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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 29, 1995
COMMISSION FILE NUMBER: 0-17017
DELL COMPUTER CORPORATION
2112 KRAMER LANE, BUILDING 1
AUSTIN, TEXAS 78758-4012
(512) 338-4400
A DELAWARE CORPORATION IRS EMPLOYER ID NO. 74-2487834
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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, and (2) it 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. /X/
As of March 1, 1995, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $1,201,662,480.
As of March 1, 1995, the registrant had outstanding 39,719,402 shares of
its Common Stock, $.01 Par Value.
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Unless otherwise indicated, all references to years in connection with
financial information refer to the Company's fiscal years and all references to
quarters in connection with financial information refer to the Company's fiscal
quarters. The Company's fiscal year ends on the Sunday closest to January 31 of
each year. Fiscal 1995 ended on January 29, 1995, fiscal 1994 ended on January
30, 1994, fiscal 1993 ended on January 31, 1993, and fiscal 1996 will end on
January 28, 1996.
All percentage amounts used in describing operating results are based on
the related dollar amounts rounded to the nearest thousand which are set forth
in the Selected Consolidated Financial Data and the Consolidated Financial
Statements and related notes thereto included in this annual report.
PART I
ITEM 1. BUSINESS
Dell Computer Corporation (the "Company" or "Dell") designs, develops,
manufactures, markets, services and supports a broad range of personal
computers, including desktops, notebooks and servers compatible with industry
standards under the Dell(R) brand name. With revenue of nearly $3.5 billion for
1995, Dell is the world's leading direct marketer of personal computers and one
of the top five personal computer vendors in the world.
Dell primarily markets its personal computer products and services directly
to its customers, which include major corporate, government, medical and
education accounts as well as small businesses and individuals. The Company
believes that its direct customer relationships provide it with a competitive
advantage because the information that the Company gathers and analyzes from
these relationships enables it to better understand and respond to customer
demands for computer products and services. Additionally, such information
enables the Company to focus its computer product development efforts on the
technologies that are most valued by its customers. Dell's approach also
generally avoids the inefficiency and mark-ups associated with the typical
industry model, where products move through a multi-step process involving
manufacturers, distributors, retail stores and a variety of value-added service
providers. Dell supplements its direct marketing strategy by selling personal
computer systems through certain value-added remarketers and system integrators
("VARs") and, in certain international geographical regions, third-party
distributors and consumer retailers.
The Company employs a build-to-order manufacturing process that enables the
Company to achieve rapid inventory turnover and reduced inventory levels, which
reduces the Company's exposure to the risk of declining inventory values. This
flexible manufacturing process also allows the Company to rapidly incorporate
new technologies and components into its product offerings.
The Company's product development efforts are focused on designing and
developing personal computer products which adhere to industry standards and
incorporate technologies and features at reasonable price levels that the
Company believes are the most desired by its customers. As of March 1, 1995, the
Company offered 64 personal computer systems, many of which can be custom
configured with a variety of hardware including multimedia and communication
devices as well as an assortment of memory, mass storage and other options. As
part of its commitment to provide personal computer solutions, the Company also
markets a wide range of software, peripherals, and service and support programs.
Dell Computer Corporation was originally incorporated in Texas in May 1984.
In October 1987, the current Delaware corporation was formed and the renamed
successor to the Texas company became a subsidiary of the Delaware corporation.
Based in Austin, Texas, the Company operates wholly-owned subsidiaries in the
Americas, Europe, Japan, Asia, Australia, and other international locations.
Dell Computer Corporation's Common Stock, $.01 Par Value, (the "Common Stock")
is quoted on the Nasdaq National Market under the trading symbol DELL.
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THE DELL DIRECT RELATIONSHIP MARKETING STRATEGY
Dell's primary strategy has been to develop and utilize direct customer
relationships to understand end users' needs and to deliver high quality
personal computer products and services tailored to meet those needs. The
Company provides its customers with individualized service, from the initial
order through custom configured manufacturing to post-sale service and support,
including technical support and on-site service. The Company uses feedback from
its broad base of customer contacts to refine its product development, marketing
and customer support plans.
Dell's direct marketing strategy provides the Company with several
competitive advantages. First, Dell can price its products aggressively because
it avoids typical dealer mark-ups and high inventory costs of physical stores.
Second, it can offer a broader line of products because it is not constrained by
physical retail shelf space. Third, the Company can accelerate time-to-market on
new product introductions which reduces obsolescence risk because it does not
need to support an extensive pipeline of dealer inventory. Fourth, direct
customer contact provides valuable information that is used to shape future
product offerings and post-sale service and support. Fifth, the Company
continually adds to its database of information about its customers, enabling it
to market future product offerings more cost-effectively. Finally, by providing
its end users with a full range of services, the Company believes it has a
greater opportunity to develop customer loyalty than those who market through
retail stores. The Company attempts to expand its direct marketing distribution
channel through ongoing revision and improvement of its marketing and sales
compensation programs to more effectively reach its customers and achieve
improved market penetration, by improving its support systems, by pursuing
additional distribution opportunities and by entering new markets.
There is no single customer of Dell, or any VAR or distributor of the
Company's products, to which aggregate sales amounted to ten percent or more of
the Company's consolidated revenue for any of the last three fiscal years ended
in 1995.
Although the Company believes its direct marketing strategy offers many
advantages to certain customers, a portion of personal computer buyers
(primarily certain medium- to small-sized businesses and individuals) desire
physical access to products, particularly when making their first personal
computer purchase. Direct marketing typically does not offer these end-users
physical access to products before the purchase decision. However, the Company's
personal computer products have achieved customer acceptance with a large number
of customers who are comfortable purchasing directly from the manufacturer. The
Company is dependent on the growth of direct distribution channels to have a
growing market in which to sell its products and services. There can be no
assurance that worldwide direct marketing channels will grow or that the Company
would be able to establish a more significant presence in indirect channels of
distribution if it becomes necessary or desirable in the future.
INTERNATIONAL OPERATIONS
The Company currently sells personal computer products, primarily through
direct marketing, in more than 125 countries through selected distributors and
wholly-owned and operated subsidiaries in the Americas, Europe, Japan, Asia,
Australia, and other international locations. Many of the Company's
international subsidiaries were originally formed as stand-alone businesses
providing sales, technical support and customer service. While this approach
facilitated effective and rapid market penetration, it also created redundant
marketing and support programs among the subsidiaries. During 1995, the Company
continued its process of consolidating common functions, primarily in Europe,
into regional business units to reduce redundant costs and improve the Company's
ability to deliver its products and services in these markets. International
operations benefited in 1995 from improvements in manufacturing logistics and
efficiencies from its vendor certification program and from improved inventory
management.
Dell's manufacturing facility in Limerick, Ireland now supplies virtually
all of the products the Company sells in Europe, Japan, Australia, the Middle
East and Africa. The Company expects to begin construction in March 1995 of a
238,000 square foot combination office and manufacturing facility on a nine-acre
site in Penang, Malaysia, to meet the needs of its expanding Asia-Pacific
business. Dell intends to continue to expand its international activities by
increasing its market presence in existing markets through ongoing revisions and
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improvement of its marketing and sales compensation programs to more effectively
reach its customers, by improving its support systems, by pursuing additional
distribution opportunities, and by entering new markets. The Company evaluates
international distributor candidates primarily based upon compatibility, brand
strategies, and market presence. The success and profitability of international
operations may be adversely affected by risks associated with international
activities, including economic and labor conditions, political instability, tax
laws (including U.S. taxes on foreign subsidiaries), and changes in the value of
the United States dollar versus the local currency in which products are sold.
Changes in exchange rates may adversely affect the Company's consolidated net
sales (as expressed in United States dollars) and gross profit margins from
international operations. The Company attempts to mitigate this exposure through
hedging transactions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Hedging Activities."
The Company's European operations contributed net revenue of $953 million
for 1995, representing a 22% increase over $782 million in net revenue for 1994.
European revenue for 1994 represented a 41% increase over $553 million in net
revenue for 1993. Other international sales increased 126% to $122 million for
1995 primarily driven by Japan which more than doubled in 1995 compared with
1994. Other international sales increased in 1994 to $54 million from $1.3
million in 1993. These increases resulted primarily from increased sales in
existing geographic markets and, to a lesser extent, expansion into new
geographic markets. In prior years, the Company consolidated its international
operating results on a one-month delay to facilitate consolidated financial
reporting. In the fourth quarter of 1995, the Company eliminated this one-month
delay. Accordingly, the Company's income before income taxes for 1995 includes
one additional month of international operations. Net earnings before taxes of
$5.7 million for this additional month are included in the consolidated
statement of operations in financing and other income (expense) resulting in an
additional $4.1 million of net income or $0.10 of primary earnings per common
share. Net earnings for this additional month of international operations had no
effect on the Company's operating income.
MARKETING AND SALES
Dell markets its personal computer products and services directly to
businesses, government agencies, medical and educational institutions and
individuals, primarily by means of telephone and catalogs and through a growing
field sales force calling on major customers. The Company provides related
technical support and other customer services primarily by telephone as well as
through on-site field service contracts. Specialized marketing approaches are
tailored to meet the needs of each type of customer in a cost effective manner.
National and Multi-National Accounts
Dell currently has a broad base of business among Fortune 500(R) companies
and governmental, medical and educational institutions worldwide. The Company's
government customers include the U.S. Federal government and various state and
local governments. The Company has held a U.S. General Services Administration
Schedule contract since June 1987, through which U.S. federal governmental
agencies purchase the Company's computers and equipment.
The Company has developed direct sales marketing programs and services
specifically geared to large corporate, government, medical, and educational
customers. Dell account management teams consisting of sales, customer service
and technical support representatives form long-term customer relationships to
provide each large account with a single source of assistance on issues ranging
from order placement to system configuration, connectivity and technology
transitioning. To support these teams, Dell has account executives in many major
cities in the Americas, Europe and other international locations. For customers
with in-house maintenance organizations, Dell offers a variety of programs
including specialized personal 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.
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The Company also markets its products through VARs that customize these
computer systems with specific end-user applications through the addition of
hardware, software or services. Because VARs frequently package complete
application-specific solutions, they are in position to benefit from the
Company's custom manufacturing and technical and marketing support programs. To
provide VARs with added flexibility, the Company offers several programs
tailored directly to their needs. For example, VARs can purchase complete
systems from the Company and have them shipped directly to the user's
installation site, allowing VARs to reduce inventory, handling and other related
costs.
Net sales from national and multi-national accounts increased 26% to $2.3
billion in 1995 from $1.8 billion in 1994. Revenue from national accounts
increased 50% in 1994 from $1.2 billion in 1993. Sales to this customer group as
a percentage of consolidated net sales represented approximately 67% in 1995,
64% in 1994 and 61% in 1993.
Medium- to Small-Sized Businesses and Individuals
The Company markets its personal computer products and services to medium-
to small-sized businesses and individuals by advertising in trade and general
business publications and 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 computer systems
that are custom configured to their performance, features and other system
requirements; knowledgeable sales assistance; and post-sale support and on-site
service offerings.
The Company supplements its direct marketing strategy through distribution
agreements with retail mass merchants primarily in Japan and a catalog
distribution company in the United Kingdom. In June 1994, the Company adopted a
plan to discontinue sales through mass merchant and other consumer retailers in
the United States and Canada to better focus on its direct marketing model.
Net revenue from medium- to small-sized businesses and individuals
increased 12% to $1.2 billion in 1995 from $1.0 billion in 1994. Net revenue
from medium- to small-businesses and individuals increased 31% in 1994 from $787
million in 1993. Sales to this customer group represented 33% of consolidated
net sales in 1995, 36% in 1994 and 39% in 1993.
SERVICE AND SUPPORT
The Company offers customers several service and support programs tailored
to meet varying levels of customer requirements and toll-free telephone access
to trained technical specialists, 24 hours a day, 7 days a week. These
specialists maintain close contact with marketing, manufacturing, and product
design groups and have on-line access to the original system configuration and
the customer's service history. The Company tracks customer support calls by
category in order to identify and correct trends that may signal a design or
manufacturing concern. Many of Dell's current systems include software that
enables customers to diagnose and communicate system problems. Several models
also include a built-in diagnostics system that can provide on-line information
about system malfunctions. The Company has experienced delays in its telephone
support system due to high volumes of customer calls for technical support at
particular times. The Company is currently expanding its telephone support
operations.
In addition to personal support by telephone, the Company offers
alternative support avenues through the Internet and many of the on-line
subscription services such as CompuServe, America Online and Prodigy. Dell also
provides customers access to the Company's bulletin board system, TechFaxSM and
AutoTech systems which provide free technical information and answers to
frequently asked questions.
In the United States, basic warranty coverage for Optiplex(TM) desktops,
advanced server systems and the Latitude XP(TM) notebook is a three year
limited-warranty while Dimension(TM) desktop products and the Latitude(TM) line
of notebook computers come with a one year limited-warranty. Standard services
under these warranties include: (i) unlimited, toll-free 24-hour customer
service and technical support; (ii) "Getting Started" hotline support; (iii)
parts delivery and on-site labor service, with limited warranty coverage varying
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by product type. Additionally, Dell offers an unconditional 30 day money back
guarantee for any customer buying directly from Dell.
Recognizing that customer requirements vary, Dell enables customers to pay
for customized levels of service to support their needs. These services include:
(i) enhancement of basic warranty coverage for extended periods or on-site
support through the SelectCareSM Services program; (ii) a Shared Maintenance
Program to provide instruction and support for servicing Dell computers to
companies with their own service capabilities or a third party service provider;
(iii) Dell BusinessCareSM, which is designed for corporate users with servers on
local or wide area networks, and includes network software support by Dell and
next business day on-site services delivered by BancTec Service Corp., an
independent contractor; and (iv) upgrades to faster response through four hour
on-site service provided by Digital Equipment Corporation.
Many of the support services described above are offered exclusively or
primarily to Dell's customers in the United States. A full line of warranty,
service and support options are available in Dell's international markets, but
these options can vary significantly based on the local market and customer
requirements.
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on designing and
developing personal computer products which adhere to industry standards and
incorporate technologies and features at reasonable price levels that the
Company believes are the most desired by its customers. The Company employs a
product development team that includes programmers, technical project managers
and engineers experienced in system architecture, logic board and chip design,
sub-system development, mechanical engineering, manufacturing processing and
operating systems design. 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.
The Company's expenditures on research, development and engineering
activities approximated $65 million in fiscal 1995 compared with $49 million for
1994 and $42 million for 1993. The Company considers its research, development
and engineering activities to be important to its success and growth. Research,
development and engineering spending is determined as part of the annual budget
process and is based upon cost-benefit analyses and revenue forecasts. The
Company prioritizes activities to focus on projects that it believes will have
the greatest market acceptance and return on the Company's investment. See
"Business -- Patents, Trademarks and Licenses."
To maintain its competitive position, the Company must continue to enhance
its existing products while developing new products. To do so it must obtain and
incorporate new hardware, software, communications and peripheral technologies
that are primarily developed by others. The Company believes that it is
necessary for its products to adhere to generally accepted industry standards,
which are subject to change in ways that are not within the control of the
Company. There can be no assurance that the Company's product development
activities will be successful, that new technologies will be available to the
Company, that the Company will be able to deliver commercial quantities of new
products in a timely manner, that those products will adhere to generally
accepted industry standards, or that the products will achieve market
acceptance. Some new products introduced by the Company are intended to replace
existing products. Although the Company monitors the products that are intended
to be replaced and attempts to phase out the manufacture of those products in a
timely manner, there can be no assurance that such transitions will be executed
without adversely affecting the Company's results of operations or financial
conditions.
In addition, the personal computer industry is characterized by continuing
improvements in technology which vendors must incorporate into their products in
order to remain competitive. The Company's direct marketing model and
build-to-order manufacturing process has allowed it to participate in these
technology transitions, including the transition to Pentium processor-based
computer systems, earlier than some of its competitors. As a new technology
matures and an increasing number of competitors incorporate this technology into
their products, price competition typically increases. There can be no assurance
that the Company will be able to continue to effectively manage technology
transitions or that there will be technology
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improvements in the personal computer business sufficient to allow the Company
to take advantage of its direct model and build-to-order manufacturing process.
THE DELL PRODUCT PORTFOLIO
As of January 29, 1995, the Company had seven Dell-branded lines of
personal computer systems comprised of a total of 64 systems. Of such systems,
60 were introduced since February 1994. The Company's award-winning 486-based
notebook computer line targeted at users running mainstream applications
includes five Latitude and five Latitude XP systems which offer industry-leading
performance, flexible system expansion and advanced battery and power management
technology. The OmniPlex(TM) line is comprised of four Pentium processor-based
and five 486-based systems that are targeted for corporate and other major
account customers with high performance personal computing needs. The OptiPlex
line is comprised of four Pentium processor-based systems and twelve 486-based
systems that are targeted at corporate customers who require advanced features
and performance. The Dell Dimension XPS(TM) line is comprised of four Pentium
processor-based systems that are targeted at technologically sophisticated
businesses and individual users. The Dell Dimension product line is comprised of
five 486-based personal computer systems targeted at medium- to small-sized
businesses and individual users. Each Dell Dimension XPS system and some of the
Dell Dimension systems can be configured in either a desktop or a floorstanding
model. Each system can be custom configured with a variety of hardware including
multimedia and communication devices as well as an assortment of memory, mass
storage and other options and is backed by Dell's comprehensive service and
support program, which includes compatibility, service and response guarantees.
The Dell PowerEdge(TM) line includes twenty servers consisting of twelve
Pentium processor-based systems and eight 486-based systems which can be used as
file servers, database servers, applications servers, and
communications/groupware servers in a networked computing environment. Four of
the twelve Pentium processor-based systems contain dual processors which enable
the server to support several multiprocessing operating systems and
applications.
In addition to its own branded products, the Company offers a broad range
of software and peripheral products through its DellWare(R) program. The
DellWare line offers more than 7,000 of the most popular software packages and
hardware and communication peripherals. In February 1993, Dell expanded its
third-party applications software integration capabilities with ReadyWareSM, a
collection of more than 150 popular software applications and interface cards
that can be factory-installed on all Dell systems. The Company offers next
business day delivery as well as an extended training and support program from
Software Support, Inc. of Lake Mary, Florida, on more than 120 of its software
offerings. This support program includes a 24-hour toll-free software support
line.
The Company enhances its personal computer systems offerings with a number
of specialized services, including custom hardware and software integration and
network installation and support. For example, the Company offers custom
configuration, installation and support of integrated network solutions based on
Novell's network operating systems. Under this program, the Company offers
turnkey solutions for networking offices that need basic local area networks or
for linking workgroups with more complex networks. The Company offers a number
of other hardware and software integration services tailored to specific
end-user needs.
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
and post-sale service and support and 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 Dell's direct model, allows the Company to
gauge customer satisfaction issues as well as the opportunity to test new
propositions in the marketplace prior to product or service introductions.
The Company is in the process of transitioning its management information
systems to more fully integrate them on an enterprise wide basis, to reduce
redundancy and to incorporate enhanced functionality.
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The Company currently expects this transition, which involves both hardware and
software enhancements, to continue at least through 1998. There can be no
assurance that this management information system transition can be accomplished
on a timely basis or without disruptions of the Company's operations, or
management information functions, which could have a material adverse effect on
the Company's results of operations.
The Company has experienced rapid growth, which has required it to enhance
and expand its management team, information systems, manufacturing operations,
and other aspects of its infrastructure. If the Company continues to experience
rapid growth, of which there can be no assurance, it will need to continue to
improve and expand its infrastructure. There can be no assurance that the
Company will be able to manage expansion of its infrastructure to support future
growth effectively, nor can there be any assurance that the Company's results of
operations will not be adversely affected by any such growth, enhancements or
expansion.
GOVERNMENT REGULATION
In the United States, the Federal Communications Commission ("FCC")
regulates the radio frequency emissions of personal 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. The
Company periodically tests or hires consultants to test its products to ensure
that the products satisfy applicable FCC regulations. All of the Company's
current desktop and portable systems are sold under the more restrictive Class B
certification. Many of the network servers sold by the Company are under Class A
certification, but some are sold under Class B certification. From time to time,
the Company has experienced delays in securing FCC certification and there can
be no assurance that such delays will not occur in the future.
The Company is also required to obtain regulatory approvals in other
countries prior to the sale or shipment of personal computing equipment. In
certain jurisdictions such requirements are more stringent than in the United
States, and many developing nations are just beginning to establish safety,
environmental and other regulatory requirements which may vary greatly from U.S.
requirements. Any delays or failures in obtaining necessary approvals from
foreign jurisdictions may impede or preclude the Company's efforts to penetrate
such markets and there can be no assurance that such failures or delays will not
occur in the future.
THE DELL MANUFACTURING PROCESS
The Company manufactures all of its desktop and server personal computer
systems at its Austin, Texas and Limerick, Ireland manufacturing facilities. The
Company expects to begin construction in March 1995 of a 238,000 square foot
combination office and manufacturing facility on a nine-acre site in Penang,
Malaysia, to meet the needs of its expanding Asia-Pacific business. The Company
contracts with Quanta Computer, Inc. and Sony Corporation to manufacture
unconfigured base Latitude and Latitude XP notebook personal computers,
respectively, which the Company custom configures for shipment to customers.
The Company's manufacturing process consists of assembly, functional
testing and quality control of the Company's products as well as components,
parts and subassemblies from suppliers. The Company has pursued a build-to-order
manufacturing strategy which is designed to allow it to rapidly produce personal
computer solutions customized to customer specifications. The Company's
build-to-order manufacturing process enables the Company to achieve rapid
inventory turnover and reduced inventory levels, which somewhat reduces the
Company's exposure to the risk of declining inventory values. This flexible
manufacturing process also allows the Company to rapidly incorporate new
technologies or components into its product offerings. However, the
build-to-order manufacturing process makes it more difficult for the Company to
achieve the same manufacturing efficiencies as computer manufacturers that sell
standardized products in high volume.
Quality control is maintained through 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 toll-free telephone support
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service. During 1995, the Company implemented a voluntary vendor certification
program under which qualified vendors commit to meet defined quality
specifications. Both the U.S. and the Ireland manufacturing facilities have been
certified as meeting ISO 9002 quality standards.
The Company's manufacturing process requires a high volume of quality
components that are procured from third party suppliers. Reliance on suppliers,
as well as industry supply conditions, generally involves several risks,
including the possibility of defective parts, a shortage of components,
increases in component costs, and reduced control over delivery schedules, any
or all of which could adversely affect the Company's financial results. The
Company has several single supplier relationships and the lack of availability
of timely and reliable supply of components from these sources could adversely
affect the Company's business. Even when multiple suppliers are available, the
Company may establish a working relationship with a single source when the
Company believes it is advantageous due to performance, quality, support,
delivery, capacity and price considerations. While the Company has supply
agreements with certain suppliers, such agreements typically only specify
general terms and conditions, subject to release of purchase orders by the
Company and acceptance thereof by the component supplier. In addition,
alternative sources of supply are not available for some of the Company's single
sourced components. Where alternative sources are available, qualification of
the alternative suppliers and establishment of reliable supplies of components
from such sources may result in delays and could adversely affect the Company's
manufacturing processes and results of operations. The Company occasionally
experiences delays in receiving certain components, which can cause delays in
the shipment of some products to customers. Also, the Company has occasionally
experienced certain defective components, which can affect the reliability and
reputation of its products. There can be no assurance that the Company will be
able to continue to obtain additional supplies of reliable components in a
timely or cost-effective manner. In particular, the Company obtains its supply
of microprocessors from Intel Corporation, although certain comparable
microprocessors are available from other sources. The Company is continuing to
increase its shipments of products incorporating Intel's Pentium microprocessor.
In November 1994, an inaccuracy in Intel's Pentium microprocessor was
publicized that, in some cases, may cause errors in division. Based on
information from Intel Corporation, the Company believes only a limited number
of its Pentium microprocessor customers perform calculations affected by the
inaccuracy. Nonetheless, Intel has offered replacement microprocessors to
end-users for any Pentium microprocessor exhibiting this inaccuracy. By early
February 1995, all of the Company's new shipments of Pentium processor-based
products contained the corrected Pentium microprocessors. Although the Company
had an inventory of Pentium microprocessors that exhibited the inaccuracy and
previously shipped products which included such microprocessors, the Company
believes that the costs associated with this inventory and replacement of
Pentium microprocessors which exhibit this inaccuracy previously shipped to
customers will not have a material adverse effect on the Company's results of
operations or financial condition.
BACKLOG
The Company does not believe that backlog is a meaningful indicator of
sales that can be expected for any period. The Company attempts to reduce
manufacturing costs by more efficiently managing its flow of customer orders,
which resulted in an increase in backlog to $95 million at January 29, 1995,
compared with $38 million at January 30, 1994. Consistent with the Company's
unconditional 30 day return policy, customers may cancel or reschedule without
penalty prior to commencement of manufacturing.
COMPETITION
The personal computer industry is highly competitive and is characterized
by the frequent introduction of new products, short product life cycles,
continual improvement in product price/performance characteristics, price
sensitivity on the part of customers, and a large number of competitors. The
industry also has been characterized by rapid technological advances in hardware
performance and features and software functionality based on existing or
emerging industry standards. Principle competitive factors include product
performance, quality and reliability, customer service and support, marketing
and distribution capabilities and price. The Company believes it competes
effectively on the basis of these factors although there can be no assurance
that the Company will be able to maintain its competitive position with respect
to these or other factors. The
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Company and other manufacturers of personal computers that adhere to industry
standards generally have access to and make use of many of the same components,
often from the same group of suppliers. The prices of many of these components
decline periodically, and the general practice of the Company and other personal
computer manufacturers is to reduce the prices of their personal computer
products to reflect these component price declines. The Company may take
additional pricing actions as it attempts to maintain a competitive mix of
price, performance, and customer support services while managing its liquidity,
profitability and growth. The Company attempts to mitigate the effects of price
reductions by improving product mix, further reducing component costs and
lowering operating costs. There can be no assurance that pricing actions will be
effective in stimulating higher levels of sales or that cost reduction efforts
will offset the effects of pricing actions on the Company's gross margin. Some
of the Company's competitors have greater financial, marketing, manufacturing
and technological resources, broader product lines, greater brand name
recognition, and larger installed customer bases than those of the Company.
There can be no assurance that the Company will continue to compete
successfully.
PATENTS, TRADEMARKS AND LICENSES
The Company holds 61 United States patents and six foreign patents. As of
March 1, 1995, the Company had 276 United States patent applications pending,
and 32 foreign applications pending in several European and Asian countries. The
Company's United States patents expire in years 2005 through 2015. The
inventions claimed in its patents and patent applications cover aspects of the
Company's current and possible future personal computer products and related
technologies. The Company is developing a portfolio of patents which 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 twelve of
its other marks in the U.S. The Company has pending applications for
registration of 16 other trademarks. The DELL word mark, Dell logo and other
trademark and service mark registrations in the U.S. 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 U.S. is material to the Company's
operations. The Company has also applied for or obtained registration of the
DELL mark and/or several other marks in approximately 91 other countries or
jurisdictions where the Company conducts or anticipates expanding its
international business. The Company also has 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 comprising or
incorporating the term "Dell" in certain foreign countries. 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.
On March 5, 1993, Dell and Texas Instruments, Inc. ("TI") entered into an
agreement to cross-license their respective patent portfolios. Under the terms
of the agreement, Dell makes annual royalty payments to TI. The agreement
expires on January 31, 1998.
The Company entered into a patent license agreement with International
Business Machines ("IBM") in August 1993, under which the parties have licensed
to one another within prescribed fields of use all current patents and all
patents entitled to an effective application filing date prior to February 1,
1999, which are owned by either of the parties or any of their subsidiaries.
Under the agreement, the Company will also make royalty payments to IBM. The
agreement terminates on the latest expiration date of the patents licensed
thereunder.
The Company has entered into non-exclusive licensing agreements with
Microsoft Corporation for various software packages, including a license for its
MS-DOS and Windows operating system software. The license grants the Company the
right to distribute copies of MS-DOS and Windows through March 31, 1996, with
the right, at the Company's election, to extend the license for up to five
additional years. In addition, the Company has entered into a non-exclusive
license agreement with Phoenix Technologies, Ltd. ("Phoenix") for basic
input-output system (BIOS) and other software that facilitates compatibility
between the Com-
9
<PAGE> 11
pany's products and products manufactured and sold by other companies. The
license agreement with Phoenix provides for a perpetual license on a
royalty-free basis for a nominal annual maintenance fee.
From time to time, other companies and individuals assert exclusive patent,
copyright, trademark and other intellectual property rights to technologies or
marks that are important to the personal 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 counterpart 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. There can be no assurance, however,
that the Company will be able to obtain licenses to intellectual property of
third parties on commercially reasonable terms, if at all. In addition, the
Company could be at a disadvantage if its competitors obtain licenses for
protected technologies with more favorable terms than does the Company. If the
Company or its suppliers are unable to license protected technology used in the
Company's products, the Company could be prohibited from marketing those
products or may have to market products without desirable features. The Company
could also incur substantial costs to redesign its products or to defend any
legal action taken against the Company. If the Company's products should be
found to infringe protected technology, the Company could be enjoined from
further infringement and required to pay damages to the infringed party. Any of
these could have a material effect on the Company.
TRADEMARKS
Several United States trademarks appear in this Annual Report. Dell and
DellWare are registered trademarks of the Company. Dell Dimension, Dimension
XPS, Latitude, Latitude XP, OmniPlex, OptiPlex, and PowerEdge are trademarks of
the Company. BusinessCare, ReadyWare, SelectCare and TechFax are service marks
of the Company. This document also contains other trademarks and tradenames of
other entities. The Company disclaims proprietary interest in the marks and
names of others.
EMPLOYEES
At January 29, 1995, the Company had approximately 6,400 full-time
employees, approximately 4,500 in the United States and 1,900 in other
countries. The Company has never experienced a work stoppage due to labor
difficulties and believes that its employee relations are good.
SEGMENTS AND SEASONALITY
Dell operates in one industry segment: the design, development,
manufacture, sale, service and support of a broad range of personal computers
and related products. In the United States, the Company has experienced
increased sales to the government sector in the third fiscal quarter, which the
Company believes reflects the budgetary spending practices of the U.S. Federal
government. In addition, in its third fiscal quarter, the Company has
experienced decreased sales in Europe, which the Company believes is the result
of the holiday schedule in European countries in the late summer months. These
seasonal trends have not been material relative to the Company's level of
consolidated net sales and have partially offset one another. There can be no
assurance that the Company will not experience material seasonal trends in the
future.
ITEM 2. PROPERTIES
The Company's principal offices and manufacturing and warehousing
facilities are located in the Austin, Texas area. As of January 29, 1995, the
Company's Austin area offices and facilities totaled approximately 1,571,000
square feet, which included 1,347,000 square feet of leased office,
manufacturing and warehouse space in several buildings under leases with
expiration dates ranging from April 1995 to April 2003. In 1995, the Company
completed construction and took occupancy of a 224,000 square foot office
building on land owned by Dell in Round Rock, Texas, which is used as a direct
sales, marketing and support center. The Company also leases office and
warehouse space in Canada and Mexico totaling approximately 108,000 square feet.
At January 29, 1995, Dell's international facilities were composed of
office, manufacturing and warehousing space which totaled approximately 700,000
square feet including approximately 290,000 square feet of office space in
seventeen countries. The Company's European manufacturing and warehousing
10
<PAGE> 12
activities are conducted at a 300,000 square foot site in Limerick, Ireland
owned by the Company. The Company also leases a 110,000 square foot warehouse in
Ireland under a lease that expires in June 1995.
Dell has a 228,000 square foot office building under construction in Round
Rock, Texas, to be completed in October 1995, on Company owned land contiguous
to its other Round Rock building. Also, the Company expects to begin
construction of a 238,000 square foot combination office and manufacturing
facility in Malaysia in March 1995. 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
Set forth below is a discussion of certain legal proceedings involving the
Company, some of which could have a material adverse effect on the Company if
resolved against it. The Company is also party to other legal proceedings
incidental to its business, none of which the Company believes to be material.
The Company and its Chairman, Michael S. Dell, were defendants in nineteen
lawsuits filed between May and November 1993, in the United States District
Court for the Western District of Texas, Austin Division. In general, the
plaintiffs alleged that the Company made overly optimistic forecasts about the
Company's prospects without a reasonable basis and failed to disclose adverse
material information about the Company's business (particularly with regard to
problems in its notebook business) on a timely basis, thereby inducing the
plaintiffs to buy Company common stock at artificially high prices. The
plaintiffs also alleged that the Company's Chairman, Michael S. Dell, sold
securities of the Company while in the possession of material, non-public
information about the Company. On November 17, 1994, the Company announced that
Mr. Dell and the Company had reached settlement with the plaintiffs. Under the
settlement, the Company and its insurers will pay a total of $13.4 million (plus
accrued interest from the settlement date) to the plaintiffs. In the settlement,
neither the Company nor Mr. Dell admitted liability or obligation of any kind in
connection with the lawsuit or the underlying allegations. The court approved
the settlement and entered a final judgment of dismissal on February 24, 1995.
The settlement did not have a material effect on Dell's financial position or
results of operations, since the settlement amount was covered by insurance or
previously taken reserves.
As of March 1, 1995, the Company has been named as a defendant in 26
repetitive stress injury lawsuits, most of which are in New York state courts or
United States District Courts for the New York City area. One is in the Federal
District Court for the State of Pennsylvania. The allegations in all of these
lawsuits are similar: each plaintiff alleges that he or she suffers from
symptoms generally known as "repetitive stress injury," which allegedly were
caused by the design or manufacture of the keyboard supplied with the computer
the plaintiff used. The Company has denied or is in the process of denying the
claims and intends to vigorously defend the suits. The suits naming the Company
are just a few of many lawsuits of this type which have been filed, often naming
Apple, Atex, Compaq, IBM, Keytronic and other major suppliers of keyboard
products. The Company currently is not able to predict the outcome of these
suits. It is possible that the Company may be named in additional suits.
Ultimate resolution of the litigation against the Company may depend on progress
in resolving this type of litigation overall. However, the Company does not
believe that the outcome of any of these matters will have a material adverse
effect on the Company's financial condition or results of operations.
For information about a Securities and Exchange Commission informal inquiry
relating to the Company's foreign currency hedging and trading activities, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Hedging Activities." By letter dated July 21, 1993, the Commission
notified the Company that it was extending the informal inquiry to the
circumstances and events surrounding the public announcement on July 14, 1993,
about the Company's expected losses for its second quarter of 1994 and into the
Company's procedures for estimating sales.
On August 11, 1993, the Department of Commerce ("DOC") served a subpoena on
the Company, requesting documents relating to possible prohibited exports of
personal computers that may have been shipped from Dell to Russia, Ireland, Iran
or Iraq during the period from January 1992 through October 1993. Dell formally
responded to the DOC in November 1993 and is awaiting a response with respect to
certain shipments to Russia and Iran. If the Office of Export Enforcement's
investigators determine that the
11
<PAGE> 13
Company has violated applicable regulations, the government could potentially
file civil or criminal charges. The Company is cooperating in the investigation.
The Company does not believe this investigation or its outcome will have a
material adverse effect on the Company's financial condition or results of
operations.
The Company has received a request from the Federal Trade Commission
("FTC") dated January 5, 1994, to provide documents and other information in
connection with the FTC's inquiry into the computer industry to determine
whether the Company's advertising and marketing claims regarding cathode ray
tube ("CRT") monitor screen sizes are in violation of the Federal Trade
Commission Act. In general, the inquiry focuses on differences between
advertising and marketing claims as to the size of CRT monitor screen sizes, and
the size of the display area actually viewable by the consumer. The Company is
cooperating with the FTC in this inquiry. The Company does not believe that the
inquiry or its outcome will have a material adverse effect on the Company's
financial condition or results of operations.
In April 1994 the State of California Attorney General notified Dell and 12
other personal computer manufacturers that certain of their advertisements with
regard to monitor screen sizes were believed to be deceptive and misleading,
based on the same concepts expressed by the FTC. The Company is responding to
this investigation in coordination with other companies in the industry. The
Company does not believe that the inquiry or its outcome will have a material
adverse effect on the Company's financial condition or results of operations.
The Company has received a subpoena from the FTC dated July 18, 1994, in
connection with an inquiry with respect to whether the Company may have
misrepresented or improperly failed to disclose patent rights that would
conflict with open use of a local high-speed personal computer bus standard
promulgated by the Video Electronics Standards Association ("VESA"). The Company
is cooperating in this inquiry. The Company does not believe that the inquiry or
its outcome will have a material adverse effect on the Company's financial
condition or results of operations.
In addition, in March 1995 the Company was named along with twelve other
personal computer and/or computer monitor manufacturers in a complaint filed by
the District Attorney for Merced County, California. The complaint alleges that
each of the defendants has engaged in false and/or misleading advertising with
regard to the size of computer monitor screens and seeks unspecified damages and
injunctive relief. The Company is vigorously contesting the allegations of the
complaint and does not believe that the litigation of the complaint or its
outcome will have a material adverse effect on the Company's financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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<PAGE> 14
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock is quoted on the Nasdaq National Market under the trading
symbol DELL. The following table sets forth, for the fiscal quarters indicated,
the high and low reported bid sale price for the Common Stock as reported on the
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL 1995
Fourth Quarter
(October 31, 1994, through January 29, 1995)............................ $47 3/4 $36 3/4
Third Quarter
(August 1, 1994, through October 30, 1994).............................. $44 $27 1/2
Second Quarter
(May 2, 1994, through July 31, 1994).................................... $30 3/4 $21 1/2
First Quarter
(January 31, 1994, through May 1, 1994)................................. $30 1/8 $19 1/8
FISCAL 1994
Fourth Quarter
(November 1, 1993, through January 30, 1994)............................ $28 1/8 $20 1/8
Third Quarter
(August 2, 1993, through October 31, 1993).............................. $21 5/8 $15 1/8
Second Quarter
(May 3, 1993, through August 1, 1993)................................... $34 3/4 $13 7/8
First Quarter
(February 1, 1993, through May 2, 1993)................................. $49 1/4 $27 5/8
</TABLE>
HOLDERS
As of March 1, 1995, there were 3,244 holders of record of the Common
Stock.
DIVIDENDS
The Company has never paid cash dividends on its common stock. The Company
intends to retain earnings for use in its business and, therefore, does not
anticipate paying any cash dividends on common stock for at least the next
twelve months. In addition, the terms of the Company's current loan agreements
and credit facilities place restrictions on the payment of cash dividends by the
Company.
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<PAGE> 15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the consolidated financial statements, including the Notes to Consolidated
Financial Statements. The information set forth below is not necessarily
indicative of results of future operations. The information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 2, FEBRUARY 3,
1995(A) 1994(B) 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales:
Americas................................... $2,400,012 $2,037,221 $1,459,607 $ 648,082 $ 397,271
Europe..................................... 952,943 781,905 552,999 241,857 148,964
Other International........................ 122,388 54,039 1,318 -- --
---------- ---------- ---------- --------- ---------
Consolidated net sales................... 3,475,343 2,873,165 2,013,924 889,939 546,235
Cost of sales................................ 2,737,290 2,440,349 1,564,472 607,768 364,183
---------- ---------- ---------- --------- ---------
Gross profit.......................... 738,053 432,816 449,452 282,171 182,052
Operating expenses:
Selling, general and administrative........ 423,429 422,906 267,982 182,155 115,016
Research, development and engineering...... 65,361 48,934 42,358 33,140 22,444
---------- ---------- ---------- --------- ---------
Total operating expenses................. 488,790 471,840 310,340 215,295 137,460
---------- ---------- ---------- --------- ---------
Operating income (loss)............... 249,263 (39,024) 139,112 66,876 44,592
Financing and other income (expense), net.... (36,267) 258 4,180 6,539 (1,020)
---------- ---------- ---------- --------- ---------
Income (loss) before income taxes.......... 212,996 (38,766) 143,292 73,415 43,572
Provision for income taxes (benefit)......... 63,819 (2,933) 41,650 22,504 16,340
---------- ---------- ---------- --------- ---------
Net income (loss)..................... 149,177 (35,833) 101,642 50,911 27,232
Preferred stock dividends.................... (8,750) (3,743) -- -- --
---------- ---------- ---------- --------- ---------
Net income (loss) applicable to common
stockholders........................ $ 140,427 $ (39,576) $ 101,642 $ 50,911 $ 27,232
========== ========== ========== ========= =========
Earnings (loss) per common share
Primary.................................... $ 3.38 $ (1.06) $ 2.59 $ 1.40 $ .91
========== ========== ========== ========= =========
Fully diluted.............................. $ 3.15 $ -- $ -- $ -- $ --
========== ========== ========== ========= =========
Weighted average shares used to compute
earnings per share
Primary.................................... 41,542 37,333 39,235 36,274 30,064
========== ========== ========== ========= =========
Fully diluted.............................. 47,322 -- -- -- --
========== ========== ========== ========= =========
Statement of Financial Position Data:
Working capital.............................. $ 718,951 $ 510,397 $ 358,948 $ 282,646 $ 95,163
Total assets................................. $1,594,000 $1,140,480 $ 927,005 $ 559,563 $ 264,222
Long-term debt............................... $ 113,429 $ 100,000 $ 48,373 $ 41,450 $ --
Preferred stock.............................. $ 120,151 $ 120,151 $ -- $ -- $ --
Total stockholders' equity................... $ 651,736 $ 471,108 $ 369,200 $ 274,180 $ 112,005
</TABLE>
- ---------------
(a) In prior years, the Company consolidated its international operating results
on a one-month delay to facilitate consolidated financial reporting. In the
fourth quarter of 1995, the Company eliminated this one-month delay.
Accordingly, the Company's income before income taxes for 1995 includes one
additional month of international operations. Net earnings before taxes of
$5.7 million for this additional month are included in the consolidated
statement of operations in financing and other income (expense) resulting
in an additional $4.1 million of net income or $0.10 of primary earnings
per common share. Net earnings for this additional month of international
operations had no effect on the Company's operating income.
(b) See Note 8 of Notes to Consolidated Financial Statements for a discussion of
certain charges recorded in the first half of 1994 that contributed to the
net loss.
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported net income of $149.2 million or $3.38 per common share
for 1995 compared with a net income (loss) of ($35.8) million or ($1.06) per
common share for 1994 and $101.6 million or $2.59 per common share in 1993.
In prior years, the Company consolidated its international operating
results on a one-month delay to facilitate consolidated financial reporting. In
the fourth quarter of 1995, the Company eliminated this one-month delay.
Accordingly, the Company's income before income taxes for 1995 includes one
additional month of international operations. Net earnings before taxes of $5.7
million for this additional month are included in the consolidated statement of
operations in financing and other income (expense) resulting in an additional
$4.1 million of net income or $0.10 of primary earnings per common share. Net
earnings for this additional month of international operations had no effect on
the Company's operating income.
The table below sets forth for the years indicated the percentage of
consolidated net sales represented by certain items in the Company's
consolidated statements of operations.
<TABLE>
<CAPTION>
PERCENTAGE OF CONSOLIDATED NET SALES
-----------------------------------------
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales:
Americas.................................................. 69.1% 70.9% 72.5%
Europe.................................................... 27.4 27.2 27.5
Other international....................................... 3.5 1.9 --
----- ----- -----
Consolidated net sales................................. 100.0 100.0 100.0
Cost of sales............................................. 78.8 84.9 77.7
----- ----- -----
Gross profit........................................... 21.2 15.1 22.3
Operating expenses:
Selling, general and administrative....................... 12.2 14.7 13.3
Research, development and engineering..................... 1.9 1.7 2.1
----- ----- -----
Total operating expenses............................... 14.1 16.4 15.4
----- ----- -----
Operating income (loss)........................... 7.1 (1.3) 6.9
Financing and other income (expense), net................... (1.0) -- 0.2
----- ----- -----
Income (loss) before income taxes......................... 6.1 (1.3) 7.1
Provision for income taxes (benefit) ....................... 1.8 (0.1) 2.1
----- ----- -----
Net income (loss)......................................... 4.3 (1.2) 5.0
Preferred stock dividends................................... (0.3) (0.1) --
----- ----- -----
Net income (loss) applicable to common stockholders....... 4.0% (1.3)% 5.0%
===== ===== =====
</TABLE>
Net Sales
Consolidated net sales increased 21% to $3.5 billion in 1995 from $2.9
billion for 1994. Consolidated net sales for 1994 increased 43% from $2.0
billion in sales for 1993. Average revenue per unit increased 12% and unit
volumes increased 8% for 1995 over 1994 primarily because of strong demand for
the Company's Pentium processor-based products and notebook computers. Average
revenue per unit declined by 12% in 1994 compared with 1993 because of shifts in
the Company's product mix and industry-wide pricing strategies. Unit volumes
increased by 61% in 1994 over 1993 due to increased volumes of the Company's
desktop and server products, offset somewhat by the cancellation of its prior
notebook product line in the second quarter of 1994. The Company's consolidated
net sales (expressed in United States dollars) benefited by .5% and 2.4% in 1995
and 1993, respectively, and were reduced by 3.9% in 1994, due to fluctuations in
the average value of the United States dollar relative to its average value in
the comparable periods of the prior year.
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<PAGE> 17
Since January 30, 1994, the Company has introduced the Latitude family of
notebook computers as well as several Pentium processor-based systems in its
PowerEdge server line and in its Dimension, OmniPlex and OptiPlex desktop
product lines. The Company believes that its success is largely dependent upon
continued growth of its notebook and server product lines and its ability to
continue to efficiently manage the transition to Pentium processor-based
computers and other technological advancements as they become commercially
available. There can be no assurance that the Company's development activities
will be successful, that product technologies will be available to the Company,
that the Company will be able to deliver commercial quantities of computer
products in a timely manner, or that such products will achieve market
acceptance.
Consolidated net sales consisted primarily of sales of computer systems,
including hardware, certain software and accessories, which amounted to 88%, 87%
and 86% of consolidated net sales for 1995, 1994 and 1993, respectively. The
balance of consolidated net sales consisted of revenue from sales of computer
peripherals as well as other hardware, software and accessories sold separately
from computer systems and from sales of extended service contracts. Revenue from
the Company's Pentium processor-based products represented 29% and 1% of system
revenue in 1995 and 1994, respectively. Pentium processor-based sales continued
to gain momentum with fourth quarter sales representing 44% of total system
revenue. The substantial increase in such system sales resulted from the
Company's rapid introduction of Pentium processor-based systems relative to its
competitors and increased customer acceptance of these systems. Sales of the
Company's 486-based systems reflected the shift in demand toward Pentium
processor-based systems and decreased to 71% of system revenue for 1995 (56% in
the fourth quarter of 1995) from 92% of system revenue for 1994. Sales of
486-based products represented 68% of system revenue in 1993 with 386-based
products representing the remaining 32% of system revenue.
Sales of the Company's Latitude family of notebook computers represented 8%
of system revenue for 1995. The Company's notebook computer sales grew
throughout the year with fourth quarter 1995 notebook computer revenue totaling
$128 million or 14% of system revenue, compared with sales of $122 million for
the first three quarters of 1995 combined or 6% of system revenue. The increase
in notebook computer revenue during 1995 primarily resulted from strong customer
acceptance of the Company's Latitude XP notebook computer line introduced in
August 1994. Sales of the Company's notebook computers declined to 3% of system
revenue for 1994 from 12% for 1993 primarily due to the cancellation of the
Company's prior notebook computer product line in the second quarter of 1994.
Net revenue from the Americas (United States, Canada, Mexico and Latin
America) increased 18% in 1995 to $2.4 billion from $2.0 billion in 1994. Net
revenue from the Americas increased 40% in 1994 from $1.5 billion in 1993. The
Company's European operations contributed net revenue of $953 million for 1995,
representing a 22% increase over $782 million in net revenue for 1994. European
revenue for 1994 represented a 41% increase over $553 million in net revenue for
1993. Other international sales increased 126% to $122 million for 1995
primarily driven by Japan where revenue more than doubled in 1995 compared with
1994. Other international sales increased to $54 million in 1994 from $1.3
million in 1993. The Company expects to begin construction in March 1995 of a
238,000 square foot combination office and manufacturing facility on a nine-acre
site in Penang, Malaysia, to meet the needs of its expanding Asia-Pacific
business. Dell intends to continue to expand its international activities by
increasing market presence in existing markets, improving support systems,
pursuing additional distribution opportunities, and entering new markets
primarily through third-party resellers.
Consolidated net sales to national accounts, consisting of sales to major
corporate, government and education accounts and value-added resellers, led
sales gains with a 26% increase to $2.3 billion in 1995 from $1.8 billion in
1994. Consolidated sales to national accounts increased 50% in 1994 from $1.2
billion in 1993. Sales to medium- to small-sized businesses and individuals
increased 12% to $1.2 billion for 1995 from $1.0 billion for 1994 despite the
decline in sales to mass merchant and other consumer retailers due to the
discontinuation of traditional consumer retailer sales in the United States and
Canada in July 1994. Sales to medium- to small-sized businesses and individuals
increased 31% in 1994 from $787 million for 1993.
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<PAGE> 18
Gross Profit Margin
The Company's 1995 gross profit margin increased to 21.2% from 15.1% in
1994. Gross profit margin for 1994 was adversely affected by $70.3 million of
inventory write-downs and related costs incurred during the first half of 1994.
Excluding these charges, gross profit margin would have been 17.5% for 1994. The
increase in gross profit margin to 21.2% from 17.5% (as adjusted) is due to
improvements in manufacturing logistics and efficiencies, component costs and
quality due to the Company's vendor certification and vendor consolidation
programs, and lower charges for inventory obsolescence attributable to improved
inventory management. Gross profit margins also benefited from higher average
revenue per unit resulting from: a more moderate pricing environment in the last
half of 1995; a higher margin sales mix driven by notebook computers and Pentium
processor-based systems; and changes in the Company's sales incentive programs.
The decline in gross profit margin for 1994 from 22.3% in 1993 was also
attributable to significant price reductions to maintain competitive position;
manufacturing inefficiencies associated with system and process weaknesses; and
price reductions on older products to avoid incurring additional charges for
excess and obsolete inventory.
The Company may take pricing actions as it attempts to maintain a
competitive mix of price, performance, and customer support services while
managing its liquidity, profitability and growth. The Company attempts to
mitigate the effects of price reductions by improving product mix, further
reducing component costs and lowering operating costs. There can be no assurance
that pricing actions will be effective in stimulating higher levels of sales or
that cost reduction efforts will offset the effects of pricing actions on the
Company's gross margin.
Operating Expenses
Operating expenses as a percentage of consolidated net sales decreased to
14.1% for 1995 from 16.4% for 1994. Operating expenses increased 4% to $488.8
million for 1995 from $471.8 million for 1994. Operating expenses as a
percentage of consolidated net sales would have been 15.7% for 1994, but was
increased by $21 million of charges for consolidating operations, write-offs of
certain assets, and employee severance payments. The actions were taken to
reduce costs, and included the closing of a subsidiary in Europe and
consolidation of its former operations into another central European location.
European service and support operations were combined to reduce redundant costs.
Additionally, certain headcount reductions were made due to the efficiencies
created from the consolidations. The decrease in operating expenses as a
percentage of consolidated net sales in 1995 from 1994 is primarily due to
infrastructure investments incurred during the Company's regional consolidation
efforts commenced in 1994 and reduced advertising and promotion expenses offset
by increased compensation expense as the Company strengthened its management
team and increased research, development and engineering expenses in 1995.
Research and development expenses increased 34% in 1995 compared with 1994
primarily due to higher compensation expense relating to a 24% increase in
headcount and higher development costs related to notebook computers and other
product development efforts. The Company expects research and development
expenses to increase in dollar amount in 1996. Operating expenses for 1994 of
15.7%, (as adjusted) were relatively flat compared with 15.4% for 1993.
The Company believes that its ability to manage operating costs is an
important factor in its ability to remain price competitive. During 1995, the
Company continued its process of consolidating common functions, primarily in
Europe, into regional business units to reduce redundant costs and improve the
Company's ability to deliver its products and services in these markets.
However, the Company will invest in key global information systems through 1998
to manage and support its growth. No assurance can be given that the Company's
efforts to manage future operating expenses will be successful.
17
<PAGE> 19
Financing and Other Income (Expense), net
Financing and other income (expense) was ($36.3) million, $.3 million and
$4.2 million for 1995, 1994 and 1993, respectively. The table below sets forth
for the years indicated the components of financing and other income (expense):
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Financing and other income (expense):
Investment income (loss), net:
Short-term investments............................ $ (7,031) $ 8,772 $12,945
Investment derivatives............................ (23,948) 5,184 2,505
Interest expense..................................... (12,203) (8,350) (7,869)
Foreign currency transactions........................ 2,790 777 9,084
Foreign currency trading............................. -- -- (9,649)
International year-end transition.................... 5,725 -- --
Other................................................ (1,600) (6,125) (2,836)
-------- ------- -------
$(36,267) $ 258 $ 4,180
======== ======= =======
</TABLE>
Short-term investment income (loss) was ($7.0) million in 1995 compared
with $8.8 million in 1994 and $12.9 million in 1993. Investment losses for 1995
were primarily due to realized losses of $24.4 million on certain of the
Company's short-term investments offset by investment income of approximately
$17.4 million for 1995. The investment losses were primarily a result of
interest rate increases in the United States, Canadian, Japanese, and European
interest rate markets. The increase in investment income to $17.4 million for
1995 compared with $8.8 million for 1994 was primarily due to higher average
investment balances and higher effective interest rates. Other unrealized losses
on short-term investments in the amount of $4.0 million ($2.6 million net of
tax) at January 29, 1995, were assessed to be temporary and recorded as a
separate component of stockholders' equity. The Company accounts for highly
liquid investments with maturities of three months or less at date of
acquisition as short-term investments and reflects the related cash flows as
investing cash flows. As a result, a significant portion of its gross investment
maturities and purchases disclosed as investing cash flows is related to highly
liquid investments.
The Company has historically employed a variety of interest rate derivative
instruments to manage its principal, market and credit risks and enhance its
investment yield. Derivative instruments utilized include interest rate swaps,
written and purchased interest rate options and swaptions (options to enter into
interest rate swaps). Prior to June 1994, the Company structured derivative
instruments in interest rate markets where it had foreign operations. Interest
rate derivatives generally involve exchanges of interest payments based upon
fixed and floating interest rates without exchanges of underlying notional
amounts. At January 29, 1995 the Company had no investment derivatives
outstanding. At January 30, 1994, the Company had outstanding investment
derivative contracts with a notional amount of $355 million. For the first and
second quarters of 1995, the average fair value of these investment derivative
financial instruments totaled ($11.9) million and ($7.8) million, respectively.
The Company closed all remaining investment derivatives during the second
quarter of 1995. Realized and unrealized net gains (losses) on investment
derivatives recognized in income for 1995 were ($23.9) million compared with
$5.2 million for 1994 and $2.5 million for 1993.
All of the Company's foreign exchange and interest rate derivative
instruments involve elements of market and credit risk in excess of the amounts
recognized in the financial statements. The counterparties to financial
instruments consist of a number of major financial institutions. In addition to
limiting the amount of agreements and contracts it enters into with any one
party, the Company regularly monitors the credit quality of the financial
institutions which are counterparties to these financial instruments. The
Company does not anticipate nonperformance by the counterparties.
Interest expense incurred for 1995 increased to $12.2 million from $8.4
million for 1994. The increase in interest expense in 1995 was primarily due to
higher average debt balances outstanding and higher net interest
18
<PAGE> 20
costs associated with the 11% Senior Notes (the "Notes") issued in the third
quarter of 1994. Concurrently with the issuance of the Notes, the Company
entered into interest rate swap agreements to reduce its interest costs
associated with the Notes. The swap agreements effectively changed the Company's
interest rate exposure from a fixed-rate to a floating-rate basis. However, in
response to increasing interest rates, in August 1994, the Company entered into
offsetting swap agreements to effectively change its interest rate exposure from
a floating-rate basis to a fixed-rate basis. The interest rate swap agreements
mature on August 15, 1998, the first available redemption date of the Notes. At
January 29, 1995, the Company had outstanding receive fixed/pay floating
interest rate swaps with an aggregate notional amount of $100 million offset by
receive floating/pay fixed interest rate swaps with an aggregate notional amount
of $100 million. In addition, the Company had an interest rate swap which
matured in February 1995, with a notional amount of $50 million which was used
to change floating interest rate reset dates on the receive fixed/pay floating
interest rate swaps. The weighted average interest rate, adjusted by the swaps,
was 12.1% and 9.5% for 1995 and 1994, respectively. At January 29, 1995, the
Company is paying a net interest cost of 13.8% on the Notes.
Net foreign currency gains (losses) were $2.8 million, $.8 million and
($.6) million for 1995, 1994 and 1993, respectively. During 1993, the Company
entered into foreign currency forward and option contracts with the intent to
profit from anticipated movements in exchange rates. The Company marked the
contracts to market and recognized resulting gains and losses as a component of
net financing and other income. Net foreign exchange losses recognized during
1993 consisted of $9.6 million in losses related to foreign currency trading
activities and $9.0 million in foreign currency transaction gains associated
with unhedged intercompany balances and other foreign currency transactions. The
Company resumed its intercompany hedging practices in the third quarter of 1993.
During 1994 and 1995, the Company did not enter into foreign currency contracts
with the intent to profit from movements in exchange rates. Accordingly, net
foreign currency transaction gains recognized during 1994 resulted from
remeasuring non-functional currency denominated assets and liabilities, net of
transaction hedge results.
In prior years, the Company consolidated its international operating
results on a one-month delay to facilitate consolidated financial reporting. In
the fourth quarter of 1995, the Company eliminated this one-month delay.
Accordingly, the Company's income before income taxes for 1995 includes one
additional month of international operations. Net earnings before taxes of $5.7
million for this additional month are included in the consolidated statement of
operations in financing and other income (expense) resulting in an additional
$4.1 million of net income or $0.10 of primary earnings per common share.
Financing fees and other income (expense) were ($1.6) million for 1995,
($6.1) million for 1994 and ($2.8) million for 1993. In 1995, the reduction in
financing fees and other costs was primarily due to higher financing-related
expenses incurred in 1994 in connection with refinancing of debt and credit
facilities during 1994.
Income Tax
The Company's effective tax rate was 30.0% for 1995 compared with 7.6% and
29.1% for 1994, and 1993, respectively. The change in the effective tax rate
resulted from changes in the geographical distribution of income and losses and
from significant second quarter 1994 losses.
Fluctuations in Operating Results
The Company's operating results may fluctuate from period to period and
will depend on numerous factors, including, but not limited to, customer demand
and market acceptance of the Company's products, new product introductions,
product obsolescence, component price fluctuations, varying product mix, foreign
currency exchange rates, foreign currency and interest rate hedging, and other
factors. In addition, the Company has operated without a material backlog so
that net sales in a given quarter are dependent on customer orders received in
that quarter and operating expenditures are primarily based on forecasts of
customer demand. As a result, if demand does not meet the Company's expectations
in any given period, the sales shortfall may result in an increased impact on
operating results due to the Company's inability to adjust operating
expenditures quickly enough to compensate for such shortfall. The Company's
business is sensitive
19
<PAGE> 21
to the spending patterns of its customers, which in turn are subject to
prevailing economic conditions and other factors beyond the Company's control.
The Company's results of operations could be materially adversely affected by
changes in economic conditions or customer spending patterns for personal
computer products.
HEDGING ACTIVITIES
The results of the Company's international operations are affected by
changes in exchange rates between certain foreign currencies and the United
States dollar. The financial statements of the Company's international sales
subsidiaries have generally been measured using the local currency as the
functional currency. An increase in the value of the United States dollar
increases costs incurred by the Company's international operations because many
of its international subsidiaries' component purchases are denominated in the
United States dollar. Changes in exchange rates may negatively affect the
Company's consolidated net sales (as expressed in United States dollars) and
gross profit margins from international operations. Effective January 30, 1995,
most of the Company's European sales will be made from a U.S. dollar functional
currency entity.
The purpose of the Company's hedging program is to reduce the Company's
exposure to the risk that the dollar-value equivalent of anticipated cash flows
will be adversely affected by changes in foreign currency exchange rates. The
Company attempts to reduce its exposure to currency fluctuations involving
anticipated, but not firmly committed, transactions and involving transactions
with firm foreign currency commitments through the use of purchased foreign
currency option contracts and forward contracts.
Realized and unrealized gains or losses and premiums on foreign currency
purchased option contracts that are designated and effective as hedges of
probable anticipated, but not firmly committed, foreign currency transactions
are deferred and recognized in income in the same period as the hedged
transaction. The risk of loss associated with purchased options is limited to
premium amounts paid for the option contracts, which could be significant.
Forward contracts designated as hedges of anticipated transactions are accounted
for on a mark-to-market basis and included in income as a component of cost of
sales. Transaction exposures representing firm foreign currency commitments are
generally hedged using foreign exchange forward contracts. Forward contracts
related to transaction exposures are accounted for on a mark-to-market basis
with realized and unrealized gains or losses included in financing and other
income (expense) as an offset to the underlying hedged transaction. The risk of
loss associated with forward contracts is limited to the exchange rate
differential from the time the contract is made until the time it is settled.
The Company enters into foreign currency purchased options and, to a lesser
extent, forward contracts to hedge a portion of its anticipated, but not firmly
committed, transactions including sales by international subsidiaries, which
includes international sales by a U.S. dollar functional currency entity and
intercompany shipments to certain international subsidiaries, and foreign
currency denominated purchases of certain components. Foreign currency purchased
options generally expire in twelve months or less and forward contracts
generally mature in three months or less. The principal hedge currencies are the
German mark, the British pound and the Japanese yen. At January 29, 1995, the
Company held purchased option contracts that were designated and effective as
hedges of anticipated sales by international subsidiaries with a total notional
amount of $434.3 million and a combined net realized and unrealized loss of $2.1
million. At January 29, 1995, the Company held purchased options that were
designated and effective as hedges of foreign currency denominated purchases
with a total notional amount of $65.0 million and a combined net realized and
unrealized gain of $1.6 million. Based upon foreign currency exchange rates at
January 30, 1994 and January 31, 1993, option contracts which hedged anticipated
intercompany shipments had a combined net realized and unrealized gain of $2.2
million and $2.0 million, respectively.
Prior to March 20, 1992, the Company principally used combination foreign
currency option contracts to hedge anticipated intercompany sales to its
international subsidiaries. During this period, the accounting for combination
option contracts was actively deliberated by the accounting profession. The
Company closely followed the deliberations of the accounting profession during
this period. Prior to March 20, 1992, the Company accounted for open combination
option contracts entered into with the same strike prices and maturities
("synthetic forward contracts") which were originally entered into to hedge
anticipated 1993 sales
20
<PAGE> 22
to international subsidiaries on a mark-to-market basis. On March 19, 1992, the
Chief Accountant of the Securities and Exchange Commission (the "Commission")
settled much of the accounting controversy associated with hedge accounting for
anticipated transactions when he issued a letter indicating that the Commission
would object to deferral of realized and unrealized gains or losses arising from
complex options and similar transactions entered into after March 20, 1992.
Subsequent to that date, the Company has not entered into any combination option
contracts to hedge anticipated transactions as described above.
In 1992, the Company realized $1.7 million in losses on forward contracts
entered into to hedge anticipated 1993 sales to its international subsidiaries,
which losses were deferred at February 2, 1992, and recognized in the first two
quarters of 1993. Generally accepted accounting principles do not afford hedge
accounting treatment to forward contracts intended to hedge anticipated
transactions. The Company does not believe the losses are material in the
context of the Company's financial condition or results of operations taken as a
whole.
On November 30, 1992, the Commission's Division of Enforcement notified the
Company about an informal inquiry regarding the Company's accounting practices
for foreign currency hedging and trading activities and the completeness of the
Company's public disclosure about those activities. The Company and its
independent accountants are voluntarily cooperating with the Commission in this
informal inquiry. The Commission's Division of Corporation Finance has also
indicated it has concerns about the deferred accounting treatment the Company
afforded gains and losses on forward and option contracts entered into to hedge
anticipated transactions and has not expressed its definitive views about
whether the Company's accounting for these forward and option contracts complies
with generally accepted accounting principles in all material respects. The
Company has not received correspondence from the Commission regarding this
matter since September 1993.
The table below shows the effect on income before income taxes, net income
and earnings per common share for each of the four quarters of 1993, 1994, and
1995, if gains and losses on hedging contracts had been accounted for on a
mark-to-market basis. However, if the Company had believed this accounting
treatment to be appropriate, it likely would have followed different hedging
strategies, which could have received differing accounting treatment than
indicated below. Accordingly, the Company does not believe that the net income
on a mark-to-market basis or the earnings per common share on a mark-to-market
basis included in the following table accurately reflect its business results or
the effect of hedging on its net income.
<TABLE>
<CAPTION>
1993
------------------------------------------------------------
QUARTER ENDED
---------------------------------------------- YEAR ENDED
MAY 3, AUGUST 2, NOVEMBER 1, JANUARY 31, JANUARY 31,
1992 1992 1992 1993 1993
------ --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Effect on income before income taxes:
Forward contracts.......................... $ 1.0 $ 0.7 $ -- $ -- $ 1.7
Synthetic forward contracts................ 1.8 2.0 0.9 -- 4.7
Other option contracts..................... (4.9) (13.7) 29.8 9.5 20.7
------ -------- -------- -------- ---------
Total effect on income before
income taxes..................... $ (2.1) $ (11.0) $30.7 $ 9.5 $ 27.1
====== ======= ======== ======== ========
Deferred realized and unrealized gain
(loss)..................................... $(27.2) $ (38.2) $(7.5) $ 2.0 $ 2.0
====== ======= ======== ======== ========
Effect on net income and earnings
per common share:
Net income on a mark-to-market basis....... $ 18.4 $ 14.7 $48.9 $38.0 $ 120.8
Net income as reported..................... $ 19.8 $ 21.9 $28.6 $31.3 $ 101.6
Earnings per common share on a
mark-to-market basis.................... $ .48 $ .38 $1.24 $ .94 $ 3.08
Earnings per common share as reported...... $ .52 $ .57 $ .72 $ .77 $ 2.59
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
1994
------------------------------------------------------------
QUARTER ENDED
---------------------------------------------- YEAR ENDED
MAY 2, AUGUST 1, OCTOBER 31, JANUARY 30, JANUARY 30,
1993 1993 1993 1994 1994
------ --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Effect on income (loss) before income taxes:
Forward contracts........................... $ -- $ -- $ -- $ -- $ --
Synthetic forward contracts................. -- -- -- -- --
Other option contracts...................... (0.3) 5.3 (6.4) 1.6 0.2
----- -------- -------- -------- ---------
Total effect on income (loss) before
income taxes...................... $(0.3) $ 5.3 $(6.4) $ 1.6 $ 0.2
===== ======= ======== ======== ========
Deferred realized and unrealized gain
(loss)...................................... $ 1.7 $ 7.0 $ .6 $ 2.2 $ 2.2
===== ======= ======== ======== ========
Effect on net income (loss) and earnings
(loss) per common share:
Net income (loss) on a mark-to-market
basis.................................... $10.0 $ (71.8) $ 7.8 $18.7 $ (35.6)
Net income (loss) as reported .............. $10.2 $ (75.8) $12.0 $17.7 $ (35.8)
Earnings (loss) per common share on a
mark-to-market basis..................... $ .25 $ (1.93) $ .16 $ .41 $ (1.06)
Earnings (loss) per common share as
reported................................. $ .25 $ (2.03) $ .26 $ .39 $ (1.06)
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
QUARTER ENDED
--------------------------------------------- YEAR ENDED
MAY 1, JULY 31, OCTOBER 30, JANUARY 29, JANUARY 29,
1994 1994 1994 1995 1995
------ -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Effect on income (loss) before income taxes:
Forward contracts............................ $ -- $ -- $ -- $ -- $ --
Synthetic forward contracts.................. -- -- -- -- --
Other option contracts....................... (1.9) (8.2) 0.3 7.1 (2.7)
------ ------- -------- -------- --------
Total effect on income (loss) before
income taxes....................... $ (1.9) $ (8.2) $ 0.3 $ 7.1 $ (2.7)
====== ======= ======== ======== ========
Deferred realized and unrealized gain (loss)... $ 0.3 $ (7.9) $(7.6) $(0.5) $ (0.5)
====== ======= ======== ======== ========
Effect on net income (loss) and earnings (loss)
per common share:
Net income (loss) on a mark-to-market
basis..................................... $ 17.7 $ 22.9 $41.6 $65.3 $ 147.3
Net income (loss) as reported ............... $ 19.0 $ 28.6 $41.4 $60.3 $ 149.2
Earnings (loss) per common share on a
mark-to-market basis...................... $ .38 $ .51 $ .94 $1.47 $ 3.33
Earnings (loss) per common share as
reported.................................. $ .42 $ .65 $ .93 $1.36 $ 3.38
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities in 1995 was $243.4
million, which represented the Company's primary source of cash. At January 29,
1995, the Company's working capital totaled $719.0 million. Days in accounts
receivable at the end of 1995 decreased to 47 days from 50 days at the end of
1994. Days in accounts payable increased to 49 days at the end of 1995 from 42
days at the end of 1994. Inventory levels decreased to 32 days of supply at the
end of the 1995 from 33 days at the end of 1994. Maintaining the Company's
current inventory level is dependent upon the Company's ability to achieve
targeted revenue and product mix, to further minimize complexities in its
product line, and to maximize commonality of parts. There can be no assurance
that the Company will be able to maintain these low inventory levels in future
periods.
22
<PAGE> 24
The Company utilized $63.7 million of cash during 1995 to construct
facilities and to acquire information systems and personal computer office
equipment. Capital expenditures for 1996 are expected to be approximately $100
million, primarily related to the construction of manufacturing and
administrative facilities, the acquisition and development of an integrated
management information system and the acquisition of computer equipment for
internal use. The Company believes that its cash and short-term investments and
cash flow from operations will be adequate to fund its planned 1996 capital
expenditures.
Effective June 10, 1994, the Company entered into a new line of credit
facility which bears interest at a defined Base Rate or Eurocurrency Rate with
covenants based on quarterly income, maintenance of net worth, a maximum ratio
of total liabilities to tangible net worth, and a maximum inventory level.
Maximum amounts available under the credit facility are limited to $90 million
less the aggregate of outstanding letters of credit. During the commitment
period, the Company is obligated to pay a fee on the unused portion of the
credit facility. No borrowings are outstanding under this credit facility, and
the maximum available totaled $77.3 million as of January 29, 1995.
The Company's subsidiary, Dell Receivables Corporation, has a Receivables
Purchase Agreement, which was renewed effective May 24, 1994, pursuant to which
the Company may raise up to $100 million through the sale of interests in
certain of its accounts receivable. The funding expense is based on the rate of
interest on commercial paper issued by the purchaser. The Company is obligated
to pay a commitment fee based on the unused portion of the amount available
under the Receivable Purchase Agreement. This facility was unused during 1995
and the maximum available at January 29, 1995 totaled $100 million.
On August 26, 1993, the Company issued $100 million of 11% Senior Notes due
August 15, 2000. Interest on the Notes is payable semiannually, commencing
February 15, 1994. The Notes are redeemable, in whole or in part, at the option
of the Company, on and after August 15, 1998 at redemption prices decreasing
from 103.50% to 101.75% of principal, depending upon the redemption date.
Concurrent with the issuance of the Notes, on August 26, 1993, the Company
sold 1,250,000 shares of Series A Preferred Stock generating gross proceeds of
$125 million. Each share of Series A Preferred Stock entitles its holder to 7%
cumulative annual dividends and to convert to shares of common stock. In the
event of voluntary or involuntary liquidation, each share of Preferred Stock
entitles its holder to receive $100 per share liquidation preference plus an
amount equal to accrued and unpaid dividends before any distributions to common
stockholders. On February 21, 1995, the Company offered to pay a cash premium of
$8.25 for each share of its Series A Preferred that is converted to common
stock. The offer of premium upon conversion is available to holders of Series A
Preferred Stock until March 22, 1995 unless extended by the Company. The Company
has offered to register resales of the shares of common stock issued upon
conversion of the Series A Preferred Stock pursuant to the offer of premium for
a limited period with the Securities and Exchange Commission. For purposes of
primary earnings per share, the effect of payment of the conversion premium and
the expenses of the conversion offer will be treated as an additional dividend
on the Series A Preferred Stock for financial reporting purposes in the period
in which the conversion offer is completed.
In December 1994, the Company obtained a $14 million loan secured by its
recently-constructed facility in Round Rock, Texas. The loan is for 15 years at
an interest rate of 10.28% with monthly payments of principal and interest,
payable in arrears, commencing in February 1995. The long-term portion of the
loan was $13.4 million at January 29, 1995.
Repayment of the Company's $100 million in 11% Senior Notes due August 15,
2000, the $14 million loan secured by its facilities in Round Rock, Texas and
its operating lease commitments constitute the Company's long-term commitments
to use cash.
Management believes that sufficient resources will be available to meet the
Company's cash requirements through at least the next twelve months. Cash
requirements for periods beyond the next twelve months depend on the Company's
profitability, its ability to manage working capital requirements, and its rate
of growth.
23
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Accountants................................................... 25
Consolidated Statement of Financial Position at January 29, 1995 and January 30,
1994............................................................................. 26
Consolidated Statement of Operations for the three years ended January 29, 1995..... 27
Consolidated Statement of Cash Flows for the three years ended January 29, 1995..... 28
Consolidated Statement of Stockholders' Equity for the three years ended January 29,
1995............................................................................. 29
Notes to Consolidated Financial Statements.......................................... 30
Financial Statement Schedule:
For the three years ended January 29, 1995
Schedule VIII -- Valuation and Qualifying Accounts............................... 61
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
24
<PAGE> 26
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 January 29, 1995
and January 30, 1994, and the results of their operations and their cash flows
for each of the three fiscal years in the period ended January 29, 1995, 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 21, 1995
25
<PAGE> 27
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
1995 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash.............................................................. $ 42,953 $ 3,355
Short-term investments............................................ 484,294 333,667
Accounts receivable, net.......................................... 537,974 410,774
Inventories....................................................... 292,925 220,265
Other current assets.............................................. 112,215 80,323
---------- ----------
Total current assets...................................... 1,470,361 1,048,384
Property and equipment, net......................................... 116,981 86,892
Other assets........................................................ 6,658 5,204
---------- ----------
$1,594,000 $1,140,480
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 447,071 $ 282,708
Accrued liabilities............................................... 279,402 237,651
Income taxes...................................................... 24,937 17,628
---------- ----------
Total current liabilities................................. 751,410 537,987
Long-term debt...................................................... 113,429 100,000
Other liabilities................................................... 77,425 31,385
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value; shares authorized: 5,000,000;
shares outstanding: 1,250,000.................................. 13 13
Common stock: $.01 par value; shares authorized: 100,000,000;
shares issued and outstanding: 39,679,638 and 37,929,031,
respectively................................................... 397 379
Additional paid-in capital........................................ 356,768 320,041
Unrealized (loss) gain on short-term investments.................. (2,628) 3,230
Retained earnings................................................. 311,217 170,790
Cumulative translation adjustment................................. (14,031) (23,345)
---------- ----------
Total stockholders' equity................................ 651,736 471,108
---------- ----------
$1,594,000 $1,140,480
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 28
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net sales................................................ $3,475,343 $2,873,165 $2,013,924
Cost of sales............................................ 2,737,290 2,440,349 1,564,472
---------- ---------- ----------
Gross profit........................................... 738,053 432,816 449,452
Operating expenses:
Selling, general and administrative.................... 423,429 422,906 267,982
Research, development and engineering.................. 65,361 48,934 42,358
---------- ---------- ----------
Total operating expenses....................... 488,790 471,840 310,340
---------- ---------- ----------
Operating income (loss)........................ 249,263 (39,024) 139,112
Financing and other income (expense), net................ (36,267) 258 4,180
---------- ---------- ----------
Income (loss) before income taxes...................... 212,996 (38,766) 143,292
Provision for income taxes (benefit)..................... 63,819 (2,933) 41,650
---------- ---------- ----------
Net income (loss)...................................... 149,177 (35,833) 101,642
Preferred stock dividends................................ (8,750) (3,743) --
---------- ---------- ----------
Net income (loss) applicable to common stockholders...... $ 140,427 $ (39,576) $ 101,642
========== ========== ==========
Earnings (loss) per common share:
Primary................................................ $ 3.38 $ (1.06) $ 2.59
========== ========== ==========
Fully Diluted.......................................... $ 3.15 $ -- $ --
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 29
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 149,177 $ (35,833) $ 101,642
Charges to income not requiring cash outlays:
Depreciation and amortization.................... 33,141 30,646 19,597
Net loss on short-term investments............... 21,218 -- --
Other............................................ 3,476 3,971 149
Changes in:
Operating working capital........................ (2,664) 97,008 (162,521)
Non-current assets and liabilities............... 39,034 17,254 2,111
---------- ---------- ----------
Net cash provided by (used in) operating
activities..................................... 243,382 113,046 (39,022)
Cash used in investing activities:
Short-term investments:
Purchases........................................ (4,643,768) (2,587,858) (1,808,464)
Maturities and other redemptions................. 4,339,505 2,287,998 1,750,919
Sales............................................ 123,406 46,560 76,570
Capital expenditures................................ (63,691) (48,055) (47,251)
---------- ---------- ----------
Net cash used in investing activities............ (244,548) (301,355) (28,226)
Cash flows from financing activities:
Net proceeds from (payments for) short-term
borrowings....................................... -- (8,500) 8,500
Borrowings from long-term debt...................... 13,429 96,654 7,270
Repayments of borrowings............................ (695) (49,861) (711)
Net proceeds from issuance of preferred stock....... -- 120,151 --
Preferred stock dividends paid...................... (8,750) (1,921) --
Issuance of common stock under employee plans....... 35,000 21,935 12,244
---------- ---------- ----------
Net cash provided by financing activities........ 38,984 178,458 27,303
---------- ---------- ----------
Effect of translation exchange rate changes on cash... 1,780 (1,742) (567)
---------- ---------- ----------
Net increase (decrease) in cash....................... 39,598 (11,593) (40,512)
Cash at beginning of period........................... 3,355 14,948 55,460
---------- ---------- ----------
Cash at end of period................................. $ 42,953 $ 3,355 $ 14,948
========== ========== ==========
</TABLE>
See Note 10 for Supplemental Consolidated Statement of Cash Flow
Information.
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 30
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------------------------------------------------
PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS OTHER TOTAL
--------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at February 2, 1992.............. $-- $358 $165,745 $106,902 $ 1,175 $274,180
Net income.............................. -- -- -- 101,642 -- 101,642
Issuance of 1,056,328 shares of common
stock under employee plans........... -- 11 12,233 -- -- 12,244
Foreign currency translation
adjustment........................... -- -- -- -- (18,866) (18,866)
--- ------ -------- -------- -------- --------
Balances at January 31, 1993.............. -- 369 177,978 208,544 (17,691) 369,200
Net loss................................ -- -- -- (35,833) -- (35,833)
Issuance of 1,250,000 shares of
preferred stock...................... 13 -- 120,138 -- -- 120,151
Issuance of 1,071,083 shares of common
stock under employee plans........... -- 10 21,925 -- -- 21,935
Preferred stock dividends paid.......... -- -- -- (1,921) -- (1,921)
Unrealized gain on short-term
investments.......................... -- -- -- -- 3,230 3,230
Foreign currency translation
adjustment........................... -- -- -- -- (5,654) (5,654)
--- ------ -------- -------- -------- --------
Balances at January 30, 1994.............. 13 379 320,041 170,790 (20,115) 471,108
Net income.............................. -- -- -- 149,177 -- 149,177
Issuance of 1,750,607 shares of common
stock under employee plans........... -- 18 36,727 -- -- 36,745
Preferred stock dividends paid.......... -- -- -- (8,750) -- (8,750)
Unrealized loss on short-term
investments.......................... -- -- -- -- (5,858) (5,858)
Foreign currency translation
adjustment........................... -- -- -- -- 9,314 9,314
--- ------ -------- -------- -------- --------
Balances at January 29, 1995.............. $13 $397 $356,768 $311,217 $(16,659) $651,736
=== ====== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 31
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company designs, develops, manufactures, markets, services and supports
a broad range of personal computers, including desktops, notebooks and servers
compatible with industry standards under the Dell(R) brand name. The Company's
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. The fiscal year of the Company ends on
the Sunday nearest January 31. Unless otherwise indicated, all references to
years in connection with financial information refer to the Company's fiscal
years and all references to quarters refer to the Company's fiscal quarters. The
Company's significant accounting policies are set forth below.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Dell Computer Corporation and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated. Certain prior period amounts have been reclassified for comparative
purposes.
In prior years, the Company consolidated its international operating
results on a one-month delay to facilitate consolidated financial reporting. In
the fourth quarter of 1995, the Company eliminated the one-month delay.
Accordingly, the Company's income before income taxes for 1995 includes one
additional month of international operations. Net earnings before taxes of $5.7
million for this additional month are included in the consolidated statement of
operations in financing and other income (expense) and the related cash flows
have been included in operating cash flows in the consolidated statement of cash
flows. Net earnings for this additional month of international operations had no
effect on the Company's operating income.
Short-term Investments -- Short-term investments consist primarily of debt
securities and equity securities with readily determinable fair values. The
Company accounts for highly liquid investments with maturities of three months
or less at date of acquisition as short-term investments. The Company's
short-term investments are classified as available-for-sale and accordingly are
reported at fair value, with unrealized gains and losses reported net of taxes
in a separate component of stockholders' equity. Unrealized losses whose decline
is determined to be other than temporary are charged against income. The
specific identification method is used to determine the cost of securities sold.
Investments whose turnover is quick and maturities are short are reflected as
gross purchases and gross maturities and other redemptions in the Consolidated
Statement of Cash Flows. Effective January 30, 1994, the Company adopted
Statement of Financial Accounting Standards 115, "Accounting for Certain
Investments in Debt and Equity Securities," which had no effect on the Company's
results of operations. Prior to January 30, 1994, short-term investments were
classified as available-for-sale and carried at the lower of aggregate amortized
cost or market, with changes in the valuation allowance recognized in current
period income.
Inventories --Inventories are stated at the lower of cost or market, cost
being determined on a first-in, first-out basis. On a quarterly basis, the
Company compares on a part by part basis the amount of the inventory on hand and
under commitment with its latest forecasted requirements to determine whether
writedowns for excess or obsolete inventory are required.
Property and Equipment -- Property and equipment are carried at cost.
Depreciation is provided using the straight-line method over the economic lives
of the assets ranging 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 financial statements for most of the
Company's international subsidiaries are generally measured using the local
currency as the functional currency. Accordingly, assets and liabilities of
these subsidiaries are translated at current rates of exchange at the balance
sheet date of the reporting entity. The resulting gains or losses from
translation are included in a separate component of stockholders' equity. Income
and expense items for these subsidiaries are translated using monthly average
exchange rates. Gains or losses resulting from remeasuring monetary asset and
liability accounts that are denominated in currencies other than a subsidiary's
functional currency are included currently as a component of financing and other
income (expense) in the consolidated financial statements. Financial statements
for
30
<PAGE> 32
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
international subsidiaries with a U.S. dollar functional currency, such as the
Company's European manufacturing facility, are translated to U.S. dollars using
current rates of exchange for monetary assets and liabilities and historical
rates of exchange for nonmonetary assets. Income and expense items for these
subsidiaries are translated using monthly average exchange rates. Gains and
losses from this process are included in the results of operations.
Financial Instruments -- In the normal course of business, the Company has
utilized derivative financial instruments to manage its exposure to fluctuations
in foreign currency exchange and interest rates. Additionally, the Company has
utilized certain derivative financial instruments for trading purposes. In the
future, the Company intends to use derivative financial instruments only to
manage its exposure to fluctuations in foreign currency exchange rates and to
manage market risk on components of its debt and equity.
Foreign currency hedging instruments -- The Company enters into
foreign exchange option and forward contracts to hedge its probable
anticipated, but not firmly committed, transactions and transaction foreign
currency exposures. Subsequent to March 20, 1992, anticipated foreign
currency transactions have been hedged using purchased foreign currency
option contracts for periods not exceeding twelve months and, to a lesser
extent, foreign exchange forward contracts, generally for periods not
exceeding three months. Realized and unrealized gains or losses and
premiums on foreign currency purchased option contracts that are designated
and effective as hedges of probable anticipated currency transactions are
deferred and recognized in income in the same period as the hedged
transaction. The risk of loss associated with purchased options is limited
to premium amounts paid for the option contracts, which could be
significant.
Prior to March 21, 1992, the Company principally used combination
option contracts that were designated as hedges of probable anticipated,
but not firmly committed, foreign currency transactions. Gains and losses
on such transactions were deferred and recognized in income in the same
period as the hedged transaction.
Forward contracts designated as hedges of anticipated transactions are
accounted for on a mark-to-market basis and included in income as a
component of cost of sales. Transaction exposures representing firm foreign
currency commitments are generally hedged using foreign exchange forward
contracts. Forward contracts related to transaction exposures are accounted
for on a mark-to-market basis with realized and unrealized gains or losses
included in financing and other income (expense) as an offset to the
underlying hedged transaction.
Interest rate management -- Interest rate differential to be paid or
received on interest rate swaps which are designated to specific borrowings
are accrued and recognized as an adjustment to interest expense. Realized
gains or losses on terminated interest rate swap positions designated to
specific borrowings are recognized as an adjustment to interest expense
over the original life of the interest rate swaps.
Investment derivatives -- Derivative financial instruments that are
not designated to a specific asset or liability are considered investment
derivatives and are accounted for on a mark-to-market basis, with realized
and unrealized gains or losses recognized as incurred and included as a
component of financing and other income (expense), in the consolidated
financial statements. The Company discontinued its investment derivative
program in the second quarter of 1995.
Additionally, during 1993, the Company actively traded foreign
currency forward and option contracts with the intent to profit from
anticipated changes in the financial markets. These contracts were
designated at inception as trading activities and accordingly, were
accounted for on a mark-to-market basis with the realized and unrealized
gain or loss recognized as a component of financing and other income
(expense) in the consolidated financial statements.
31
<PAGE> 33
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition -- Sales revenue is recognized at the date of shipment
to customers. Provision is made currently for estimated product returns. Revenue
from separately priced extended warranty programs is deferred and recognized
over the extended warranty period and the related extended warranty costs are
recognized as incurred.
Warranty and Other Post-sales Support Programs -- The Company provides
currently for the estimated costs which may be incurred under its warranty and
other post-sales support programs.
Income Taxes -- The provision for income taxes is based on earnings
reported in the financial statements under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities and their
reported amounts for financial statement purposes.
Earnings (Loss) Per Common Share -- Primary earnings or loss per common
share are computed by dividing net income applicable to common stockholders by
the weighted average number of common shares and common share equivalents
outstanding (if dilutive) during each period. Common share equivalents include
stock options. The Series A Convertible Preferred Stock is not a common share
equivalent for purposes of computing earnings or loss per common share. The
number of common equivalent shares outstanding is computed using the treasury
stock method. Shares used in the fully diluted earnings per share have been
adjusted for the assumed conversion of the Company's Series A Convertible
Preferred Stock. See Note 4 -- Stockholders' Equity, Preferred Stock.
NOTE 2 -- SHORT-TERM INVESTMENTS
Short-term investments at January 29, 1995 and January 30, 1994, are as
follows:
<TABLE>
<CAPTION>
JANUARY 29, 1995
--------------------------------------------------
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Preferred stock.................................... $ 70,048 $367 $ 21 $ 70,394
Mutual funds....................................... 54,750 -- 235 54,515
State and municipal securities..................... 188,678 214 327 188,565
U.S. corporate and bank debt....................... 137,860 131 4,171 133,820
International corporate and bank debt.............. 36,999 1 -- 37,000
-------- -------- -------- ---------
Total short-term investments............. $488,335 $713 $4,754 $ 484,294
======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 30, 1994
--------------------------------------------------
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Preferred stock.................................... $ 52,470 $ 484 $3,250 $ 49,704
Mutual funds....................................... 10,000 -- 14 9,986
State and municipal securities..................... 133,340 263 17 133,586
U.S. corporate and bank debt....................... 136,124 4,345 78 140,391
-------- -------- -------- ---------
Total short-term investments............. $331,934 $5,092 $3,359 $ 333,667
======== ======== ======== =========
</TABLE>
The Company's gross realized gains on the sale of short-term investments
were $2.8 million for 1995 and $0.6 million for 1994 and 1993. Gross realized
losses were $24.4 million for 1995, $1.1 million for 1994 and $0.03 million for
1993.
32
<PAGE> 34
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The contractual maturities of debt securities classified as
available-for-sale carried at fair value at January 29, 1995 are as follows:
<TABLE>
<CAPTION>
LESS THAN 60 DAYS TO ONE TO
60 DAYS ONE YEAR THREE YEARS TOTAL
--------- ---------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
State and municipal securities............. $ 114,525 $ 68,164 $ 5,876 $188,565
U.S. Corporate and bank debt............... 62,981 28,910 41,929 133,820
International corporate and bank debt...... 27,000 10,000 -- 37,000
--------- --------- ------- --------
Total debt securities............ $ 204,506 $ 107,074 $47,805 $359,385
========= ========= ======= ========
</TABLE>
NOTE 3 -- FINANCING ARRANGEMENTS
On August 26, 1993, the Company issued $100 million of 11% Senior Notes
(the "Notes") due August 15, 2000. Interest on the Notes is payable semiannually
on February 15 and August 15. The Notes are redeemable, in whole or in part, at
the option of the Company, on and after August 15, 1998 at redemption prices
decreasing from 103.50% to 101.75% of principal, depending upon the redemption
date, plus accrued interest to the date of redemption.
The Indenture governing the Notes contains certain covenants including
limitations on the amount of future indebtedness and restrictions on the payment
of cash dividends on the Company's common stock under certain circumstances.
However, covenants limiting future indebtedness may be inapplicable from time to
time if the Notes are assigned an investment grade rating by both of the major
rating services.
Concurrently with the issuance of the Notes, the Company entered into
interest rate swap agreements to reduce its interest costs associated with the
Notes. The swap agreements effectively changed the Company's interest rate
exposure from a fixed-rate to a floating-rate basis. However, in response to
increasing interest rates, in August 1994, the Company entered into offsetting
swap agreements to effectively change its interest rate exposure from a
floating-rate basis to a fixed-rate basis. The interest rate swap agreements
mature on August 15, 1998, the first available redemption date of the Notes. At
January 29, 1995, the Company had outstanding receive fixed/pay floating
interest rate swaps with an aggregate notional amount of $100 million offset by
receive floating/pay fixed interest rate swaps with an aggregate notional amount
of $100 million. In addition, the Company had an interest rate swap which
matured in February 1995, with a notional amount of $50 million which was used
to change floating interest rate reset dates on the receive fixed/pay floating
interest rate swaps. The weighted average interest rate, adjusted by the swaps,
was 12.1% and 9.5% for 1995 and 1994, respectively. At January 29, 1995, the
Company is paying a net interest cost of 13.8% on the Notes.
In December 1994, the Company obtained a $14 million loan secured by its
recently-constructed facility in Round Rock, Texas. The loan is for 15 years at
an interest rate of 10.28% with monthly payments of principal and interest, paid
in arrears, commencing in February 1995. The long-term portion of the loan was
$13.4 million at January 29, 1995. Principal due under the loan over the next
five years is as follows: 1996 -- $.4 million; 1997 -- $.5 million; 1998 -- $.5
million; 1999 -- $.6 million; 2000 -- $.6 million.
Effective June 10, 1994, the Company entered into a new line of credit
facility which bears interest at a defined Base Rate or Eurocurrency Rate with
covenants based on quarterly income, maintenance of net worth, a maximum ratio
of total liabilities to tangible net worth, and a maximum inventory level. The
line of credit also contains certain restrictions on the payment of cash
dividends on the Company's common stock. Maximum amounts available under the
credit facility are limited to $90 million less the aggregate of outstanding
letters of credit. During the commitment period, the Company is obligated to pay
a fee on the unused portion of the credit facility. At January 29, 1995, no
amounts were outstanding under this credit facility, and the maximum amount
available totaled $77.3 million.
33
<PAGE> 35
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's subsidiary, Dell Receivables Corporation, has a Receivable
Purchase Agreement, which was renewed effective May 24, 1994, pursuant to which
the Company may raise up to $100 million through the sale of interests in
certain of its accounts receivable. The Company is obligated to pay a commitment
fee on the unused portion of the amount available under the Receivable Purchase
Agreement. The discount on sale of receivables is included in financing and
other income (expense). During 1994, the Company sold $85 million of
receivables. As of January 30, 1994, there were no receivables sold which
remained to be collected. This facility was unused in 1995.
In fiscal 1994, the Company repaid its borrowings under Section 84 of
Ireland's Corporation Tax Act of 1976 and retired its commercial paper program.
NOTE 4 -- STOCKHOLDERS' EQUITY
Preferred Stock -- On August 26, 1993, the Company sold 1,250,000 shares of
Series A Convertible Preferred Stock (the "Preferred Stock") generating gross
proceeds of $125 million. Preferred stock issuance costs were approximately $4
million. Each share of Preferred Stock entitles its holder to receive annual
cumulative cash dividends of $7 and to convert it into 4.2105 shares of common
stock (equivalent to a conversion price of $23.75 per share of common stock),
subject to adjustment to prevent dilution in certain circumstances. In the event
of voluntary or involuntary liquidation, each share of Preferred Stock entitles
its holder to receive up to $100 per share plus an amount equal to accrued and
unpaid dividends before any distributions to common stock. The aggregate
liquidation preference value of the Preferred Stock at January 29, 1995,
including accrued and unpaid dividends, was $126.8 million. The preferred shares
are not redeemable before August 25, 1996. On and after August 25, 1996, the
Preferred Stock may be redeemed by the Company, at its option, in whole or in
part at any time at a redemption price per share decreasing from $104.67 to
$100, depending on the redemption date, together in each case with any accrued
and unpaid dividends.
Dividends on the Preferred Stock are cumulative, have priority over
dividends on common stock, and must be paid in the event of liquidation and
before any distribution to holders of common stock. On January 26, 1995, the
Board of Directors declared a $1.75 per share quarterly cash dividend which was
paid on February 15, 1995, to Preferred Stockholders of record on January 27,
1995.
In addition, so long as any Preferred Stock is outstanding, the Company may
not, without the affirmative vote or consent of the holders of at least 66 2/3%
(unless a higher percentage shall then be required by applicable law) of all
outstanding shares of Preferred Stock, voting separately as a class, (i) amend,
alter or repeal any provision of the Company's Certificate of Incorporation or
Bylaws so as to affect adversely the relative rights, preferences,
qualifications, limitations, or restrictions of the Preferred Stock, (ii)
create, authorize or issue, or reclassify any authorized stock of the Company
into, or increase the authorized amount of, any series or class of stock that
ranks senior to the Preferred Stock as to dividends or distributions of assets
upon liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, or any security convertible into any such class or series of such
stock, or (iii) enter into a share exchange that affects the Preferred Stock,
consolidate with or merge into another entity, or permit another entity to
consolidate with or merge into the Company, unless in each such case each share
of Preferred Stock remains outstanding and unaffected or is converted into or
exchanged for convertible preferred stock of the surviving entity having powers,
preferences and relative participating optional or other rights and
qualification limitations and restrictions thereof identical to that of a share
of Preferred Stock (except for changes that do not affect the holders of the
Preferred Stock adversely).
The holders of the Preferred Stock have no voting rights except if
dividends have not been paid in an aggregate amount for at least six quarterly
dividends on such shares. Under these circumstances, the number of members of
the Company's Board of Directors will be increased by two, and the holders of
the Preferred
34
<PAGE> 36
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock will be entitled to elect two additional directors at any meeting of
stockholders at which directors are to be elected held during the period such
dividends remain in arrears.
On February 21, 1995, the Company offered to pay a cash premium of $8.25
for each share of its Preferred Stock that is converted to common stock. The
offer of premium upon conversion is available to holders of Preferred Stock
through March 22, 1995 unless extended by the Company. The Company has offered
to register the resale of the shares of common stock issued upon conversion of
the Preferred Stock for a 50-day period with the Securities and Exchange
Commission (the "Commission"). Assuming all of the outstanding shares of Series
A Preferred Stock are converted during the conversion period, the holders of
Preferred Stock will receive an aggregate of 5,263,125 shares of common stock
and $10,312,500 in cash. The payment of the conversion premium and the expenses
of the conversion offer will be treated as an additional dividend on Preferred
Stock for financial reporting purposes. Accordingly, the aggregate amount of the
conversion premium and expenses paid will be deducted from net income to
determine the net income applicable to common stockholders for the period in
which the conversion offer is completed, which will be the first quarter of 1996
unless the offer is extended or withdrawn. In addition, weighted average shares
outstanding used to compute primary earnings per common share will include the
shares of common stock issued upon conversion from the closing of the conversion
until the end of the period.
Common Stock -- During 1993, the Company's Board of Directors declared a 3
for 2 stock split in the form of a 50% stock dividend. All share and per-share
information has been retroactively restated in the consolidated financial
statements to reflect the stock split.
Employee Stock Purchase Plan -- The Company has an Employee Stock Purchase
Plan which permits substantially all employees to acquire the Company's common
stock. Participating employees may acquire common stock at the end of each
period at a purchase price of 85% of the lower of the fair market value at the
beginning or the end of the participation period. Periods are semi-annual and
begin on January 1 and July 1 of each year. Employees may designate up to 10% of
their base compensation for the purchase of common stock. Common stock reserved
for future employee purchases aggregated 1,370,592 shares at January 29, 1995
and 1,655,036 shares at January 30, 1994. Shares issued under this plan were
284,444 shares in 1995, 238,539 shares in 1994 and 150,326 shares in 1993. There
have been no charges to income in connection with the issuance of these shares.
The 401(k) Plan -- The Company has a defined contribution retirement plan
which complies with Section 401(k) of the Internal Revenue Code. Substantially
all employees who have completed three months of service are eligible to
participate in the plan. Effective January 1, 1995, the plan was amended to
provide for Company matching contributions of 100% of the employees' voluntary
contributions, up to a maximum of 3% of the employees' compensation, and to
reduce the service period to three months. Prior to the change, the plan
provided for Company matching contributions of 50% of the employees' voluntary
contributions, up to a maximum of 6% of the employees' compensation, and
required a service period of six months. The Company has accrued for its
estimated matching amounts to be funded from authorized, previously unissued,
shares of the Company's common stock. Shares are issued to the plan based on the
fair market value of the Company's common stock at the time of issuance. The
amounts expensed for the Company's matching contribution during 1995, 1994, and
1993, were $4.1 million, $3.0 million and $2.0 million, respectively.
Stock Option Plans -- On June 22, 1994, the Company's stockholders approved
the Dell Computer Corporation Incentive Plan (the "Incentive Plan") which
effectively replaced the 1993 Stock Option Plan (the "1993 Plan") and the 1989
Stock Option Plan (the "1989 Plan"), as amended. At the time of approval of the
Incentive Plan, 4,500,923 shares of common stock were reserved for issuance
under the Incentive Plan; that amount equaled the remaining shares reserved for
issuance under the 1993 Plan and 1989 Plan, as amended, which were subsequently
canceled. The Incentive Plan has provisions which are substantially the same as
those of the 1993 Plan and the 1989 Plan, as amended. The Incentive Plan,
administered by the Compensation Committee of the Board of Directors, provides
for the granting of incentive awards in the form
35
<PAGE> 37
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of stock options, stock appreciation rights ("SARs"), stock and cash to
directors, executive officers, employees of the Company and its subsidiaries and
certain other persons who are not employees of the Company who provide
substantial advice or other assistance or services to the Company. Awards under
the Incentive Plan must be granted within ten years of the plan adoption date.
Options granted may be either incentive stock options within the meaning of
Section 422 of the Internal Revenue Code or nonqualified options. The right to
purchase shares under the existing stock option plans typically vest over a five
year period beginning on the option's date of grant. Stock options must be
exercised within ten years from date of grant. Stock options are generally
issued at fair market value. For stock options which have been issued at
discounted prices, the Company accrues compensation expense over the vesting
period for the difference between the exercise price and the fair market value
on the measurement date. During 1995, the Company also granted 140,000 shares of
restricted stock, all of which were held for vesting at January 29, 1995.
Restricted shares typically vest over a seven year period beginning on the date
of grant; restrictions may not extend more than ten years from date of grant.
For grants of restricted stock, the Company accrues compensation expense, equal
to the fair market value at the date of grant, and recognizes such expense over
the vesting period. Options vesting over a ten year period with an exercise
price of $.01 per share were granted to certain key employees in 1995, 1994 and
1993 at fair market values ranging from $24.88 to $27.94, $18.50 to $36.50 and
$15.75 to $35.88 in 1995, 1994 and 1993, respectively.
Under the Incentive Plan, each non-employee director automatically receives
nonqualified stock options on the day after the first Board of Directors meeting
he attends in person or by telephone as a non-employee director. In addition,
each non-employee director who is a member of the Board of Directors as of both
the day before and after the Company's annual meeting of stockholders each year
beginning with 1994 will automatically be granted nonqualified stock options on
the date of the first Board of Directors meeting following the annual meeting of
stockholders.
Prior to the adoption of the 1989 Stock Option Plan, the Company had two
incentive stock option plans and a nonqualified stock option plan for its
employees and directors. Options under those plans must be exercised within ten
years from date of grant.
The following table summarizes stock option activity under the plans for
each of the three years ended January 29, 1995:
<TABLE>
<CAPTION>
STOCK OPTION PLANS
-----------------------------------
PRICE RANGE NUMBER
OF SHARES OF SHARES
UNDER OPTION UNDER OPTION
-------------- ----------------
<S> <C> <C>
Outstanding at February 2, 1992........................ $.11-$19.55 3,727,773
Granted.............................................. $.01-$36.31 2,642,079
Canceled............................................. $.01-$24.69 (475,729)
Exercised............................................ $.11-$23.31 (850,135)
-------------
Outstanding at January 31, 1993........................ $.01-$36.31 5,043,988
Granted.............................................. $.01-$36.31 2,505,590
Canceled............................................. $.01-$30.69 (1,204,814)
Exercised............................................ $.01-$23.66 (726,412)
-------------
Outstanding at January 30, 1994........................ $.01-$36.31 5,618,352
Granted.............................................. $.01-$46.63 2,161,249
Canceled............................................. $.01-$30.69 (820,551)
Exercised............................................ $.01-$36.31 (1,367,527)
-------------
Outstanding at January 29, 1995........................ $.01-$46.63 5,591,523
=============
</TABLE>
36
<PAGE> 38
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options on 1,418,672 shares were exercisable under the plans at January 29,
1995. Shares available for future grants under the plans are 2,409,614 at
January 29, 1995. On August 24, 1993, the Company granted 390,623 nonqualified
options to purchase its common stock at $18.69 per share under the 1993 Plan in
exchange for cancellation of outstanding options to purchase its common stock
for $30.69 which had been previously granted under the 1989 Plan. Pursuant to
the exchange agreement, vesting of these options shall occur on the earlier of
August 24, 2002, or the date that the Company's common stock has traded for
thirty consecutive days at or above $32.69 per share, which occurred in 1995.
NOTE 5 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1995 1994 1993
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Domestic............................................ $51,600 $ 29,404 $ 42,827
Foreign............................................. 15,895 8,033 12,727
Prepaid............................................... (3,676) (40,370) (13,904)
------- -------- --------
Provision for income taxes (benefit).................. $63,819 $ (2,933) $ 41,650
======= ======== ========
</TABLE>
Income (loss) before income taxes included approximately $126 million,
($32) million and $51 million related to foreign operations in the fiscal years
ended January 29, 1995, January 30, 1994 and January 31, 1993, respectively.
The Company has not recorded a deferred income tax liability of $22.5
million for additional U.S. federal income taxes that would result from the
distribution of earnings of its foreign subsidiaries, if they were repatriated.
The Company currently intends to reinvest indefinitely the undistributed
earnings of its foreign subsidiaries.
The deferred tax asset is comprised of the following principal temporary
differences:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30, JANUARY 31,
1995 1994 1993
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation........................................ $(4,994) $ (96) $ 1,578
Provisions for doubtful accounts and returns........ 22,499 19,988 13,472
Inventory and warranty provisions................... 26,431 27,626 13,032
Deferred service contract revenue................... 24,971 9,507 3,074
Other............................................... 8,899 7,239 (1,979)
-------- -------- --------
Deferred tax asset.................................. $77,806 $64,264 $29,177
======== ======== ========
</TABLE>
37
<PAGE> 39
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the income tax provisions in the consolidated
financial statements and the tax expense computed at the United States statutory
rates are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1995 1994 1993
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision (benefit) computed at the U.S. federal
statutory rate of 35%, 35% and 34%, respectively.... $ 74,548 $(13,568) $48,719
Research and development credit....................... (1,438) (1,345) (1,007)
Foreign income taxed at different rate................ (15,584) 10,315 (7,849)
Net operating loss carryovers......................... 1,471 3,969 (204)
Other nondeductible accruals.......................... 383 (1,568) --
Other................................................. 4,439 (736) 1,991
-------- -------- -------
Provision (benefit) for income taxes.................. $ 63,819 $ (2,933) $41,650
======== ======== =======
Effective tax rates................................... 30.0% 7.6% 29.1%
======== ======== =======
</TABLE>
NOTE 6 -- FINANCIAL INSTRUMENTS
Financial instruments with off-balance sheet risk
Foreign currency hedging instruments -- The results of the Company's
international operations are affected by changes in exchange rates between
certain foreign currencies and the United States dollar. The financial
statements of the Company's international sales subsidiaries have generally been
measured using the local currency as the functional currency. Effective January
30, 1995, most of the Company's European sales will be made from a U.S. dollar
functional currency entity.
The Company attempts to reduce its exposure to currency fluctuations
involving anticipated, but not firmly committed, transactions and involving
transactions with firm foreign currency commitments through the use of purchased
foreign currency option contracts and forward contracts. The risk of loss
associated with forward contracts is limited to the exchange rate differential
from the time the contract is made until the time it is settled. The risk of
loss associated with purchased options is limited to premium amounts paid for
the option contracts, which could be significant.
Hedging of Anticipated Transactions. The Company enters into foreign
currency purchased options and, to a lesser extent, forward contracts to hedge a
portion of its anticipated, but not firmly committed, transactions including
sales by international subsidiaries, which includes international sales by a
U.S. dollar functional currency entity and intercompany shipments to certain
international subsidiaries, and foreign currency denominated purchases of
certain components. Foreign currency purchased options generally expire in
twelve months or less and forward contracts generally mature in three months or
less. The principal hedge currencies are the German mark, the British pound and
the Japanese yen. At January 29, 1995, the Company held purchased option
contracts that were designated and effective as hedges of anticipated sales by
international subsidiaries with a total notional amount of $434.3 million and a
combined net realized and unrealized loss of $2.1 million. At January 29, 1995,
the Company held purchased options that were designated and effective as hedges
of foreign currency denominated purchases with a total notional amount of $65.0
million and a combined net realized and unrealized gain of $1.6 million. Based
upon foreign currency exchange rates at January 30, 1994 and January 31, 1993,
option contracts which hedged anticipated intercompany shipments had a combined
net realized and unrealized gain of $2.2 million and $2.0 million, respectively.
On November 30, 1992, the Securities and Exchange Commission's Division of
Enforcement notified the Company about an informal inquiry regarding the
Company's accounting practices for foreign currency hedging and trading
activities and the completeness of the Company's public disclosure about those
activities.
38
<PAGE> 40
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company believes its accounting treatment for foreign currency hedging and
trading activities complies with generally accepted accounting principles in all
material respects and that the Company has provided appropriate disclosures of
its hedging activities. The Company has not received correspondence from the
Commission regarding this matter since September 1993.
Transaction Hedging. Transaction exposures representing firm foreign
currency commitments are generally hedged using foreign currency forward
contracts. Forward contracts with maturity dates of less than three months
designated to hedge foreign currency transaction exposures of $29.4 million and
$19 million were outstanding at January 29, 1995 and January 30, 1994,
respectively.
Investment Derivatives -- The Company has historically employed a variety
of interest rate derivative instruments to manage its principal, market and
credit risks and enhance its investment yield. Derivative instruments utilized
include interest rate swaps, written and purchased interest rate options and
swaptions (options to enter into interest rate swaps). Prior to June 1994, the
Company structured derivative instruments in interest rate markets where it had
foreign operations. Interest rate derivatives generally involve exchanges of
interest payments based upon fixed and floating interest rates without exchanges
of underlying notional amounts. At January 29, 1995 the Company had no
investment derivatives outstanding. At January 30, 1994, the Company had
outstanding investment derivative contracts with a notional amount of $355
million. For the first and second quarters of 1995, the average fair value of
these investment derivative financial instruments totaled ($11.9) million and
($7.8) million, respectively. The Company closed all remaining investment
derivatives during the second quarter of 1995. Realized and unrealized net gains
(losses) on investment derivatives recognized in income for 1995 were ($23.9)
million compared with $5.2 million for 1994 and $2.5 million for 1993.
Interest Rate Management -- The Company has also entered into certain
interest rate derivative instruments as a means of managing its interest rate
risk and the interest costs associated with the Senior Notes. See Note
3 -- Financing Arrangements.
39
<PAGE> 41
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair value of financial instruments
The estimated fair value amounts disclosed below have been determined by
the Company using available market information and appropriate valuation
methodologies as described below. However, 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, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
financial statements at fair value because of the short-term maturity of these
instruments. The estimated fair values of the Company's other financial
instruments at January 29, 1995, and January 30, 1994, are as follows:
<TABLE>
<CAPTION>
JANUARY 29, 1995 JANUARY 30, 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term investments................. $ 484,294 $ 484,294 $ 333,667 $ 333,667
Long-term debt......................... (113,429) (117,929) (100,000) (105,500)
Derivative financial instruments:
Transaction hedging:
Forward contracts................. 5,402 5,402 (81) (81)
Hedging of anticipated transactions:
Foreign currency option
contracts....................... 15,154 14,668 5,800 8,035
Interest rate management:
Receive fixed/pay floating
interest rate swaps............. -- (9,258) -- (1,170)
Receive floating/pay fixed
interest rate swaps............. -- (827) -- --
Investment derivatives:
Interest rate options and
swaptions....................... -- -- (2,444) (2,444)
Interest rate swaps............... -- -- 812 812
</TABLE>
The fair values of short-term investments, long-term debt and interest rate
derivative instruments were estimated based upon quotes from brokers. Foreign
exchange forward contracts fair values are estimated using market quoted rates
of exchange at the applicable balance sheet date. The estimated fair value of
foreign currency option contracts is based on market quoted rates of exchange at
the applicable balance sheet date and the Black-Scholes options pricing model.
Concentrations of credit risk
All of the Company's foreign exchange and interest rate derivative
instruments involve elements of market and credit risk in excess of the amounts
recognized in the financial statements. The counterparties to financial
instruments consist of a number of major financial institutions. In addition to
limiting the amount of agreements and contracts it enters into with any one
party, the Company monitors its positions with and the credit quality of the
financial institutions which are counterparties to these financial instruments.
The Company does not anticipate nonperformance by the counterparties.
The Company has business activities with large corporate, government and
education customers, small-to medium-sized businesses and individuals and
remarketers. Its receivables from such parties are well diversified. The Company
places its short-term investments with high quality financial institutions and
other companies and currently invests primarily in equity securities and debt
instruments that have maturities of less than three years. The Company's
receivables, short-term investments and financial instruments holdings are
40
<PAGE> 42
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subject to potential credit risk. However, in management's opinion, no
significant concentration of credit risk exists for the Company. There can be no
assurance that the credit quality of the financial institutions for which the
Company invests or transacts business with will be stable or that efforts to
diversify receivables, investments or financial instrument holdings will prevent
the Company from incurring material losses.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Legal Matters -- The Company is subject to certain legal proceedings and
claims which arise in the ordinary course of its business. Additionally, the
Company has been made aware of others in the industry who assert exclusive
rights to certain technologies, some of which have offered related licenses to
the Company. Such an offer of a license is usually taken in the industry as a
notice of a patent infringement claim. The Company's policy is to evaluate such
claims on a case-by-case basis and, if appropriate, to enter into licensing
arrangements that appear necessary or desirable. Management does not believe
that the outcome of any of these matters will have a material adverse effect on
the Company's financial condition or results of operations.
The Company and its Chairman, Michael S. Dell, were defendants in nineteen
lawsuits filed between May and November 1993, in the United States District
Court for the Western District of Texas, Austin Division. On November 17, 1994,
the Company announced that Mr. Dell and the Company had reached settlement with
the plaintiffs. Under the settlement, the Company and its insurers will pay a
total of $13.4 million (plus accrued interest from the settlement date) to the
plaintiffs. In the settlement, neither the Company nor Mr. Dell admitted
liability or obligation of any kind in connection with the lawsuit or the
underlying allegations. The court approved the settlement and entered a final
judgment of dismissal in February 1995. The settlement did not have a material
effect on Dell's financial position or results of operations, since the
settlement amount was covered by insurance or previously taken reserves.
The Company has been named as a defendant in 26 repetitive stress injury
lawsuits, most of which are in New York state courts or United States District
Courts for the New York City area. One is in the Federal District Court for the
State of Pennsylvania. The allegations in all of these lawsuits are similar;
each plaintiff alleges that he or she suffers from symptoms generally known as
"repetitive stress injury," which allegedly were caused by the design or
manufacture of the keyboard supplied with the computer the plaintiff used. The
Company has denied or is in the process of denying the claims and intends to
vigorously defend the suits. The suits naming the Company are just a few of many
lawsuits of this type which have been filed, often naming Apple, Atex, Compaq,
IBM, Keytronic and other major suppliers of keyboard products. The Company
currently is not able to predict the outcome of these suits. It is possible that
the Company may be named in additional suits. Ultimate resolution of the
litigation against the Company may depend on progress in resolving this type of
litigation overall. However, the Company does not believe that the outcome of
any of these matters will have a material adverse effect on the Company's
financial condition or results of operations.
41
<PAGE> 43
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Commitments -- The Company is subject to certain patent royalty
agreements that require fixed cash payments with scheduled increases over the
next four years. The Company is also subject to ongoing software royalty
agreements for periods exceeding twelve months which require cash payments.
Additionally, the Company leases property and equipment, manufacturing
facilities and office space under non-cancelable leases. Certain leases obligate
the Company to pay taxes, maintenance and repair costs. Future minimum payments
under these leases at January 29, 1995 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
FISCAL YEAR --------------
----------------------------------------------------- (IN THOUSANDS)
<S> <C>
1996................................................. $ 18,597
1997................................................. 14,403
1998................................................. 11,044
1999................................................. 7,894
2000................................................. 4,189
Thereafter........................................... 2,760
-----------
Total minimum lease payments required...... $ 58,887
===========
</TABLE>
Rental expense recorded under all operating leases was $20 million, $19
million and $14 million for the fiscal years ended 1995, 1994, and 1993,
respectively.
NOTE 8 -- OTHER CHARGES
During the first half of 1994, the Company delayed and canceled certain
notebook development projects and reevaluated its probable future sales for the
notebook products then offered. The Company recorded over $39.3 million of
charges in the first half of 1994 due to the notebook inventory writedowns and
delayed and canceled notebook projects. The Company canceled its existing
notebook product line in August, 1993 and sold its then-remaining inventories of
notebooks at significantly reduced prices. The Company focused its efforts on
the development of a 486-based notebook product line and re-entered the notebook
computer market with a phased approach. Completion of the first phase of the
Company's reentry into the notebook computer market resulted in the introduction
on February 21, 1994, of the 486-based Dell Latitude family of notebook
computers.
During the first half of 1994, the Company also recorded $29.3 million of
other costs, consisting of $13.8 million of inventory writedowns due to excess
components, $12.0 million of costs incurred for the cancellation of certain
contracts and a $3.5 million reserve established for litigation in connection
with a stockholder suit. These charges arose from the Company's determination
that certain products and inventory were excess or obsolete because the products
were scheduled to be replaced with newer products or because the Company
otherwise had lowered its estimates of expected demand for materials in
inventory or under outstanding purchase commitments.
During the first half of 1994, the Company recorded $22.8 million for the
costs of restructuring certain of its operations. The charge included $10.2
million for asset writedowns, $8.1 million related to the consolidation of
operations and $4.5 million for employee severance payments. Most of these
restructuring charges were associated with consolidating certain common
functions in the European subsidiaries and creating regional business units.
This consolidation effort was designed to reduce redundant costs and improve the
Company's ability to deliver higher levels of operational efficiency and higher
quality support in European markets. Operations in some subsidiaries were closed
and transferred to other subsidiaries, and some consolidation occurred outside
of Europe. Approximately 60% of these charges were cash provisions,
approximately half of which were incurred in fiscal 1994. During fiscal 1995,
the Company completed certain of the consolidations and closure of a subsidiary.
There are no reserves remaining at January 29, 1995.
42
<PAGE> 44
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- GEOGRAPHIC AREA INFORMATION
The Company operates in one principal segment across geographically diverse
markets. Americas includes the United States, Canada, Mexico and Latin America.
Substantially all of Americas operating results and identifiable assets are in
the United States. Transfers between geographic areas are recorded at cost plus
a markup.
<TABLE>
<CAPTION>
FISCAL YEAR 1995
-------------------------------------------------------------------
OTHER
AMERICAS EUROPE INTERNATIONAL ELIMINATIONS CONSOLIDATED
--------- --------- ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers...... $2,400,012 $ 952,943 $ 122,388 $ -- $ 3,475,343
Transfers between geographic areas... 3,861 108,769 -- (112,630) --
---------- ---------- --------- ---------- -----------
Total sales.......................... $2,403,873 $1,061,712 $ 122,388 $ (112,630) $ 3,475,343
========== ========== ========= ========== ===========
Operating income..................... $ 110,653 $ 132,297 $ 6,313 $ -- $ 249,263
========== ========== ========= ========== ===========
Identifiable assets.................. $1,121,790 $ 411,089 $ 61,121 $ -- $ 1,594,000
========== ========== ========= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1994
-------------------------------------------------------------------
OTHER
AMERICAS EUROPE INTERNATIONAL ELIMINATIONS CONSOLIDATED
--------- --------- ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers...... $2,037,221 $ 781,905 $ 54,039 $ -- $ 2,873,165
Transfers between geographic areas... 1,035 98,553 -- (99,588) --
---------- --------- --------- ---------- -----------
Total sales.......................... $2,038,256 $ 880,458 $ 54,039 $ (99,588) $ 2,873,165
========== ========= ========= ========== ===========
Operating income..................... $ (35,540) $ 14,610 $ (18,094) $ -- $ (39,024)
========== ========= ========= ========== ===========
Identifiable assets.................. $ 894,867 $ 229,609 $ 16,004 $ -- $ 1,140,480
========== ========= ========= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1993
-------------------------------------------------------------------
OTHER
AMERICAS EUROPE INTERNATIONAL ELIMINATIONS CONSOLIDATED
--------- --------- ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers...... $1,459,607 $ 552,999 $ 1,318 $ -- $ 2,013,924
Transfers between geographic areas... 35,326 -- $ -- (35,326) --
---------- --------- --------- ----------- -----------
Total sales.......................... $1,494,933 $ 552,999 $ 1,318 $ (35,326) $ 2,013,924
========== ========= ========= ========== ===========
Operating income..................... $ 110,761 $ 34,668 $ (6,317) $ -- $ 139,112
========== ========= ========= ========== ===========
Identifiable assets.................. $ 671,379 $ 251,633 $ 3,993 $ -- $ 927,005
========== ========= ========= ========== ===========
</TABLE>
43
<PAGE> 45
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF FINANCIAL POSITION INFORMATION
Accounts receivable:
Gross accounts receivable............................................ $ 563,555 $ 436,789
Allowance for doubtful accounts...................................... (25,581) (26,015)
--------- ---------
$ 537,974 $ 410,774
========= =========
Inventories:
Production materials................................................. $ 262,150 $ 195,744
Work-in-process and finished goods................................... 30,775 24,521
--------- ---------
$ 292,925 $ 220,265
========= =========
Other current assets:
Deferred premiums and other foreign exchange contracts............... $ 20,248 $ 8,035
Deferred income taxes................................................ 77,806 64,264
Other current assets................................................. 14,161 8,024
--------- ---------
$ 112,215 $ 80,323
========= =========
Property and Equipment:
Land and buildings................................................... $ 41,954 $ 12,157
Computer equipment................................................... 73,125 63,531
Office furniture and fixtures........................................ 22,853 20,992
Machinery and other equipment........................................ 36,288 28,377
Leasehold improvements............................................... 33,633 26,645
--------- ---------
Total property and equipment......................................... 207,853 151,702
Accumulated depreciation and amortization............................ (90,872) (64,810)
--------- ---------
$ 116,981 $ 86,892
========= =========
Accrued liabilities:
Royalties and licensing.............................................. $ 34,815 $ 50,185
Accrued compensation................................................. 35,060 14,396
Accrued warranty costs............................................... 65,468 49,201
Taxes other than income taxes........................................ 39,873 18,143
Deferred profit on warranty contracts................................ 22,451 21,106
Other accrued liabilities............................................ 81,735 84,620
--------- ---------
$ 279,402 $ 237,651
========= =========
</TABLE>
44
<PAGE> 46
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
1995 1994 1993
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
INFORMATION
Research, development and engineering expenses:
Research and development expenses........................ $ 39,389 $ 36,338 $ 31,282
Engineering expenses..................................... 25,972 12,596 11,076
---------- --------- ----------
$ 65,361 $ 48,934 $ 42,358
========== ========= ==========
Financing and other income (expense):
Investment income (loss), net:
Short-term investments................................ $ (7,031) $ 8,772 $ 12,945
Investment derivatives................................ (23,948) 5,184 2,505
Interest expense......................................... (12,203) (8,350) (7,869)
Foreign currency transaction............................. 2,790 777 9,084
Foreign currency trading................................. -- -- (9,649)
International year-end transition........................ 5,725 -- --
Other.................................................... (1,600) (6,125) (2,836)
---------- --------- ----------
$ (36,267) $ 258 $ 4,180
========== ========= ==========
Weighted average shares used to compute earnings (loss)
per share:
Primary............................................... 41,542 37,333 39,235
========== ========= ==========
Fully Diluted......................................... 47,322 -- --
========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
1995 1994 1993
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOW
INFORMATION
Changes in operating working capital accounts:
Accounts receivable, net................................. $ (116,621) $ (44,942) $ (222,470)
Inventories.............................................. (72,083) 81,605 (180,517)
Accounts payable......................................... 164,544 (5,260) 208,923
Accrued liabilities...................................... 37,889 70,782 56,208
Other.................................................... (16,393) (5,177) (24,665)
---------- --------- ----------
$ (2,664) $ 97,008 $ (162,521)
========== ========= ==========
Changes in non-current assets and liabilities:
Other assets............................................. $ (1,578) $ 974 $ (1,116)
Other liabilities........................................ 40,612 16,280 3,227
---------- --------- ----------
$ 39,034 $ 17,254 $ 2,111
========== ========= ==========
Supplemental cash flow information:
Income taxes paid........................................ $ 56,510 $ 6,671 $ 27,233
Interest paid............................................ $ 10,499 $ 5,024 $ 1,334
</TABLE>
45
<PAGE> 47
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- QUARTERLY RESULTS (UNAUDITED)
In prior years, the Company consolidated its international operating
results on a one-month delay to facilitate consolidated financial reporting. In
the fourth quarter of 1995, the Company eliminated this one-month delay.
Accordingly, the Company's income before income taxes for the fourth quarter of
1995 includes one additional month of international operations. Net earnings
before taxes of $5.7 million for this additional month are included in the
consolidated statement of operations in financing and other income (expense)
resulting in an additional $4.1 million of net income. Net earnings for this
additional month had no effect on operating income.
The Company believes that the following information reflects all normal
recurring adjustments necessary for a fair presentation of the information for
the periods presented. The following tables contain selected unaudited
consolidated statement of operations and stock price data for each quarter of
fiscal 1995 and 1994. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
FISCAL YEAR 1995
---------------------------------------------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
--------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales........................................ $1,032,663 $884,552 $791,496 $766,632
Gross profit..................................... 217,161 181,423 169,637 169,832
Operating income................................. 78,671 59,546 51,061 59,985
Net income....................................... 60,291 41,354 28,559 18,973
Earnings per common share:
Primary........................................ $ 1.36 $ .93 $ .65 $ .42
Fully diluted.................................. $ 1.25 $ .86 $ .62 $ --
Weighted average shares used to compute earnings
per share:
Primary........................................ 42,862 42,091 40,620 40,315
Fully diluted.................................. 48,079 47,840 46,047
Stock bid prices per share:
High........................................... $ 47 3/4 $ 44 $ 30 3/4 $ 30 1/8
Low............................................ $ 36 3/4 $ 27 1/2 $ 21 1/2 $ 19 1/8
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1994
-----------------------------------------------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER(A) QUARTER
--------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales........................................ $ 742,948 $757,284 $700,569 $672,364
Gross profit..................................... 138,350 135,568 45,774 113,124
Operating income (loss).......................... 27,156 17,789 (98,118) 14,149
Net income (loss)................................ 17,708 11,982 (75,708) 10,185
Earnings (loss) per common share:................ $ .39 $ .26 $ (2.03) $ .25
Weighted average shares used to compute earnings
(loss) per share:.............................. 39,870 39,653 37,229 40,455
Stock bid prices per share:
High........................................ $ 28 1/8 $ 21 5/8 $ 34 3/4 $ 49 1/4
Low......................................... $ 20 1/8 $ 15 1/8 $ 13 7/8 $ 27 5/8
</TABLE>
- ---------------
(a) As more fully discussed in Note 8 of Notes to Consolidated Financial
Statements, during the second quarter of 1994, the Company recorded $71
million of charges primarily associated with inventory writedowns and
restructuring and other charges.
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not equal
the annual earnings per share.
46
<PAGE> 48
PART III
ITEM 10. DELL'S DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of Dell consists of one person who is an employee of
Dell and eight persons who are outside directors. The executive officers and
directors of Dell, and their ages as of March 1, 1995, are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- -------------------------------------------------
<S> <C> <C>
Michael S. Dell 30 Chairman of the Board, Chief Executive Officer,
and Director
Morton L. Topfer 58 Vice Chairman
L. Scott Flaig 50 Senior Vice President, Corporate Operations
Eric F. Harslem 49 Senior Vice President, Product Group
Richard N. Snyder 50 Senior Vice President, General Manager of Dell
Americas
Thomas J. Meredith 44 Chief Financial Officer
Thomas L. Thomas 45 Chief Information Officer
Thomas B. Green 40 General Counsel and Secretary
Phillip E. Kelly 37 Vice President, General Manager -- Asia
Martyn R. Ratcliffe 33 Vice President, General Manager -- Europe
Julie A. Sackett 51 Vice President, Human Resources
Donald J. Carty 48 Director
Paul O. Hirschbiel, Jr. 42 Director
Michael H. Jordan 58 Director
George Kozmetsky 77 Director
Thomas W. Luce III 54 Director
Klaus Luft 53 Director
Claudine B. Malone 58 Director
Michael A. Miles 55 Director
</TABLE>
Dell has classified its board of directors into three classes. Directors in
each class are elected to serve for three-year terms and until their successors
are elected and qualified. Each year, the directors of one class stand for
election as their terms of office expire. Messrs. Carty, Hirschbiel, and Luce
are designated as Class I directors, and their terms of office expire at the
Company's 1995 annual meeting of stockholders. Messrs. Dell, Jordan and Luft are
designated as Class II directors, and their terms of office expire at the
Company's 1996 annual meeting of stockholders. Mr. Kozmetsky, Ms. Malone and Mr.
Miles are designated as Class III directors, and their terms of office expire at
the Company's 1997 annual meeting of stockholders.
Executive officers serve at the discretion of the Board of Directors.
Set forth below are descriptions of the principal occupations of Dell's
executive officers and directors.
Michael S. Dell is Dell's founder and has been Chairman of the Board, Chief
Executive Officer and a director of Dell since May 1984.
Morton L. Topfer joined Dell in June 1994 as Vice Chairman. In this
position Mr. Topfer shares the Office of the Chief Executive Officer with
Michael Dell. Prior to being elected to his position at Dell, Mr. Topfer was
employed by Motorola, Inc. for 23 years, last serving as Corporate Executive
Vice President of Motorola, Inc. and President of Motorola's Land Mobile
Products Sector.
L. Scott Flaig was named Senior Vice President, Corporate Operations, in
February 1995. Mr. Flaig joined Dell in December 1992 as Senior Vice President,
Worldwide Operations. From April 1989 through November 1992, Mr. Flaig was a
partner with the accounting firm Ernst & Young, serving as National Director for
manufacturing services starting in June 1990.
47
<PAGE> 49
Eric F. Harslem joined Dell in June 1993 as Senior Vice President, Product
Group. Before joining Dell, he was Vice President of the Macintosh Desktop
Division of Apple Computer Corporation, where he was employed since 1983.
Richard N. Snyder joined Dell in February 1995 as Senior Vice President,
General Manager of Dell Americas. Before joining Dell, Mr. Snyder was General
Manager of the DeskJet Printer Group at Hewlett-Packard Co., where he was
employed for 22 years.
Thomas J. Meredith joined Dell in November 1992 as Chief Financial Officer.
He also served as Treasurer of Dell from November 1992 until March 1994. From
April 1990 to November 1992, he was Vice President and Treasurer of Sun
Microsystems, Inc. Before joining Sun, Mr. Meredith held financial positions
with Amdahl Corporation, most recently as President of Amdahl Capital
Corporation.
Thomas L. Thomas joined Dell in March 1993 as Chief Information Officer.
From March 1987 through February 1993, Mr. Thomas was Vice President and Chief
Information Officer of Kraft Commercial Products, a division of Philip Morris
Companies Inc.
Thomas B. Green joined Dell in August 1994 as General Counsel and
Secretary. Before joining Dell, Mr. Green served as Executive Vice President,
General Counsel and Secretary for Chicago Title & Trust Company, a wholly-owned
subsidiary of Alleghany Corporation, where he was employed from October 1992 to
July 1994. Prior to that, he was Executive Vice President and General Counsel
for Trammell Crow Company from October 1990 to October 1992. From February 1989
to October 1990, Mr. Green was employed by Jones, Day, Reavis & Pogue, last
serving as a partner in that firm.
Phillip E. Kelly joined Dell in November 1994 as Vice President, General
Manager -- Asia. Prior to his employment with Dell, Mr. Kelly held a series of
positions during a 14 year career with Motorola, Inc., last serving as Vice
President and General Manager for the North Asia Division of Motorola's Land
Mobile Products Sector, based in Hong Kong.
Martyn R. Ratcliffe joined Dell in January 1994 as Vice President, General
Manager -- Europe. Prior to joining Dell, Mr. Ratcliffe served as the President
and Chief Operating Officer of Zeos International Ltd. from November 1992 to
December 1993. He was the Chief Operating Officer of VTech Computers from
February 1992 to October 1992. Prior to his employment with VTech, Mr. Ratcliffe
held several positions from June 1988 to December 1991 with Technophone Ltd. and
Nokia Mobile Phones, which acquired Technophone Ltd.
Julie A. Sackett joined Dell in December 1994 as Vice President, Human
Resources. Before joining Dell, Ms. Sackett was employed by Sequent Computer
Systems, Inc., where she served as Vice President of Human Resources. Prior to
her employment with Sequent, she held a series of human resource management
positions during an 18 year career with Motorola, Inc., including Vice President
of Compensation and Benefits and Vice President of Personnel Services for
Motorola's Semiconductor Sector, and Vice President and Director of Human
Resources and Security for that company's Government Electronics Group.
Donald J. Carty was elected to the Board of Directors of Dell in December
1992. Mr. Carty was named President of American Airlines, Inc., a subsidiary of
AMR Corporation, and President of AMR's Airline Group in March 1995. He
continues to serve as Executive Vice President of AMR Corporation. From October
1989 to March 1995, Mr. Carty also held the positions of Chief Financial Officer
of AMR Corporation and Executive Vice President, Finance & Planning for American
Airlines, Inc. He has held senior vice presidential positions with American
Airlines, Inc. since 1988.
Paul O. Hirschbiel, Jr. has been a director of Dell since October 1987. Mr.
Hirschbiel became a director of Dell pursuant to the terms of the Stock Purchase
Agreement, dated October 26, 1987, that was entered into between Dell and the
purchasers of Dell preferred stock. Mr. Hirschbiel has been a vice president or
director of Prudential Equity Investors, Inc. (formerly Prudential Venture
Capital Management, Inc.) since September 1983.
Michael H. Jordan was elected to the Board of Directors of Dell in December
1992. Since July 1993 he has been Chairman and Chief Executive Officer of
Westinghouse Electric Corporation. From September 1992 through June 1993, he was
a principal with the investment firm of Clayton, Dubilier and Rice. From
December 1990 through July 1992, he was Chairman of PepsiCo International. From
December 1986 to
48
<PAGE> 50
December 1990, he was Chairman of PepsiCo World-Wide Foods. He is a member of
the boards of directors of Aetna Life & Casualty Co., Melville Corp. and
Rhone-Poulenc Rorer Inc.
George Kozmetsky has been a director of Dell since March 1987. Since 1982,
Mr. Kozmetsky has been Executive Associate for Economic Affairs of the
University of Texas System and Director of the IC2 Institute of The University
of Texas at Austin.
Thomas W. Luce III was elected to the Board of Directors of Dell in
November 1991. Mr. Luce is a partner of the law firm Hughes & Luce, L.L.P., in
Dallas, Texas, and has been affiliated with the firm since 1973. From October
1991 through April 1992, Mr. Luce was Chairman of the Board and Chief Executive
Officer of First Southwest Company, a Dallas-based investment firm that is a
member of the National Association of Securities Dealers, Inc. He is a member of
the board of directors of Enserch Corporation.
Klaus Luft was elected to the Board of Directors of Dell on March 1, 1995.
He is the owner and the President of MATCH -- Market Access for Technology
Services GmbH, a private company headquartered in Munich, Germany. MATCH
provides sales and marketing services to high technology companies. Mr. Luft
also serves as International Advisor to Goldman Sachs Europe Limited. Prior to
establishing his own company, he was Chief Executive Officer until November 1989
for Nixdorf Computer AG, a manufacturer of computer systems in Paderborn,
Germany. During his 23 years with Nixdorf, Mr. Luft held executive board
positions in marketing, manufacturing and finance for more than 17 years before
becoming Chief Executive Officer.
Claudine B. Malone was elected to the Board of Directors of Dell in
February 1993. Ms. Malone is President of Financial & Management Consulting,
Inc., a firm she founded in 1982. She also taught at the business schools of the
University of Virginia, Harvard, and Georgetown University. Ms. Malone is a
trustee of the Massachusetts Institute of Technology and the Deputy Chairman of
the Federal Reserve Bank of Richmond. She is a member of the boards of directors
of Hannaford Brothers Co., Hasbro, Inc., Houghton Mifflin Corp., Lafarge Corp.,
The Limited, Inc., Mallinckrodt Group Inc., Penn Mutual Life Insurance Co.,
SAIC, Scott Paper Company and Union Pacific Corporation.
Michael A. Miles was elected to the Board of Directors of Dell in February
1995. Mr. Miles is a special limited partner in the investment firm of Forstmann
Little and Co. From September 1991 to July 1994, he was Chairman of the Board
and Chief Executive Officer of Philip Morris Companies Inc. Prior to assuming
that position, Mr. Miles was Vice Chairman and a member of the Board of
Directors of Philip Morris Companies Inc. and Chairman and Chief Executive
Officer of Kraft General Foods, Inc., positions he held since December 1989. He
is also a member of Chase Manhattan's International Advisory Committee and a
trustee of Northwestern University. Mr. Miles is a member of the boards of
directors of Dean Witter, Discover & Co., Sears, Roebuck and Co. and Time Warner
Inc.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The executive officers and members of Dell's Board of Directors are
required to file reports with the Securities and Exchange Commission disclosing
the amount and nature of their beneficial ownership in common stock, as well as
changes in that ownership. Based solely on its review of forms received by the
Company, or written representations from certain reporting persons, the Company
believes that during fiscal 1995, all required reports were filed in a timely
manner.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors of Dell who are not employees are compensated for their services.
In fiscal 1995, each outside director received an annual retainer of $25,000,
plus $1,000 for each meeting of the Board of Directors attended in person. The
outside directors are also entitled to initial and annual grants of options to
buy 15,000 and 6,000 shares of common stock, respectively. Dell provides its
outside directors with the ability to defer receipt of all or a portion of the
annual cash retainer, as well as the ability to elect to receive annual grants
of stock options in lieu of all or a portion of the annual cash retainer. Dell
also reimburses directors for their reasonable expenses associated with
attending Board of Directors meetings, and provides its directors with liability
insurance.
49
<PAGE> 51
The following table sets forth the cash payments and stock option grants
that were made to Dell's outside directors during fiscal 1995.
<TABLE>
<CAPTION>
CASH OPTIONS
NAME PAYMENTS GRANTED(A)
---------------------------------------------------- -------- -------------
<S> <C> <C>
Mr. Carty........................................... $29,000 6,000 Shares
Mr. Hirschbiel...................................... $29,000 6,000 Shares
Mr. Jordan.......................................... $29,000 6,000 Shares
Mr. Kozmetsky....................................... $29,000 6,000 Shares
Mr. Luce............................................ $29,000 6,000 Shares
Mr. Luft............................................ n/a n/a(b)
Ms. Malone.......................................... $29,000 6,000 Shares
Mr. Miles........................................... n/a n/a(b)
</TABLE>
- ---------------
(a) These options were granted on August 19, 1994, with an exercise price of
$34.19 per share. Twenty percent of these options become exercisable on the
anniversary of the date of grant in each of the first five years if the
person has been a director of Dell continuously through that anniversary
date, and all options expire on the tenth anniversary of the date of grant.
(b) Messrs. Miles and Luft were elected to Dell's Board of Directors in
February 1995 and March 1995, respectively. Both members were in
attendance at the March 1, 1995 Board of Directors meeting and have
received an initial stock option grant of 15,000 options with an exercise
price of $40.25 per share and $1,000 for attendance at the meeting.
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation Table
The following table summarizes the compensation paid during the last three
fiscal years to Dell's Chief Executive Officer and Dell's four most highly
compensated executive officers other than the Chief Executive Officer.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION($)(A) COMPENSATION
---------------------------------- ------------
AWARDS
------------
SECURITIES
UNDERLYING
NAME AND FISCAL OTHER ANNUAL OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SARS(#)(B) COMPENSATION($)(C)
- -------------------------- ------ -------- -------- ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Dell 1995 $374,850 $443,182 $ 92,789(d) 0 $ 10,308
Chairman of the Board, 1994 358,994 0 33,844(d) 0 13,614
Chief Executive Officer 1993 337,019 198,668 3,696(d) 0 11,600
Morton L. Topfer 1995 300,000 266,015 82,039(e) 207,500(i) 4,400
Vice Chairman 1994 -- -- -- -- --
1993 -- -- -- -- --
Eric F. Harslem 1995 345,125 306,028 83,802(f) 21,759 4,620
Senior Vice President, 1994 196,250 0 293,472(f) 130,800 0
Product Group 1993 -- -- -- -- --
Thomas J. Meredith 1995 277,894 246,414 71,048(g) 16,076 9,785
Chief Financial Officer 1994 265,000 0 178,457(g) 31,433 9,744
1993 55,208 34,284 115,000(g) 125,000 0
L. Scott Flaig 1995 314,437 209,113 11,556(h) 18,990 5,177
Senior Vice President, 1994 300,000 0 224,522(h) 32,000 1,873
Corporate Operations 1993 51,359 29,325 148,000(h) 100,000 0
</TABLE>
- ---------------
(a) Includes deferred compensation.
(b) Dell did not grant any SARs to executive officers in fiscal 1993-1995.
50
<PAGE> 52
(c) These amounts represent Dell's matching contributions under Dell's 401(k)
plan and deferred compensation plan.
(d) Amount represents reimbursement for personal financial counseling services
paid for by Dell.
(e) Amount is comprised of the following: reimbursement for personal financial
counseling services paid for by Dell, $7,496; and relocation expenses,
$74,543.
(f) Amount is comprised of the following: (i) for fiscal 1995 -- reimbursement
for personal financial counseling services paid for by Dell, $23,457;
relocation expenses, $58,861; and imputed interest on a below market loan,
$1,484; and (ii) for fiscal 1994 -- reimbursement for personal financial
counseling services paid for by Dell, $2,825; relocation expenses,
$151,947; and a signing bonus, $138,700.
(g) Amount is comprised of the following: (i) for fiscal 1995 -- reimbursement
for personal financial counseling services paid for by Dell, $68,779; and
imputed interest on a below market loan, $2,269; (ii) for fiscal
1994 -- reimbursement for personal financial counseling services paid for
by Dell, $17,125; and relocation expenses, $161,332; and (iii) for fiscal
1993 -- relocation expenses, $10,000; and a signing bonus, $105,000.
(h) Amount is comprised of the following: (i) for fiscal 1995 -- reimbursement
for personal financial counseling services paid for by Dell, $10,694; and
imputed interest on a below market loan, $862; (ii) for fiscal
1994 -- reimbursement for personal financial counseling services paid for
by Dell, $12,992; and relocation expenses, $211,530; and (iii) for fiscal
1993 -- relocation expenses, $10,000; and a signing bonus, $138,000.
(i) See notes (d) and (e) to the "Option/SAR Grants in Last Fiscal Year" table
below.
Option/SAR Grants in Last Fiscal Year
Dell has one active long-term incentive plan, the Incentive Plan, under
which up to 4,500,923 shares may be issued. The plan authorizes the grant of:
incentive stock options with exercise prices no lower than the fair market value
of the underlying stock on the date of grant; nonqualified stock options and
stock appreciation rights at exercise prices no lower than 50% of fair market
value; and other stock awards. At January 29, 1995, 2,409,614 shares of common
stock remained available for issuance pursuant to awards to be granted under the
Incentive Plan. The following table sets forth information regarding the stock
option grants Dell made to the named executive officers during fiscal 1995.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS/ EMPLOYEES EXERCISE MARKET GRANT DATE
GRANT SARS IN FISCAL PRICE PRICE ON EXPIRATION PRESENT
NAME DATE GRANTED(A) YEAR ($/SH) GRANT DATE DATE VALUE(B)
- ----------------------- ------- ---------- ---------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael S. Dell 0 n/a n/a n/a n/a n/a
Morton L. Topfer 6/1/94 33,750(c) 1.56% $28.19 $28.19 6/1/04 $ 488,025
6/1/94 70,000(d) 3.24 0.01 28.19 6/1/04 1,972,600
6/1/94 70,000(e) 3.24 0.01 28.19 6/1/04 1,972,600
6/29/94 33,750(f) 1.56 26.00 26.00 6/29/04 429,300
Eric F. Harslem 6/29/94 21,759(f) 1.01 26.00 26.00 6/29/04 276,774
Thomas J. Meredith 6/29/94 16,076(f) 0.74 26.00 26.00 6/29/04 204,487
L. Scott Flaig 6/29/94 18,990(f) 0.88 26.00 26.00 6/29/04 241,553
</TABLE>
- ---------------
(a) Dell did not grant any SARs to executive officers in fiscal 1995.
(b) The estimated grant date present value is determined using the
Black-Scholes Model for all options with exercise prices not equal to
$0.01 per share. The material assumptions and adjustments incorporated in
the Black-Scholes Model in estimating the values of the options reflected
in the table include the following: (i) an exercise price of the option
equal to the fair market value of the underlying stock on the
51
<PAGE> 53
date of grant; (ii) an interest rate that represents the interest rate on a
U.S. Treasury security on the date of grant with a maturity date
corresponding to that of the option term; (iii) volatility calculated using
daily stock prices for the one-year period prior to the grant date; (iv)
dividends at the rate of $0 per share (any dividends paid would reduce the
value of the options); (v) an option term of 10 years; and (vi) an
approximate 35% reduction to reflect the probability of forfeiture due to
termination prior to vesting and the probability of a shortened option term
due to termination of employment prior to the option expiration date. For
the options with an exercise price equal to $0.01 per share, the estimated
grant date present value is determined using the market price on the grant
date less the $0.01 exercise price. The ultimate values of the options will
depend on the future market prices of common stock, which cannot be
forecast with reasonable accuracy. The actual value, if any, that an
optionee will recognize upon exercise of an option will depend on the
excess of the market value of the common stock over the exercise price on
the date the option is exercised.
(c) These options vest 25% each year for four years on the anniversary of the
date of grant.
(d) These options are structured to be the equivalent of restricted stock: the
exercise price is nominal ($.01 per share), a portion of the options must
be exercised each calendar year, 60% of the underlying stock will be held
by Dell for two years, and gains on the options and the stock received on
exercise may be forfeited if Mr. Topfer leaves Dell and competes against
Dell within two years thereafter. The options vest 25% each year for four
years on the anniversary of the date of grant.
(e) These options are structured to be the equivalent of restricted stock: the
exercise price is nominal ($.01 per share), options must be exercised in
the calendar year in which the options vest, 60% of the underlying stock
will be held by Dell for two years, and gains on the options and the stock
received on exercise may be forfeited if Mr. Topfer leaves Dell and
competes against Dell within two years thereafter. The options vest 100%
after nine years on the anniversary of the date of grant. These options are
subject to early vesting, potentially within four years, if certain
performance criteria relating to stockholder return are met.
(f) These options vest 20% each year for five years on the anniversary of the
date of grant.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table provides information about the options exercised by the
named executive officers during fiscal 1995 and about unexercised stock options
held by the named executive officers on January 29, 1995.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE
UNDERLYING OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FY-END(#) FY-END($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(A) UNEXERCISABLE(A)
- ------------------------------------- ----------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Michael S. Dell...................... 0 $ 0 0/ $ 0/
0 0
Morton L. Topfer..................... 0 0 0/ 0/
207,500 6,849,024
Eric F. Harslem...................... 25,000 816,156 6,160/ 119,061/
121,399 3,957,008
Thomas J. Meredith................... 20,000 793,550 25,886/ 271,448/
96,623 2,739,875
L. Scott Flaig....................... 8,336 327,105 16,000/ 210,971/
101,654 3,397,589
</TABLE>
- ---------------
(a) Dell did not have any outstanding SARs held by executive officers during
fiscal 1995. The value of the options is calculated based on $41.83, which
was the average sales price per share for common stock on January 27, 1995.
52
<PAGE> 54
EMPLOYMENT, OTHER COMPENSATION, AND CHANGE-IN-CONTROL ARRANGEMENTS
Each of the named executive officers has signed an employment agreement
with Dell. The employment agreements require Dell to give an executive officer
either two weeks notice of termination or severance pay equal to two weeks of
such officer's compensation, unless the termination is for cause.
Dell's 1989 and 1993 stock option plans provide that outstanding options
granted under these respective stock option plans may become vested and
exercisable as of the day immediately preceding the date before any person
acquires 50% or more of Dell's outstanding common stock. The Incentive Plan
includes provisions governing the effects on outstanding awards granted under
the plan upon the occurrence of a dissolution, liquidation, merger,
consolidation or other reorganization of Dell, including a provision that
permits Dell to allow for the preservation of the rights of the holders of
awards in the event of such reorganization or providing for the accelerations of
vesting and exercisability of awards.
Dell has an Employee Stock Purchase Plan that permits substantially all
employees to acquire Dell's common stock at the end of each period at a purchase
price of 85% of the lower of the fair market value at the beginning or the end
of the participation period. Periods are semi-annual and begin on January 1 and
July 1 of each year. Employees may designate up to 10% of their base
compensation for the purchase of common stock. The Compensation Committee
administers the Employee Stock Purchase Plan.
Dell has a defined contribution retirement plan which complies with Section
401(k) of the Internal Revenue Code. Substantially all employees who have
completed three months of service are eligible to participate in the plan.
Effective January 1, 1995, the plan was amended to provide for matching
contributions made by Dell of 100% of the employees' voluntary contributions, up
to a maximum of 3% of the employees' compensation, and to reduce the service
period to three months. Prior to the change, the plan provided for matching
contributions made by Dell of 50% of the employees' voluntary contributions, up
to a maximum of 6% of the employees' compensation, and required a service period
of six months. Employees may also contribute amounts in excess of the 3% up to
15% of compensation, but no matching contributions are made for excess
contributions.
Dell has a deferred compensation plan for executive officers and highly
compensated employees that allows the participants to defer a portion of their
compensation. Employees may contribute up to 6% of compensation and receive
matching contributions in cash of 50% of the voluntary contributions. Employees
may contribute amounts in excess of the 6%, but no matching contributions are
made for the excess contributions. Both deferred compensation and matching
contributions are not segregated from Dell's assets and are therefore subject to
Dell being able to pay the amounts when due.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1995, Messrs. Kozmetsky, Hirschbiel and Jordan served as members
of the Compensation Committee. No member of the Compensation Committee is or was
formerly an officer or an employee of the Company or its subsidiaries.
No interlocking relationship exists between the Company's Board of
Directors or the Compensation Committee and the board of directors or the
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
53
<PAGE> 55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No director or executive officer of Dell owns any shares of Dell Series A
Convertible Preferred Stock.
The following table provides information about the beneficial ownership of
common stock as of March 1, 1995, (i) by each person who is known by Dell to own
beneficially more than five percent of the outstanding shares of common stock;
(ii) by each director including Michael S. Dell, Dell's Chairman of the Board
and Chief Executive Officer; (iii) by the other executive officers named in the
Summary Compensation Table in "Compensation of Executive Officers"; and (iv) by
all directors and executive officers as a group. To Dell's knowledge, each
person has sole investment and voting power over the shares indicated, except as
otherwise indicated.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
-------------------------------------------------------- -------------------- ----------
<S> <C> <C>
Michael S. Dell......................................... 9,092,051(a) 22.9%
2112 Kramer Lane, Building 1
Austin, Texas 78758
FMR Corp................................................ 4,505,500(b) 11.3
82 Devonshire Street
Boston, Massachusetts 02109
Twentieth Century Companies, Inc........................ 3,250,000(c) 8.2
4500 Main Street
Kansas City, Missouri 64141-9210
Donald J. Carty......................................... 6,000(d) *
Paul O. Hirschbiel, Jr.................................. 1,864(e) *
Michael H. Jordan....................................... 6,000(d) *
George Kozmetsky........................................ 228,780(f) *
Thomas W. Luce III...................................... 3,360(g) *
Klaus Luft.............................................. 0 *
Claudine B. Malone...................................... 3,000(d) *
Michael A. Miles........................................ 2,500(h) *
Morton L. Topfer........................................ 1,050 *
Eric F. Harslem......................................... 29,160(d) *
Thomas J. Meredith...................................... 77,775(d) *
L. Scott Flaig.......................................... 39,628(d) *
All Directors and Executive Officers as a Group
(19 persons).......................................... 9,680,340(d) 24.4
</TABLE>
- ---------------
* Represents less than 1% of the 39,719,402 shares of common stock issued and
outstanding at March 1, 1995.
(a) Includes 157,316 shares of common stock held in a trust of which Mr. Dell
is the grantor. Does not include 152,528 shares of common stock held in a
trust of which Mr. Dell's wife is the grantor or 718,009 shares of common
stock held by Mr. Dell's wife, and Mr. Dell disclaims any beneficial
ownership in all of such shares.
(b) Includes 3,858,500 shares owned by Fidelity Magellan Fund, which is an
investment company for which the investment advisor is Fidelity Management
& Research Company, a wholly-owned subsidiary of FMR Corp. Also includes
53,100 shares owned by various investment companies and institutional
investors to whom Fidelity International Limited is an investment advisor.
Until June 30, 1980, Fidelity International Limited was a majority-owned
subsidiary of Fidelity Management & Research Company, a
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<PAGE> 56
wholly-owned subsidiary of FMR Corp. On that date the shares of Fidelity
International Limited were distributed to the shareholders of FMR Corp. as
a dividend, and the two entities today are independently owned and managed.
FMR disclaims any beneficial ownership of these 53,100 shares. Edward C.
Johnson 3d and Abigail P. Johnson each own 24.9% of the outstanding voting
stock of FMR Corp. and, with other family members and trusts, are part of a
controlling group with respect to FMR Corp. A partnership controlled by
Edward C. Johnson 3d and members of his family owns approximately 47.22% of
the outstanding voting stock of Fidelity International Limited. Edward C.
Johnson 3d is Chairman of FMR Corp. and Fidelity International Limited.
This beneficial ownership information is based on a filing made with the
Securities and Exchange Commission by such beneficial owner, which
reflected ownership of common stock as of December 31, 1994.
(c) Investors Research Corporation, a wholly-owned subsidiary of Twentieth
Century Companies, Inc. acts as investment advisor to Twentieth Century
Investors, Inc., a registered investment company which owns 3,250,000
shares of common stock of the Company. Mr. James E. Stowers, Jr. controls
Twentieth Century Companies, Inc. by virtue of his ownership of
approximately 60% of the voting stock of Twentieth Century Companies, Inc.
This beneficial ownership information is based on a filing made with the
Securities and Exchange Commission by such beneficial owner, which
reflected ownership of common stock as of December 31, 1994.
(d) Includes shares subject to options that are currently exercisable or
exercisable within 60 days of March 1, 1995, as follows: Mr. Carty, 6,000
shares; Mr. Jordan, 6,000 shares; Ms. Malone, 3,000 shares; Mr. Harslem,
6,160 shares; Mr. Meredith, 25,886 shares; Mr. Flaig, 16,000 shares; and
All Directors and Executive Officers as a Group, 75,262 shares.
(e) Includes 60 shares held in trusts for two of Mr. Hirschbiel's children. Mr.
Hirschbiel is the trustee under these trusts.
(f) Includes 34,884 shares held by the KOZ Fund, Ltd., an affiliate of Mr.
Kozmetsky.
(g) All shares are owned by the Hughes & Luce Retirement Plan for the benefit
of Mr. Luce.
(h) All shares are held in the name of Mr. Miles' wife.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 17, 1993, Dell loaned $224,940 to Thomas J. Meredith, Dell's
Chief Financial Officer, to pay the exercise price of a stock option and the
related federal income tax obligation. The loan is unsecured, is due and payable
on June 1, 1995, and bears interest at the rate of 6% per annum. As of March 1,
1995, the amount outstanding under the loan, including interest, was $241,173.
On June 1, 1994, Dell loaned $66,386 to Mr. Meredith to pay the federal income
tax obligation related to a stock option exercise. The loan is unsecured, is due
and payable on June 1, 1995, and is non-interest bearing. As of March 1, 1995,
the full amount of the loan was outstanding.
On June 1, 1994, Dell loaned $82,983 to Eric F. Harslem, Dell's Senior Vice
President, Product Group, to pay the federal income tax obligation related to a
stock option exercise. The loan was unsecured and non-interest bearing. Such
loan was repaid during fiscal year 1995.
On August 29, 1994, Dell loaned $134,616 to Joel J. Kocher, Dell's former
Senior Vice President, to pay the federal income tax obligation related to a
stock option exercise. The loan was unsecured and non-interest bearing. Such
loan was repaid during fiscal year 1995.
Thomas W. Luce III is a partner of the law firm Hughes & Luce, L.L.P., in
Dallas, Texas. Dell retained that firm during fiscal 1995 to provide various
legal services, and the dollar amount of fees that Dell paid to that firm did
not exceed five percent of that firm's gross revenue for the year.
On September 15, 1994, Dell entered into an agreement with Joel J. Kocher
regarding the termination of Mr. Kocher's employment and providing for severance
arrangements. Under the agreement, Mr. Kocher acknowledged that he resigned from
all positions as a corporate officer or director of Dell on September 14, 1994.
Also under the agreement, Mr. Kocher's employment by Dell was terminated on
October 4, 1994. As
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<PAGE> 57
consideration for Mr. Kocher's agreement to abide by certain non-competition
covenants, Dell agreed to pay Mr. Kocher $390,000. Subject to Mr. Kocher's
compliance with the same non-competition covenants, and as further consideration
for those covenants, Mr. Kocher and Dell agreed to amend certain stock option
grant agreements previously granted to Mr. Kocher, but unvested on the effective
date of the agreement, so as to accelerate the vesting dates on which Mr. Kocher
could purchase Dell's common stock at the indicated exercise prices per share:
6,930 shares at $17.33 per share; 13,500 shares at $23.66 per share; 9,600
shares at $30.69 per share; 22,000 shares at $22.50 per share; 17,408 shares at
$26.00 per share; and 68,250 shares at $9.77 per share. The vesting dates for
each of such options were accelerated in the agreement so as to cause 25% of
each such option to vest on each of the following dates: January 1, 1995; April
1, 1995; July 1, 1995; and October 1, 1995. In addition, Mr. Kocher and Dell
agreed to amend the stock option grant agreements related to such options to
extend the deadline dates for exercise of all such options to October 31, 1995.
As further consideration for the non-competition covenants, Dell agreed to waive
the two year restriction as to 9,000 shares of Dell's common stock which were
issued to Mr. Kocher upon his exercise of an option under the Special and
Nonstatutory Stock Option Agreement under Dell's 1989 Stock Option Plan dated
June 22, 1992 (the "1992 Option Agreement"), which were subject to two year
restrictions on transfer, and as to 21,000 shares of Dell's common stock which
Mr. Kocher was entitled to acquire under the 1992 Option Agreement.
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<PAGE> 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following financial statements, financial statement schedule and
exhibits are filed as part of this 10-K.
Financial Statements and Financial Statement Schedule -- See Index to
Consolidated Financial Statements at Item 8 on page 23 of this report.
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
3.1 -- Certificate of Incorporation of Dell Computer Corporation (the
"Company"), as amended (incorporated by reference to Exhibit 3.1 of
the Company's Annual Report on Form 10-K for the year ended February
2, 1992, Commission File No. 0-17017)
3.2 -- Certificate of Amendment to the Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.2 of the Company's
Annual Report on Form 10-K for the year ended January 31, 1993,
Commission File No. 0-17017)
3.3 -- Certificate of Stock Designation of the Company (incorporated by
reference to Exhibit 3.3 of the Company's Registration Statement on
Form S-4 as filed with the Securities and Exchange Commission on
October 1, 1993, Registration No. 33-69680)
3.4 -- Bylaws of the Company (incorporated by reference to Exhibit 3.2 of
the Company's Annual Report on Form 10-K for the year ended February
2, 1992, Commission File No. 0-17017)
4.1 -- Indenture dated as of August 15, 1993, between the Company and The
First National Bank of Boston regarding 11% Senior Notes Due August
15, 2000 (incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-4 as filed with the Securities and
Exchange Commission on October 1, 1993, Registration No. 33-69680)
4.2 -- Exchange and Registration Rights dated as of August 15, 1993, between
the Company and the purchasers of 11% Senior Notes Due August 15,
2000 (incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-4 as filed with the Securities and
Exchange Commission on October 1, 1993, Registration No. 33-69680)
10.1* -- Dell Computer Corporation 1986 Incentive Stock Option Plan, as
amended (incorporated by reference to Exhibit 4c of the Company's
Registration Statement on Form S-8 as filed with the Securities and
Exchange Commission on September 20, 1988, Registration No. 33-24621)
10.2* -- Dell Computer Corporation 1987 Incentive Stock Option Plan, as
amended (incorporated by reference to Exhibit 4d of the Company's
Registration Statement on Form S-8 as filed with the Securities and
Exchange Commission on September 20, 1988, Registration No. 33-24621)
10.3* -- Dell Computer Corporation 1987 Non-qualified Stock Option Plan, as
amended, including the UK Scheme (incorporated by reference to
Exhibit 4e of the Company's Registration Statement on Form S-8 as
filed with the Securities and Exchange Commission on September 20,
1988, Registration No. 33-24621)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.4* -- Dell Computer Corporation 1989 Stock Option Plan, as amended and
restated (incorporated by reference to Exhibit 10.4 of the Company's
Annual Report on Form 10-K for the year ended January 31, 1993,
Commission File No. 0-17017)
10.5* -- Dell Computer Corporation Employee Stock Purchase Plan (incorporated
by reference to Exhibit 4d of the Company's Registration Statement on
Form S-8 as filed with the Securities and Exchange Commission on
October 30, 1989, Registration No. 33-31812)
10.6* -- Dell Computer Corporation 401(k) Plan (incorporated by reference to
Exhibit 10f of the Company's Annual Report on Form 10-K for the year
ended February 2, 1990, Commission File No. 0-17017)
10.7* -- First Amendment to Exhibit 10.6, Dell Computer Corporation 401(k)
Plan (incorporated by reference to Exhibit 10.7 of the Company's
Annual Report on Form 10-K for the year ended February 3, 1991,
Commission File No. 0-17017)
10.8* -- Second Amendment to Exhibit 10.6, Dell Computer Corporation 401(k)
Plan (incorporated by reference to Exhibit 10.8 of the Company's
Annual Report on Form 10-K for the year ended January 31, 1993,
Commission File No. 0-17017)
10.9#* -- Third, Fourth, Fifth and Sixth Amendments to Exhibit 10.6, Dell
Computer Corporation 401(k) Plan.
10.10* -- Dell Computer Corporation Deferred Compensation Plan (incorporated by
reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K
for the year ended February 3, 1991, Commission File No. 0-17017)
10.11 -- Credit Agreement between the Company and Citibank, N.A., for itself
and as agent for the other banks named therein dated June 18, 1993,
together with Amendment No. 1 to Credit Agreement between the Company
and Citibank, N.A., for itself and as agent for the other banks named
therein dated July 30, 1993. A list of schedules and exhibits to the
Credit Agreement is included on page iv of the Credit Agreement. The
Company hereby agrees to furnish supplementally to the Securities and
Exchange Commission on request a copy of any omitted schedule or
exhibit to the Credit Agreement (incorporated by reference to Exhibit
10.19 of the Company's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission on October 1, 1993,
Registration No. 33-69680)
10.12* -- Form of Indemnity Agreement between the Company and certain of its
officers, directors and key employees (incorporated by reference to
Exhibit 10.23 of the Company's Registration Statement on Form S-1 as
filed with the Securities and Exchange Commission on May 12, 1988,
Registration No. 33-21823)
10.13 -- Lease Agreement for Arboretum Point dated July 25, 1987 (incorporated
by reference to Exhibit 10.25 of the Company's Registration Statement
on Form S-1 as filed with the Securities and Exchange Commission on
May 12, 1988, Registration No. 33-21823)
10.14 -- First through Fourth Amendments to Exhibit 10.13, Lease Agreement for
Arboretum Point (incorporated by reference to Exhibit 10r of the
Company's Annual Report on Form 10-K for the year ended January 27,
1989, Commission File No. 0-17017)
10.15 -- Fifth Amendment to Exhibit 10.13, Lease Agreement for Arboretum Point
(incorporated by reference to Exhibit 19b of the Company's Quarterly
Report on Form 10-Q for the quarter ended July 28, 1989, Commission
File No. 0-17017)
</TABLE>
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<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.16 -- Sixth Amendment to Exhibit 10.13, Lease Agreement for Arboretum Point
(incorporated by reference to Exhibit 10.25 of the Company's Annual
Report on Form 10-K for the year ended January 31, 1993, Commission
File No. 0-17017)
10.17 -- Lease Agreement for Building 12 in Braker Center dated January 6,
1989 (incorporated by reference to Exhibit 10s of the Company's
Annual Report on Form 10-K for the year ended January 27, 1989,
Commission File No. 0-17017)
10.18 -- Two Amendments to Exhibit 10.17 Lease Agreement for Building 12 in
Braker Center (incorporated by reference to Exhibit 10.27 of the
Company's Annual Report on Form 10-K for the year ended January 31,
1993, Commission File No. 0-17017)
10.19* -- Agreement between the Company and Michael S. Dell dated May 12, 1988,
with the Employment Agreement between Michael S. Dell and a
predecessor of Dell Computer Corporation dated May 3, 1984
(incorporated by reference to Exhibit 10.25 of Amendment No. 3 to the
Company's Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission on March 27, 1991, Registration
No. 33-38991)
10.20* -- Employment Agreement between the Company and Joel Kocher effective as
of December 14, 1987 (incorporated by reference to Exhibit 10.22 of
Amendment No. 3 to the Company's Registration Statement on Form S-1,
as filed with the Securities and Exchange Commission on March 27,
1991, Registration No. 33-38991)
10.21* -- Employment Agreement between the Company and Savino R. Ferrales
effective as of January 9, 1989 (incorporated by reference to Exhibit
10.21 of Amendment No. 3 to the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission on
March 27, 1991, Registration No. 33-38991)
10.22* -- Employment Agreement between the Company and Richard E. Salwen
effective as of June 12, 1989, with a letter agreement dated May 21,
1989 (incorporated by reference to Exhibit 10.23 of Amendment No. 3
to the Company's Registration Statement on Form S-1, as filed with
the Securities and Exchange Commission on March 27, 1991,
Registration No. 33-38991)
10.23* -- Employment Agreement between the Company and Thomas J. Meredith dated
November 16, 1992 (incorporated by reference to Exhibit 10.36 of the
Company's Annual Report on Form 10-K for the year ended January 31,
1993, Commission File No. 0-17017)
10.24* -- Employment Agreement between the Company and L. Scott Flaig dated
December 1, 1992 (incorporated by reference to Exhibit 10.37 of the
Company's Annual Report on Form 10-K for the year ended January 31,
1993, Commission File No. 0-17017)
10.25* -- Form of Stock Option Agreement under the 1989 Stock Option Plan
(incorporated by reference to Exhibit 10.38 of the Company's Annual
Report on Form 10-K for the year ended January 31, 1993, Commission
File No. 0-17017)
10.26* -- Dell Computer Corporation 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.36 of the Company's Registration Statement on
Form S-4 as filed with the Securities and Exchange Commission on
October 1, 1993, Registration No. 33-69680)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.27* -- Form of Incentive Stock Option Agreement and Nonstatutory Stock
Option Agreement under the 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.37 of the Company's Registration Statement on
Form S-4 as filed with the Securities and Exchange Commission on
October 1, 1993, Registration No. 33-69680)
10.28 -- Receivables Purchase Agreement among Dell Receivables Corporation,
Dell USA L.P., Sheffield Receivables Corporation, and Barclays Bank
PLC, New York Branch, dated as of June 23, 1993. A list of schedules
and exhibits to the Receivables Purchase Agreement is included on
page iv of the Receivables Purchase Agreement. The Company hereby
agrees to furnish supplementally to the Securities and Exchange
Commission on request a copy of any omitted schedule or exhibit to
the Receivables Purchase Agreement (incorporated by reference to
Exhibit 10.38 of the Company's Registration Statement on Form S-4 as
filed with the Securities and Exchange Commission on October 1, 1993,
Registration No. 33-69680)
10.29* -- Severance Agreement dated September 15, 1994 between the Company and
Joel Kocher (incorporated by reference to Exhibit 10.1 of the
Company's Registration Statement on Form S-3, as filed with the
Securities and Exchange Commission on February 21, 1995, Registration
No. 33-57775)
10.30* -- Dell Computer Corporation Incentive Plan (incorporated by reference
to Exhibit 4.6 of the Company's Registration Statement on Form S-8,
as filed with the Securities and Exchange Commission on July 14,
1994, Registration No. 33-54577)
10.31# -- Credit Agreement between the Company and Citibank, N.A., for itself
and as agent for the other banks named therein dated June 10, 1994. A
list of schedules and exhibits to the Credit Agreement is included on
page iv of the Credit Agreement. The Company hereby agrees to furnish
supplementally to the Securities and Exchange Commission on request a
copy of any omitted schedule or exhibit to the Credit Agreement.
21.0 -- Subsidiaries of the Company (incorporated by reference to Exhibit
21.0 of the Company's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission on October 1, 1993,
Registration No. 33-69680)
23.1# -- Consent of Price Waterhouse LLP
27# -- Financial Data Schedule
</TABLE>
- ---------------
# Filed herewith.
* Indicates management compensatory plan, contract or arrangement.
REPORTS ON FORM 8-K
Dell Computer Corporation did not file any reports on Form 8-K during the
fourth quarter of fiscal 1995.
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SCHEDULE VIII
DELL COMPUTER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
FISCAL BEGINNING BAD DEBT CHARGED TO END OF
YEAR DESCRIPTION OF PERIOD EXPENSE ALLOWANCE PERIOD
- -------------------- ------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1995................ Allowance for doubtful accounts $ 26,015 $ 7,819 $8,253 $ 25,581
1994................ Allowance for doubtful accounts $ 14,000 $ 13,455 $1,440 $ 26,015
1993................ Allowance for doubtful accounts $ 7,527 $ 8,141 $1,668 $ 14,000
</TABLE>
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
Dell Computer Corporation
DATE: April 20, 1995 By: /s/ MICHAEL S. DELL
Michael S. Dell
Chairman of the Board and
Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
DATE: April 20, 1995 /s/ MICHAEL S. DELL
Michael S. Dell
Chairman of the Board and
Chief Executive Officer
DATE: April 20, 1995 /s/ THOMAS J. MEREDITH
Thomas J. Meredith
Chief Financial Officer
DATE: April 20, 1995 /s/ DONALD J. CARTY
Donald J. Carty
Director
DATE: April 20, 1995 /s/ PAUL O. HIRSCHBIEL, JR.
Paul O. Hirschbiel, Jr.
Director
DATE: April 20, 1995 /s/ MICHAEL H. JORDAN
Michael H. Jordan
Director
DATE: April 20, 1995 /s/ GEORGE KOZMETSKY
George Kozmetsky
Director
DATE: April 20, 1995 /s/ THOMAS W. LUCE, III
Thomas W. Luce, III
Director
DATE: April 20, 1995 /s/ KLAUS LUFT
Klaus Luft
Director
DATE: April 20, 1995 /s/ CLAUDINE B. MALONE
Claudine B. Malone
Director
DATE: April 20, 1995 /s/ MICHAEL A. MILES
Michael A. Miles
Director
</TABLE>
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBIT PAGE
- --------- -------------------------------------------------------------------- --------------
<S> <C> <C>
23.1 -- Consent of Price Waterhouse LLP.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 of Dell Computer Corporation of our report dated February
21, 1995 appearing on page 24 of this Form 10-K.
PRICE WATERHOUSE LLP
Austin, Texas
April 19, 1995
