both grammatically and mechanically correct and formatted in the same fashion as the project itself. If there is a Part A, your response should identify a Part A, etc. In addition, you must appropriately cite all resources used in your response and document them in a bibliography using APA style. (280 points) (A 10-page, double-spaced, narrative response plus appendices are required.)

Project Guidelines

This case focuses on your decision-making process. Either conclusion is valid as long as your recommendation is consistent with your analysis of the data. Use the following criteria as a guide in framing your responses.

This case analysis, like all cases, contains abstractions of reality and simplified assumptions. Use the facts of the case as given in conducting your analysis. Resist the temptation to dispute the facts or assumptions. Also, refrain from modifying them to suit your interpretation of reality. (For instance, do not state that the note?s structure or interest rate is unrealistic and then proceed to modify them.)

In Lessons 3 through 6, you will analyze specific financial statement components (e.g., short-term liquidity). You will then apply your analysis to determine whether Apple has sufficient current assets to meet maturing obligations and base your conclusions on your interpretation of the data. Remember, analysis requires attaching meaning to the information. In other words, it is far more than reciting trends in ratios over time.

The following project parts facilitate your paper?s composition, as discussed in the ?Decision Report Format? above. Your Stand-Alone Project paper should address the following issues and should do so in a seamless, integrated fashion rather than presenting a series of independent responses to the issues raised and questions asked in the lesson benchmarks. (Remember that you will not be able to begin this project until you have completed Lesson 1.)

Part A	Begin your financial report on Apple Computer by analyzing Apple, Dell, and Gateway. (28 points)
	1.	Determine the requested loan amount (rounded to the nearest million) and its interest rate.
	2.	Make a preliminary assessment of the financial condition and performance of Apple, Dell, and Gateway. Begin by comparing the common sized data of the latter two (2) companies? income statements and balance sheets from 1999-2002 to that of Apple?s financial statements you created in Lesson 1.
	3.	Analyze the revenue growth of each of the three (3) firms, their net income as a percentage of sales, current assets as a percentage of total assets, and liabilities as a percentage of total assets from 1998 through 2002.
Part B	Examine the global economy as it impacts the computer industry. (30 points)
	1.	Discuss the impacts of global, economic and industry conditions on the personal computer industry through 2002.
	2.	Classify the industry as either an emerging, growing, mature, or declining segment of the economy.
	3.	Compare and contrast Apple?s products and markets with those of Dell and Gateway.
	4.	Determine if each firm files consolidated financial statements and discuss the analytical implication associated with the companies? fiscal years. Identify the type of audit report each company received in its 2002 Form 10-K filing and discuss the implications of that report on the credibility of the firms? financial disclosures.
	5.	Compare and contrast inventory costing, methods of depreciation, and revenue recognition policies for Apple, Dell, and Gateway. Identify which of those three (3) accounting policies (inventory costing, depreciation methods, or revenue recognition) would be more important than the other two in influencing your loan recommendation.
Part C	Look at the financial stability of all three (3) companies by analyzing their liquidity rates. (54 points)
	1.	Add the short-term liquidity ratios for Dell and Gateway to Apple?s short-term liquidity ratio charts that you created in Lesson 3. Use the 1999-2002 ratios contained in Supplement II for Dell and Gateway and their 1994-1998 ratios presented in Appendix A (page 346 of your textbook) to accomplish this task.
	2.	Analyze Apple?s short-term liquidity. Be sure to discuss each of the seventeen (17) liquidity measures.
	3.	Compare Apple?s short-term liquidity measures with those of Dell and Gateway. In doing so, you should determine if the data indicate that Apple has historically been able to meet its maturing obligations, and then project whether it will be able to do so in the near future.
	4.	Discuss whether technical adjustments for LIFO reserves or LIFO liquidation are necessary. (Ignore other technical adjustments, such as substituting purchases for cost of goods sold in computing accounts payable turnover.)
Part D	In addition to liquidity rate, cash flow is an important indicator of a company?s financial stability. For that reason, analyze the cash flow of all three (3) companies. (37 points)
	1.	Add the cash flow ratios for Dell and Gateway to Apple?s cash flow ratio charts that you created in Lesson 4. Use the 1999-2002 ratios contained in Supplement II for Dell and Gateway and their 1994-1998 ratios presented in Appendix A (page in your text) to accomplish this task.
	2.	Analyze Apple?s cash flow. In doing so, you should determine whether the data indicate that Apple has historically been able to sufficiently and efficiently generate cash, and then project whether it will be able to do so in the near future, given its life cycle stage.
	3.	Compare Apple?s cash flows with those of Dell and Gateway.
Part E	Analyze the assets and operating performance of each company. (35 points)
	1.	Add the asset utilization ratios for Dell and Gateway to Apple?s asset utilization ratio charts that you created in Lesson 5. Use the 1999-2002 ratios contained in Supplement II for Dell and Gateway and their 1994-1998 ratios presented in Appendix A (page 346 in your text) to accomplish this task.
	2.	Analyze Apple?s operating performance and asset utilization. In doing so, you should determine if the data indicate that Apple has historically generated quality earnings and produced adequate investment returns, and then project whether it will be able to do so in the near future.
	3.	Compare Apple?s operating performance and asset utilization with those of Dell and Gateway.
	4.	Discuss whether technical adjustments should be made to returns on assets and equity. (Do not make the numerical adjustments if you think they are necessary.)
Part F	Combine some of your prior research and begin thinking seriously about whether Apple Computers should get the loan. (66 points)
	1.	Add the capital structure ratios for Dell and Gateway to Apple?s capital structure ratio charts that you created in Lesson 6. Use the 1999-2002 ratios contained in Supplement II for Dell and Gateway and their 1994-1998 ratios presented in Appendix A (page 346 in your text) to accomplish this task.
	2.	Analyze Apple?s capital structure. In doing so, you should determine if the data indicate that Apple has historically achieved an acceptable balance between debt and equity financing, and then project whether it will be able to do so in the near future.
	3.	Compare Apple?s capital structure with those of Dell and Gateway.
	4.	Compute and compile Apple?s January 1, 2003 pro forma balance sheet assuming the loan is made on that date.
	5.	Calculate optimistic, likely, and pessimistic 2003 pro forma income statements for Apple. Assume the loan took place on January 1, 2003; income statement line items increase by 10% (optimistic), 5% (likely), and 1% (pessimistic) from their 2002 amounts; there are no unusual, nonrecurring items, or irregular items that occur in 2003; and the effective income tax rate is 25%.
	6.	Compute Apple?s 2003 earnings coverage ratio (times interest earned ratio) under the optimistic, likely, and pessimistic income scenarios. Comment on Apple?s ability to cover interest incurred from the January 2003 loan. (Ignore interest expense on other loans in making the calculations.)
	7.	Regardless of your pro forma income statements, forecast a $.25 EPS range for Apple in 2003 (e.g., earnings will range from $.35 to $.60 per share). Justify your estimated range.
	8.	Based on your EPS forecast, project Apple?s 2003 price to earnings ratio with a range of five (e.g., the P/E ratio will fall between 15:1 and 20:1). Justify your estimated range.
	9.	Rank order Apple, Dell, and Gateway from highest to lowest in terms of EPS and price to earnings forecasts for 2003.
Part G	Write an Executive Summary explaining your position on Apple?s loan in light of the analysis you have done throughout the course. (30 points)
	1.	Discuss the major points concerning the computer industry as a whole that the bank would have to consider in making this loan.
	2.	Discuss four (4) factors disfavoring the granting of the loan.
	3.	Discuss four (4) factors favoring the granting of the loan.
	4.	Write a conclusion that states your loan recommendation and includes your rational for the recommendation.

Apple Computer, Inc. Income Statement (in millions of dollars) Net sales Cost of sales Gross margin Operating expenses: Research and development Selling, general and administration Executive bonus Restructuring costs In-process research and development Total operating expenses Operating income Other income and (expenses) Income (loss) before taxes Provision (benefit) for taxes Net income (loss) $ Basic EPS Diluted EPS $ $ $ 2002 5,742 4,139 1,603 446 1,111 (2) 30 1 1,586 17 70 87 22 65 $ 0.18 0.18 2001 $5,363 $ 4,128 1,235 2000 7,983 5,817 2,166 430 1,138 11 1,579 (344) 304 (40) (15) (25) $ 380 1,166 90 8 1,644 522 570 1,092 306 786 ($0.07) $ ($0.07) $ 2.42 2.18 Table A: Apple Income Statement Apple Computer, Inc. Balance Sheet (in millions of dollars) Assets Current Assets Cash and equivalents Short-term investments Accounts receivable, net Inventories Deferred tax assets Other current assets Total current assets Property, plant & equipment, net Non-current investments Other assets Total assets 2002 $ $ 2,252 $ 2,085 565 45 166 275 5,388 621 39 250 6,298 2001 2,310 $ 2,026 466 11 169 161 5,143 564 128 186 $6,021 $ 2000 1,191 2,836 953 33 162 252 5,427 313 786 277 6,803 Liabilities Current Liabilities Notes payable Accounts payable Accrued expenses Total current liabilities Long-term debt Deferred tax liabilities Total liabilities $ Shareholders' Equity Preferred stock Common stock Retained earnings Other equity Total shareholders' equity Total liabilities and S/E $ 911 747 1,658 316 229 2,203 1,826 2,325 (56) 4,095 6,298 $ $ 801 717 1,518 317 266 2,101 1,157 776 1,933 300 463 2,696 0 1,693 2,260 -33 3,920 $6,021 $ 76 1,502 2,285 244 4,107 6,803 Table B: Apple Balance Sheet Apple Computer, Inc. Statements of Cash Flows (in millions of dollars) Operating Activities Net income (loss) Depreciation and amortization expense Deferred income taxes IPRD and gains from equity sales Change in accounts receivable Change in inventory Change in accounts payable Restructuring costs Other Cash generated by operating act. Investing Activities Purchase of short-term investments Proceeds from sale of S-T investments Proceeds from sale of P,P&E Purchase of P,P&E Acquisition of technology Proceeds from sale of equity invest. $ $ $ 2002 2001 2000 65 118 (34) 42 (99) (34) 110 (79) 89 ($25) $ 102 (36) (88) 487 22 (356) 786 84 163 (364) (272) (13) 345 (27) 124 826 (4,144) 4,100 (174) 25 79 $185 $ ($4,268) $ 5,089 ### (232) 340 (4,267) 3,331 11 (107) 372 Other Cash used for investing activities Financing Activities Notes payable to bank Long-term borrowings Proceeds from issuance of pref. stock Increase in common stock, net Dividends Cash generated by financing act. $ $ (59) (252) (37) $892 $ (270) (930) $ 105 105 42 $42 $ ### ### ### (31.00) ### (31) Total cash generated (used) $ (58) $1,119 $ (135) Cash and cash equiv., beginning of year Cash and cash equivalents, end of year $ $ 2,310 2,252 $1,191 $ $2,310 $ 1,326 1,191 Table C: Apple Statement of Cash Flows $ 1999 6,134 $ 4,438 1,696 314 996 $ $ $ $ $ 27 1,337 359 317 676 75 601 $ 1998 5,941 4,462 1,479 303 908 7 1,218 261 68 329 20 309 2.10 1.81 $2.34 $2.10 1999 1998 1,326 $ 1,900 681 20 143 215 4,285 318 339 219 5,161 $ 1,481 819 955 78 365 3,698 348 243 4,289 $ $ $ $ $ $ 812 737 1,549 300 208 2,057 $ 719 801 1,520 954 173 2,647 150 1,349 1,499 106 3,104 5,161 $ 150 633 898 (39) 1,642 4,289 1999 1998 601 $ 85 (35) (230) 274 58 93 2 (50) 798 $ 309 111 1 7 72 359 34 (107) (11) 775 (4,236) $ 3,155 23 (47) (2,313) 1,723 89 (46) (10) 24 245 ows $ (104) (964) $ (10) (543) (25) 3 $ $ 11.00 11 $ $ (155) $ 251 $ $ 1,481 $ 1,326 $ 1,230 1,481 41 19 Dell Income Statements (in millions of dollars) Sales revenues Cost of goods sold Gross profit Selling, general and administrative expenses Research and development expense Special charges Total operating expenses Operating income Other gains and losses Pretax income Tax expense Income before extraordinary items Extraordinary items or accounting change Net income $ 2002 31,168 25,661 5,507 2,784 452 482 3,718 1,789 (58) 1,731 485 1,246 1,246 Basic EPS Diluted EPS $ $ 0.48 0.46 $ 2001 $31,888 $ 25,445 6,443 3,193 482 105 3,780 2,663 531 3,194 958 2,236 59 $2,177 $ 2000 25,265 $ 20,047 5,218 2,387 374 194 2,955 2,263 188 2,451 785 1,666 1,666 $ 1999 18,243 $ 14,137 4,106 1,788 272 2,060 2,046 38 2,084 624 1,460 1,460 $ 1998 12,327 9,605 2,722 1,202 204 $0.84 $ $0.79 $ 0.60 $ 0.60 $ 0.58 $ 0.53 $ 1.44 1.28 1,406 1,316 52 1,368 424 944 ### 944 Table 1: Dell Income Statements Dell Balance Sheets (in millions of dollars) Cash Short-term Investments Accounts receivable Inventory Other current assets Total current assets Property, plant and equipment Investments Other assets Total assets $ Accounts Payable Accrued Liabilities Total current liabilities Long-term debt Warranty payable Other liabilities Total liabilities Preferred stock Common stock Retained earnings Other comprehensive income Other equity adjustments Total shareholders' equity Total liabilities and shareholders equity $ $ $ 2002 3,641 273 2,269 278 1,416 7,877 826 4,373 459 13,535 2001 $4,910 $ 528 2,895 400 758 9,491 996 2,418 530 $13,435 $ 2000 3,809 $ 323 2,608 391 550 7,681 765 2,721 304 11,471 $ 1999 520 $ 2,661 2,094 273 791 6,339 523 15 6,877 $ 1998 320 1,524 1,486 233 349 3,912 342 5,075 2,444 7,519 520 802 8,841 $4,286 $ 2,257 6,543 509 ### 761 7,813 4,795 839 62 (74) 5,622 $13,435 $ 3,538 $ 1,654 5,192 508 463 6,163 ### 3,583 1,260 533 (68) 5,308 11,471 $ 2,397 $ 1,298 3,695 512 ### 349 4,556 1,781 606 (66) 2,321 6,877 $ 1,643 1,054 2,697 17 225 36 2,975 ### 747 607 2000 1999 1998 1,460 $ 103 444 (9) 20 367 51 2,436 $ 944 67 5,605 1,364 (26) (2,249) 4,694 13,535 14 4,268 (61) 1,293 4,268 Table 2: Dell Balance Sheets Dell Computer, Inc. Statement of Cash Flows (in millions of dollars) 2002 Operating: Net income (loss) Depreciation and amortization expense Tax benefits of employee stock plans Special charges Gain on sale of investments Other Changes in operating working capital Non-current assets and liabilities Cash generated by operating activities Investing: Securities purchases Securities sales Capital expenditures Net cash used for investing activities Financing: Purchase of common stock Issuance of debt Repurchase of notes payable $ 2001 1,246 239 487 742 17 178 826 62 3,797 $2,177 $ 240 929 105 (307) 109 671 271 $4,195 $ 1,666 $ 156 1,040 194 (80) 56 812 82 3,926 $ $ (5,382) 3,425 (303) (2,260) ($2,606) $ 2,331 (482) ($757) $ (3,101) $ 2,319 (401) (1,183) $ (1,938) $ (12,305) 1,304 12,017 (296) (187) (930) $ (475) $ (3,000) $ (2,700) $ - (1,061) $ 20 ### (1,518) $ 494 - $ $ 24 529 28 1,592 (1,023) Issuance of common stock Issuance of preferred stock Sale of equity options Preferred stock dividends Other Net cash generated by financing activities 295 Foreign exchange effect on cash 3 (2,702) $ (9) (2,305) $ 289 57 (695) $ (104) $ 404 (32) 35 212 ### ### ### (812) $ 88 38 (1) (898) (10) (14) Total cash generated (used) $ (1,269) $1,101 $ 2,083 $ 684 $ 205 Cash and cash equiv., beginning of year Cash and cash equivalents, end of year $ $ 4,910 3,641 $3,809 $ $4,910 $ 1,726 $ 3,809 $ 1,042 $ 1,726 $ 115 320 Table 3: Dell Statement of Cash Flows Dell Income Statements Vertical Common Size Sales revenues Cost of goods sold Gross profit Selling, general and administrative expenses Research and development expense Special charges Total operating expenses Operating income Other gains and losses Pretax income Tax expense Income before extraordinary items Extraordinary items or accounting change Net income 2002 100.0% 82.3% 17.7% 8.9% 1.5% 1.5% 11.9% 5.7% -0.2% 5.6% 1.6% 4.0% 0.0% 4.0% 2001 100.0% 79.8% 20.2% 10.0% 1.5% 0.3% 11.9% 8.4% 1.7% 10.0% 3.0% 7.0% 0.2% 6.8% 2000 100.0% 79.3% 20.7% 9.4% 1.5% 0.8% 11.7% 9.0% 0.7% 9.7% 3.1% 6.6% 0.0% 6.6% 1999 100.0% 77.5% 22.5% 9.8% 1.5% 0.0% 11.3% 11.2% 0.2% 11.4% 3.4% 8.0% 0.0% 8.0% 1998 100.0% 77.9% 22.1% 9.8% 1.7% 0.0% 11.4% 10.7% 0.4% 11.1% 3.4% 7.7% 0.0% 7.7% Table 4: Dell Vertical Common Size Income Statements Dell Income Statements Horizontal Common Size--Rolling Forward Sales revenues Cost of goods sold Gross profit Selling, general and administrative expenses Research and development expense Special charges Total operating expenses Operating income Other gains and losses Pretax income Tax expense Income before extraordinary items Extraordinary items or accounting change Net income 2002 97.7% 100.8% 85.5% 87.2% 93.8% 2001 126.2% 126.9% 123.5% 133.8% 128.9% 2000 138.5% 141.8% 127.1% 133.5% 137.5% 1999 148.0% 147.2% 150.8% 148.8% 133.3% 1998 100.0% 100.0% 100.0% 100.0% 100.0% 98.4% 67.2% -10.9% 54.2% 50.6% 55.7% 127.9% 117.7% 282.4% 130.3% 122.0% 134.2% 143.4% 110.6% 494.7% 117.6% 125.8% 114.1% 146.5% 155.5% 73.1% 152.3% 147.2% 154.7% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 57.2% 130.7% 114.1% 154.7% 100.0% Table 5: Dell Horizontal Common Size Income Statements Dell Balance Sheets Vertical Common Size Cash Short-term Investments Accounts receivable Inventory Other current assets Total current assets Property, plant and equipment Investments Other assets Total assets 2002 26.9% 2.0% 16.8% 2.1% 10.5% 58.2% 6.1% 32.3% 3.4% 100.0% 2001 36.5% 3.9% 21.5% 3.0% 5.6% 70.6% 7.4% 18.0% 3.9% 100.0% 2000 33.2% 2.8% 22.7% 3.4% 4.8% 67.0% 6.7% 23.7% 2.7% 100.0% 1999 7.6% 38.7% 30.4% 4.0% 11.5% 92.2% 7.6% 0.0% 0.2% 100.0% 1998 7.5% 35.7% 34.8% 5.5% 8.2% 91.7% 8.0% 0.0% 0.3% 100.0% Accounts Payable Accrued Liabilities Total current liabilities Long-term debt Warranty payable Other liabilities Total liabilities Preferred stock Common stock Retained earnings Other comprehensive income Other equity adjustments Total shareholders' equity Total liabilities and shareholders equity 37.5% 18.1% 55.6% 3.8% 0.0% 5.9% 65.3% 0.0% 41.4% 10.1% -0.2% -16.6% 34.7% 100.0% 31.9% 16.8% 48.7% 3.8% 0.0% 5.7% 58.2% 0.0% 35.7% 6.2% 0.5% -0.6% 41.8% 100.0% 30.8% 14.4% 45.3% 4.4% 0.0% 4.0% 53.7% 0.0% 31.2% 11.0% 4.6% -0.6% 46.3% 100.0% 34.9% 18.9% 53.7% 7.4% 0.0% 5.1% 66.2% 0.0% 25.9% 8.8% 0.0% -1.0% 33.8% 100.0% 38.5% 24.7% 63.2% 0.4% 5.3% 0.8% 69.7% 0.0% 17.5% 14.2% 0.0% -1.4% 30.3% 100.0% Table 6: Dell Vertical Common Size Balance Sheets Dell Balance Sheets Horizontal Common Size--Rolling Forward Cash Short-term Investments Accounts receivable Inventory Other current assets Total current assets Property, plant and equipment Investments Other assets Total assets Accounts Payable Accrued Liabilities Total current liabilities Long-term debt Warranty payable Other liabilities Total liabilities Preferred stock Common stock Retained earnings Other comprehensive income Other equity adjustments Total shareholders' equity Total liabilities and shareholders equity 2002 74.2% 51.7% 78.4% 69.5% 186.8% 83.0% 82.9% 2001 128.9% 163.5% 111.0% 102.3% 137.8% 123.6% 130.2% 2000 732.5% 12.1% 124.5% 143.2% 69.5% 121.2% 146.3% 1999 162.5% 174.6% 140.9% 117.2% 226.6% 162.0% 152.9% 1998 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 86.6% 100.7% 174.3% 117.1% 2026.7% 166.8% 107.1% 161.1% 100.0% 100.0% 118.4% 108.3% 114.9% 102.2% 121.1% 136.5% 126.0% 100.2% 147.6% 127.4% 140.5% 99.2% 145.9% 123.1% 137.0% 3011.8% 100.0% 100.0% 100.0% 100.0% 105.4% 113.2% 164.4% 126.8% 132.7% 135.3% 969.4% 153.1% 100.0% 100.0% 116.9% 162.6% 133.8% 66.6% 201.2% 207.9% 238.4% 99.8% 100.0% 100.0% 3039.2% 83.5% 100.7% 108.8% 105.9% 117.1% 103.0% 228.7% 166.8% 108.2% 179.5% 161.1% 100.0% 100.0% 100.0% Table 7: Dell Horizontal Common Size Balance Sheets Dell Liquidity Ratios Working capital Working capital ratio Quick ratio Inventory turnover Days in inventory Accounts receivable turnover Days in accounts receivable Inventory conversion cycle Accounts payable turnover Days in accounts payable Net cash conversion cycle Cash + short-term investments A/R*days in accounts receivable Inventory*days in inventory Product dollar days Current assets-other current assets Liquidity index $ 2002 1,653.00 $ 1.24 1.03 75.70 4.82 12.07 30.24 35.06 5.48 66.58 -31.52 4,676.00 78,072.20 1,634.63 84,382.82 7,597.00 11.11 2001 2,718.50 $ 1.46 1.28 64.34 5.67 11.59 31.49 37.17 6.50 56.12 -18.95 4,785.00 86,657.19 2,243.80 93,685.99 7,932.00 11.81 2000 2,566.50 $ 1.58 1.35 60.38 6.04 10.75 33.96 40.01 6.76 54.03 -14.02 3,656.50 79,850.72 2,006.87 85,514.09 6,339.50 13.49 1999 1,929.50 1.60 1.35 55.88 6.53 10.19 35.81 42.35 7.00 52.15 -9.81 2,512.50 64,106.59 1,652.63 68,271.72 4,555.50 14.99 Table 8: Dell Liquidity Ratios Dell Cash Flow Ratios 2002 12.53 0.08 2001 8.70 0.11 2000 9.79 0.10 1999 8.23 0.12 3,494.00 0.06 1.27 0.28 0.12 2.12 Cash flow adequacy Reinvestment ratio Long-term debt repayment Dividend payout Free cash flow Depreciation impact ratio Recapitalization index Cash flow return on assets Cash flow return on sales Operations index 3,713.00 0.06 2.01 0.34 0.13 1.58 3,525.00 0.04 2.57 0.43 0.16 1.73 2,140.00 0.04 2.87 0.44 0.13 1.19 2000 6.594% 2.75 2.41 18.16% 43.68% 1999 8.003% 3.27 3.08 26.20% 80.80% 2000 0.58 1.41 0.10 0.24 0.34 0.14 0.81 2.75 20.73 24.77 1999 0.68 2.08 0.10 0.32 0.42 0.15 1.21 3.27 37.88 42.93 Table 9: Dell Cash Flow Ratios Dell Asset Utilization Ratios 2002 3.998% 2.31 2.61 9.24% 24.16% Profit margin Asset turnover Financial structure leverage Return on assets Return on equity 2001 6.827% 2.56 2.28 17.48% 39.84% Table 10: Dell Asset Utilization Ratios Dell Capital Structure Ratios Debt to capital Debt to equity Long-term debt to capital Long-term debt to equity Working capital/total assets-Z1 Retained earnings/totalassets-Z2 EBIT/total assets-Z3 Sales/total assets-Z4 Market to book-Z5 Z-Score 2002 0.62 1.61 0.10 0.25 0.15 0.11 0.44 2.31 5.06 8.07 2001 0.56 1.28 0.09 0.21 0.26 0.12 0.71 2.56 8.61 12.26 Table 11: Dell Capital Structure Ratios Gateway Income Statements (in millions of dollars) Sales revenue Cost of goods sold Gross profit S,G & A expenses Operating income Other, net Income before taxes Change in accounting principle Provision for taxes Net income $ $ 2002 4,171 3,605 566 1,077 (511) 35 476 (167) (309) 2001 $6,080 $ 5,241 839 2,022 (1,184) 106 (1,290) (24) (276) ($1,034) $ 2000 9,601 $ 7,542 2,059 1,548 511 (103) 408 (12) 155 241 $ 1999 8,965 $ 7,128 1,837 1,241 596 67 663 235 428 $ 1998 7,467 5,921 1,546 1,052 494 46 540 2001 $731 $ 435 220 120 617 2,123 608 36 220 $2,987 $ 2000 484 $ 130 545 315 793 2,267 898 166 822 4,153 $ 1999 1,128 $ 209 646 192 522 2,697 746 52 460 3,955 $ 1998 1,169 158 558 167 176 2,228 530 65 67 2,890 $ 341 469 336 1,146 ### 276 1,422 3 732 616 214 1,565 $2,987 $ $ 785 556 289 1,631 141 1,772 3 742 1,650 (15) 2,380 4,153 $ $ 899 609 302 1,810 ### 128 1,938 3 657 1,409 (52) 2,017 3,955 $ 11 718 415 285 1,429 3 113 1,545 2 365 982 (4) 1,345 2,890 194 346 Table 12: Gateway Income Statements Gateway Balance Sheets (in millions of dollars) Cash Short-term Investments Accounts receivable Inventory Other current assets Total current assets Property, plant and equipment Intangibles Other assets Total assets $ Notes payable Accounts payable Accrued liabilities Other current liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Common stock Additional paid-in-capital Retained earnings Other equity adjustments Total shareholders' equity Total liabilities and shareholders equity $ $ $ 2002 466 601 198 88 602 1,955 481 23 50 2,509 279 365 296 940 322 1,262 3 733 307 204 1,247 2,509 $ Table 13: Gateway Balance Sheets Gateway, Inc. Consolidated Statement of Cash Flows (in millions of dollars) 2002 Operating: Net income (loss) Depreciation and amortization expense Deferred income taxes Nonrecurring expenses Change in accounts receivable Change in inventory Change in accounts payable Other Cash generated by operating activities Investing: Capital expenditures Purchase of available-for-sale securities Proceeds from sale of avail.-for-sale sec. Acquisition of technology Other Investment in other long-term investments Purchase of financing receivables Cash used for investing activities Financing: Proceeds from notes payable Payments on long-term liabilities $ $ $ $ $ 2001 2000 1999 1998 (298) 159 257 14 11 32 60 (260) (25) ($1,034) $ 200 (30) 646 302 195 (442) (107) ($270) $ 241 $ 189 (54) 165 76 (123) (113) (92) 289 $ 428 $ 134 (3) 31 (115) (24) 182 98 731 $ 346 106 (58) (78) (614) 436 21 (235) ($199) $ (283) 570 ### (30) ### 50 $109 $ (315) $ (81) 160 (60) (247) (410) (953) $ (338) $ (147) 97 ### (1) (127) (315) (831) $ - $200 $ (4) 3.0 $ (9) (6) (52) 81 229 256 908 (235) (169) 49 (1) (356) (13) Dividends Stock options exercised Proceeds from stock issuance Purchase of treasury stock Cash generated by financing activities (5) Foreign exchange effect on cash 83 2 (59) 20 $ 83 100 (123) 54 $ 36 23 0 $ 9 200 $405 $ 3 0 4 1 $247 $ (644) $ (42) $ 576 $484 $ $731 $ 1,128 $ 484 $ 1,170 $ 1,128 $ 594 1,170 (5) Total cash generated (used) $ (265) Cash and cash equiv., beginning of year Cash and cash equivalents, end of year $ $ 731 466 Table 14: Gateway Statement of Cash Flows Gateway Income Statements Vertical Common Size Sales revenue Cost of goods sold Gross profit S,G & A expenses Operating income Other, net Income before taxes Change in accounting principle Provision for taxes Net income 2002 #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! 2001 #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! 2000 #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! 1999 #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! 1998 #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! Table 15: Gateway Vertical Common Size Income Statements Gateway Income Statements Horizontal Common Size--Rolling Forward Sales revenue Cost of goods sold Gross profit S,G & A expenses Operating income Other, net Income before taxes Change in accounting principle Provision for taxes Net income 2002 68.6% 68.8% 67.5% 53.3% 43.2% 32.7% -36.9% 0.0% 59.6% 29.9% 2001 63.3% 69.5% 40.7% 130.6% -231.5% -103.9% -316.2% 0.0% -180.6% -429.0% 2000 107.1% 105.8% 112.1% 124.7% 85.7% -153.7% 61.5% 0.0% 66.0% 56.3% 1999 120.1% 120.4% 118.8% 118.0% 120.6% 145.7% 122.8% 0.0% 121.1% 123.7% Table 16: Gateway Horizontal Common Size Income Statements 1998 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 0.0% 100.0% 100.0% Gateway Balance Sheets Vertical Common Size Cash Short-term Investments Accounts receivable Inventory Other current assets Total current assets Property, plant and equipment Intangibles Other assets Total assets 2002 18.6% 24.0% 7.9% 3.5% 24.0% 77.9% 19.2% 0.9% 2.0% 100.0% 2001 24.5% 14.6% 7.4% 4.0% 20.7% 71.1% 20.4% 1.2% 7.4% 100.0% 2000 11.7% 3.1% 13.1% 7.6% 19.1% 54.6% 21.6% 4.0% 19.8% 100.0% 1999 28.5% 5.3% 16.3% 4.9% 13.2% 68.2% 18.9% 1.3% 11.6% 100.0% 1998 40.4% 5.5% 19.3% 5.8% 6.1% 77.1% 18.3% 2.2% 2.3% 100.0% Notes payable Accounts payable Accrued liabilities Other current liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Common stock Additional paid-in-capital Retained earnings Other equity adjustments Total shareholders' equity Total liabilities and shareholders equity 0.0% 11.1% 14.5% 11.8% 37.5% 0.0% 12.8% 50.3% 0.1% 29.2% 12.2% 8.1% 49.7% 100.0% 0.0% 11.4% 15.7% 11.2% 38.4% 0.0% 9.2% 47.6% 0.1% 24.5% 20.6% 7.2% 52.4% 100.0% 0.0% 18.9% 13.4% 7.0% 39.3% 0.0% 3.4% 42.7% 0.1% 17.9% 39.7% -0.4% 57.3% 100.0% 0.0% 22.7% 15.4% 7.6% 45.8% 0.0% 3.2% 49.0% 0.1% 16.6% 35.6% -1.3% 51.0% 100.0% 0.4% 24.8% 14.4% 9.9% 49.4% 0.1% 3.9% 53.5% 0.1% 12.6% 34.0% -0.1% 46.5% 100.0% Table 17: Gateway Vertical Common Size Blanace Sheets Gateway Balance Sheets Horizontal Common Size--Rolling Forward Cash Short-term Investments Accounts receivable Inventory Other current assets Total current assets Property, plant and equipment Intangibles Other assets Total assets Notes payable Accounts payable Accrued liabilities Other current liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Common stock Additional paid-in-capital Retained earnings Other equity adjustments Total shareholders' equity Total liabilities and shareholders equity 2002 63.7% 138.2% 90.0% 73.3% 97.6% 92.1% 79.1% 63.9% 22.7% 84.0% 2001 151.0% 334.6% 40.4% 38.1% 77.8% 93.6% 67.7% 21.7% 26.8% 71.9% 2000 42.9% 62.2% 84.4% 164.1% 151.9% 84.1% 120.4% 319.2% 178.7% 105.0% 1999 96.5% 132.3% 115.8% 115.0% 296.6% 121.1% 140.8% 80.0% 686.6% 136.9% 1998 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 81.8% 77.8% 88.1% 82.0% 0.0% 0.0% 43.4% 84.4% 116.3% 70.3% 0.0% 0.0% 87.3% 91.3% 95.7% 90.1% 0.0% 0.0% 125.2% 146.7% 106.0% 126.7% 0.0% 0.0% 100.0% 100.0% 100.0% 100.0% 100.0% 0.0% 88.7% 100.0% 100.1% 49.8% 0.0% 79.7% 84.0% 80.3% 100.0% 98.7% 37.3% 0.0% 65.8% 72.0% 91.4% 100.0% 112.9% 117.1% 0.0% 118.0% 105.0% 125.4% 150.0% 180.0% 143.5% 0.0% 150.0% 136.9% 100.0% 100.0% 100.0% 100.0% 0.0% 100.0% 100.0% Table 18: Gateway Horizontal Common Size Blanace Sheets Gateway, Inc. Liquidity Ratios Working capital Working capital ratio Quick ratio Inventory turnover Days in inventory Accounts receivable turnover Days in accounts receivable Inventory conversion cycle Accounts payable turnover Days in accounts payable Net cash conversion cycle Cash + short-term investments A/R*days in accounts receivable Inventory*days in inventory Product dollar days Current assets-other current assets Liquidity index $ 2002 996.00 $ 1.95 1.27 34.66 10.53 19.96 18.29 28.82 11.63 31.39 (2.57) 1116.50 3822.48 1095.10 6034.08 1429.50 4.22 2001 807.00 $ 1.58 0.92 24.10 15.15 15.90 22.96 38.11 9.31 39.21 (1.10) 890.00 8783.19 3294.56 12967.75 1490.00 8.70 2000 761.50 $ 1.44 0.91 29.75 12.27 16.12 22.64 34.91 8.96 40.75 (5.84) 975.50 13481.55 3110.01 17567.07 1824.50 9.63 1999 843.00 1.52 1.19 39.71 9.19 14.89 24.51 33.70 8.82 41.40 (7.70) 1332.00 14754.88 1649.89 17736.76 2113.50 8.39 Table 19: Gateway Liquidity Rations Gateway, Inc. Cash Flow Ratios 2002 0.34 3.12 (0.20) 48.00 (6.36) (0.49) (0.01) (0.01) Cash flow adequacy Reinvestment ratio Long-term debt repayment Dividend payout Free cash flow Depreciation impact ratio Recapitalization index Cash flow return on assets Cash flow return on sales 2001 (1.33) (0.74) (0.01) (473.00) (0.74) 1.00 (0.08) (0.04) - 2000 0.89 1.09 0.03 1999 2.13 0.46 0.01 (35.00) 0.65 1.67 0.07 0.03 387.00 0.18 2.52 0.21 0.08 2000 2.510% 2.368 1.844 5.94% 10.96% 1999 4.774% 2.619 2.036 12.51% 25.46% 2000 0.46 0.84 0.03 0.06 0.23 0.53 0.42 2.37 4.70 8.24 1999 0.51 1.04 0.04 0.07 0.30 0.49 0.57 2.62 8.00 11.98 - Table 20: Gateway Cash Flow Ratios Gateway, Inc. Asset Utilization Ratios 2002 -7.408% 1.518 1.954 -11.24% -21.98% Profit margin Asset turnover Financial structure leverage Return on assets Return on equity 2001 -17.007% 1.703 1.810 -28.96% -52.42% Table 21: Gateway Asset Utilization Ratios Gateway, Inc. Capital Structure Ratios Debt to capital Debt to equity Long-term debt to capital Long-term debt to equity Working capital/total assets-Z1 Retained earnings/totalassets-Z2 EBIT/total assets-Z3 Sales/total assets-Z4 Market to book-Z5 Z-Score 2002 0.49 0.95 0.11 0.21 0.43 0.24 (0.61) 1.52 0.94 2.52 2001 0.45 0.81 0.06 0.11 0.27 0.44 1.09 1.70 1.72 5.23 Table 22: Gateway Capitilization Structure Ratios