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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1998
COMMISSION FILE NUMBER: 0-17017
DELL COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-2487834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE DELL WAY, ROUND ROCK, TEXAS 78682-2244
(Address, including Zip Code, of registrant's principal executive offices)
(512) 338-4400
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT AS OF MARCH 31, 1998..... $36,352,865,736
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 31,
1998...................................................... 640,316,904
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PART I
ITEM 1 - BUSINESS
GENERAL
Dell Computer Corporation (the "Company") designs, develops, manufactures,
markets, services and supports a wide range of computer systems, including
desktops, notebooks, workstations and network servers, and also markets
software, peripherals and service and support programs. With revenue of $12.3
billion for fiscal 1998 (which ended on February 1, 1998), the Company is the
world's leading direct computer systems company and one of the top three
computer systems companies in the world.
The Company is a Delaware corporation that was incorporated in October 1987,
succeeding to the business of a predecessor Texas corporation that was
originally incorporated in May 1984. Based in Round Rock, Texas, the Company
conducts operations worldwide through wholly-owned subsidiaries. See "Item
1 -- Business -- Geographic Areas of Operations" below. Unless otherwise
specified, references herein to the "Company" are references to the Company and
its consolidated subsidiaries. The Company operates in one principal industry
segment.
The Company's common stock, par value $.01 per share, is listed on The Nasdaq
National Market under the symbol "DELL." See "Item 5 -- Market for Registrant's
Common Equity and Related Stockholder Matters -- Market Information" below.
BUSINESS STRATEGY
The Company's business strategy, centered around its direct business model, is
customer-focused and aims to deliver the best customer experience through
direct, comprehensive customer relationships, cooperative research and
development with technology partners, custom-built computer systems and service
and support programs tailored to customer needs. The Company believes that this
approach provides it with several competitive advantages. The approach
eliminates the need to support an extensive network of wholesale and retail
dealers, thereby avoiding typical dealer mark-ups; avoids the higher inventory
costs associated with the wholesale/retail channel and the competition for
retail shelf space; and reduces the obsolescence risk associated with products
in a rapidly changing technological market. In addition, direct customer contact
allows the Company to maintain, monitor and update a database of information
about customers and their current and future products and service needs, which
can be used to shape future product offerings and post-sale service and support
programs. This direct approach, combined with the Company's efficient
procurement, manufacturing and distribution processes, allows the Company to
bring relevant technology to its customers faster and more competitively priced
than many of its competitors.
Comprehensive Customer Relationships -- The Company develops and utilizes direct
customer relationships to understand end-users' needs and to deliver high
quality computer products and services tailored to meet those needs. The type of
relationship depends on the type of customer. For large corporate and
institutional customers, the relationship may begin prior to sale, when the
Company works with the customer to plan a strategy to meet that customer's
current and future technology needs. The direct relationship continues after the
sale, as dedicated account teams consisting of sales, customer service and
technical personnel continue to support the customer's technology objectives.
The Company also establishes direct relationships with medium and small
businesses and home users, either through account representatives, through
telephone sales representatives or through Internet contact. All of these direct
customer relationships provide the Company with a flow of information about its
customers' plans and requirements and enable it to weigh their needs against
emerging technologies.
Cooperative Research and Development -- The Company also develops cooperative,
meaningful relationships with the world's most advanced technology companies.
Working with these compa-
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nies, the Company's engineers manage quality, integrate technologies and design
and manage system architecture. This cooperative approach allows the Company to
determine the best method and timing for delivering new technologies to the
market. The Company's goal is to deliver relevant technology to its customers at
the right time.
Custom-Built Computers -- The Company was founded on the principle that
delivering computers custom-built to specific customer orders is the best
business model for providing solutions that are truly relevant to end-user
needs. This build-to-order, flexible manufacturing process enables the Company
to achieve faster inventory turnover and reduced inventory levels and allows the
Company to rapidly incorporate new technologies and components into its product
offerings.
Custom-Tailored Service and Support Programs -- In the same way that the
Company's computer products are built-to-order, service and support programs are
designed to fit specific customer requirements. The Company offers a broad range
of service and support programs through its own technical personnel and its
direct management of specialized service suppliers. These services range from
telephone and Internet support to on-site customer-dedicated systems engineers.
While the Company believes that its business strategy provides it with
competitive advantages, there are many factors that may affect the Company's
business and the success of its operations. For a discussion of these factors,
see "Item 1 -- Business -- Factors Affecting the Company's Business and
Prospects" below.
GEOGRAPHIC AREAS OF OPERATIONS
The Company's products are currently sold in more than 170 countries worldwide.
The Company has organized its worldwide operations into geographic regions to
support its customers in each area through regional business units. The Americas
region, which is based in Round Rock, Texas, covers the United States, Canada
and Latin America. The European region, which is based in Bracknell, England,
covers the European countries and also some countries in the Middle East and
Africa. The Asia-Pacific/Japan region covers the Far East, including Japan,
Australia and New Zealand, and is based in Hong Kong (for areas other than
Japan) and Kawasaki, Japan (for Japan).
The Company's corporate headquarters are located in Round Rock, Texas, and its
manufacturing facilities are located in Austin, Texas; Limerick, Ireland; and
Penang, Malaysia. See "Item 2 -- Properties" below.
For financial information about the results of the Company's operations by
geographic region for each of the last three fiscal years, see Note 11 of Notes
to Consolidated Financial Statements included in "Item 8 -- Financial Statements
and Supplementary Data" below.
During fiscal 1998, the Company continued to strengthen its presence in the
Asia-Pacific area, where it now has direct-to-the-customer operations in eleven
countries. In addition, since the end of fiscal 1998, the Company has announced
that it will establish a customer center in China to produce, sell and provide
service and technical support for the Company's full range of computer systems
in that market. The Company expects to begin operations from the China Customer
Center later this year. The Company intends to continue to expand its
international activities by increasing its market presence in existing markets
and by entering new markets. International activities are subject to special
risks. See "Item 1 -- Business -- Factors Affecting the Company's Business and
Prospects" below.
PRODUCT PORTFOLIO
The Company offers a wide range of computer systems, including desktops,
notebooks, workstations and network servers, as well as software, peripherals
and service and support programs.
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Desktop Computer Systems -- The Company's OptiPlex(R) line of desktop computer
systems is the Company's mainstream offering for corporate and institutional
customers who require highly reliable systems optimized for use in networked
environments. All systems within the OptiPlex line are "Managed PCs," enabling
remote manageability and control using industry-standard systems management
tools. Some OptiPlex systems are designed for optimal performance with 32-bit
operating systems, and some are available as Net PCs. All OptiPlex systems
utilize the Company's no-tool OptiFrame(TM) chassis, easing serviceability and
upgradability. The OptiFrame chassis is built entirely from recyclable
materials.
The Dell Dimension(R) line of desktop computer systems is designed for small
businesses, workgroups and individuals, who generally demand fast performance
and the latest technology without the need for remote manageability. Some
systems within the Dimension line contain the latest, state-of-the-art
technology and are targeted at technologically sophisticated users, while others
are designed for more value-oriented users.
Notebook Computers -- The Company offers two lines of notebook computer systems,
each designed for targeted customer needs. The Latitude(R) line is targeted at
business customers who require highly reliable and durable systems with maximum
connectivity for use in networked environments. The Inspiron(TM) line, which was
introduced in September 1997, is targeted at technologically sophisticated users
who require the latest technology and high-end multimedia performance.
Workstations -- During fiscal 1998, the Company entered the workstation market
when it began offering the Dell Workstation 400. These Windows NT(R)-based
systems incorporate highly advanced technology and are designed specifically to
run sophisticated, intensive professional applications, such as computer-aided
design, financial service and software development programs.
Network Servers -- The PowerEdge(R) line of network servers consists of systems
that can operate as file servers, database servers, applications servers and
communications/groupware servers in a networked computing environment. PowerEdge
systems can be configured as desired for use in a range of networked
environments, from single workgroups to entire enterprises. The Company also
offers rack-mountable chassis for its network servers and a Scalable Disk System
for increasing network storage capacity.
Software and Accessories -- In addition to its own branded products, the Company
offers a wide range of software, peripherals and other accessories through its
DellWare(R) program. Through its DellPlus software integration program, the
Company can factory-install a customer's proprietary applications or hard-disk
images at the time of system manufacture and deliver other customer-specific
solutions. Through the ReadyWare(R) program, the Company can factory-install
off-the-shelf software applications and interface cards in any computer system
the Company sells.
Service and Support -- The Company enhances its product offerings with a number
of specialized services, including custom hardware and software integration,
leasing and asset management and network installation and support. The Company
offers next-business-day delivery, as well as an extended training and support
program on many of its software offerings. For additional discussion of the
Company's service and support programs, see "Item 1 -- Business -- Service and
Support" below.
MARKETING AND SALES
The Company's customers range from large corporations, government agencies and
medical and educational institutions to small businesses and individuals. The
Company segments its sales and marketing approaches to meet the needs of various
types of customers. No single customer accounted for more than 10% of the
Company's consolidated net sales during any of the last three fiscal years.
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Relationship Business -- The Company has a broad range of business based on
continuing relationships with Fortune 500(R) companies, governmental, medical
and educational institutions and small-to-medium businesses. The Company
maintains a field sales force calling on business and institutional customers
and prospects. The Company develops direct sales marketing programs and services
specifically geared to these relationship customers. For large customers,
dedicated account teams, consisting of sales, customer service and technical
support representatives, form long-term customer relationships to provide each
customer with a single source of assistance on various issues, including
technology needs assessment; system configuration; order placement; lifecycle
cost management; technology transition planning; installation assistance and
project management; and detailed product, service and financial reporting. To
support these teams, the Company has account executives in many major cities
around the world. For customers with in-house maintenance organizations, the
Company offers a variety of programs, including specialized computer training
programs, a repair parts assistance program and other customized programs to
provide access to the Company's technical support team. Customized product
delivery and service programs are available on a worldwide basis. See "Item
1 -- Business -- Service and Support" below.
For multinational corporate customers, the Company offers several programs
designed to provide global capability, support and coordination. Through these
programs, the Company can provide single points of contact and accountability
with global account specialists, special global pricing, consistent service and
support programs across global regions and access to central purchasing
facilities.
The Company also has specific sales and marketing programs targeted at federal,
state and local governmental agencies. The Company maintains account teams
(consisting of sales representatives, K12 and higher education sales
representatives, health care sales representatives and technical support
representatives) dedicated to specific governmental markets. The Company holds a
U.S. General Services Administration Schedule contract, through which it sells
to U.S. federal governmental agencies.
Transactional Business -- The Company also has a significant base of business
among small-to-medium businesses and home users. The Company maintains a sales
force that markets its products and services to these customers by advertising
in trade and general business publications and by mailing a broad range of
direct marketing publications, such as promotional pieces, catalogs and customer
newsletters. The Company believes these customers value its ability to provide
reliable, custom configured computer systems at competitive prices,
knowledgeable sales assistance, post-sale support and on-site service offerings.
Internet Business -- An increasing portion of the Company's business is being
conducted via the Internet through the Company's World Wide Web site at
www.dell.com. Through the web site, customers and potential customers can access
a wide range of information about the Company's product offerings, can configure
and purchase systems on-line and can access volumes of support and technical
information. By the end of fiscal 1998, the Company was receiving in excess of
800,000 visits per week to www.dell.com, where it maintains nearly 42
country-specific sites, and Company revenue generated through the Internet
exceeded $4 million a day.
The Company also utilizes the Internet to enhance the direct relationships with
its customers. The Company designs and implements custom Internet sites, called
Premier Pages(SM), for various large customers, allowing these customers to
simplify and accelerate procurement and support processes. Through these custom
sites, the Company is able to provide the customer with on-line configuration,
pricing and purchasing capability; on-line detailed order, purchasing and
inventory reports; and critical account team information.
Leasing and Asset Management Services -- During fiscal 1998, the Company formed
Dell Financial Services L.P. ("DFS") as a joint venture with Newcourt Credit
Group Inc., a financial services company headquartered in Toronto, Canada. DFS
offers leasing and other financial services
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(including asset management and recovery, technology planning and project
management) that are directly integrated with the Company's sales and
manufacturing capabilities.
SERVICE AND SUPPORT
The Company offers a variety of service and support programs in all of its
geographic markets. The following is a brief description of the service and
support programs offered exclusively or primarily to the Company's U.S.
customers. A full line of warranty, service and support options are available in
the Company's international markets, but these options can vary significantly
based on the local market and customer requirements.
Standard Programs -- Most of the Company's systems include a standard one-year,
next-business-day, on-site service contract. In addition, basic warranty
coverage for the Company's systems includes either a three-year or one-year
limited warranty (depending on the system). The three-year warranties include
one year of parts and labor coverage and two additional years of parts-only
coverage, while the one-year warranties include a year of parts and labor
coverage. The Company also provides a 30-day "Total Satisfaction" money back
guarantee for any end-user customer buying a system directly from the Company.
The Company provides all of its customers with access to a toll-free hardware
support line that is accessible 24 hours a day, 7 days a week. The technical
specialists staffing this line maintain close contact with the Company's
marketing, manufacturing and product design groups and have on-line access to
each customer's original system configuration and service history. The Company
also provides automated and on-line technical support through a variety of
avenues, including the Internet (via www.dell.com, e-mail or on-line
subscription services), its TechConnect service (an interactive bulletin board
service), its AutoTech system (an interactive voice response unit) and its
TechFax system (a fax-back service).
Many of the Company's systems include software that helps customers diagnose and
communicate system problems. Several systems also include a built-in diagnostics
program that can provide on-line information about system malfunctions.
Additional Options -- Recognizing that customer service and support requirements
vary, the Company offers customers the opportunity to customize their service
and support programs by selecting additional levels of service and support to
satisfy their individual needs. Through the SelectCare(R) program, which is
available for all desktop and notebook systems, the Company offers a broad range
of service and support options beyond the standard programs, including an
extension of the standard one-year service contract to include up to four
additional years of next-business-day, on-site service.
The Company's BusinessCare(SM) and BusinessCare Plus programs are standard
warranty upgrades available to PowerEdge server customers. The BusinessCare
program includes one year of next-business-day parts and labor on-site service,
two additional years of parts delivery service and five full assistance calls to
the Company's DirectLine(SM) network operating system support technicians. The
BusinessCare Plus program includes three years of four-hour, same-day service,
as well as five full assistance calls to the DirectLine network.
The Company's Premier Access(SM) program is a service and support program
specifically designed for IS professionals who have technical expertise in
diagnosing and servicing computer systems. Customers can choose their level of
service under the program, including rapid service and parts dispatches, direct
access to advanced level technical support, specialized on-line support,
reimbursement for certain labor costs and parts management assistance.
Through the DellPlus program, the Company offers specialized services designed
to satisfy customers' unique hardware and software integration requirements.
With this program, a customer's particular integration requirements (whether
hardware related, such as specialized network cards, video and graphic boards,
modems, tape drives or hard drives; or software related, such as
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customer proprietary software applications or drivers) can be satisfied at the
time the customer's systems are manufactured. This is in addition to the
Company's ReadyWare program, which is a collection of popular software
applications and interface cards that can be factory-installed.
The Company also offers a variety of on-site installation services that can be
customized to meet the needs of each specific customer. These services include
basic installation and orientation, system connectivity and functional testing,
external peripheral installation, internal device installation and file server
and advanced system installation.
Many of the Company's service and support programs, particularly software
support and on-site service programs, are provided through independent
third-party contractors.
MANUFACTURING
The Company operates manufacturing facilities in Austin, Texas; Limerick,
Ireland; and Penang, Malaysia. During fiscal 1998, the Company opened an
additional manufacturing facility in Austin to produce OptiPlex desktop systems
for the Americas region. Since the end of fiscal 1998, the Company has announced
plans to acquire an additional manufacturing facility in Limerick, Ireland and
to construct an additional manufacturing facility in Austin, Texas and a
manufacturing facility in Xiamen, China.
The Company's manufacturing process consists of assembly, functional testing and
quality control of the Company's computer systems. Testing and quality control
processes are also applied to components, parts and subassemblies obtained from
suppliers. The Company's build-to-order manufacturing process is designed to
allow the Company to quickly produce customized computer systems and to achieve
rapid inventory turnover and reduced inventory levels, which lessens the
Company's exposure to the risk of declining inventory values. This flexible
manufacturing process also allows the Company to incorporate new technologies or
components into its product offerings quickly.
The Company contracts with various suppliers to manufacture unconfigured base
notebook computers and then custom configures these systems for shipment to
customers.
Quality control is maintained through the testing of components, parts and
subassemblies at various stages in the manufacturing process. Quality control
also includes a burn-in period for completed units after assembly, on-going
production reliability audits, failure tracking for early identification of
production and component problems and information from the Company's customers
obtained through its direct relationships and service and support programs. The
Company conducts a voluntary vendor certification program, under which qualified
vendors commit to meet defined quality specifications. All of the Company's
manufacturing facilities have been certified as meeting ISO 9002 quality
standards.
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on designing and
developing competitively priced computer systems that adhere to industry
standards and incorporate the technologies and features that the Company
believes are the most desired by its customers. To accomplish this objective,
the Company must evaluate, obtain and incorporate new hardware, software,
storage, communications and peripherals technologies that are primarily
developed by others. The Company's product development team includes
programmers, technical project managers and engineers experienced in system
architecture, logic board design, sub-system development, mechanical
engineering, manufacturing processing and operating systems. This
cross-functional approach to product design has enabled the Company to develop
systems with improved functionality, manufacturability, reliability,
serviceability and performance, while keeping costs competitive. The Company
takes steps to ensure that new products are compatible with industry standards
and that they meet cost objectives based on competitive pricing targets.
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The Company bases its product development efforts on cooperative, meaningful
relationships with the world's most advanced technology companies. These working
partnerships allow the Company to use its direct marketing model and
build-to-order manufacturing process to deliver, on a timely and cost-effective
basis, those emerging technologies that are most relevant to its customers.
During fiscal 1998, the Company incurred $204 million in research, development
and engineering expenses, compared with $126 million for fiscal 1997 and $95
million for fiscal 1996. The amount the Company spends on research, development
and engineering activities, which the Company believes to be important to its
continued success and growth, is determined as part of the annual budget process
and is based on cost-benefit analyses and revenue forecasts. The Company
prioritizes activities to focus on projects that it believes will have the
greatest market acceptance and achieve the highest return on the Company's
investment.
PATENTS, TRADEMARKS AND LICENSES
The Company holds 317 U.S. patents and 7 foreign patents. At March 1, 1998, the
Company had 307 U.S. patent applications pending and 42 foreign applications
pending in several European and Asian countries. The Company's U.S. patents
expire in years 2005 through 2015. The inventions claimed in those patents and
patent applications cover aspects of the Company's current and possible future
computer system products and related technologies. The Company is developing a
portfolio of patents that it anticipates will be of value in negotiating
intellectual property rights with others in the industry.
The Company has obtained U.S. federal trademark registration for its DELL word
mark and its Dell logo mark. The Company owns registrations for 22 of its other
marks in the United States. As of March 1, 1998, the Company had pending
applications for registration of nine other trademarks. The DELL word mark, Dell
logo and other trademark and service mark registrations in the United States may
be renewed as long as the mark continues to be used in interstate commerce. The
Company believes that establishment of the DELL mark and logo in the United
States is material to the Company's operations. The Company has also applied for
or obtained registration of the DELL mark and several other marks in
approximately 190 other countries or jurisdictions where the Company conducts or
anticipates expanding its international business. The Company has also taken
steps to reserve corporate names and to form non-operating subsidiaries in
certain foreign countries where the Company anticipates expanding its
international business. The Company is precluded from obtaining a registration
for trademarks consisting of or incorporating the term "Dell" in certain foreign
countries, although the Company does not believe that its inability to register
"Dell" as a trademark in such countries will have a material adverse effect on
its business.
The Company has entered into a variety of licensing and cross-licensing
agreements pursuant to which the Company licenses various patented hardware
technology. In addition, the Company has entered into non-exclusive licensing
agreements with Microsoft Corporation for various operating system and
application software. The Company has also entered into various other software
licensing agreements with other companies.
From time to time, other companies and individuals assert exclusive patent,
copyright, trademark or other intellectual property rights to technologies or
marks that are important to the computer industry or the Company's business. The
Company evaluates each claim relating to its products and, if appropriate, seeks
a license to use the protected technology. The licensing agreements generally do
not require the counterparty to assist the Company in duplicating its patented
technology nor do these agreements protect the Company from trade secret,
copyright or other violations by the Company or its suppliers in developing or
selling these products.
INFRASTRUCTURE
Management Information Systems -- The Company's management information systems
enable the Company to track each unit sold from the initial sales contacts,
through the manufacturing process
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to post-sale service and support. The system assists the Company in tracking key
information about many of its customers. The Company is able to target marketing
activities specifically to particular types of customers using its database to
assess purchasing trends, advertising effectiveness and customer and product
groupings. This database, unique to the Company's direct model, allows the
Company to gauge customer satisfaction issues and also provides the opportunity
to test new propositions in the marketplace prior to product or service
introductions. The Company continually analyzes updates and enhancements of its
management information systems to more fully integrate them on an
enterprise-wide basis, to reduce redundancy and to incorporate enhanced
functionality.
Employees -- At February 1, 1998, the Company had approximately 16,000
employees. Approximately 11,000 of those employees were located in the United
States, and approximately 5,000 were located in other countries. The Company has
never experienced a work stoppage due to labor difficulties and believes that
its employee relations are good.
GOVERNMENT REGULATION
In the United States, the Federal Communications Commission (the "FCC")
regulates the radio frequency emissions of computing equipment. The FCC has
established two standards for computer products, Class A and Class B. Only Class
B products may be sold for use in a residential environment. Both Class A and
Class B products may be sold for use in a commercial environment. All of the
Company's current desktop, notebook, workstation and network server systems are
sold under the more restrictive Class B certification. The Company periodically
tests its products to ensure that the products satisfy applicable FCC
regulations.
The Company's business also is subject to regulation by various other federal
and state governmental agencies. Such regulation includes the anti-trust
regulatory activities of the U.S. Federal Trade Commission and Department of
Justice, the import/export regulatory activities of the U.S. Department of
Commerce and the product safety regulatory activities of the U.S. Consumer
Products Safety Commission.
The Company also is required to obtain regulatory approvals in other countries
prior to the sale or shipment of products. In certain jurisdictions, such
requirements are more stringent than in the United States. Many developing
nations are just beginning to establish safety, environmental and other
regulatory requirements, which may vary greatly from U.S. requirements.
BACKLOG
At the end of fiscal 1998, backlog was $215 million, compared with backlog of
$222 million at the end of fiscal 1997. The Company does not believe that
backlog is a meaningful indicator of sales that can be expected for any period,
and there can be no assurance that the backlog at any point in time will
translate into sales in any subsequent period, particularly in light of the
Company's policy of allowing customers to cancel or reschedule orders without
penalty prior to commencement of manufacturing.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
There are many factors that affect the Company's business and the results of its
operations, some of which are beyond the control of the Company. The following
is a description of some of the important factors that may cause the actual
results of the Company's operations in future periods to differ materially from
those currently expected or desired.
- - General economic and industry conditions -- Any general economic, business or
industry conditions that cause customers or potential customers to reduce or
delay their investments in computer systems could have a negative effect on
the Company's strength and profitability. For example, a softening of demand
for computer systems may result in decreased revenues (or at least declining
revenue growth rates) for computer manufacturers in general and the Company in
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particular and may result in pricing pressures for products that the Company
sells, which could have a negative effect on the Company's revenues and
profitability.
- - Competition -- The computer industry is highly competitive. Some of the
Company's competitors have stronger brand-recognition, greater financial,
marketing, manufacturing and technological resources, broader product lines
and larger installed customer bases than does the Company. The intense
competition inherent in the industry could result in loss of customers or
pricing pressures, which would negatively affect the Company's results of
operations.
- - International activities -- The Company's future growth rates and success are
partly dependent on continued growth and success in international markets. As
is the case with most international operations, the success and profitability
of the Company's international operations are subject to numerous risks and
uncertainties, including local economic and labor conditions, political
instability, tax laws (including U.S. taxes on foreign operations) and foreign
currency exchange rates.
- - Product, customer and geographic mix -- The profit margins realized by the
Company vary somewhat among its products, its customer segments and its
geographic markets. Consequently, the overall profitability of the Company's
operations in any given period is partially dependent on the product, customer
and geographic mix reflected in that period's net sales.
- - Seasonal trends -- The Company experiences some seasonal trends in the sale of
its products. For example, sales to governments (particularly U.S. federal
sales) are often stronger in the Company's third quarter, European sales are
often weaker in the third quarter and consumer sales are often stronger in the
fourth quarter. Historically, the net result of seasonal trends has not been
material relative to the Company's overall results of operations, but many of
the factors that create and affect seasonal trends are beyond the Company's
control.
- - Technological changes and product transitions -- The computer industry is
characterized by continuing improvements in technology, which result in the
frequent introduction of new products, short product life cycles and continual
improvement in product price/performance characteristics. While the Company
believes that its direct business model and asset management practices afford
it an inherent competitive advantage over some of its competitors, product
transitions present some of the greatest executional challenges and risks for
any computer systems company. A failure on the part of the Company to
effectively manage a product transition will directly affect the demand for
the Company's products and the profitability of the Company's operations. In
addition, while the Company has meaningful relationships with some of the
world's most advanced technology companies, continuing technological
advancement, which is a significant driver of customer demand, is largely
beyond the control of the Company.
- - Inventory levels -- The Company's direct business model gives it the ability
to operate with reduced levels of component and finished goods inventories,
and the Company's financial success in recent periods has been due in part to
its asset management practices, including its ability to achieve rapid
inventory turns. The Company's ability to aggressively manage its inventory
has been enhanced by favorable supply conditions in the industry. Less
favorable supply conditions, as well as other factors beyond the Company's
control, may require or result in increased inventory levels in the future.
- - Supply sources -- 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 (which can
adversely affect the reliability and reputation of the Company's products), a
shortage of components and reduced control over delivery schedules (which can
adversely affect the Company's manufacturing efficiencies) and increases in
component costs (which can adversely affect the Company's profitability).
The Company has several single-sourced supplier relationships, either because
alternative sources are not available or the relationship is advantageous due
to performance, quality,
9
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support, delivery, capacity or price considerations. If these sources are
unable to provide timely and reliable supply, the Company could experience
manufacturing delays or inefficiencies, adversely affecting its results of
operations.
- - Risk on financial instruments -- The Company regularly utilizes derivative
instruments to hedge its exposure to fluctuations in foreign currency exchange
rates and interest rates. In addition, the Company utilizes equity instrument
contracts to execute repurchases of its common stock under its
Board-authorized stock repurchase program. Some of these instruments and
contracts may involve elements of market and credit risk in excess of the
amounts recognized in the financial statements.
- - Strength of infrastructure -- The Company has grown at a rapid pace, requiring
enhancement and expansion of its management team, information systems,
manufacturing operations and other aspects of its infrastructure. The
Company's continued success and profitability partly depends on its ability to
continue to improve its infrastructure (particularly management and
information systems) to keep pace with the growth in its overall business
activities.
- - Patent rights -- The Company's continued business success may be largely
dependent on its ability to obtain licenses to intellectual property developed
by others on commercially reasonable and competitive terms. If the Company or
its suppliers are unable to obtain desirable technology licenses, the Company
could be prohibited from marketing products, could be forced to market
products without desirable features or could incur substantial costs to
redesign its products, defend legal actions or pay damages.
- - Year 2000 Compliance -- Computers, software and other equipment utilizing
microprocessors that use only two digits to identify a year in a date field
may be unable to process accurately certain date-based information at or after
the year 2000. This is commonly referred to as the "Year 2000 issue," and the
Company is addressing this issue on several different fronts. First, all
Dell-branded hardware products shipped since the end of 1996 are Year 2000
compliant; earlier Dell-branded hardware products can be made Year 2000
compliant through BIOS upgrades or software patches. The Company has assigned
a team to monitor product compliance and has created a website at
www.dell.com/year2000 containing additional information about the Year 2000
issue and the Company's compliance program. Second, the Company has requested
Year 2000 compliance certification from each of its major vendors and
suppliers for their hardware or software products and for their internal
business applications and processes. Finally, the Company has established a
separate team to coordinate solutions to the Year 2000 issue for its own
internal information systems, with a goal of having all of its internal
systems Year 2000 compliant by the end of 1998. The Company currently does not
expect that the cost of its Year 2000 compliance program will be material to
its financial condition or results of operations or that its business will be
adversely affected by the Year 2000 issue in any material respect.
Nevertheless, achieving Year 2000 compliance is dependent on many factors,
some of which are not completely within the Company's control. Should either
the Company's internal systems or the internal systems of one or more
significant vendors or suppliers fail to achieve Year 2000 compliance, the
Company's business and its results of operations could be adversely affected.
TRADEMARKS AND SERVICEMARKS
Several United States trademarks and service marks appear in this Report. Dell,
the Dell logo, Dell Dimension, Latitude, OptiPlex and PowerEdge are registered
trademarks of the Company, and DellWare, ReadyWare and SelectCare are registered
service marks. Inspiron and OptiFrame are trademarks of the Company, and
BusinessCare, DirectLine Premier Access and Premier Page are service marks. This
Report also contains trademarks and tradenames of other entities; the Company
disclaims proprietary interest in the marks and names of others.
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ITEM 2 -- PROPERTIES
At February 1, 1998, the Company owned or leased a total of approximately 4.2
million square feet of office, manufacturing and warehouse space worldwide, 3.1
million square feet of which is located in the United States and the remainder
is located in various international areas.
Domestic Properties -- The Company's principal offices and U.S. manufacturing
and warehousing facilities are located in the Austin, Texas area. At February 1,
1998, the Company had a total of approximately 1.9 million square feet of
office, manufacturing and warehouse space under lease in several buildings in
Austin and Round Rock, Texas. The expiration dates of such leases range from May
1998 to March 2005. The Company owns 360 acres of land in Round Rock, Texas
(north of Austin), on which are located several office buildings completed since
August 1994 that contain an aggregate of approximately 1.2 million square feet
of office space. These buildings, comprising the Company's Round Rock campus,
house the Company's sales, marketing and support staff for the Americas region,
as well as the Company's executive headquarters and administrative support
functions. The Company also leases 570 acres of land in Austin, 120 of which
were acquired in September 1997 and the remainder of which was acquired in
February 1998. The Company intends to utilize this acreage for a manufacturing
campus and has already announced plans to construct a 300,000 square-foot server
and workstation manufacturing facility on a portion of this acreage.
International Properties -- At February 1, 1998, the Company's international
facilities consisted of (a) approximately 487,000 square feet of leased office
space in 27 countries (with lease expiration dates ranging from 1998 to 2013),
(b) a Company owned 300,000-square-foot manufacturing and warehousing facility
in Limerick, Ireland and (c) a Company owned 238,000-square-foot combination
office and manufacturing facility in Penang, Malaysia (located on land leased
until the year 2053 from the State Authority of Penang). In addition, in January
1998, the Company announced plans to acquire an additional manufacturing
facility in Limerick, Ireland. This facility consists of approximately 35 acres
of land and a building containing approximately 340,000 square feet of
manufacturing and office space. The Company expects to complete this acquisition
in April 1998 and expects to use this facility to manufacture servers and
workstations for the European region.
The Company is evaluating other opportunities to expand facilities in
anticipation of increasing needs. The Company believes that it can readily
obtain appropriate additional space as may be required at competitive rates.
ITEM 3 -- LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims arising in the
ordinary course of business. The Company's management does not expect that the
results in any of these legal proceedings will have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal 1998.
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PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded on The Nasdaq National Market under the
symbol "DELL." Information regarding the market prices of the Company's common
stock may be found in Note 13 of Notes to Consolidated Financial Statements
included in "Item 8 -- Financial Statements and Supplementary Data" below.
HOLDERS
As of March 31, 1998, there were 8,891 holders of record of the Company's common
stock.
DIVIDENDS
The Company has never paid cash dividends on its common stock. The Company
intends to retain its earnings for use in its business and, therefore, does not
anticipate paying any cash dividends on the common stock for at least the next
twelve months.
On each of March 6, 1998 and July 25, 1997, the Company effected a two-for-one
common stock split by paying a 100% stock dividend to stockholders of record as
of February 27, 1998 and July 18, 1997, respectively.
ITEM 6 -- SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FISCAL YEAR ENDED
-------------------------------------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28, JANUARY 29, JANUARY 30,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Results of Operations Data:
Net revenue............................... $12,327 $7,759 $5,296 $3,475 $2,873
Gross margin.............................. $ 2,722 $1,666 $1,067 $ 738 $ 433
Operating income (loss)................... $ 1,316 $ 714 $ 377 $ 249 $ (39)
Income (loss) before extraordinary loss... $ 944 $ 531 $ 272 $ 149 $ (36)
Net income (loss)......................... $ 944 $ 518 $ 272 $ 149 $ (36)
Income (loss) before extraordinary loss
per common share(a)(b):
Basic................................ $ 1.44 $ 0.75 $ 0.36 $ 0.23 $(0.07)
Diluted.............................. $ 1.28 $ 0.68 $ 0.33 $ 0.19 $(0.07)
Weighted average shares(a):
Basic................................ 658 710 716 618 597
Diluted.............................. 738 782 790 750 597
Balance Sheet Data:
Working capital........................... $ 1,215 $1,089 $1,018 $ 718 $ 510
Total assets.............................. $ 4,268 $2,993 $2,148 $1,594 $1,140
Long-term debt............................ $ 17 $ 18 $ 113 $ 113 $ 100
Total stockholders' equity................ $ 1,293 $ 806 $ 973 $ 652 $ 471
- ---------------
(a) The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," in the fiscal year ended February 1, 1998. All
historical earnings per share data have been restated to conform to this
presentation. Additionally, all share and per share information has been
retroactively restated to reflect the two-for-one splits of the common stock
in March 1998 and July 1997. See Note 1 and Note 7 of Notes to Consolidated
Financial Statements.
(b) Excludes extraordinary loss of $0.02 basic per common share and $0.02
diluted per common share for fiscal 1997. See Note 2 of Notes to
Consolidated Financial Statements.
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ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's objective is to maximize stockholder value by executing a strategy
that focuses on a balance of three priorities: growth, profitability and
liquidity. The following discussion highlights the Company's performance in the
context of these priorities. This discussion should be read in conjunction with
the Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table summarizes the results of the Company's operations for each
of the past three fiscal years. All percentage amounts were calculated using the
underlying data in thousands.
FISCAL YEAR ENDED
-------------------------------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 INCREASE 1997 INCREASE 1996
----------- -------- ----------- -------- -----------
(DOLLARS IN MILLIONS)
Net revenue................................ $12,327 59% $7,759 47% $5,296
Gross margin............................... $ 2,722 63% $1,666 56% $1,067
Percentage of net revenue................ 22.1% 21.5% 20.2%
Operating expenses......................... $ 1,406 48% $ 952 38% $ 690
Percentage of net revenue................ 11.4% 12.3% 13.1%
Operating income........................... $ 1,316 84% $ 714 90% $ 377
Percentage of net revenue................ 10.7% 9.2% 7.1%
Net income available to common
stockholders............................. $ 944 83% $ 518 99% $ 260
Net Revenue
The Company has become one of the top three computer vendors in the world as a
result of its continued revenue growth. The increases in consolidated net
revenue for both fiscal 1998 and fiscal 1997 were principally due to increased
units sold. Unit shipments grew 60% and 55% for fiscal years 1998 and 1997,
respectively.
The unit volume growth in fiscal 1998 resulted from increased demand for the
Company's products across all product lines. This growth was driven by the
Company's continued sales efforts to win new customer accounts through
aggressive pricing actions and to increase market penetration of new and
higher-end products, including products incorporating Intel's Pentium(R) Pro and
Pentium II processors of speeds greater than 200MHz. While desktop products
continue to be the primary driver of unit volumes (comprising 84% of total unit
shipments in fiscal 1998), the growth rates in both the enterprise (the
combination of servers and workstations) and notebook product lines exceeded the
growth rate in desktops during fiscal 1998. Unit sales of desktop computers
increased 55%, while unit sales of enterprise and notebook computers increased
265% and 66%, respectively, during fiscal 1998.
Average revenue per unit in fiscal 1998 remained relatively stable compared to
fiscal 1997. Although aggressive pricing in the desktop product line adversely
affected average revenue per unit, this was partially offset by increases in the
enterprise and notebook product lines, primarily due to a migration to
higher-end enterprise and higher-platform notebook systems.
The unit volume increase in fiscal 1997 was also a result of increased demand
for the Company's products across all product lines. In particular, demand for
enterprise products resulted in unit growth of 160% in fiscal 1997, compared to
a 37% decrease in units in fiscal 1996. Additionally in fiscal 1997, the Company
continued to introduce products utilizing latest technology, including products
incorporating Intel's Pentium and Pentium Pro processors with speeds at the
200MHz level.
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The Company experienced growth in net revenue in all geographic regions in both
fiscal 1998 and fiscal 1997. The following table summarizes the Company's net
revenue by geographic region for each of the past three fiscal years:
FISCAL YEAR ENDED
----------------------------------------------------------
FEBRUARY 1, 1998 FEBRUARY 2, 1997 JANUARY 28, 1996
---------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
Net revenue:
Americas............................... $ 8,531 69% $5,279 68% $3,474 66%
Europe................................. 2,956 24 2,004 26 1,478 28
Asia-Pacific and Japan................. 840 7 476 6 344 6
------- ---- ------ ---- ------ ----
Consolidated net revenue................. $12,327 100% $7,759 100% $5,296 100%
======= ==== ====== ==== ====== ====
In the Americas region, where efforts have allowed the Company to build valuable
supplier and customer relationships, net revenue grew 62% and 52% in fiscal 1998
and fiscal 1997, respectively. In the European region, substantially all
countries experienced revenue growth in both fiscal 1998 and fiscal 1997. This
allowed Europe to increase revenue 48% and 36% in fiscal 1998 and fiscal 1997,
respectively. Asia-Pacific and Japan revenues increased 77% in fiscal 1998
compared to a 38% increase in fiscal 1997.
Management believes that opportunity exists for continued worldwide growth by
increasing the Company's market presence in existing markets, entering new
markets and pursuing additional product opportunities. In fiscal 1998, the
Company continued to drive revenue growth through its Internet Web site located
at www.dell.com. By fiscal year-end, revenue generated through this venue
exceeded $4 million a day. Management believes that the Internet will continue
to be a significant sales and service medium for the Company in the future.
Additionally in fiscal 1998, the Company expanded its product offerings to
include high-performance workstations, and formed a business unit dedicated to
workstations in order to grow this product line. As a result of these and other
opportunities, the Company has announced plans to acquire an additional
manufacturing facility in Limerick, Ireland and to construct an additional
manufacturing facility in Austin, Texas and a manufacturing facility in Xiamen,
China.
Gross Margin
The increase in gross margin as a percentage of net revenue in fiscal 1998 over
fiscal 1997 was the result of several factors, including component cost declines
(which were partially offset by price reductions), manufacturing efficiencies
and an overall shift in mix to higher-end servers and higher-priced notebook
platforms. Additionally in fiscal 1998, the Company experienced a higher mix of
Intel's Pentium Pro and Pentium II processors with speeds greater than 200MHz.
This contributed to the demand for higher-performance products, which typically
carry higher gross margins. The Company's direct business model involves the
maintenance of low levels of inventory. Consequently, component cost declines
can have a significant impact on overall product costs and gross margin. During
fiscal 1998, significant component cost declines occurred (particularly
mid-year, in memory components), causing a decline in overall product costs.
However, the Company's aggressive pricing strategies mitigated the impact of
these cost declines on gross margin. Gross margin also benefited as the Company
successfully migrated customers to higher-end enterprise systems with additional
options for external storage capacity and higher-platform notebook computers.
The mix of enterprise and notebook products increased to 9% and 20% of system
revenue, respectively, compared with 4% and 18%, respectively, during the prior
fiscal year.
The gross margin increase as a percentage of consolidated net revenue in fiscal
1997 resulted primarily from component cost declines (which were partially
offset by price reductions) and a product mix shift to notebooks, servers and
higher-end desktop products. Additionally, during fiscal
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1996 the Company experienced a problematic product transition involving certain
of its OptiPlex desktop products, which had an adverse effect on gross margin.
Operating Expenses
The following table presents certain information regarding the Company's
operating expenses during each of the last three fiscal years:
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN MILLIONS)
Operating expenses:
Selling, general and administrative................... $1,202 $ 826 $ 595
Percentage of net revenue.......................... 9.8% 10.7% 11.3%
Research, development and engineering................. $ 204 $ 126 $ 95
Percentage of net revenue.......................... 1.6% 1.6% 1.8%
Total operating expenses................................ $1,406 $ 952 $ 690
Percentage of net revenue............................. 11.4% 12.3% 13.1%
Selling, general and administrative expenses increased in absolute dollar
amounts but declined as a percentage of net revenue for both fiscal 1998 and
1997. The increase in absolute dollars was due primarily to the Company's
increased staffing worldwide and increased infrastructure expenses, including
information systems, to support the Company's continued growth. The decline in
selling, general and administrative expense as a percentage of net revenue
resulted from significant net revenue growth.
The Company continues to fund research, development and engineering activities
to meet the demand for swift product cycles. As a result, research, development
and engineering expenses have increased each year in absolute dollars due to
increased staffing levels and product development costs. The Company expects to
continue to increase research, development and engineering spending in absolute
dollar amounts in order to invest in new products.
The Company believes that its ability to manage operating costs is an important
factor in its ability to remain competitive and successful. The Company will
continue to invest in information systems, personnel and other infrastructure,
and in research, development and engineering activities, to support its growth
and to provide for new, competitive products. Although operating expenses are
expected to increase in absolute dollar terms, the Company's goal is to manage
these expenses, over time, relative to its net revenue and gross margin.
Operating Income
While delivering annual revenue growth of 59% and 47% in fiscal years 1998 and
1997, respectively, the Company has grown operating income by 84% in fiscal 1998
and 90% in fiscal 1997. This reflects the Company's ability to manage operating
expenses in relation to growth in gross margin to deliver strong operating
performance.
Financing and Other
Financing and other increased $19 million in fiscal 1998 from fiscal 1997 to $52
million primarily as a result of increased investment income due to increased
average marketable securities balances. Also, financing and other increased $27
million in fiscal 1997 from fiscal 1996 to $33 million due to increased
investment income and decreased interest expense.
15
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Income Taxes
The Company's effective tax rate was 31% for fiscal 1998 compared to 29% for
both fiscal 1997 and 1996. The increase in the effective tax rate resulted from
changes in the geographical distribution of income and losses. As a result of
the Company's geographical distribution of income, the Company's effective tax
rate is lower than the U.S. federal statutory rate of 35%.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents selected financial statistics and information for
each of the past three fiscal years:
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN MILLIONS)
Cash and marketable securities......................... $1,844 $1,352 $ 646
Working capital........................................ $1,215 $1,089 $1,018
Days of sales in accounts receivable................... 36 37 42
Days of supply in inventory............................ 7 13 31
Days in accounts payable............................... 51 54 33
During fiscal 1998, the Company generated $1.6 billion in cash flows from
operating activities, which represents the Company's principal source of cash.
Cash flows from operating activities benefited from increased net income and
continued asset management focus.
During fiscal 1998, the Company repurchased 69 million shares of its common
stock for an aggregate cost of $1.0 billion. The Company is currently authorized
to repurchase up to 100 million additional shares of its common stock and
anticipates that repurchases under this program will constitute a significant
use of future cash resources. At February 1, 1998, the Company held equity
instrument contracts that relate to the purchase of 50 million additional shares
of its common stock for an average cost of $44 per share exercisable at various
times in the first quarter of fiscal 1999 through the third quarter of fiscal
2000. For additional information regarding the Company's stock repurchase
program, see Note 7 of Notes to Consolidated Financial Statements.
The Company utilized $187 million in cash during fiscal 1998 to construct and
equip manufacturing and office facilities. The Company expects to spend
approximately $330 million to purchase capital items for manufacturing and
office facilities during fiscal 1999 to support the Company's continued growth.
During fiscal 1998, the Company replaced two revolving credit facilities with
one $250 million 5-year revolving credit facility. Additionally, during fiscal
1996, the Company entered into a transaction that gives the Company the ability
to raise up to $150 million through a receivables securitization facility. At
both February 1, 1998, and February 2, 1997, these facilities were unused.
During fiscal 1998, the Company entered into a $227 million master lease
facility, which allows the Company to lease certain real property, buildings and
equipment to be constructed or acquired. At February 1, 1998, $43 million of
this facility had been utilized.
In March 1998, the Company filed a registration statement with the U.S.
Securities and Exchange Commission related to $500 million of debt securities.
Presently, no securities under this registration are issued or outstanding.
Management believes that the Company has sufficient resources from cash provided
from operations and available borrowings to support its operations and capital
requirements for at least the next twelve months.
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MARKET RISK
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to fluctuations in foreign currency values and changes in
the market value of its investments.
Foreign Currency Hedging Activities
The Company's objective in managing its exposure to foreign currency exchange
rate fluctuations is to reduce the impact of adverse fluctuations in earnings
and cash flows associated with foreign currency exchange rate changes.
Accordingly, the Company utilizes foreign currency option contracts and forward
contracts to hedge its exposure on anticipated transactions and firm
commitments. The principal currencies hedged are the British pound, Japanese
yen, German mark, French franc and Canadian dollar. The Company monitors its
foreign exchange exposures daily to ensure the overall effectiveness of its
foreign currency hedge positions. However, there can be no assurance the
Company's foreign currency hedging activities will substantially offset the
impact of fluctuations in currency exchange rates on its results of operations
and financial position.
Based on the Company's foreign exchange instruments outstanding at February 1,
1998, the Company estimates a maximum potential one-day loss in fair value of
$12 million, using a Value-at-Risk ("VAR") model. The VAR model estimates were
made assuming normal market conditions and a 95% confidence level. There are
various types of modeling techniques that can be used in a VAR computation; the
Company used a Monte Carlo simulation type model that valued its foreign
currency instruments against a thousand randomly generated market price paths.
Anticipated transactions, firm commitments, receivables and accounts payable
denominated in foreign currencies were excluded from the model. The VAR model is
a risk estimation tool, and as such is not intended to represent actual losses
in fair value that will be incurred by the Company. Additionally, as the Company
utilizes foreign currency instruments for hedging anticipated and firmly
committed transactions, a loss in fair value for those instruments is generally
offset by increases in the value of the underlying exposure. Foreign currency
fluctuations did not have a material impact on the Company during fiscal years
1998, 1997 and 1996.
Marketable Securities
The fair value of the Company's investments in marketable securities at February
1, 1998 was $1.5 billion. The Company's investment policy is to manage its
marketable securities portfolio to preserve principal and liquidity while
maximizing the return on the investment portfolio through the full investment of
available funds. The Company diversifies the marketable securities portfolio by
investing in multiple types of investment-grade securities and through the use
of different investment brokers. The Company's marketable securities portfolio
is primarily invested in short-term securities with at least an investment grade
rating to minimize interest rate and credit risk as well as to provide for an
immediate source of funds. Based on the Company's marketable securities
portfolio and interest rates at February 1, 1998, a 175 basis point increase or
decrease in interest rates would result in a decrease or increase of $17
million, respectively, in the fair value of the marketable securities portfolio.
Although changes in interest rates may affect the fair value of the marketable
securities portfolio and cause unrealized gains or losses, such gains or losses
would not be realized unless the investments are sold.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
There are numerous factors that may affect the Company's business and the
results of its operations. These factors include general economic and business
conditions; the level of demand for personal computers; the level and intensity
of competition in the personal computer industry and the pricing pressures that
may result; the ability of the Company to timely and effectively manage
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periodic product transitions and component availability; the ability of the
Company to develop new products based on new or evolving technology and the
market's acceptance of those products; the ability of the Company to manage its
inventory levels to minimize excess inventory, declining inventory values and
obsolescence; the product, customer and geographic sales mix of any particular
period; the Company's ability to continue to improve its infrastructure
(including personnel and systems) to keep pace with the growth in its overall
business activities; and the Company's ability to ensure its products and
information systems and those of its third party providers will be Year 2000
compliant. For a discussion of these and other factors affecting the Company's
business and prospects, see "Item 1 -- Business -- Factors Affecting the
Company's Business and Prospects" above.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Response to this item is included in "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Market Risk" above.
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ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Financial Statements:
Report of Independent Accountants......................... 20
Consolidated Statement of Financial Position at February
1, 1998 and February 2, 1997........................... 21
Consolidated Statement of Income for the three fiscal
years ended February 1, 1998........................... 22
Consolidated Statement of Cash Flows for the three fiscal
years ended February 1, 1998........................... 23
Consolidated Statement of Stockholders' Equity for the
three fiscal years ended February 1, 1998.............. 24
Notes to Consolidated Financial Statements................ 25
Financial Statement Schedule:
For the three fiscal years ended February 1, 1998
Schedule II -- Valuation and Qualifying Accounts....... 58
All other schedules are omitted because they are not applicable.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Dell Computer Corporation
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Dell
Computer Corporation and its subsidiaries at February 1, 1998 and February 2,
1997, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended February 1, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Austin, Texas
February 16, 1998
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DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN MILLIONS)
ASSETS
FEBRUARY 1, FEBRUARY 2,
1998 1997
----------- -----------
Current assets:
Cash...................................................... $ 320 $ 115
Marketable securities..................................... 1,524 1,237
Accounts receivable, net.................................. 1,486 903
Inventories............................................... 233 251
Other..................................................... 349 241
------ ------
Total current assets.............................. 3,912 2,747
Property, plant and equipment, net.......................... 342 235
Other....................................................... 14 11
------ ------
Total assets...................................... $4,268 $2,993
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $1,643 $1,040
Accrued and other......................................... 1,054 618
------ ------
Total current liabilities......................... 2,697 1,658
Long-term debt.............................................. 17 18
Deferred revenue on warranty contracts...................... 225 219
Other....................................................... 36 13
Commitments and contingent liabilities...................... -- --
------ ------
Total liabilities................................. 2,975 1,908
------ ------
Put options................................................. -- 279
------ ------
Stockholders' equity:
Preferred stock and capital in excess of $.01 par value;
shares issued and outstanding: none.................... -- --
Common stock and capital in excess of $.01 par value;
shares issued and outstanding: 644 and 692,
respectively........................................... 747 195
Retained earnings......................................... 607 647
Other..................................................... (61) (36)
------ ------
Total stockholders' equity........................ 1,293 806
------ ------
$4,268 $2,993
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
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DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS)
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
Net revenue............................................. $12,327 $7,759 $5,296
Cost of revenue......................................... 9,605 6,093 4,229
------- ------ ------
Gross margin.......................................... 2,722 1,666 1,067
------- ------ ------
Operating expenses:
Selling, general and administrative................... 1,202 826 595
Research, development and engineering................. 204 126 95
------- ------ ------
Total operating expenses...................... 1,406 952 690
------- ------ ------
Operating income.............................. 1,316 714 377
Financing and other..................................... 52 33 6
------- ------ ------
Income before income taxes and extraordinary loss..... 1,368 747 383
Provision for income taxes.............................. 424 216 111
------- ------ ------
Income before extraordinary loss...................... 944 531 272
Extraordinary loss, net of taxes........................ -- (13) --
------- ------ ------
Net income............................................ 944 518 272
Preferred stock dividends............................... -- -- (12)
------- ------ ------
Net income available to common stockholders............. $ 944 $ 518 $ 260
======= ====== ======
Basic earnings per common share (in whole dollars):
Income before extraordinary loss...................... $ 1.44 $ 0.75 $ 0.36
Extraordinary loss, net of taxes...................... -- (.02) --
------- ------ ------
Earnings per common share............................. $ 1.44 $ 0.73 $ 0.36
======= ====== ======
Diluted earnings per common share (in whole dollars):
Income before extraordinary loss...................... $ 1.28 $ 0.68 $ 0.33
Extraordinary loss, net of taxes...................... -- (.02) --
------- ------ ------
Earnings per common share............................. $ 1.28 $ 0.66 $ 0.33
======= ====== ======
Weighted average shares outstanding:
Basic................................................. 658 710 716
Diluted............................................... 738 782 790
The accompanying notes are an integral part of these consolidated financial
statements.
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DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
FISCAL YEAR ENDED
---------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net income............................................... $ 944 $ 518 $ 272
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 67 47 38
Other............................................... 24 29 22
Changes in:
Operating working capital............................. 529 659 (195)
Non-current assets and liabilities.................... 28 109 38
-------- ------- -------
Net cash provided by operating activities........ 1,592 1,362 175
-------- ------- -------
Cash flows from investing activities:
Marketable securities:
Purchases............................................. (12,305) (9,538) (4,545)
Maturities and sales.................................. 12,017 8,891 4,442
Capital expenditures..................................... (187) (114) (101)
-------- ------- -------
Net cash used in investing activities............ (475) (761) (204)
-------- ------- -------
Cash flows from financing activities:
Purchase of common stock................................. (1,023) (495) --
Repurchase of 11% Senior Notes........................... -- (95) --
Issuance of common stock under employee plans............ 88 57 48
Cash received from sale of equity options................ 38 -- --
Preferred stock dividends and other...................... (1) -- (14)
-------- ------- -------
Net cash (used in) provided by financing
activities..................................... (898) (533) 34
-------- ------- -------
Effect of exchange rate changes on cash.................... (14) (8) 7
-------- ------- -------
Net increase in cash....................................... 205 60 12
Cash at beginning of period................................ 115 55 43
-------- ------- -------
Cash at end of period...................................... $ 320 $ 115 $ 55
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
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DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
PREFERRED STOCK
AND CAPITAL IN COMMON STOCK AND
EXCESS OF PAR CAPITAL IN EXCESS
VALUE OF PAR VALUE
---------------- ------------------ RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS OTHER TOTAL
------ ------ ------- ------- -------- ----- -------
Balances at January 29, 1995.......... 1 $ 120 635 $ 242 $ 311 $(21) $ 652
Net income.......................... -- -- -- -- 272 -- 272
Stock issuance under employee plans,
including tax benefits........... -- -- 33 74 -- (17) 57
Preferred stock conversion.......... (1) (114) 80 114 -- -- --
Other............................... -- -- -- -- (13) 5 (8)
Balances at January 28, 1996.......... -- 6 748 430 570 (33) 973
Net income.......................... -- -- -- -- 518 -- 518
Stock issuance under employee plans,
including tax benefits........... -- -- 6 65 -- (18) 47
Purchase and retirement of 62
million shares................... -- -- (62) (22) (388) -- (410)
Purchase and reissuance of 19
million shares for employee plans
and preferred stock conversion... -- (6) -- -- (55) -- (61)
Reclassification of put options..... -- -- -- (279) -- -- (279)
Other............................... -- -- -- 1 2 15 18
Balances at February 2, 1997.......... -- -- 692 195 647 (36) 806
Net income.......................... -- -- -- -- 944 -- 944
Stock issuance under employee plans,
including tax benefits........... -- 21 274 -- (11) 263
Purchase and retirement of 69
million shares................... -- (69) (39) (984) -- (1,023)
Reclassification of put options..... -- -- -- 279 -- -- 279
Other............................... -- -- -- 38 -- (14) 24
Balances at February 1, 1998.......... -- $ -- 644 $ 747 $ 607 $(61) $ 1,293
The accompanying notes are an integral part of these consolidated financial
statements.
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DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- Dell Computer Corporation, a Delaware corporation
(including its consolidated subsidiaries, the "Company") designs, develops,
manufactures, markets, services and supports a wide range of computer systems,
including desktops, notebooks and enterprise systems (includes servers and
workstations), and also markets software, peripherals and service and support
programs. The Company markets its computer products and services under the
Dell(R) brand name directly to its customers. These customers include major
corporate, government, medical and education accounts, as well as
small-to-medium businesses and individuals. The Company conducts operations
worldwide through wholly owned subsidiaries; such operations are primarily
concentrated in the United States, Europe and the Asia-Pacific rim.
Fiscal Year -- The Company's fiscal year is the 52 or 53 week period ending on
the Sunday nearest January 31.
Principles of Consolidation -- The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and include
the accounts of the Company. All significant intercompany transactions and
balances have been eliminated. Certain reclassifications have been made in the
prior years for consistent presentation.
Use of Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of management's
estimates. These estimates are subjective in nature and involve judgements that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at fiscal year end and the reported amounts of
revenues and expenses during the fiscal year. Actual results could differ from
those estimates.
Marketable Securities -- The Company's marketable securities are classified as
available-for-sale and are reported at fair value. Unrealized gains and losses
are reported, net of taxes, as a component of stockholders' equity. Unrealized
losses are charged against income when a decline in fair value is determined to
be other than temporary. The specific identification method is used to determine
the cost of securities sold. Gains and losses on marketable securities are
included in financing and other when realized. The Company accounts for highly
liquid investments with maturities of three months or less at date of
acquisition as marketable securities and reflects the related cash flows as
investing cash flows. As a result, a significant portion of its gross marketable
securities purchases and maturities disclosed as investing cash flows is related
to highly liquid investments.
Inventories -- Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Property, Plant and Equipment -- Property, plant and equipment are carried at
depreciated cost. Depreciation is provided using the straight-line method over
the estimated economic lives of the assets, which range from ten to thirty years
for buildings and two to five years for all other assets. Leasehold improvements
are amortized over the shorter of five years or the lease term.
Foreign Currency Translation -- The majority of the Company's international
sales are made by international subsidiaries which have the U.S. dollar as their
functional currency. International subsidiaries which have the U.S. dollar as
the functional currency are remeasured into U.S. dollars using current rates of
exchange for monetary assets and liabilities and historical rates of exchange
for nonmonetary assets. Gains and losses from remeasurement are included in
financing and other. The Company's subsidiaries that do not have the U.S. dollar
as their functional currency translate assets and liabilities at current rates
of exchange in effect at the balance sheet date. The resulting gains and losses
from translation are included as a component of stockholders' equity. Items of
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income and expense for the Company's international subsidiaries are translated
using the monthly average exchange rates in effect for the period in which the
items occur.
Foreign Currency Hedging Instruments -- The Company enters into foreign exchange
contracts to hedge its foreign currency risks. These contracts must be
designated at inception as a hedge and measured for effectiveness both at
inception and on an ongoing basis. 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 as a component of
revenue, cost of sales and/or operating expenses in the same period as the
hedged transaction. Forward contracts designated as hedges of probable
anticipated or firmly committed transactions are accounted for on a
mark-to-market basis, with realized and unrealized gains or losses recognized
currently.
Equity Instruments Indexed to the Company's Common Stock -- Proceeds received
upon the sale of equity instruments and amounts paid upon the purchase of equity
instruments are recorded as a component of stockholders' equity. Subsequent
changes in the fair value of the equity instrument contracts are not recognized.
If the contracts are ultimately settled in cash, the amount of cash paid or
received is recorded as a component of stockholders' equity.
Revenue Recognition -- Sales revenue is recognized at the date of shipment to
customers. Provision is made for an estimate of product returns and doubtful
accounts and is based on historical experience. Revenue from separately priced
service and extended warranty programs are deferred and recognized over the
extended warranty period.
Warranty and Other Post-sales Support Programs -- The Company provides currently
for the estimated costs that may be incurred under its initial warranty and
other post-sales support programs.
Advertising Costs -- Advertising costs are charged to expense as incurred.
Advertising expenses for fiscal years 1998, 1997 and 1996 were $137 million, $87
million and $83 million, respectively.
Stock-Based Compensation -- The Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in the
fiscal year ended February 2, 1997. On adoption, the Company continued to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for its stock option and stock purchase plans. As a
result, no expense has been recognized for options granted with an exercise
price equal to market value at the date of grant or in connection with the
employee stock purchase plan. For stock options that have been issued at
discounted prices, the Company accrues for compensation expense over the vesting
period for the difference between the exercise price and fair market value on
the measurement date.
Income Taxes -- The provision for income taxes is based on income before income
taxes as reported in the Consolidated Statement of Income. Deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Earnings Per Common Share -- The Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," in the fiscal year ended
February 1, 1998. Basic earnings per share is based on the weighted effect of
all common shares issued and outstanding, and is calculated by dividing net
income available to common stockholders by the weighted average shares
outstanding during the period. Diluted earnings per share is calculated by
dividing net income available to common stockholders by the weighted average
number of common shares used in the basic earnings per share calculation plus
the number of common shares that would be issued assuming conversion of all
potentially dilutive common shares outstanding. All historical earnings
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per share data have been restated to conform to this presentation. Below is the
calculation of basic and diluted earnings per share for each of the past three
fiscal years:
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net income.............................................. $ 944 $ 518 $ 272
Less: preferred stock dividends......................... -- -- (12)
----- ----- -----
Net income available to common stockholders............. $ 944 $ 518 $ 260
===== ===== =====
Weighted average shares outstanding -- Basic............ 658 710 716
Employee stock options and other........................ 80 72 74
----- ----- -----
Weighted average shares outstanding -- Diluted.......... 738 782 790
===== ===== =====
Earnings per common share:
Basic................................................. $1.44 $0.73 $0.36
Diluted............................................... $1.28 $0.66 $0.33
Recently Issued Accounting Pronouncement -- On March 4, 1998, the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants, issued Statement of Position 98-1 (SoP 98-1), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which
provides guidance concerning the capitalization of costs related to such
software. The SoP 98-1 must be adopted by the Company effective as of fiscal
year 2000 and is not expected to have a material impact on the Company's
consolidated results of operations or financial position.
NOTE 2 -- FINANCIAL INSTRUMENTS
DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of marketable securities, long-term debt and interest rate
derivative instruments has been estimated based upon market quotes from brokers.
The fair value of foreign currency forward contracts has been estimated using
market quoted rates of foreign currencies at the applicable balance sheet date.
The estimated fair value of foreign currency purchased option contracts is based
on market quoted rates at the applicable balance sheet date and the
Black-Scholes options pricing model. Considerable judgment is necessary in
interpreting market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. Changes in assumptions
could significantly affect the estimates.
Cash, accounts receivable, accounts payable and accrued and other liabilities
are reflected in the financial statements at fair value because of the
short-term maturity of these instruments.
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MARKETABLE SECURITIES
The following table summarizes by major security type the fair value of the
Company's holdings of marketable securities.
FEBRUARY 1, FEBRUARY 2,
1998 1997
----------- -----------
(IN MILLIONS)
Preferred stock............................................. $ 172 $ 172
Mutual funds, principally invested in debt securities....... 800 182
Debt securities:
State and municipal securities............................ 190 317
U.S. corporate and bank debt.............................. 307 415
U.S. government and agencies.............................. 40 98
International corporate and bank debt..................... 15 53
------ ------
Total debt securities....................................... 552 883
------ ------
Total marketable securities....................... $1,524 $1,237
====== ======
At February 1, 1998 and February 2, 1997, the cost of marketable securities
approximates fair value. At February 1, 1998, debt securities with a carrying
amount of $414 million mature within one year; the remaining debt securities
mature within three years. The Company's gross realized gains and losses on the
sale of marketable securities for fiscal years 1998, 1997 and 1996 were not
material.
FOREIGN CURRENCY INSTRUMENTS
The Company uses foreign currency purchased option contracts and forward
contracts to reduce its exposure to currency fluctuations involving probable
anticipated, but not firmly committed, transactions and transactions with firm
foreign currency commitments. These transactions include international sales by
U.S. dollar functional currency entities, foreign currency denominated purchases
of certain components and intercompany shipments to certain international
subsidiaries. The risk of loss associated with purchased options is limited to
premium amounts paid for the option contracts. Foreign currency purchased
options generally expire in twelve months or less. At February 1, 1998, the
Company held purchased option contracts with a notional amount of $2.0 billion,
a carrying amount of $69 million and a combined net realized and unrealized
deferred loss of $2 million. Additionally, at February 2, 1997, the Company held
purchased option contracts with a notional amount of $1.2 billion, a carrying
amount of $33 million and a combined net realized and unrealized deferred gain
of $25 million. The risk of loss associated with forward contracts is equal to
the exchange rate differential from the time the contract is entered into until
the time it is settled. Transactions with firm foreign currency commitments are
generally hedged using foreign currency forward contracts for periods not
exceeding three months. At February 1, 1998, the Company held forward contracts
with a notional amount of $800 million, a carrying amount of $26 million and a
combined net realized and unrealized deferred gain of $10 million. At February
2, 1997, the Company held foreign currency forward contracts with a notional
amount of $207 million and a contract carrying amount of $12 million, which
represented fair value.
LONG-TERM DEBT AND INTEREST RATE RISK MANAGEMENT
During fiscal 1997, the Company repurchased $95 million of its outstanding $100
million 11% Senior Notes Due August 15, 2000 (the "Senior Notes"). As a result
of the repurchase, the Company recorded an extraordinary loss of $13 million
(net of tax benefit of $7 million). In connection with the Senior Notes, the
Company entered into interest rate swap agreements that expire on August 15,
1998. At February 1, 1998 and February 2, 1997, the Company had outstanding
receive fixed/pay floating interest rate swap agreements in the aggregate
notional amount of $100 million offset by receive floating/pay fixed interest
rate swap agreements in the aggregate notional amount of
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$100 million. The notional amount of both the receive fixed/pay floating
interest rate swaps and the offsetting receive floating/pay fixed interest rate
swaps was marked-to-market and included in the extraordinary loss. The weighted
average interest rate on the Senior Notes, adjusted by the swaps, was 13.8% for
fiscal years 1998, 1997 and 1996, respectively. The difference between the
Company's carrying amounts and fair value on long-term debt and related interest
rate swaps was not material at both February 1, 1998, and February 2, 1997,
respectively.
NOTE 3 -- INCOME TAXES
The provision for income taxes consists of the following:
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(IN MILLIONS)
Current:
Domestic.............................................. $362 $252 $102
Foreign............................................... 41 34 25
Deferred................................................ 21 (70) (16)
---- ---- ----
Provision for income taxes.............................. $424 $216 $111
==== ==== ====
Income before income taxes and extraordinary loss included approximately $205
million, $223 million and $176 million related to foreign operations in fiscal
years 1998, 1997 and 1996, respectively.
The Company has not recorded a deferred income tax liability of approximately
$127 million for additional taxes that would result from the distribution of
certain earnings of its foreign subsidiaries, if they were repatriated. The
Company currently intends to reinvest indefinitely these undistributed earnings
of its foreign subsidiaries.
The components of the Company's net deferred tax asset (included in other
current assets) are as follows:
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(IN MILLIONS)
Provisions for product returns and doubtful accounts.... $ 20 $ 31 $ 25
Inventory and warranty provisions....................... 24 21 18
Deferred service contract revenue....................... 124 107 53
Other................................................... (62) (26) (29)
---- ---- ----
Net deferred tax asset.................................. $106 $133 $ 67
==== ==== ====
The effective tax rate differed from statutory U.S. federal income tax rate as
follows:
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
U.S. federal statutory rate............................. 35.0% 35.0% 35.0%
Foreign income taxed at different rates................. (4.6)% (6.2)% (6.0)%
Other................................................... 0.6% 0.2% --
------ ------ ------
Effective tax rates..................................... 31.0% 29.0% 29.0%
====== ====== ======
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NOTE 4 -- JOINT VENTURE
During fiscal 1998, the Company and Newcourt Credit Group Inc. formed a joint
venture, Dell Financial Services L.P. ("DFS"), to provide leasing and asset
management services to the Company's customers. The Company has a 70% interest
in DFS; however, as the Company does not exercise control over DFS, it accounts
for the investment under the equity method. Dell Credit Company L.L.C., which is
owned 50% by the Company and 50% by Newcourt, is the sole general partner of DFS
and, as such, is liable for the obligations of DFS. Operations of DFS for fiscal
year 1998 were not material to the Company.
NOTE 5 -- FINANCING ARRANGEMENTS
During fiscal 1997, the Company entered into a $100 million 364-day revolving
credit facility and a $150 million 3-year revolving credit facility. During
fiscal 1998, the Company replaced the two separate facilities with one $250
million 5-year revolving credit facility. Additionally during fiscal 1996, the
Company entered into a transaction that gives the Company the ability to raise
up to $150 million through a receivables securitization facility. Commitment
fees for each of these facilities are paid quarterly and are based on specific
liquidity requirements. Commitment fees paid in both fiscal 1998 and 1997 were
not material to the Company. At both February 1, 1998 and February 2, 1997,
these facilities were unused.
NOTE 6 -- PREFERRED STOCK
The Company has the authority to issue 5 million shares of preferred stock, par
value $.01 per share.
Series A Convertible Preferred Stock -- During fiscal 1996, the Company offered
to pay a cash premium of $8.25 for each outstanding share of Series A
Convertible Preferred Stock that was converted to common stock. Holders of 1
million shares of Series A Convertible Preferred Stock elected to convert and,
as a result, received an aggregate of approximately 20 million shares of common
stock and $10 million in cash during fiscal 1996. During fiscal 1997, the
remaining 60,000 shares of Series A Convertible Preferred Stock were converted
into common stock in accordance with their terms, resulting in the issuance of
an additional 1 million shares of common stock.
Series A Junior Participating Preferred Stock -- In conjunction with the
distribution of Preferred Share Purchase Rights (see Note 9 -- Preferred Share
Purchase Rights), the Company's Board of Directors designated 200,000 shares of
preferred stock as Series A Junior Participating Preferred Stock ("Junior
Preferred Stock") and reserved such shares for issuance upon exercise of the
Preferred Share Purchase Rights. At February 1, 1998 and February 2, 1997, no
shares of Junior Preferred Stock were issued or outstanding.
NOTE 7 -- COMMON STOCK
Authorized Shares -- During fiscal 1998, the Company's stockholders approved an
increase in the number of authorized shares of common stock to one billion from
three hundred million at the end of fiscal 1997.
Stock Split -- On each of March 6, 1998 and July 25, 1997, the Company effected
a two-for-one common stock split by paying a 100% stock dividend to stockholders
of record as of February 27, 1998 and July 18, 1997, respectively. All share and
per share information has been retroactively restated in the Consolidated
Financial Statements to reflect these stock splits.
Stock Repurchase Program -- The Board of Directors has authorized the Company to
repurchase up to 250 million shares of its common stock in open market or
private transactions. During fiscal 1998 and fiscal 1997, the Company
repurchased 69 million and 81 million shares of its common stock, respectively,
for an aggregate cost of $1.0 billion and $503 million, respectively. The
Company utilizes equity instrument contracts to facilitate its repurchase of
common stock. At
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February 1, 1998 and February 2, 1997, the Company held equity instrument
contracts that relate to the purchase of 50 million and 36 million shares of
common stock, respectively, at an average cost of $44 and $9 per share,
respectively. Additionally, at February 1, 1998 and February 2, 1997, the
Company has sold put obligations covering 55 million and 34 million shares,
respectively, at an average exercise price of $39 and $8, respectively. The
equity instruments are exercisable only at expiration, with the expiration dates
ranging from the first quarter of fiscal 1999 through the third quarter of
fiscal 2000.
At February 2, 1997, certain outstanding put obligations contained net cash
settlement or physical settlement terms thus resulting in a reclassification of
the maximum potential repurchase obligation of $279 million from stockholders'
equity to put warrants. The outstanding put obligations at February 1, 1998
permitted net-share settlement at the Company's option and, therefore, did not
result in a put warrant liability on the balance sheet. The equity instruments
did not have a material dilutive effect on earnings per common share for fis