<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 1, 1998
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COMMISSION FILE NUMBER: 0-17017
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DELL COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 74-2487834
(State of incorporation) (I.R.S. Employer ID No.)
</TABLE>
ONE DELL WAY
ROUND ROCK, TEXAS 78682
(Address of principal executive offices)
(512) 338-4400
(Telephone number)
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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 TWELVE MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] No [ ]
AS OF THE CLOSE OF BUSINESS ON DECEMBER 10, 1998, 1,272,252,873 SHARES OF
THE REGISTRANT'S COMMON STOCK, PAR VALUE $.01 PER SHARE, WERE OUTSTANDING.
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<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELL COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN MILLIONS AND UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 1, FEBRUARY 1,
1998 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 519 $ 320
Marketable securities..................................... 2,278 1,524
Accounts receivable, net.................................. 2,157 1,486
Inventories............................................... 281 233
Other..................................................... 680 349
------ ------
Total current assets.............................. 5,915 3,912
Property, plant and equipment, net.......................... 511 342
Other....................................................... 16 14
------ ------
Total assets...................................... $6,442 $4,268
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $2,313 $1,643
Accrued and other......................................... 1,345 1,054
------ ------
Total current liabilities......................... 3,658 2,697
Long-term debt.............................................. 512 17
Deferred revenue on warranty contracts...................... 247 225
Other....................................................... 78 36
------ ------
Total liabilities................................. 4,495 2,975
------ ------
Stockholders' equity:
Preferred stock and capital in excess of $.01 par value;
shares authorized: 5; shares issued and outstanding:
none................................................... -- --
Common stock and capital in excess of $.01 par value;
shares issued and outstanding: 1,271 and 1,287,
respectively........................................... 1,462 747
Retained earnings........................................... 557 607
Other....................................................... (72) (61)
------ ------
Total stockholders' equity........................ 1,947 1,293
------ ------
Total liabilities and stockholders' equity........ $6,442 $4,268
====== ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE> 3
DELL COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue........................................ $4,818 $3,188 $13,070 $8,590
Cost of revenue.................................... 3,732 2,471 10,125 6,691
------ ------ ------- ------
Gross margin..................................... 1,086 717 2,945 1,899
------ ------ ------- ------
Operating expenses:
Selling, general and administrative.............. 471 312 1,296 832
Research, development and engineering............ 76 59 198 148
------ ------ ------- ------
Total operating expenses...................... 547 371 1,494 980
------ ------ ------- ------
Operating income.............................. 539 346 1,451 919
Financing and other................................ 9 13 26 36
------ ------ ------- ------
Income before income taxes....................... 548 359 1,477 955
Provision for income taxes......................... 164 111 442 296
------ ------ ------- ------
Net income....................................... $ 384 $ 248 $ 1,035 $ 659
====== ====== ======= ======
Basic earnings per common share (in whole
dollars)......................................... $ 0.30 $ 0.19 $ 0.82 $ 0.50
====== ====== ======= ======
Diluted earnings per common share (in whole
dollars)......................................... $ 0.28 $ 0.17 $ 0.74 $ 0.45
====== ====== ======= ======
Weighted average shares outstanding:
Basic......................................... 1,264 1,307 1,268 1,325
====== ====== ======= ======
Diluted....................................... 1,381 1,442 1,396 1,474
====== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 4
DELL COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS AND UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
NOVEMBER 1, NOVEMBER 2,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,035 $ 659
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 72 48
Other................................................ (5) 17
Changes in:
Operating working capital.............................. 520 245
Non-current assets and liabilities..................... 62 33
-------- -------
Net cash provided by operating activities............ 1,684 1,002
-------- -------
Cash flows from investing activities:
Marketable securities:
Purchases.............................................. (11,293) (8,649)
Maturities and sales................................... 10,565 8,492
Capital expenditures...................................... (238) (121)
-------- -------
Net cash used in investing activities................ (966) (278)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of issuance
costs.................................................. 494 --
Purchase of common stock.................................. (1,128) (710)
Issuance of common stock under employee plans............. 130 58
Cash received from sale of equity options................. -- 38
-------- -------
Net cash used in financing activities................ (504) (614)
-------- -------
Effect of exchange rate changes on cash..................... (15) (3)
-------- -------
Net increase in cash........................................ 199 107
Cash at beginning of period................................. 320 115
-------- -------
Cash at end of period....................................... $ 519 $ 222
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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DELL COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Dell
Computer Corporation (the "Company") should be read in conjunction with the
consolidated financial statements and notes thereto filed with the Securities
and Exchange Commission in the Company's Annual Report on Form 10-K for the
fiscal year ended February 1, 1998. In the opinion of management, the
accompanying condensed consolidated financial statements reflect all adjustments
of a normal recurring nature considered necessary to present fairly the
financial position of the Company and its consolidated subsidiaries at November
1, 1998 and February 1, 1998, and the results of their operations and their cash
flows for the three-month and nine-month periods ended November 1, 1998 and
November 2, 1997.
NOTE 2 -- COMMON STOCK
On July 17, 1998, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the number of shares of
common stock, par value $.01 per share, that the Company is authorized to issue
from one billion to three billion.
On September 4, 1998, the Company effected a two-for-one common stock split by
paying a 100% stock dividend to stockholders of record as of August 28, 1998.
All share and per share information included in the accompanying condensed
consolidated financial statements and related notes have been restated to
reflect the stock split.
NOTE 3 -- INVENTORIES
<TABLE>
<CAPTION>
NOVEMBER 1, FEBRUARY 1,
1998 1998
----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Inventories:
Production materials...................................... $243 $189
Work-in-process and finished goods........................ 38 44
---- ----
$281 $233
==== ====
</TABLE>
NOTE 4 -- DEBT ISSUANCE
In April 1998, the Company issued $200 million 6.55% fixed rate senior notes due
April 15, 2008 (the "Senior Notes") and $300 million 7.10% fixed rate senior
debentures due April 15, 2028 (the "Senior Debentures"). Interest on the Senior
Notes and Senior Debentures is paid semi-annually. The Senior Notes and Senior
Debentures are redeemable, in whole or in part, at the election of the Company
for principal, any accrued interest and a redemption premium based on the
present value of interest to be paid over the term of the debt agreements. The
Senior Notes and Senior Debentures generally contain no restrictive covenants,
other than a limitation on liens on the Company's assets and a limitation on
sale-leaseback transactions.
Concurrent with the issuance of the Senior Notes and Senior Debentures, the
Company entered into interest rate swap agreements converting the Company's
interest rate exposure from a fixed rate to a floating rate basis to better
align the associated interest rate characteristics to its cash and marketable
securities portfolio. The interest rate swap agreements have an aggregate
notional amount of $200 million maturing April 15, 2008 and $300 million
maturing April 15, 2028. The floating rates are based on three-month London
interbank offered rates ("LIBOR") plus .40% and .79% for the Senior Notes and
Senior Debentures, respectively. As a result of the interest rate swap
agreements, the Company's effective interest rates for the Senior Notes and
Senior Debentures were 6.09% and 6.48%, respectively, for the three-month and
nine-month periods ended November 1, 1998.
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DELL COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has designated the issuance of the Senior Notes and Senior
Debentures and the related interest rate swap agreements as an integrated
transaction. Accordingly, the differential to be paid or received on the
interest rate swap agreements is accrued and recognized as an adjustment to
interest expense as interest rates change.
NOTE 5 -- COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" during the first quarter of fiscal 1999.
SFAS No. 130 establishes new rules for the reporting and presentation of
comprehensive income and its components. The Company's comprehensive income is
comprised of net income, foreign currency translation adjustments and unrealized
gains and losses on marketable securities held as available-for-sale
investments. Comprehensive income of $374 million and $234 million,
respectively, for the three-month periods ended November 1, 1998 and November 2,
1997, and $1,029 million and $634 million, respectively, for the nine-month
periods ended November 1, 1998 and November 2, 1997, was not materially
different from reported net income.
NOTE 6 -- EARNINGS PER COMMON SHARE
Basic earnings per share is based on the weighted effect of all common shares
issued and outstanding, and is calculated by dividing net income available to
common stockholders by the weighted average shares outstanding during the
period. Diluted earnings per share is calculated by dividing net income
available to common stockholders by the weighted average number of common shares
used in the basic earnings per share calculation plus the number of common
shares that would be issued assuming conversion of all potentially dilutive
common shares outstanding. The following table sets forth the computation of
basic and diluted earnings per share (in millions, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income.................................... $ 384 $ 248 $1,035 $ 659
====== ====== ====== ======
Weighted average shares outstanding(a):
Weighted average shares
outstanding -- Basic..................... 1,264 1,307 1,268 1,325
Employee stock options and other............ 117 135 128 149
------ ------ ------ ------
Weighted average shares
outstanding -- Diluted................... 1,381 1,442 1,396 1,474
====== ====== ====== ======
Earnings per common share(a):
Basic....................................... $ 0.30 $ 0.19 $ 0.82 $ 0.50
Diluted..................................... $ 0.28 $ 0.17 $ 0.74 $ 0.45
</TABLE>
- ---------------
(a) All share and per share information has been retroactively restated to
reflect the two-for-one split of the common stock in September 1998.
NOTE 7 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company is assessing the impact that the adoption of SFAS No. 133 will have on
its consolidated financial statements.
5
<PAGE> 7
DELL COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- LEGAL MATTERS
The Company is subject to various legal proceedings and claims arising in the
ordinary course of business. The Company's management does not expect that the
outcome in any of these legal proceedings, individually or collectively, will
have a material adverse effect on the Company's financial condition, results of
operations or cash flows.
6
<PAGE> 8
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All percentage amounts and ratios were calculated using the underlying data in
thousands. Operating results for the three-month and nine-month periods ended
November 1, 1998, are not necessarily indicative of the results that may be
expected for the full fiscal year.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
consolidated net revenue represented by certain items in the Company's condensed
consolidated statement of income.
<TABLE>
<CAPTION>
PERCENTAGE OF CONSOLIDATED NET REVENUE
-----------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue:
Americas.................................... 69.7% 72.0% 68.5% 70.1%
Europe...................................... 24.4 22.0 25.2 22.9
Asia Pacific and Japan...................... 5.9 6.0 6.3 7.0
----- ----- ----- -----
Consolidated net revenue................. 100.0 100.0 100.0 100.0
Cost of revenue............................... 77.5 77.5 77.5 77.9
----- ----- ----- -----
Gross margin............................. 22.5 22.5 22.5 22.1
Operating expenses:
Selling, general and administrative......... 9.8 9.8 9.9 9.7
Research, development and engineering....... 1.6 1.8 1.5 1.7
----- ----- ----- -----
Total operating expenses................. 11.4 11.6 11.4 11.4
----- ----- ----- -----
Operating income......................... 11.2 10.9 11.0 10.7
Financing and other........................... 0.2 0.4 0.2 0.4
----- ----- ----- -----
Income before income taxes.................. 11.4 11.3 11.2 11.1
Provision for income taxes.................... 3.4 3.5 3.3 3.4
----- ----- ----- -----
Net income.................................. 8.0% 7.8% 7.9% 7.7%
===== ===== ===== =====
</TABLE>
Net Revenue
Consolidated net revenue increased 51% and 52% in the third quarter and first
nine months of fiscal 1999, respectively, over the comparable periods of fiscal
1998, and increased 11% over the second quarter of fiscal 1999.
The increase in consolidated net revenue was primarily attributable to increased
units sold. Unit sales increased 66% and 68% in the third quarter and first nine
months of fiscal 1999, respectively, compared to the same periods of fiscal
1998, and increased 12% over the second quarter of fiscal 1999. Unit sales
increased across all product lines for the third quarter and first nine months
of fiscal 1999, compared to the same periods of fiscal 1998. Desktop products
continue to be the primary component of unit sales, comprising 79% of total
units sold during the third quarter and first nine months of fiscal 1999.
However, the unit sales growth rate in enterprise systems (which includes
servers, storage and workstations) and notebooks exceeded the unit sales growth
rate of desktop products. During the third quarter and first nine months of
fiscal 1999, enterprise unit sales increased 112% and 165%, respectively,
compared to the third quarter and first nine months of fiscal 1998, and
increased sequentially 13% over the second quarter of fiscal 1999. Notebook unit
sales increased 141% and 123% in the third quarter and first nine months of
fiscal 1999, compared to the same period of the prior fiscal year, and increased
sequentially 16% over the second quarter of fiscal 1999.
The effect of the increased unit sales on consolidated net revenue for the third
quarter and first nine months of fiscal 1999 compared to the same periods of
fiscal 1998 was partially offset by a decline in average revenue per unit sold
of 9% and 10%, respectively. The decrease in average revenue per unit sold was
primarily attributable
7
<PAGE> 9
to price reductions as a result of component cost declines. On a sequential
basis, average revenue per unit sold remained relatively flat in the third
quarter of fiscal 1999.
Net revenue increased in all geographic regions in the third quarter and the
first nine months of fiscal 1999 as compared to the same periods of fiscal 1998.
Net revenue for the third quarter of fiscal 1999 compared to the third quarter
of fiscal 1998 increased 46% in the Americas, 68% in Europe and 49% in
Asia-Pacific and Japan. Net revenue for the first nine months of fiscal 1999
compared to the first nine months of fiscal 1998 increased 48% in the Americas,
67% in Europe and 39% in Asia-Pacific and Japan.
The increase in consolidated net revenue of 11% from the second quarter to the
third quarter of fiscal 1999 was primarily attributable to revenue growth in the
Americas of 13%, while Europe and Asia-Pacific and Japan also experienced
sequential growth of 9% and 1%, respectively.
Gross Margin
The Company's gross margin as a percentage of consolidated net revenue remained
flat at 22.5% in the third quarter of fiscal 1999, compared to the same period
of fiscal 1998, and increased to 22.5% in the first nine months of fiscal 1999
from 22.1% in the comparable period of the prior fiscal year. The increase
resulted primarily from component cost declines, which were generally passed
through to customers, resulting in the aforementioned declines in average
revenue per unit sold. The Company's gross margin as a percentage of
consolidated net revenue decreased from the second quarter to the third quarter
of fiscal 1999.
Operating Expenses
Selling, general and administrative expenses as a percentage of consolidated net
revenue remained flat at 9.8% in the third quarter of fiscal 1999, compared to
the same period of fiscal 1998, and increased to 9.9% in the first nine months
of fiscal 1999 from 9.7% in the comparable period of the prior fiscal year.
Selling, general and administrative expenses increased in absolute dollar
amounts due primarily to the Company's increased staffing worldwide and
increased infrastructure expenses, including those for information systems, to
support the Company's continued growth. The Company's selling, general and
administrative expenses as a percentage of consolidated net revenue decreased
from the second quarter to the third quarter of fiscal 1999.
Research, development and engineering expenses increased in absolute dollar
amounts due to increased staffing levels and product development costs.
Although total operating expenses may continue to increase in absolute dollar
terms, the Company's goal is to manage these expenses, over time, relative to
its consolidated net revenue and gross margins.
Income Taxes
The Company's effective tax rate was 30% for the third quarter and first nine
months of fiscal 1999, compared with 31% for the third quarter and first nine
months of fiscal 1998. The decrease in the Company's effective tax rate resulted
from changes in the geographical distribution of its income and losses.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents selected financial statistics and information:
<TABLE>
<CAPTION>
NOVEMBER 1, FEBRUARY 1,
1998 1998
----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cash and marketable securities.............................. $2,797 $1,844
Working capital............................................. $2,257 $1,215
Days of sales in accounts receivable........................ 40 36
Days of supply in inventory................................. 7 7
Days in accounts payable.................................... 56 51
</TABLE>
8
<PAGE> 10
Cash flow from operating activities was $1.7 billion for the first nine months
of fiscal 1999, which resulted primarily from the Company's net income and
increase in operating working capital.
During the third quarter of fiscal 1999, the Company repurchased 18 million
shares of common stock at an average cost of $22 per share. The Company is
currently authorized to repurchase up to 100 million additional shares of its
available common stock and anticipates that such repurchases will constitute a
significant use of future cash resources. At November 1, 1998, the Company had
equity option arrangements that entitle it to purchase 40 million additional
shares of common stock at an average cost of $28 per share at various times
through the third quarter of fiscal 2000. The above share and per share
information has been restated to reflect the Company's two-for-one stock split
effected on September 4, 1998.
The Company utilized $238 million in cash during the first nine months of fiscal
1999 to improve and equip facilities. Cash flows for capital expenditures for
fiscal 1999 are expected to be approximately $340 million.
During fiscal 1998, the Company entered into a master lease facility providing
the capacity to fund up to $227 million. During the third quarter of fiscal
1999, the Company entered into an additional master lease facility providing the
capacity to fund up to $593 million. Both agreements provide for the ability to
lease certain real property, buildings and equipment to be constructed or
acquired. At November 1, 1998, $127 million has been utilized.
In April 1998, the Company issued $200 million in Senior Notes and $300 million
in Senior Debentures. See Note 4 of Notes to Condensed Consolidated Financial
Statements.
Management believes that the Company will have sufficient resources available to
meet its cash requirements for the foreseeable future, including working capital
requirements, planned capital expenditures and stock repurchases.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
There are numerous factors that affect the Company's business and the results of
its operations. These factors include general economic and business conditions;
the level of demand for personal computers; the level and intensity of
competition in the computer industry and the pricing pressures that may result;
the ability of the Company to timely and effectively manage periodic product
transitions and component availability; the ability of the Company to develop
new products based on new or evolving technology and the market's acceptance of
those products; the ability of the Company to manage its inventory levels to
minimize excess inventory, declining inventory values and obsolescence; the
product, customer and geographic sales mix of any particular period; the
Company's ability to continue to improve its infrastructure (including personnel
and systems) to keep pace with the growth in its overall business activities;
and the Company's ability to ensure its products and internal systems and
devices will be Year 2000 compliant and to assess the Year 2000 readiness and
risk to the Company of its third party providers, and implement effective
contingency plans where needed. For a discussion of these and other factors
affecting the Company's business and prospects, see "Item 1 -- Business --
Factors Affecting the Company's Business and Prospects" in the Company's Annual
Report on Form 10-K for the fiscal year ended February 1, 1998.
YEAR 2000 COMPLIANCE
Computers, software and other equipment utilizing microprocessors that use only
two digits to identify a year in a date field may be unable to process
accurately certain date-based information referencing the year 2000. This is
commonly referred to as the "Year 2000 issue." The Company is addressing this
issue on several different fronts. First, all Dell-branded hardware products
shipped since January 1, 1997 are Year 2000 certified; and the Company has
provided BIOS upgrades and software utilities to bring earlier Dell-branded
hardware products to a level of Year 2000 compliance. The Company has assigned a
team to monitor product Year 2000 compliance and has created a website at
www.dell.com/year2000 containing additional information about the Year 2000
issue and the Company's Year 2000 program. Second, the Company requires Year
2000 compliance for all hardware and software products through its purchasing
process. Third, the Company has assigned a team to assess the Year 2000
readiness and risk to the Company of its critical vendors and
9
<PAGE> 11
suppliers, and is in the early phase of developing contingency plans to address
potential unanticipated interruptions or down time. Finally, the Company has a
team assigned to coordinate the Year 2000 program for its internal systems and
devices. At present, Year 2000 compliance of the Company's internal systems and
devices is scheduled to be substantially complete by the end of 1998, with
continued testing of compliance throughout 1999.
The total costs related to the Company's Year 2000 program are not estimated to
be material to its financial position or results of operations, and are charged
to expense as incurred. The total cost estimate does not include potential costs
related to any customer or other claims or the cost of internal software and
hardware replaced in the normal course of business. The total cost estimate is
based on the current assessment of the Company's Year 2000 program and is
subject to change as it progresses. Based on current information and assessment,
the Company does not believe that the Year 2000 issue discussed above related to
products sold to customers or internal systems will be material to its financial
position or results of operations or that its business will be adversely
affected in any material respect. Nevertheless, achieving Year 2000 compliance
is dependent on many factors, some of which are not completely within the
Company's control. Should either the Company's internal systems or one or more
critical vendors or suppliers fail due to Year 2000 issues, the Company's
business and its results of operations could be adversely affected.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." See Note 7 of Notes to Condensed
Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Concurrent with the issuance of the Senior Notes and Senior Debentures,
described above, the Company entered into interest rate swap agreements
converting the Company's interest rate exposure from a fixed rate to a floating
rate basis to better align the associated interest rate characteristics to its
cash and marketable securities portfolio. The interest rate swap agreements have
an aggregate notional amount of $200 million maturing April 15, 2008 and $300
million maturing April 15, 2028. The floating rates are based on three-month
LIBOR rates plus .40% and .79% for the Senior Notes and Senior Debentures,
respectively. As a result of the interest rate swap agreements, the Company's
effective interest rates for the Senior Notes and Senior Debentures were 6.09%
and 6.48%, respectively, for the three-month and nine-month periods ended
November 1, 1998. Any basis point increase or decrease in interest rates would
result in an equivalent increase or decrease in the Company's effective interest
rates for the Senior Notes and Senior Debentures. However, the effects of such
changes would be mitigated by offsetting trends in the Company's cash and
marketable securities portfolio.
For a description of the Company's other market risks, see disclosures in "Item
II -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Market Risk" in the Company's Annual Report on Form 10-K for the
fiscal year ended February 1, 1998.
10
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims arising in the
ordinary course of business. The Company's management does not expect that the
results in any of these legal proceedings will have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
99 -- Amended and Restated Dell Computer Corporation 1998
Broad-Based Stock Option Plan, Effective October 30, 1998
27 -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None.
11
<PAGE> 13
SIGNATURE
Pursuant to the requirements 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.
DELL COMPUTER CORPORATION
December 14, 1998
/s/ JAMES M. SCHNEIDER
------------------------------------
James M. Schneider
Senior Vice President, Finance
(On behalf of the registrant and as
chief accounting officer)
12
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
99 -- Amended and Restated Dell Computer Corporation 1998
Broad-Based Stock Option Plan, Effective October 30, 1998
27 -- Financial Data Schedule
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DELL
COMPUTER CORPORATION FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTH PERIOD
ENDED NOVEMBER 1, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
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<PAGE> 1
EXHIBIT 99
AMENDED AND RESTATED
DELL COMPUTER CORPORATION
1998 BROAD-BASED STOCK OPTION PLAN
EFFECTIVE DATE: OCTOBER 30, 1998
I. PURPOSE OF THE PLAN
The DELL COMPUTER CORPORATION 1998 BROAD-BASED STOCK OPTION PLAN (the
"Plan") is intended to provide a means whereby certain employees of DELL
COMPUTER CORPORATION, a Delaware corporation (the "Company"), and its
subsidiaries may develop a sense of proprietorship and personal involvement in
the development and financial success of the Company, and to encourage them to
remain with and devote their best efforts to the business of the Company,
thereby advancing the interests of the Company and its stockholders.
Accordingly, the Company may grant to certain employees ("Optionees") the option
("Option") to purchase shares of the common stock of the Company ("Stock"), as
hereinafter set forth. The only options which may be granted under the Plan
shall be options which do not constitute incentive stock options, within the
meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the
"Code").
II. ADMINISTRATION
The Plan shall be administered by the Office of the Chief Executive
Officer of the Company (the "OOC"). The OOC shall have sole authority to select
the Optionees from among those individuals eligible hereunder and to establish
the number of shares which may be issued under each Option. In selecting the
Optionees from among individuals eligible hereunder and in establishing the
number of shares that may be issued under each Option, the OOC may take into
account the nature of the services rendered by such individuals, their present
and potential contributions to the Company's success and such other factors as
the OOC in its discretion shall deem relevant. The OOC is authorized to
interpret the Plan and may from time to time adopt such rules and regulations,
consistent with the provisions of the Plan, as it may deem advisable to carry
out the Plan. All decisions made by the OOC in selecting the Optionees, in
establishing the number of shares which may be issued under each Option and in
construing the provisions of the Plan shall be final.
III. OPTION AGREEMENTS
(a) Each Option shall be evidenced by a written agreement executed on
behalf of the Company ("Option Agreement") which shall contain such terms and
conditions as may be approved by the OOC. The terms and conditions of the
respective Option Agreements need not be identical. Any question as to the
interpretation of any provision of an Option Agreement, including the
determination of the existence or nonexistence of a specified condition or
circumstance, shall be determined by the OOC, and its determination shall be
final.
(b) The OOC may at any time and from time to time, in its sole
discretion, accelerate the time at which an Option then outstanding may be
exercised. Any such action by the OOC may vary among individual Optionees and
may vary among Options held by any individual Optionee.
<PAGE> 2
(c) For all purposes under the Plan, the fair market value of a share
of Stock on a particular date shall be equal to the average of the high and low
sales prices of the Stock (i) reported by the Nasdaq National Market on that
date or (ii) if the Stock is listed on a national stock exchange, reported on
the stock exchange composite tape on that date; or, in either case, if no prices
are reported on that date, on the last preceding date on which such prices of
the Stock are so reported. If the Stock is traded over the counter at the time a
determination of its fair market value is required to be made hereunder, its
fair market value shall be deemed to be equal to the average between the
reported high and low or closing bid and asked prices of Stock on the most
recent date on which Stock was publicly traded. In the event Stock is not
publicly traded at the time a determination of its value is required to be made
hereunder, the determination of its fair market value shall be made by the OOC
in such manner as it deems appropriate.
(d) Each Option and all rights granted thereunder shall not be
transferable other than by will or the laws of descent and distribution.
(e) As used in Option Agreements, the following terms shall have the
respective meanings set forth below:
(i) "Disability" shall mean, with respect to a person, a
physical or mental impairment of sufficient severity that, in the
opinion of the Company, the person is unable to continue performing the
duties the person performed before such impairment and that impairment
or condition is cited by the Company as the reason for termination of
the person's employment with the Company and its Subsidiaries (as
defined below).
(ii) "Normal Retirement" shall mean, with respect to a person,
the termination of such person's employment with the Company and its
Subsidiaries by reason of retirement at any time on or after the date
on which the person reaches age 65 if the person is employed in the
United States of America or such other age as provided for by the OOC
as the normal retirement age in the country where the person is
employed.
IV. ELIGIBILITY OF OPTIONEE
Options may be granted hereunder to any individual who (a) is an
employee of the Company or any Subsidiary of the Company at the time the Option
is granted and (b) holds a position with the Company or such Subsidiary that is
within or below the grade of "D2" (as specified in the Company's current
employee job and pay classification system) or equivalent. For purposes of the
Plan, the term "Subsidiary" of the Company shall mean any corporation, limited
partnership or other entity of which a majority of the voting power of the
voting equity securities or a majority of the equity interests is owned,
directly or indirectly, by the Company.
V. SHARES SUBJECT TO THE PLAN
The aggregate number of shares which may be issued under Options
granted under the Plan shall not exceed 7,000,000 shares of Stock. Such shares
may consist of authorized but unissued shares of Stock or (where permitted by
applicable law) previously issued shares of Stock reacquired by the Company. Any
of such shares which remain unissued and which are not subject to outstanding
Options at the termination of the Plan shall cease to be subject to the Plan,
but, until termination of the Plan, the Company shall at all times make
available a sufficient number of shares to meet the requirements of the Plan.
Should any Option hereunder expire or terminate prior to its exercise in full,
the shares theretofore subject to such
2
<PAGE> 3
Option may again be subject to an Option granted under the Plan. The aggregate
number of shares which may be issued under the Plan shall be subject to
adjustment in the same manner as provided in Paragraph VIII hereof with respect
to shares of Stock subject to Options then outstanding. Exercise of an Option in
any manner shall result in a decrease in the number of shares of Stock which may
thereafter be available by the number of shares as to which the Option is
exercised.
VI. OPTION PRICE
The purchase price of Stock issued under each Option shall be
determined by the OOC, but such purchase price shall not be less than 100% of
the fair market value of Stock subject to the Option on the date the Option is
granted.
VII. TERM OF PLAN
The Plan shall be effective upon the date of its adoption by the Board
of Directors of the Company (the "Board"). Except with respect to Options then
outstanding, if not sooner terminated under the provisions of Paragraph IX, the
Plan shall terminate upon and no further Options shall be granted after the
expiration of ten years from the date of its adoption by the Board.
VIII. RECAPITALIZATION OR REORGANIZATION
(a) The existence of the Plan and the Options granted hereunder shall
not affect in any way the right or power of the Board or the stockholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities, the
dissolution or liquidation of the Company or any sale, lease, exchange or other
disposition of all or any part of its assets or business or any other corporate
act or proceeding.
(b) The shares with respect to which Options may be granted are
shares of Stock as presently constituted, but if, and whenever, prior to the
expiration of an Option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Stock or the payment of a stock
dividend on Stock without receipt of consideration by the Company, the number of
shares of Stock with respect to which such Option may thereafter be exercised
(i) in the event of an increase in the number of outstanding shares shall be
proportionately increased, and the purchase price per share shall be
proportionately reduced, and (ii) in the event of a reduction in the number of
outstanding shares shall be proportionately reduced, and the purchase price per
share shall be proportionately increased.
(c) If the Company recapitalizes, reclassifies its capital stock, or
otherwise changes its capital structure (a "recapitalization"), the number and
class of shares of Stock covered by an Option theretofore granted shall be
adjusted so that such Option shall thereafter cover the number and class of
shares of stock and/or securities to which the Optionee would have been entitled
pursuant to the terms of the recapitalization if, immediately prior to the
recapitalization, the Optionee had been the holder of record of the number of
shares of Stock then covered by such Option. If (i) the Company shall not be the
surviving entity in any merger, consolidation or other reorganization (or
survives only as a subsidiary of an entity), (ii) the Company sells, leases or
exchanges all or substantially all of its assets to any other person or entity,
(iii) the Company is to be dissolved and liquidated, (iv) any person or entity,
including a "group" as contemplated by Section 13(d)(3) of the 1934 Act,
acquires or gains ownership
3
<PAGE> 4
or control (including, without limitation, power to vote) of more than 50% of
the outstanding shares of the Company's voting stock (based upon voting power),
or (v) as a result of or in connection with a contested election of directors,
the persons who were directors of the Company before such election shall cease
to constitute a majority of the Board (each such event is referred to herein as
a "Corporate Change"), no later than (a) ten days after the approval by the
stockholders of the Company of such merger, consolidation, reorganization, sale,
lease or exchange of assets or dissolution or such election of directors or (b)
thirty days after a change of control of the type described in Clause (iv), the
Board, acting in its sole discretion without the consent or approval of any
Optionee, shall act to effect one or more of the following alternatives, which
may vary among individual Optionees and which may vary among Options held by any
individual Optionee: (1) accelerate the time at which Options then outstanding
may be exercised so that such Options may be exercised in full for a limited
period of time on or before a specified date (before or after such Corporate
Change) fixed by the Board, after which specified date all unexercised Options
and all rights of Optionees thereunder shall terminate, (2) require the
mandatory surrender to the Company by selected Optionees of some or all of the
outstanding Options held by such Optionees (irrespective of whether such Options
are then exercisable under the provisions of the Plan) as of a date, before or
after such Corporate Change, specified by the Board, in which event the Board
shall thereupon cancel such Options and the Company shall pay to each Optionee
an amount of cash per share equal to the excess, if any, of the amount
calculated in Subparagraph (d) below (the "Change of Control Value") of the
shares subject to such Option over the exercise price(s) under such Options for
such shares, (3) make such adjustments to Options then outstanding as the Board
deems appropriate to reflect such Corporate Change (provided, however, that the
Board may determine in its sole discretion that no adjustment is necessary to
Options then outstanding) or (4) provide that the number and class of shares of
Stock covered by an Option theretofore granted shall be adjusted so that such
Option shall thereafter cover the number and class of shares of stock or other
securities or property (including, without limitation, cash) to which the
Optionee would have been entitled pursuant to the terms of the agreement of
merger, consolidation or sale of assets and dissolution if, immediately prior to
such merger, consolidation or sale of assets and dissolution, the Optionee had
been the holder of record of the number of shares of Stock then covered by such
Option.
(d) For the purposes of clause (2) in Subparagraph (c) above, the
"Change of Control Value" shall equal the amount determined in clause (i), (ii)
or (iii), whichever is applicable, as follows: (i) the per share price offered
to stockholders of the Company in any such merger, consolidation,
reorganization, sale of assets or dissolution transaction, (ii) the price per
share offered to stockholders of the Company in any tender offer or exchange
offer whereby a Corporate Change takes place, or (iii) if such Corporate Change
occurs other than pursuant to a tender or exchange offer, the fair market value
per share of the shares into which such Options being surrendered are
exercisable, as determined by the Board as of the date determined by the Board
to be the date of cancellation and surrender of such Options. In the event that
the consideration offered to stockholders of the Company in any transaction
described in this Subparagraph (d) or Subparagraph (c) above consists of
anything other than cash, the Board shall determine the fair cash equivalent of
the portion of the consideration offered which is other than cash.
(e) Any adjustment provided for in Subparagraphs (b) or (c) above
shall be subject to any required shareholder action.
(f) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, for cash, property, labor or services, upon direct sale,
upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into
4
<PAGE> 5
such shares or other securities, and in any case whether or not for fair value,
shall not affect, and no adjustment by reason thereof shall be made with respect
to, the number of shares of Stock subject to Options theretofore granted or the
purchase price per share.
IX. AMENDMENT OR TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Options have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time. In addition, the OOC (without the necessity of specific Board
action) shall have the power and authority to make or approve revisions or
modifications to the terms and provisions of the Plan on behalf of the Board and
from time to time, so long as such revisions or modifications are (in the
judgment of the OOC) necessary, appropriate or desirable to effectuate the
purposes of the Plan and do not effect a material change in the structure or
purposes of the Plan. Notwithstanding the above, however, no change in any
Option theretofore granted may be made which would impair the rights of the
Optionee without the consent of such Optionee.
X. SECURITIES LAWS
(a) The Company shall not be obligated to issue any Stock pursuant to
any Option granted under the Plan at any time when the offering of the shares
covered by such Option have not been registered under the Securities Act of 1933
(the "Securities Act") and such other state, federal or foreign laws, rules or
regulations as the Company or the Board deems applicable and, in the opinion of
legal counsel for the Company, there is no exemption from the registration
requirements of such laws, rules or regulations available for the offering and
sale of such shares.
(b) The Company intends to register for issuance under the Securities
Act the shares of common stock issuable upon exercise of Options and to keep
such registration effective throughout the period any Options are exercisable.
In the absence of such effective registration or an available exemption from
registration under the Securities Act, issuance of shares of common stock
issuable upon exercise of Options may be delayed until registration of such
shares is effective or an exemption from registration under the Securities Act
is available. The Company intends to use its best efforts to ensure that no such
delay will occur. In the event exemption from registration under the Securities
Act is available upon an exercise of Options, the Option holder (or the person
otherwise permitted to exercise such Options), if requested by the Company to do
so, shall execute and deliver to the Company in writing an agreement containing
such provisions as the Company may require to assure compliance with applicable
securities laws.
(c) At the time of any exercise of an Option, the Company may, as a
condition precedent to the exercise of such Option, require from the holder of
the Option such written representations, if any, concerning the holder's
intentions with regard to the retention or disposition of the shares of stock
being acquired pursuant to such exercise and such written covenants and
agreements, if any, as to the manner of disposal of such shares as, in the
opinion of counsel to the Company, may be necessary to ensure that any
disposition by that holder will not involve a violation of the Securities Act or
any other applicable securities law or regulation.
(d) The certificates representing the shares of common stock issued
pursuant to an exercise of Options may bear such legend or legends as the OOC
deems appropriate in order to assure compliance with applicable securities laws
and regulations. The Company may refuse to register the transfer of the shares
of common stock issued pursuant to an exercise of
5
<PAGE> 6
Options on the stock transfer records of the Company if such proposed transfer
would, in the opinion of counsel to the Company, constitute a violation of any
applicable securities law or regulation, and the Company may give related
instructions to its transfer agent, if any, to stock registration of the
transfer of the shares of common stock issued pursuant to an exercise of
Options.
XI. NON-U.S. EMPLOYEES
The OOC shall determine, in its discretion, whether it is desirable or
feasible under local law, custom and practice to grant Options under the Plan to
eligible employees described in Paragraph IV in countries other than the United
States. In order to facilitate the grant of Options under this Paragraph, the
OOC may provide for such modifications and additional terms and conditions
("special terms") in Option awards to employees who are employed outside the
United States (or who are foreign nationals temporarily within the United
States) as the OOC may consider necessary, appropriate or desirable to
accommodate differences in local law, policy or custom or to facilitate
administration of the Plan. The special terms may provide that the grant of an
Option is subject to (a) applicable governmental or regulatory approval or other
compliance with local legal requirements or (b) the execution by the employee of
a written instrument in the form specified by the OOC, and that in the event
such requirements or conditions are not satisfied, the grant shall be void. The
special terms may (but need not) also provide that an Option shall become
exercisable if an employee's employment with the Company and its Subsidiaries
ends as a result of workforce reduction, realignment or similar measure. The OOC
may adopt or approve sub-plans, appendices or supplements to, or amendments,
restatements or alternative versions of, the Plan as it may consider necessary,
appropriate or desirable for purposes of implementing any special terms, without
thereby affecting the terms of the Plan as in effect for any other purpose. The
special terms and any appendices, supplements, amendments, restatements or
alternative versions, however, shall not include any provisions that are
inconsistent with the terms of the Plan as then in effect, unless the Plan could
have been amended to eliminate such inconsistency without further approval by
the Board.
XII. GOVERNING LAW
The Plan, and all Option Agreements issued under the Plan, shall be
governed by, and construed in accordance with, the laws of the State of
Delaware.
6
