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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 29, 1999
COMMISSION FILE NUMBER: 0-17017
DELL COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 74-2487834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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ONE DELL WAY, ROUND ROCK, TEXAS 78682-2244
(Address, including Zip Code, of registrant's principal executive offices)
(512) 338-4400
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT AS OF MARCH 31, 1999..... $88,625,556,895
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 31,
1999...................................................... 2,536,184,711
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth
herein, is incorporated by reference from the Registrant's definitive proxy
statement relating to the annual meeting of stockholders to be held in 1999,
which definitive proxy statement shall be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year to which this Report
relates.
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STATEMENTS IN THIS REPORT THAT RELATE TO FUTURE RESULTS AND EVENTS ARE BASED ON
THE COMPANY'S CURRENT EXPECTATIONS. ACTUAL RESULTS IN FUTURE PERIODS MAY DIFFER
MATERIALLY FROM THOSE CURRENTLY EXPECTED OR DESIRED BECAUSE OF A NUMBER OF RISKS
AND UNCERTAINTIES. FOR A DISCUSSION OF FACTORS AFFECTING THE COMPANY'S BUSINESS
AND PROSPECTS, SEE "ITEM 1 -- FACTORS AFFECTING THE COMPANY'S BUSINESS AND
PROSPECTS."
PART I
ITEM 1 -- BUSINESS
GENERAL
Dell Computer Corporation (the "Company") is the world's largest direct computer
systems company, with revenue of $18.2 billion for the fiscal year ended January
29, 1999. The Company was founded in 1984 by Michael Dell on a simple concept:
By selling computer systems directly to customers, the Company could most
efficiently understand and satisfy the computing needs of customers. The Company
offers its customers a full range of computer systems, including desktop
computer systems, notebook computers, workstations and network server and
storage products, as well as an extended selection of peripheral hardware and
computing software. The Company's "direct model" offers in-person relationships
with corporate and institutional customers, as well as telephone and Internet
purchasing; build-to-order computer systems; telephone and on-line technical
support and next-day, on-site product service. The Company sells its products
and services to large corporate, government, medical and education customers,
small-to-medium businesses and individuals.
The Company is a Delaware corporation that was incorporated in October 1987,
succeeding to the business of a predecessor Texas corporation that was
originally incorporated in May 1984. Based in Round Rock, Texas, the Company
conducts operations worldwide through wholly owned subsidiaries. See "Item
1 -- Business -- Geographic Areas of Operations." Unless otherwise specified,
references herein to the "Company" are references to the Company and its
consolidated subsidiaries. The Company operates in one principal industry
segment.
The Company's common stock, par value $.01 per share, is listed on The Nasdaq
National Market under the symbol "DELL." See "Item 5 -- Market for Registrant's
Common Equity and Related Stockholder Matters -- Market Information."
BUSINESS STRATEGY
The Company's business strategy is based on its direct business model. The
Company's business model seeks to deliver a superior customer experience through
direct, comprehensive customer relationships, cooperative research and
development with technology partners, computer systems custom-built to customer
specifications and service and support programs tailored to customer needs. The
Company believes that the direct model provides it with several distinct
competitive advantages. The direct model eliminates the need to support an
extensive network of wholesale and retail dealers, thereby avoiding dealer
mark-ups; avoids the higher inventory costs associated with the wholesale/retail
channel and the competition for retail shelf space; and reduces the high risk of
obsolescence associated with products in a rapidly changing technological
market. In addition, the direct model allows the Company to maintain, monitor
and update a customer database that can be used to shape future product
offerings and post-sale service and support programs. This direct approach,
combined with the Company's efficient procurement, manufacturing and
distribution processes, allows the Company to bring relevant technology to its
customers faster and more competitively priced than many of its competitors.
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Comprehensive Customer Relationships
The Company develops and utilizes direct customer relationships to understand
end-users' needs and to deliver high quality computer products and services
tailored to meet those needs. For large corporate and institutional customers,
the Company works with the customer prior to the sale to plan a strategy to meet
that customer's current and future technology needs. After the sale, the Company
continues the direct relationship by establishing account teams, consisting of
sales, customer service and technical personnel, dedicated to the Company's
large corporate and institutional customers. The Company also establishes direct
relationships with small-to-medium businesses and individuals, through account
representatives, telephone sales representatives or Internet contact. These
direct customer relationships provide the Company with a constant flow of
information about its customer's plans and requirements and enable the Company
to weigh its customer's needs against emerging technologies.
Cooperative Research and Development
The Company has successfully developed cooperative, working relationships with
many of the world's most advanced technology companies. Working with these
companies, the Company's engineers manage quality, integrate technologies and
design and manage system architecture. This cooperative approach allows the
Company to determine the best method and timing for delivering new technologies
to the market. The Company's goal is to quickly and efficiently deliver the
latest relevant technology to its customers.
Custom-Built Computers
The direct model is based on the principal that delivering custom-built
computers is the best business model for providing solutions that are truly
relevant to end-user needs. This concept, together with the Company's flexible,
build-to-order manufacturing process, enables the Company to achieve faster
inventory turnover and reduced inventory levels and allows the Company to
rapidly incorporate new technologies and components into its product offerings.
Custom-Tailored Service and Support Programs
In the same way that the Company's computer products are built-to-order, service
and support programs are designed to fit specific customer requirements. The
Company offers a broad range of service and support programs through its own
technical personnel and its direct management of specialized service suppliers.
These services range from telephone and Internet support to on-site
customer-dedicated systems engineers.
The Internet
The Company is committed to refining and extending the advantages of its direct
model approach by moving even greater volumes of product sales, service and
support to the Internet. The Internet, perhaps the purest and most efficient
form of the direct model, provides greater convenience and efficiency to
customers and, in turn, to the Company. As of March 31, 1999, the Company was
receiving in excess of two million visits per week to www.dell.com, where it
maintains 44 country-specific sites. Company sales generated through the
Internet achieved $14 million per day by the end of the fourth quarter of fiscal
year 1999 and approximated 25% of revenue for that quarter.
Through the Web site, customers and potential customers can access a wide range
of information about the Company's product offerings, can configure and purchase
systems on-line and can access volumes of support and technical information. The
Company also develops custom Internet sites, called Premier Pages(SM), for
various corporate and institutional customers, allowing these customers to
simplify and accelerate procurement and support processes. Through these custom
sites, the Company offers the customer paperless purchase orders, approved
product configura-
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tions, global pricing, real-time order tracking, purchasing history and account
team information. The Company currently provides more than 15,000 Premier Pages.
The Company also provides an on-line "virtual account executive" for its small
business customers. And, for all customers, the Company provides a spare-parts
ordering system, and a "virtual help desk" featuring natural-language search
capabilities and direct access to more than 50,000 pages of technical-support
data.
Subsequent to fiscal year 1999, the Company expanded its Internet presence with
the launch of www.gigabuys.com, an on-line source for more than 30,000
competitively-priced computer-related products, including software and
peripherals.
The Company believes that it has significant opportunities for continued growth
in all parts of the world, in all customer groups and in all product categories,
ranging from enterprise systems, such as network servers, high-end workstations
and storage, to home PCs. While the Company believes that its business strategy
provides it with competitive advantages, there are many factors that may affect
the Company's business and the success of its operations. For a discussion of
these factors, see "Item 1 -- Business -- Factors Affecting the Company's
Business and Prospects."
GEOGRAPHIC AREAS OF OPERATIONS
The Company conducts operations worldwide and is managed on a geographic basis,
with those geographic segments being the Americas, Europe and Asia-Pacific and
Japan regions. The Americas segment, which is based in Round Rock, Texas, covers
the U.S., Canada and Latin America. The European segment, which is based in
Bracknell, England, covers the European countries and also some countries in the
Middle East and Africa. The Asia-Pacific/Japan segment covers the Pacific Rim,
including Japan, Australia and New Zealand, and is based in Hong Kong (for areas
other than Japan) and Kawasaki, Japan (for Japan). The Company's operations are
primarily concentrated in the North America, Europe and Asia-Pacific and Japan
regions.
The Company's corporate headquarters are located in Round Rock, Texas, and its
manufacturing facilities are located in Austin, Texas; Limerick, Ireland;
Penang, Malaysia; and Xiamen, China. See "Item 2 -- Properties."
For financial information about the results of the Company's operating segments
for each of the last three fiscal years, see Note 11 of Notes to Consolidated
Financial Statements included in "Item 8 -- Financial Statements and
Supplementary Data."
During fiscal year 1999, the Company continued to strengthen its presence in the
Asia-Pacific area, where it now has direct-to-the-customer operations in 13
countries. In addition, in fiscal year 1999, the Company began operations in
China. The Company intends to continue to expand its international activities by
increasing its market presence in existing markets and by entering new markets.
International activities are subject to certain risks. See "Item
1 -- Business -- Factors Affecting the Company's Business and Prospects."
PRODUCTS AND SERVICES
The Company offers a wide range of products and services, including desktop
computer systems, notebook computers, workstations and network server and
storage products, as well as software, peripherals and service and support
programs.
Desktop Computer Systems
The Company offers two lines of desktop computer systems. The OptiPlex(R) line
is designed for corporate and institutional customers who require highly
reliable systems optimized for use in networked environments. All systems within
the OptiPlex line are "Managed PCs," enabling remote manageability and control
using industry-standard systems management tools. Some OptiPlex systems are
designed for optimal performance with 32-bit operating systems, and some are
available as Net PCs. All OptiPlex systems utilize the Company's no-tool
OptiFrame(TM) chassis,
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easing serviceability and upgradability. The OptiFrame chassis is built entirely
from recyclable materials.
The Dimension(R) line of desktop computer systems is designed for small
businesses, workgroups and individuals, who generally demand fast performance
and the latest technology without the need for remote manageability. Many
systems within the Dimension line contain the latest, state-of-the-art
technology and are targeted at technologically sophisticated users, while others
are designed for more value-oriented users.
Notebook Computers
The Company offers two lines of notebook computer systems, each designed for
targeted customer needs. The Latitude(R) line is targeted at business customers
who require highly reliable and durable systems with maximum connectivity for
use in networked environments. The Inspiron(TM) line is targeted at home and
small business users who require the latest technology and high-end multimedia
performance.
Enterprise Systems
Workstations -- The Company entered the workstation market in fiscal year 1998.
In fiscal year 1999, the Company's Dell Precision(TM) workstation product line
achieved the number one worldwide market share position in Windows NT(R)-based
workstations. The Dell Precision workstation product line is intended for
professional users who demand exceptional performance to run sophisticated
applications, such as computer-aided design, digital content creation,
geographic information systems, computer animation, software development and
financial analysis.
Network Servers -- The PowerEdge(R) line of network servers consists of systems
that can operate as file servers, database servers, applications servers and
communications/groupware servers in a networked computing environment. PowerEdge
systems can be configured as desired for use in a range of networked
environments, from single workgroups to entire enterprises. The Company also
offers rack-mountable chassis for its network servers and a full line of
external storage systems for increased disk capacity and data backup.
Storage -- The PowerVault(R) line of storage products is designed to drive
high-end storage features into standard computing environments, meeting a wide
range of customer storage needs. The Company offers a range of products within
the PowerVault line for differing customer needs. Each system within the
PowerVault line employs the latest technology. The PowerVault 650F, the highest
performing system in the line, uses Data General's CLARiiON(R) Fibre Channel
technology throughout the system and can be configured with up to 120 Fibre
Channel disk drives with a total storage capacity of over two terabytes of data.
Software and Accessories
The Company maintains three primary software and accessory programs to enhance
its computer systems. The Company offers a wide range of software, peripherals
and other accessories through its DellWare(R) and Gigabuys(SM) programs. Through
its Dell Plus(SM) custom factory integration program, the Company can
factory-install a customer's proprietary applications or hard-disk images at the
time of system manufacture and deliver other customer-specific solutions.
Through the ReadyWare(R) program, the Company can factory-install off-the-shelf
software applications in any computer system the Company sells.
Service and Support
The Company enhances its product offerings with a number of specialized
services, including custom hardware and software integration, leasing and asset
management, and network installation and support. The Company offers
next-business-day delivery, as well as an extended training and
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support program on many of its software offerings. The Company's direct
relationships with customers and its extensive on-line capabilities via
www.dell.com enhance service delivery. For additional discussion of the
Company's service and support programs, see "Item 1 -- Business -- Service and
Support."
SALES AND MARKETING
The Company's customers range from large corporations, government agencies and
medical and educational institutions to small businesses and individuals. In
general, the Company uses similar sales and marketing approaches across all
customer groups, as demand levels for each customer group are principally driven
by similar changes in market prices and overall general economic conditions.
Within each region, the Company has divided its sales and marketing forces among
the various customer groups to better meet each customer group's specific needs.
No single customer accounted for more than 10% of the Company's consolidated net
revenues during any of the last three fiscal years.
Relationship Customers
The Company has established a broad range of business based on continuing
relationships with large corporations, governmental, medical and educational
institutions and small-to-medium businesses. The Company maintains a field sales
force throughout the world to call on business and institutional customers and
prospects. The Company develops direct sales marketing programs and services
specifically geared to these relationship customers. For large customers,
dedicated account teams, consisting of sales, customer service and technical
support representatives, form long-term customer relationships to provide each
customer with a single source of assistance on various issues, including
technology needs assessment; system configuration; order placement; lifecycle
cost management; technology transition planning; installation assistance and
project management; and detailed product, service and financial reporting. For
customers with in-house maintenance organizations, the Company offers a variety
of programs, including specialized computer training programs, a repair parts
assistance program and other customized programs to provide access to the
Company's technical support team. Customized product delivery and service
programs are available on a worldwide basis. See "Item 1 -- Business -- Service
and Support."
For multinational corporate customers, the Company offers several programs
designed to provide global capability, support and coordination. Through these
programs, the Company can provide single points of contact and accountability
with global account specialists, special global pricing, consistent service and
support programs across global regions and access to central purchasing
facilities.
The Company also maintains specific sales and marketing programs targeted at
federal, state and local governmental agencies. The Company maintains account
teams (consisting of sales representatives, K12 and higher education sales
representatives, health care sales representatives and technical support
representatives) dedicated to specific governmental markets. The Company holds a
U.S. General Services Administration Schedule contract, through which it sells
to U.S. federal governmental agencies.
Transactional Customers
The Company has established a significant base of business among small-to-medium
businesses and individuals. The Company markets its products and services to
these customers by advertising in trade and general business publications and by
mailing a broad range of direct marketing
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publications, such as promotional pieces, catalogs and customer newsletters. The
Company believes these customers value its ability to provide reliable,
custom-built computer systems at competitive prices, knowledgeable sales
assistance, post-sale support and on-site service offerings.
Internet Customers
Continuing from fiscal year 1998, an increasing portion of the Company's
business is being conducted via the Internet. Through the Company's World Wide
Web site at www.dell.com, customers and potential customers can access a wide
range of information about the Company's product offerings, can configure and
purchase systems on-line and can access volumes of support and technical
information. As of March 31, 1999, the Company was receiving in excess of two
million visits per week to www.dell.com, where it maintains 44 country-specific
sites.
The Company also utilizes the Internet to enhance the direct relationships with
its customers. The Company designs and implements custom Internet sites, called
Premier Pages, for various corporate and institutional customers, allowing these
customers to simplify and accelerate procurement and support processes. Through
these custom sites, the Company offers the customer paperless purchase orders,
approved product configurations, global pricing, real-time order tracking,
purchasing history and account team information. The Company currently provides
more than 15,000 Premier Pages. The Company also provides an on-line "virtual
account executive" for its small business customers. And, for all customers, the
Company provides a spare-parts ordering system and a "virtual help desk"
featuring natural-language search capabilities and direct access to more than
50,000 pages of technical-support data.
Subsequent to fiscal year 1999, the Company expanded its Internet presence with
the launch of www.gigabuys.com, an on-line source for more than 30,000
competitively-priced computer-related products, including software and
peripherals.
Leasing and Asset Management Services
In fiscal year 1998, the Company formed Dell Financial Services L.P. ("DFS") as
a joint venture with Newcourt Credit Group Inc., a financial services company
headquartered in Toronto, Canada. DFS offers leasing and other financial
services to the Company's customers. For additional information about DFS, see
Note 10 of Notes to Consolidated Financial Statements included in "Item 8 --
Financial Statements and Supplementary Data."
SERVICE AND SUPPORT
The Company offers a full line of warranty, service and support options in all
of its geographic markets. These options vary in each of the countries in which
the Company does business based on local market and customer requirements. The
following is a description of the warranties, service and support generally
available to the Company's customers.
Standard Programs
Most of the Company's systems include a basic three year limited warranty, which
includes one year of parts and labor coverage and two additional years of parts
only coverage. Most systems also include standard one-year, next-business-day
on-site service contract (not available in all of the Company's markets), and
customers may upgrade to a three year next-business-day, on-site service
contract. The Company also provides a 30-day "Total Satisfaction" money back
guarantee for any end-user customer buying a system directly from the Company.
The Company provides customers with access to a toll-free hardware support line
that is accessible 24 hours a day, seven days a week. The technical specialists
staffing this line maintain close contact with the Company's marketing,
manufacturing and product design groups and have on-line access
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to each customer's original system configuration and service history. The
Company also provides automated and on-line technical support through a variety
of avenues, including the Internet (via www.dell.com, e-mail or on-line
subscription services), its TechConnect service (an interactive bulletin board
service), its AutoTech system (an interactive voice response unit) and its
TechFax system (a fax-back service). The Company has also recently introduced an
interactive web-based tool to provide additional customer support.
Many of the Company's systems include software that helps customers diagnose and
communicate system problems. Several systems also include a built-in diagnostics
program that can provide on-line information about system malfunctions.
Additional Options
Recognizing that customer service and support requirements vary, the Company
offers customers the opportunity to customize their service and support programs
by selecting additional levels of service and support to satisfy their
individual needs. For example, through the SelectCare(R) program, which is
available for desktop computer systems and notebook computers in the U.S. and
Canada, the Company offers a broad range of service and support options beyond
the standard programs, including an extension of the standard one-year service
contract to include up to four additional years of next-business-day, on-site
service. Through SelectCare International, owners of notebook computers have
access to service and support in a multitude of countries in which the Company
conducts business, in the event a notebook customer is in need of service or
support while travelling outside of that customer's home country.
The Company's BusinessCare(SM) and BusinessCare Plus(SM) programs are standard
warranty upgrades available to PowerEdge server customers in certain selected
locations. The BusinessCare program includes one year of next-business-day parts
and labor on-site service, two additional years of parts delivery service and
five full assistance calls to the Company's DirectLine(SM) network operating
system support technicians. The BusinessCare Plus program includes three years
of four-hour, same-day service, as well as five full assistance calls to the
DirectLine network.
The Company's Premier Access(SM) program is a service and support program
specifically designed for information systems professionals who have technical
expertise in diagnosing and servicing computer systems. Customers can choose
their level of service under the program, including rapid service and parts
dispatches, direct access to advanced level technical support, specialized
on-line support, reimbursement for certain labor costs and parts management
assistance.
Through the Dell Plus program, the Company offers specialized services designed
to satisfy customers' unique hardware and software integration requirements.
With this program, a customer's particular integration requirements (whether
hardware related, such as specialized network cards, video and graphic boards,
modems, tape drives or hard drives; or software related, such as customer
proprietary software applications or drivers) can be satisfied at the time the
customer's systems are manufactured. This is in addition to the Company's
ReadyWare program, which is a collection of popular software applications and
interface cards that can be factory-installed.
The Company also offers a variety of on-site installation services that can be
customized to meet the needs of each specific customer. These services include
basic installation and orientation, system connectivity and functional testing,
external peripheral installation, internal device installation and file server
and advanced system installation.
Many of the Company's service and support programs, particularly software
support and on-site service programs, are provided through independent third
party contractors or subcontractors.
MANUFACTURING
The Company operates manufacturing facilities in Austin, Texas; Limerick,
Ireland; Penang, Malaysia; and Xiamen, China. The Company announced plans to
open a manufacturing facility in Brazil in
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fiscal year 2000 to produce, sell and provide service and technical support for
the Company's full range of computer systems for customers in the Mercosul
region, including Brazil, Argentina, Uruguay, Paraguay and Chile.
The Company's manufacturing process consists of assembly, functional testing and
quality control of the Company's computer systems. Testing and quality control
processes are also applied to components, parts and subassemblies obtained from
suppliers. The Company's build-to-order manufacturing process is designed to
allow the Company to quickly produce customized computer systems and to achieve
rapid inventory turnover and reduced inventory levels, which lessens the
Company's exposure to the risk of declining inventory values. This flexible
manufacturing process also allows the Company to incorporate new technologies or
components into its product offerings quickly.
Quality control is maintained through the testing of components, parts and
subassemblies at various stages in the manufacturing process. Quality control
also includes a burn-in period for completed units after assembly, on-going
production reliability audits, failure tracking for early identification of
production and component problems and information from the Company's customers
obtained through its direct relationships and service and support programs. The
Company conducts a voluntary vendor certification program, under which qualified
vendors commit to meet defined quality specifications. All of the Company's
manufacturing facilities have been certified as meeting ISO 9002 quality
standards.
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on designing and
developing competitively priced computer systems that adhere to industry
standards and incorporate the technologies and features that the Company
believes are most desired by its customers. To accomplish this objective, the
Company must evaluate, obtain and incorporate new hardware, software, storage,
communications and peripherals technologies that are primarily developed by
others. The Company's product development team includes programmers, technical
project managers and engineers experienced in system architecture, logic board
design, sub-system development, mechanical engineering, manufacturing processing
and operating systems. This cross-functional approach to product design has
enabled the Company to develop systems with improved functionality,
manufacturability, reliability, serviceability and performance, while keeping
costs competitive. The Company takes steps to ensure that new products are
compatible with industry standards and that they meet cost objectives based on
competitive pricing targets.
The Company bases its product development efforts on cooperative, meaningful
relationships with the world's most advanced technology companies. These working
partnerships allow the Company to use its direct model and build-to-order
manufacturing process to deliver, on a timely and cost-effective basis, those
emerging technologies that are most relevant to its customers.
During fiscal year 1999, the Company incurred $272 million in research,
development and engineering expenses, compared with $204 million for fiscal year
1998 and $126 million for fiscal year 1997. The amount the Company spends on
research, development and engineering activities, which the Company believes to
be important to its continued success and growth, is determined as part of the
annual budget process and is based on cost-benefit analyses and revenue
forecasts. The Company prioritizes activities to focus on projects that it
believes will have the greatest market acceptance and achieve the highest return
on the Company's investment.
PATENTS, TRADEMARKS AND LICENSES
The Company holds a portfolio of 437 U.S. patents and 327 U.S. patent
applications pending, and has a number of related foreign patents and patent
applications pending. The Company's U.S. patents expire in years 2005 through
2015. The inventions claimed in those patents and patent applications cover
aspects of the Company's current and possible future computer system prod-
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ucts, manufacturing processes and related technologies. The Company is
developing a portfolio of patents that it anticipates will be of value in
negotiating intellectual property rights with others in the industry.
The Company has obtained U.S. federal trademark registration for its DELL word
mark and its Dell logo mark. The Company owns registrations for 25 of its other
marks in the U.S. As of March 1, 1999, the Company had pending applications for
registration of 23 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 several other marks in approximately 190 other countries or
jurisdictions where the Company conducts or anticipates expanding its
international business. The Company has also taken steps to reserve corporate
names and to form non-operating subsidiaries in certain foreign countries where
the Company anticipates expanding its international business.
The Company has entered into a variety of licensing and cross-licensing
agreements pursuant to which the Company licenses various patented hardware
technology. In addition, the Company has entered into non-exclusive licensing
agreements with Microsoft Corporation for various operating system and
application software. The Company has also entered into various software
licensing agreements with other companies.
From time to time, other companies and individuals assert exclusive patent,
copyright, trademark or other intellectual property rights to technologies or
marks that are important to the computer industry or the Company's business. The
Company evaluates each claim relating to its products and, if appropriate, seeks
a license to use the protected technology. The licensing agreements generally do
not require the licensor to assist the Company in duplicating its patented
technology nor do these agreements protect the Company from trade secret,
copyright or other violations by the Company or its suppliers in developing or
selling these products.
INFRASTRUCTURE
Management Information Systems
The Company's management information systems enable the Company to track each
unit sold from the initial sales contact, through the manufacturing process to
post-sale service and support. The systems assist the Company in tracking key
information about its customers. Using its database to assess purchasing trends,
advertising effectiveness and customer and product groupings, the Company
targets marketing activities specifically to particular types of customers. This
database, unique to the Company's direct model, allows the Company to gauge
customer satisfaction issues and also provides the opportunity to test new
propositions in the marketplace prior to product or service introductions.
Employees
At January 29, 1999, the Company had approximately 24,400 employees.
Approximately 16,100 of those employees were located in the U.S., and
approximately 8,300 were located in other countries. The Company has never
experienced a work stoppage due to labor difficulties and believes that its
employee relations are good.
GOVERNMENT REGULATION
The Company's business is subject to regulation by various federal and state
governmental agencies. Such regulation includes the radio frequency emission
regulatory activities of the U.S. Federal Communications Commission, the
anti-trust regulatory activities of the U.S. Federal Trade Commission and
Department of Justice, the import/export regulatory activities of the
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U.S. Department of Commerce and the product safety regulatory activities of the
U.S. Consumer Products Safety Commission.
The Company also is required to obtain regulatory approvals in other countries
prior to the sale or shipment of products. In certain jurisdictions, such
requirements are more stringent than in the U.S. Many developing nations are
just beginning to establish safety, environmental and other regulatory
requirements, which may vary greatly from U.S. requirements.
BACKLOG
At the end of fiscal year 1999, backlog was $170 million, compared with backlog
of $215 million at the end of fiscal year 1998 and $222 million at the end of
fiscal year 1997. The Company does not believe that backlog is a meaningful
indicator of sales that can be expected for any period, and there can be no
assurance that the backlog at any point in time will translate into sales in any
subsequent period.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
There are many factors that affect the Company's business and the results of its
operations, some of which are beyond the control of the Company. The following
is a description of some of the important factors that may cause the actual
results of the Company's operations in future periods to differ materially from
those currently expected or desired.
General economic and industry conditions
Any general economic, business or industry conditions that cause customers or
potential customers to reduce or delay their investments in computer systems
could have a negative effect on the Company's strength and profitability. For
example, a softening of demand for computer systems may result in decreased
revenues (or at least declining revenue growth rates) for computer manufacturers
in general and the Company in particular and may result in pricing pressures for
products that the Company sells, which could have a negative effect on the
Company's revenues and profitability.
Competition
The computer industry is highly competitive. The intense competition inherent in
the industry could result in the loss of customers or pricing pressures, which
would negatively affect the Company's results of operations.
International activities
The Company's future growth rates and success are in-part dependent on continued
growth and success in international markets. As is the case with most
international operations, the success and profitability of the Company's
international operations are subject to numerous risks and uncertainties,
including local economic and labor conditions, political instability, tax laws
(including U.S. taxes on foreign operations) and foreign currency exchange
rates.
Product, customer and geographic mix
The profit margins realized by the Company vary somewhat among its products, its
customer business units and its geographic markets. Consequently, the overall
profitability of the Company's operations in any given period is partially
dependent on the product, customer and geographic mix reflected in that period's
revenues.
10
<PAGE> 12
Seasonal trends
The Company experiences some seasonal trends in the sale of its products. For
example, sales to governments (particularly U.S. federal sales) are often
stronger in the Company's third quarter, European sales are often weaker in the
third quarter and consumer sales are often stronger in the fourth quarter.
Historically, the net result of seasonal trends has not been material relative
to the Company's overall results of operations, but many of the factors that
create and affect seasonal trends are beyond the Company's control.
Technological changes and product transitions
The computer industry is characterized by continuing improvements in technology,
which result in the frequent introduction of new products, short product life
cycles and continual improvement in product price/performance characteristics.
While the Company believes that its direct model and asset management practices
afford it an inherent competitive advantage over some of its competitors,
product transitions present some of the greatest executional challenges and
risks for any computer systems company. A failure on the part of the Company to
effectively manage a product transition will directly affect the demand for the
Company's products and the profitability of the Company's operations. In
addition, while the Company has meaningful relationships with some of the
world's most advanced technology companies, continuing technological
advancement, which is a significant driver of customer demand, is largely beyond
the control of the Company.
Inventory management/supplies
The Company's direct business model gives it the ability to operate with reduced
levels of component and finished goods inventories, and the Company's financial
success in recent periods has been due in part to its asset management
practices, including its ability to achieve rapid inventory turns. The Company's
ability to aggressively manage its inventory has been enhanced by favorable
supply conditions in the industry. Less favorable supply conditions, as well as
other factors both within and beyond the Company's control, may require or
result in increased inventory levels in the future.
The Company's manufacturing process requires a high volume of quality components
that are procured from third party suppliers. Reliance on suppliers, as well as
industry supply conditions, generally involves several risks, including the
possibility of defective parts (which can adversely affect the reliability and
reputation of the Company's products), a shortage of components and reduced
control over delivery schedules (which can adversely affect the Company's
manufacturing efficiencies) and increases in component costs (which can
adversely affect the Company's profitability).
The Company has several single-sourced supplier relationships, either because
alternative sources are not available or the relationship is advantageous due to
performance, quality, support, delivery, capacity or price considerations. If
these sources are unable to provide timely and reliable supply, the Company
could experience manufacturing delays or inefficiencies, adversely affecting its
results of operations.
Risk on financial instruments
The Company regularly utilizes derivative instruments to hedge its exposure to
fluctuations in foreign currency exchange rates and interest rates. In addition,
the Company utilizes equity instrument contracts to execute repurchases of its
common stock under its Board-authorized stock repurchase program. Some of these
instruments and contracts may involve elements of market and credit risk in
excess of the amounts recognized in the financial statements.
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<PAGE> 13
Strength of infrastructure
The Company has grown at a rapid pace, requiring enhancement and expansion of
its management team, information systems, manufacturing operations and other
aspects of its infrastructure. The Company's continued success and profitability
partly depends on its ability to continue to improve its infrastructure
(particularly management and information systems) to keep pace with the growth
in its overall business activities.
Patent rights
The Company's continued business success may be largely dependent on its ability
to obtain licenses to intellectual property developed by others on commercially
reasonable and competitive terms. If the Company or its suppliers are unable to
obtain desirable technology licenses, the Company could be prohibited from
marketing products, could be forced to market products without desirable
features or could incur substantial costs to redesign its products, defend legal
actions or pay damages.
Year 2000
The Company's Year 2000 program is discussed in "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Year 2000."
TRADEMARKS AND SERVICE MARKS
Several U.S. trademarks and service marks appear in this Report. Dell, the Dell
logo, Dimension, Latitude, OptiPlex and PowerEdge are registered trademarks of
the Company, and DellWare, Gigabuys, ReadyWare and SelectCare are registered
service marks. Dell Precision, Inspiron, OptiFrame and PowerVault are trademarks
of the Company, and BusinessCare, BusinessCare Plus, Dell Plus, DirectLine,
Premier Access and Premier Pages are service marks. This Report may also contain
trademarks and tradenames of other entities; the Company disclaims proprietary
interest in the marks and names of others.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name, age and position of each of the persons
who were serving as executive officers of the Company as of March 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael S. Dell..... 34 Chairman of the Board, Chief Executive Officer and Director
Morton L. Topfer.... 62 Vice Chairman
Kevin B. Rollins.... 46 Vice Chairman
Paul D. Bell........ 38 Senior Vice President, Americas Home and Small Business
Group
G. Carl Everett, 48 Senior Vice President, Personal Systems Group
Jr. ..............
Jan Gesmar-Larsen... 38 Senior Vice President, and President -- Dell Europe, Middle
East and Africa
Thomas B. Green..... 44 Senior Vice President, Law and Administration, and Secretary
Jerome N. 47 Senior Vice President and Chief Information Officer
Gregoire..........
Michael D. 52 Senior Vice President, Enterprise Systems Group
Lambert...........
John J. Legere...... 40 Vice President, and President -- Dell Asia Pacific
Joseph A. Marengi... 45 Senior Vice President, Americas Relationship Group
Keith Maxwell....... 50 Senior Vice President, Worldwide Operations Group
Thomas J. 48 Senior Vice President and Chief Financial Officer
Meredith..........
Rosendo G. Parra.... 39 Senior Vice President, Americas Public and International
Group
Charles H. 55 Vice President and President -- Dell Japan
Saunders..........
James M. 46 Senior Vice President, Finance
Schneider.........
</TABLE>
12
<PAGE> 14
Set forth below is biographical information about each of the Company's
executive officers.
Michael S. Dell -- Mr. Dell has been Chairman of the Board, Chief Executive
Officer and a director of the Company since May 1984. Mr. Dell founded the
Company in 1984 while attending the University of Texas at Austin. He is a
member of the Board of Directors of the U.S. Chamber of Commerce and the
Computerworld/Smithsonian Awards. Mr. Dell is also a member of the Business
Council and serves on the nominating committee for the National Technology Medal
of Honor.
Morton L. Topfer -- Mr. Topfer has been Vice Chairman of the Company since June
1994. In this position, Mr. Topfer shares the Office of the Chief Executive
Officer with Mr. Dell and Mr. Rollins. For 23 years prior to joining the
Company, Mr. Topfer held various positions with Motorola, Inc., last serving as
Corporate Executive Vice President and President of the Land Mobile Products
Sector. Before joining Motorola in 1971, Mr. Topfer spent 11 years with RCA
Laboratories in various research and development and management positions. He
began his professional career as a research engineer with Kollsman Instruments
Corporation in New York. Mr. Topfer received a Bachelor of Science degree in
Physics from Brooklyn College and a Master of Science degree in Physics from the
Polytechnic Institute of Brooklyn. He is a member of the board of directors of
Autodesk, Inc. and Alliance Gaming.
Kevin B. Rollins -- Mr. Rollins has been Vice Chairman of the Company since
November 1997, and shares the Office of the Chief Executive Officer with Mr.
Dell and Mr. Topfer. Mr. Rollins joined the Company in April 1996 as Senior Vice
President, Corporate Strategy and was named Senior Vice President, General
Manager -- Americas in May 1996. For 12 years prior to joining the Company, Mr.
Rollins was employed by Bain & Company, an international strategy consulting
firm, most recently serving as a director and partner. Mr. Rollins received a
Master of Business Administration degree and a Bachelor of Arts degree from
Brigham Young University. Mr. Rollins is also a member of the National Advisory
Council of Brigham Young University and a member of the CEO Forum on Education
and Technology.
Paul D. Bell -- Mr. Bell joined the Company in June 1996 and serves as Senior
Vice President, Americas Home and Small Business Group, where he is responsible
for all sales, marketing, customer service and technical support activities for
the small business and individuals customer groups. Mr. Bell also has primary
responsibility for the Dimension and Inspiron product lines for the Americas
region, and is responsible for portables and Dimension manufacturing in the
Americas region and manages Dell online on a worldwide basis. Prior to joining
the Company, Mr. Bell was with Bain & Company, where he was a management
consultant for six years, including two years as a consultant for the Company.
Mr. Bell received a bachelor's degree in Fine Arts and Business Administration
from Pennsylvania State University and a Master of Business Administration
degree from the Yale School of Organization and Management.
G. Carl Everett, Jr. -- Mr. Everett joined the Company in February 1998 as
Senior Vice President, Desktops and Workstations, and currently serves as Senior
Vice President, Personal Systems Group. Mr. Everett is responsible for worldwide
development, marketing and strategic technological direction for the Company's
desktop computer systems and notebook computer product lines. For over 18 years
prior to joining the Company, Mr. Everett was employed by Intel Corporation,
where he began in a field sales office and advanced into sales and marketing
management. He was appointed vice president in 1989 and, until 1994, oversaw
North American and then worldwide sales. From 1994 to 1996, Mr. Everett served
as Senior Vice President and General Manager of the Desktop Products Group.
Prior to joining Intel in 1978, Mr. Everett held various sales, marketing and
customer support positions with Motorola Semiconductor Products Group. Mr.
Everett holds a bachelor's degree in Business Administration from New Mexico
State University.
Jan Gesmar-Larsen -- Mr. Gesmar-Larsen joined the Company in August 1997 as
Senior Vice President, and President, Dell Europe, Middle East and Africa. Prior
to joining the Company, Mr. Gesmar-Larsen held various positions with Apple
Computer Europe, including Business Unit Director, Education Channels; Sales
Director, Core Business; Managing Director, Central Europe;
13
<PAGE> 15
and finally President, Europe. Prior to joining Apple in 1992, Mr. Gesmar-Larsen
was manager of the Systems Division of Compaq Corporation, Europe and
International. Prior to that, he held various management positions at Olivetti
Corporation. Mr. Gesmar-Larsen holds a bachelor's degree in Economics and a
master's degree in Marketing.
Thomas B. Green -- Mr. Green has been Senior Vice President, Law and
Administration since November 1997, and is responsible for overseeing the
Company's legal and governmental affairs, human resources function and other
administrative departments. Mr. Green joined the Company in August 1994 as
General Counsel and Secretary. Before joining the Company, Mr. Green served as
Executive Vice President and General Counsel of Chicago Title & Trust Company,
where he was employed from October 1992 to July 1994, and as Executive Vice
President and General Counsel of Trammell Crow Company from October 1990 to
October 1992. From February 1989 to October 1990, Mr. Green was employed by the
law firm of Jones, Day, Reavis & Pogue, Dallas, Texas, last serving as a partner
in that firm. His background also includes a term as law clerk to former United
States Supreme Court Chief Justice Warren Burger. Mr. Green received a Bachelor
of Arts degree in English and a Juris Doctor degree from the University of Utah.
Jerome N. Gregoire -- Mr. Gregoire joined the Company in July 1996 as Vice
President and Chief Information Officer, and was appointed Senior Vice President
in March 1999. In this position, Mr. Gregoire is responsible for the Company's
worldwide information systems, including an ongoing program to further develop
state-of-the-art information systems and processes. For 10 years prior to
joining the Company, Mr. Gregoire held various positions with PepsiCo, Inc.,
most recently serving as Chief Information Officer for Pepsi-Cola Company, the
beverage division of the PepsiCo family. While at PepsiCo, Mr. Gregoire also
served as Vice President of Management Information Systems for PepsiCo Food
Systems, supporting the worldwide Kentucky Fried Chicken, Pizza Hut and Taco
Bell operations. Mr. Gregoire's previous experience also includes positions as
Vice President of the systems group for Dean Research Corporation, a Kansas
City-based specialist in computer-controlled materials handling, primarily to
the aerospace industry; and as Vice President of Information Systems for
Kraft/CDC Foodservice, also based in Kansas City. Mr. Gregoire received a
Bachelor of Arts degree in Political Science from Park College.
Michael D. Lambert -- Mr. Lambert joined the Company in October 1996 as Senior
Vice President, Server Group, and currently serves as Senior Vice President,
Enterprise Systems Group. Mr. Lambert is responsible for worldwide development
and marketing of the Company's server, storage and workstation product lines.
Prior to joining the Company, Mr. Lambert held various officer positions with
Compaq Computer Corporation, last serving as Vice President of North American
Marketing. Prior to joining Compaq in 1994, Mr. Lambert served four years as
general manager of the large computer products division for NCR Corporation. Mr.
Lambert's more than 30 years' experience in the computer systems industry also
includes senior positions with Arix Corporation in San Jose, California, a
manufacturer of multiprocessor UNIX-based systems, and Convergent Technologies,
also in San Jose, California. Mr. Lambert received a bachelor's degree in
Business Administration from the University of Kentucky in Lexington.
John J. Legere -- Mr. Legere joined the Company in June 1998 as Vice President,
and President Asia Pacific. In this position, Mr. Legere is responsible for the
Company's operations in the Asia Pacific region. Prior to joining the Company,
Mr. Legere served as President and managing partner of AT&T Solutions' worldwide
outsourcing practice, a company with over $2.6 billion in revenues and 8,000
employees. From 1994 through 1997, Mr. Legere served as President and Chief
Executive Officer of AT&T's Hong Kong-based Asia Pacific unit, with overall
responsibility for AT&T's service offerings in the region. Mr. Legere's 18-year
career at AT&T also included various managerial positions in sales, marketing,
services, network operations, information management, field service operations,
human resources and finance. Mr. Legere earned a bachelor's degree in Business
Administration from the University of Massachusetts, a Master of Business
Administration degree from Fairleigh Dickinson University, and a master's degree
in Science, Alfred P. Sloan Fellow, from the Massachusetts Institute of
Technology
14
<PAGE> 16
Joseph A. Marengi -- Mr. Marengi joined the Company in July 1997 and serves as
Senior Vice President, Americas Relationship Group. In this position, Mr.
Marengi is responsible for the Americas customer groups serving enterprise,
large corporate and medium business customers. Prior to joining the Company, Mr.
Marengi worked with Novell, Inc., most recently serving as President and Chief
Operating Officer. He joined Novell in 1989, beginning as director of the
Eastern region and moving through successive promotions to become executive vice
president of worldwide sales and field operations. For ten years prior to
joining Novell, Mr. Marengi served as vice president of channel sales for
Excelan, Inc. and in various other executive, sales, information management
positions. From 1978 through 1981, Mr. Marengi served in the United States Coast
Guard and Coast Guard Reserve, reaching the rank of Lieutenant Commander. Mr.
Marengi earned a bachelor's degree in Public Administration from the University
of Massachusetts and a master's degree in Management from the University of
Southern California.
Keith Maxwell -- Mr. Maxwell joined the Company in March 1993, was appointed
Vice President, Worldwide Operations Group, in June 1998 and was appointed
Senior Vice President in March 1999. In this position, Mr. Maxwell is
responsible for ensuring that the Company's worldwide manufacturing processes,
capacity and supply base support the global growth of the Company. Mr. Maxwell
is also responsible for facilitating the definition and monitoring of the
Company's global process alignment and benchmarking. Previously, Mr. Maxwell
served as Vice President of the Americas segment, where he oversaw all
activities required to support the Americas fulfillment process, including
business planning and manufacturing management. Mr. Maxwell joined the Company
from Compaq Computer Corporation, where he managed all areas of new product
development from product-design evaluation to coordination of manufacturing to
identification of alternate manufacturing processes. Before joining Compaq, Mr.
Maxwell held a series of management positions in production, planning and
manufacturing at Texas Instruments, Inc. Mr. Maxwell earned a Master of Business
Administration degree from The University of Texas at Austin and a Bachelor of
Science degree in electrical engineering from Lamar University.
Thomas J. Meredith -- Mr. Meredith joined the Company in November 1992 as Chief
Financial Officer. In September 1995, Mr. Meredith was named Senior Vice
President, Finance and Information Systems, and retained the position of Chief
Financial Officer. In July 1996, Mr. Meredith's title was changed to Senior Vice
President and Chief Financial Officer. Prior to joining the Company, Mr.
Meredith was Vice President and Treasurer of Sun Microsystems, Inc. from April
1990 to November 1992 and held various financial positions with Amdahl
Corporation before that time, last serving as President of Amdahl Capital
Corporation. Mr. Meredith received a Bachelor of Science degree in Political
Science from St. Francis College in Loretto, Pennsylvania, a Juris Doctor degree
from Duquesne University and a Master of Law degree in Taxation from Georgetown
University. Mr. Meredith is a member of the boards of directors of i2
Technologies, Inc. and I-Cube, Inc.
Rosendo G. Parra -- Mr. Parra joined the Company in August 1993 and serves as
Senior Vice President, Americas Public and International Group. In that
position, Mr. Parra is responsible for the Company's operations in the federal,
state and local government and educational customer groups, Latin America,
Mexico and Canada, and is responsible for the Company's customer service
operations, with the exception of Dell Direct. Mr. Parra is also responsible for
enterprise systems manufacturing in the Americas region. Prior to joining the
Company, Mr. Parra held various sales and general management positions with GRiD
systems Corporation, including regional sales director and vice president and
general manager of the PC strategic business unit. Before his association with
GRiD, Mr. Parra spent nine years serving in various sales and management
positions for the business products division of Tandy Corporation. Mr. Parra
earned a bachelor's degree in Marketing from the University of Maryland.
Charles H. Saunders -- Mr. Saunders joined the Company in May 1997 as Vice
President and President, Dell Japan and is responsible for all operations of
Dell's Japanese subsidiary. Prior to joining the Company, Mr. Saunders spent 25
years at Motorola, Inc., most recently holding the position of Corporate Vice
President and General Manager of the U.S./Canada Division of the Land
15
<PAGE> 17
Mobile Products Sector. Before then, he served as Managing Director and
Corporate Vice President and General Manager of the Land Mobile Products
Division of Nippon Motorola Ltd. During his tenure in Japan, Mr. Saunders also
held the position of managing director of the Japan Mobile Telecommunications
Association. Mr. Saunders is a graduate of East Tennessee State University.
James M. Schneider -- Mr. Schneider joined the Company in October 1996 as Vice
President of Finance and also serves as the Company's Chief Accounting Officer.
Mr. Schneider was named Senior Vice President in September 1998. In this
position, Mr. Schneider is responsible for corporate planning and reporting,
financial systems and worldwide financial controls. For three years prior to
joining the Company, Mr. Schneider was with MCI Communications Corporation, last
serving as Senior Vice President of Corporate Finance. For 19 years prior to
joining MCI, Mr. Schneider was associated with Price Waterhouse LLP, serving as
a partner for 10 years. Mr. Schneider earned a bachelor's degree in Accounting
from Carroll College in Waukesha, Wisconsin, and is a Certified Public
Accountant. He is a member of the board of directors of General Communications,
Inc.
16
<PAGE> 18
ITEM 2 -- PROPERTIES
At January 29, 1999, the Company owned or leased a total of approximately 6.8
million square feet of office, manufacturing and warehouse space worldwide, 4.4
million square feet of which is located in the U.S. and the remainder located in
various international areas.
Domestic Properties
The Company's principal offices and U.S. manufacturing facilities are located in
the Austin, Texas area. At January 29, 1999, the Company had a total of
approximately 3.6 million square feet of office, manufacturing space under lease
in several buildings in Austin and Round Rock, Texas. The expiration dates of
such leases range from March 1999 to March 2005. The Company owns 360 acres of
land in Round Rock, Texas (north of Austin), on which are located several office
buildings completed since August 1994 that contain an aggregate of approximately
2.0 million square feet of office space. These buildings, comprising the
Company's Round Rock campus, house the Company's sales, marketing and support
staff for the Americas region, as well as the Company's executive headquarters
and administrative support functions. The Company also leases 570 acres of land
in Austin, on which is located a 300,000-square-foot facility that produces
servers and workstations. The Company intends to use the remainder of the
acreage for additional manufacturing and office facility expansion.
Subsequent to fiscal year 1999, the Company announced that it plans to construct
a 325,000-square-foot office building and a 300,000-square-foot manufacturing
facility in Austin, Texas. The Company also announced plans to expand certain
operations to a new location in the Nashville, Tennessee area.
International Properties
At January 29, 1999, the Company's international facilities consisted of
approximately 1.3 million square feet of leased office and manufacturing space
in 36 countries, with lease expiration dates ranging from March 1999 to December
2013. The Company owns two manufacturing facilities in Limerick, Ireland and
expects to occupy a third in fiscal year 2000, totaling 936,000-square-feet. The
Company also owns a 238,000-square-foot combination office and manufacturing
facility in Penang, Malaysia (located on land leased until the year 2053 from
the State Authority of Penang). During fiscal year 1999, the Company opened a
135,000-square-foot manufacturing and sales support center in Xiamen, China.
Additionally, during fiscal year 1999, the Company announced plans to open a
manufacturing facility in Brazil.
The Company believes that it can readily obtain appropriate additional space as
may be required at competitive rates.
ITEM 3 -- LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims arising in the
ordinary course of business. The Company's management does not expect that the
results in any of these legal proceedings will have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
1999.
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<PAGE> 19
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded on The Nasdaq National Market under the
symbol "DELL." Information regarding the market prices of the Company's common
stock may be found in Note 13 of Notes to Consolidated Financial Statements
included in "Item 8 -- Financial Statements and Supplementary Data."
HOLDERS
As of March 31, 1999, there were 26,173 holders of record of the Company's
common stock.
DIVIDENDS
The Company has never paid cash dividends on its common stock. The Company
intends to retain its earnings for use in its business and, therefore, does not
anticipate paying any cash dividends on the common stock for at least the next
12 months.
On each of March 6, 1998, September 4, 1998 and March 5, 1999, the Company
effected a two-for-one common stock split by paying a 100% stock dividend to
stockholders of record as of February 27, 1998, August 28, 1998 and February 26,
1999, respectively.
SALES OF UNREGISTERED SECURITIES
The Company has an active stock repurchase program, which is more fully
described in Note 6 of Notes to Consolidated Financial Statements included in
"Item 8 -- Financial Statements and Supplementary Data." One element of such
program is the sale of put obligations. During fiscal year 1999, the Company
sold 200,000 put obligations to a financial institution and received proceeds of
$1.5 million in connection with such sale. The put obligations entitle each
holder to sell to the Company, by physical delivery, cash delivery or net-share
settlement, at the Company's option, one share of common stock at a specified
price. The put obligations expire on January 7, 2000 and have an exercise price
of $40 per share. The transaction was exempt from registration under Section
4(2) of the Securities Act of 1933, as amended. The transaction was privately
negotiated and the purchaser of the put options was an accredited investor and
qualified institutional buyer. No public offering or public solicitation was
made by the Company in the placement of these securities.
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<PAGE> 20
ITEM 6 -- SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the related notes, and "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------
JANUARY 29, FEBRUARY 1, FEBRUARY 2, JANUARY 28, JANUARY 29,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Results of Operations Data:
Net revenue........................ $18,243 $12,327 $7,759 $5,296 $3,475
Gross margin....................... 4,106 2,722 1,666 1,067 738
Operating income................... 2,046 1,316 714 377 249
Income before extraordinary loss... 1,460 944 531 272 149
Net income......................... 1,460 944 518 272 149
Income before extraordinary loss
per common share(a)(b):
Basic......................... $ 0.58 $ 0.36 $ 0.19 $ 0.09 $ 0.06
Diluted....................... $ 0.53 $ 0.32 $ 0.17 $ 0.08 $ 0.05
Number of weighted average shares
outstanding(a):
Basic......................... 2,531 2,631 2,838 2,863 2,473
Diluted....................... 2,772 2,952 3,126 3,158 3,000
Balance Sheet Data:
Working capital.................... $ 2,644 $ 1,215 $1,089 $1,018 $ 718
Total assets....................... 6,877 4,268 2,993 2,148 1,594
Long-term debt..................... 512 17 18 113 113
Total stockholders' equity......... 2,321 1,293 806 973 652
</TABLE>
- ---------------
(a) All share and per share information has been retroactively restated to
reflect the two-for-one splits of common stock. See Note 6 of Notes to
Consolidated Financial Statements.
(b) Excludes extraordinary loss of $0.01 basic per common share for fiscal year
1997.
19
<PAGE> 21
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's objective is to maximize stockholder value by executing a strategy
that focuses on a balance of three priorities: growth, profitability and
liquidity. The following discussion highlights the Company's performance in the
context of these priorities. This discussion should be read in conjunction with
the Consolidated Financial Statements, including the related notes.
RESULTS OF OPERATIONS
The following table summarizes the results of the Company's operations for each
of the past three fiscal years. All percentage amounts were calculated using the
underlying data in thousands.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------
JANUARY 29, PERCENTAGE FEBRUARY 1, PERCENTAGE FEBRUARY 2,
1999 INCREASE 1998 INCREASE 1997
----------- ---------- ----------- ---------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenue....................... $18,243 48% $12,327 59% $7,759
Gross margin...................... 4,106 51 2,722 63 1,666
Percentage of net revenue....... 22.5% 22.1% 21.5%
Operating expenses................ $ 2,060 47 $ 1,406 48 $ 952
Percentage of net revenue....... 11.3% 11.4% 12.3%
Operating income.................. $ 2,046 56 $ 1,316 84 $ 714
Percentage of net revenue....... 11.2% 10.7% 9.2%
Net income........................ $ 1,460 55 $ 944 83 $ 518
</TABLE>
Net Revenue
The increase in net revenue for fiscal years 1999 and 1998 was principally due
to increased units sold. Unit sales grew 64% and 60% for fiscal years 1999 and
1998, respectively.
Unit sales increased across all product lines during fiscal year 1999. The
Company's enterprise systems, which include servers, workstations and storage
products, continued to build a substantial presence in the marketplace, with
enterprise systems unit sales growing 130% during fiscal year 1999. Notebook
computer unit sales increased 108%, primarily as the result of aggressive
pricing actions and the launch of new products. Desktop computer systems unit
sales increased 55% during fiscal year 1999. This increase was primarily
attributable to the Company's aggressive market penetration of new and
higher-end products.
Unit sales grew during fiscal year 1998, also the result of increased demand for
the Company's products across all product lines. During fiscal year 1998,
enterprise systems unit sales grew 265%, notebook computer unit sales grew 66%
and desktop computer systems unit sales grew 55%, as the Company continued to
introduce products utilizing the latest technology.
Average revenue per unit sold in fiscal year 1999 decreased 10% compared to
fiscal year 1998, partially offsetting the effects of the increase in unit sales
on consolidated net revenue. The decrease was primarily due to price reductions
resulting from continued component cost declines.
Average revenue per unit sold in fiscal year 1998 remained relatively stable
compared to fiscal year 1997. This was primarily due to aggressive pricing
strategies in desktop computer systems, partially offset by increased unit sales
in higher-end enterprise systems and higher-platform notebook computers.
20
<PAGE> 22
The Company experienced growth in net revenue in all geographic segments in both
fiscal years 1999 and 1998. The following table summarizes the Company's net
revenue by geographic segment for each of the past three fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------
JANUARY 29, PERCENTAGE FEBRUARY 1, PERCENTAGE FEBRUARY 2,
1999 INCREASE 1998 INCREASE 1997
----------- ---------- ----------- ---------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenue:
Americas.................... $12,420 46% $ 8,531 62% $5,279
Europe...................... 4,674 58 2,956 48 2,004
Asia-Pacific and Japan...... 1,149 37 840 77 476
------- ------- ------
Consolidated net revenue.... $18,243 $12,327 $7,759
======= ======= ======
</TABLE>
In the Americas segment, net revenue grew 46% and 62% in fiscal years 1999 and
1998, respectively, as the Company continued its efforts to strengthen its
consumer, small-to-medium business and large corporate customer groups. In the
European segment, substantially all countries experienced revenue growth in
excess of 50% in fiscal years 1999 and 1998, with growth experienced across all
customer groups and product lines. As a result, Europe increased net revenue 58%
and 48% in fiscal years 1999 and 1998, respectively. Asia-Pacific and Japan
revenues increased 37% in fiscal year 1999, compared to a 77% increase in fiscal
year 1998.
Management believes that opportunity exists for continued worldwide growth by
increasing the Company's market presence in its existing markets, entering new
markets and pursuing additional product opportunities. The Company continues to
expand its product offerings to meet a variety of customer needs. Also, the
Company continues to enhance and improve the reputation, quality and breadth of
all of its product lines and services. The Company is continuing its efforts to
strengthen its position in enterprise systems by introducing advanced
technologies to serve the growing needs for these products. As a result, the
Company continues to expand its global manufacturing, sales and service
facilities, completing or announcing plans for one million square feet of
additional production capacity during fiscal year 1999. To accommodate this
growth, the Company added a state-of-the-art manufacturing facility to its
operations in Austin, Texas. The Company also added to its regional
manufacturing operations in Limerick, Ireland and Xiamen, China.
Gross Margin
The increase in gross margin as a percentage of consolidated net revenue in
fiscal year 1999 over fiscal year 1998 was primarily attributable to component
cost declines. These component cost declines were generally passed through to
customers, resulting in the aforementioned declines in average revenue per unit
sold for fiscal year 1999. Also contributing to the increase in gross margin in
fiscal year 1999 were overall efficiencies experienced in the Company's
manufacturing operations and a continued shift in product mix to the higher-end
enterprise systems and notebook computers. The mix of enterprise systems and
notebook computers increased to 13% and 23% of system revenue, respectively,
compared with 9% and 20%, respectively, during the prior fiscal year.
The gross margin increase as a percentage of consolidated net revenue in fiscal
year 1998 from fiscal year 1997 resulted primarily from component cost declines,
manufacturing efficiencies and an overall shift in mix to higher-end enterprise
systems and notebook computers.
21
<PAGE> 23
Operating Expenses
The following table presents certain information regarding the Company's
operating expenses during each of the last three fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 29, FEBRUARY 1, FEBRUARY 2,
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Operating expenses:
Selling, general and administrative................... $1,788 $1,202 $826
Percentage of net revenue.......................... 9.8% 9.8% 10.7%
Research, development and engineering................. $ 272 $ 204 $126
Percentage of net revenue.......................... 1.5% 1.6% 1.6%
Total operating expenses................................ $2,060 $1,406 $952
Percentage of net revenue.......................... 11.3% 11.4% 12.3%
</TABLE>
Selling, general and administrative expenses increased in absolute dollar
amounts but remained flat as a percentage of consolidated net revenue for fiscal
year 1999, and declined for fiscal year 1998. The increase in absolute dollars
was due primarily to the Company's increase in staffing and increased
infrastructure expenses, including information systems, to support the Company's
continued growth. The decline in selling, general and administrative expenses as
a percentage of net revenue for fiscal year 1998 resulted from significant net
revenue growth.
The Company continues to invest in research, development and engineering
activities to support its continued goal of improving and developing efficient
procurement, manufacturing and distribution processes, and to develop and
introduce new products. As a result, research, development and engineering
expenses have increased each year in absolute dollars due to increased staffing
levels and product development costs. The Company expects to continue to
increase its research, development and engineering spending in absolute dollar
amounts.
The Company believes that its ability to manage operating expenses is an
important factor in its ability to remain competitive and successful. The
Company will continue to invest in personnel, information systems and other
infrastructure, and in research, development and engineering activities, to
support its continued growth and to continue to develop new, competitive
products and more efficient methods of delivery. It is the Company's goal to
manage operating expenses, over time, relative to its net revenue and gross
margin.
While delivering annual revenue growth of 48% and 59% in fiscal year 1999 and
1998, respectively, the Company has grown operating income by 56% in fiscal year
1999 and 84% in fiscal year 1998. This reflects the Company's ability to manage
operating expenses relative to gross margin resulting in increased operating
profitability.
Income Taxes
The Company's effective tax rate was 30% for fiscal year 1999 compared to 31%
for fiscal year 1998 and 29% for fiscal year 1997. The differences in the
effective tax rates among fiscal years result from changes in the geographical
distribution of income and losses. The Company's effective tax rate is lower
than the U.S. federal statutory rate of 35%, principally resulting from the
Company's geographical distribution of income.
22
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
The following table presents selected financial statistics and information for
each of the past three fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 29, FEBRUARY 1, FEBRUARY 2,
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash and marketable securities.......................... $3,181 $1,844 $1,352
Working capital......................................... 2,644 1,215 1,089
Days of sales in accounts receivable.................... 36 36 37
Days of supply in inventory............................. 6 7 13
Days in accounts payable................................ 54 51 54
------ ------ ------
Cash conversion cycle................................. (12) (8) (4)
====== ====== ======
</TABLE>
During fiscal year 1999, the Company generated $2.4 billion in cash flows from
operating activities, which represents the Company's principal source of cash.
Cash flows from operating activities resulted primarily from the Company's net
income, changes in operating working capital and income tax benefits resulting
from the exercise of employee stock options.
Throughout fiscal year 1999, the Company invested a significant portion of its
available cash in highly liquid investments with maturities of three months or
less at date of acquisition to primarily minimize principal risk and maintain
liquidity.
During fiscal year 1999, the Company continued to improve on its efficient asset
management. Days of sales in accounts receivable remained flat in fiscal year
1999, while days of supply in inventory decreased one day from fiscal year 1998
to six days. This, combined with a three-day increase in days in accounts
payable, resulted in an improvement in the Company's cash conversion cycle to a
negative 12 days in fiscal year 1999 from a negative eight days in fiscal year
1998. The Company's return on invested capital, a key indicator of efficient
asset management, increased to 195% in fiscal year 1999 from 186% in fiscal year
1998.
During fiscal year 1999, the Company repurchased 149 million shares of common
stock for an aggregate cost of $1.5 billion, primarily to manage the dilution
resulting from shares issued under the Company's employee stock option and
purchase plans. The Company is currently authorized to repurchase up to 200
million additional shares of its outstanding common stock and anticipates that
repurchases will constitute a significant use of future cash resources. At
January 29, 1999, the Company held equity instrument contracts that entitle it
to purchase 49 million additional shares of common stock at an average cost of
$14 per share at various times through the third quarter of fiscal year 2000.
For additional information regarding the Company's stock repurchase program, see
Note 6 of Notes to Consolidated Financial Statements included in "Item
8 -- Financial Statements and Supplementary Data."
The Company utilized $296 million in cash during fiscal year 1999 to improve and
equip its manufacturing and office facilities as the Company continues to grow.
Cash flows for similar capital expenditures for fiscal year 2000 are expected to
be approximately $400 million.
The Company maintains master lease facilities providing the capacity to fund up
to $820 million. The combined facilities provide for the ability of the Company
to lease certain real property, buildings and equipment to be constructed or
acquired. At January 29, 1999, $222 million of the combined facilities had been
utilized.
In April 1998, the Company issued $200 million in Senior Notes and $300 million
in Senior Debentures. For additional information regarding these issuances, see
Note 2 of Notes to Consolidated Financial Statements included in "Item
8 -- Financial Statements and Supplementary Data."
23
<PAGE> 25
The Company maintains a $250 million revolving credit facility, which expires in
June 2002. At January 29, 1999, this facility was unused.
Management believes that the Company has sufficient resources from cash provided
from operations and available borrowings to support its operations and capital
requirements for at least the next 12 months.
MARKET RISK
The Company is exposed to a variety of risks, including foreign currency
exchange rate fluctuations and changes in the market value of its investments.
In the normal course of business, the Company employs established policies and
procedures to manage these risks.
Foreign Currency Hedging Activities
The Company's objective in managing its exposure to foreign currency exchange
rate fluctuations is to reduce the impact of adverse fluctuations in earnings
and cash flows associated with foreign currency exchange rate changes.
Accordingly, the Company utilizes foreign currency option contracts and forward
contracts to hedge its exposure on anticipated transactions and firm commitments
in most of the foreign countries in which the Company operates. The principal
currencies hedged during fiscal year 1999 were the British pound, Japanese yen,
German mark, French franc and Canadian dollar. The Company monitors its foreign
currency exchange exposures daily to ensure the overall effectiveness of its
foreign currency hedge positions. However, there can be no assurance the
Company's foreign currency hedging activities will substantially offset the
impact of fluctuations in currency exchange rates on its results of operations
and financial position.
Based on the Company's foreign currency exchange instruments outstanding at
January 29, 1999, the Company estimates a maximum potential one-day loss in fair
value of approximately $12 million, using a Value-at-Risk ("VAR") model. The VAR
model estimates were made assuming normal market conditions and a 95% confidence
level. The Company used a Monte Carlo simulation type model that valued its
foreign currency instruments against a thousand randomly generated market price
paths. Anticipated transactions, firm commitments, receivables and accounts
payable denominated in foreign currencies were excluded from the model. The VAR
model is a risk estimation tool, and as such is not intended to represent actual
losses in fair value that will be incurred by the Company. Additionally, as the
Company utilizes foreign currency instruments for hedging anticipated and firmly
committed transactions, a loss in fair value for those instruments is generally
offset by increases in the value of the underlying exposure. Foreign currency
fluctuations did not have a material impact on the Company's results of
operations and financial position during fiscal years 1999, 1998 and 1997.
Euro Conversion
The Company has evaluated the potential impact of the Euro conversion on the
Company. The Company identified issues related to the Euro conversion, including
issues related to information systems and business processes, and assessed the
effect on the Company's results of operations and financial position. Also, the
Company introduced www.euro.dell.com to provide the latest information on the
Company's Euro initiatives, as well as to provide basic tools to assist the
Company's customers in dealing with the Euro conversion. There can be no
assurance that all issues related to the Euro conversion have been identified
and that any issues will not have a material effect on the Company's results of
operations or financial position. However, the Company believes that it has and
will continue to take appropriate steps to assess and address Euro conversion
issues and currently does not expect that its business will be adversely
affected by such conversion in any material respect.
24
<PAGE> 26
Marketable Securities
The fair value of the Company's investments in marketable securities at January
29, 1999, was approximately $3 billion. The Company's investment policy is to
manage its marketable securities portfolio to preserve principal and liquidity
while maximizing the return on the investment portfolio through the full
investment of available funds. The Company diversifies the marketable securities
portfolio by investing in multiple types of investment-grade securities and
through the use of different investment brokers. The Company's marketable
securities portfolio is primarily invested in short-term securities with at
least an investment grade rating to minimize interest rate and credit risk as
well as to provide for an immediate source of funds. Based on the Company's
marketable securities portfolio and interest rates at January 29, 1999, a 175
basis point increase or decrease in interest rates would result in a decrease or
increase of $25 million, respectively, in the fair value of the marketable
securities portfolio. Changes in interest rates may affect the fair value of the
marketable securities portfolio; however, such gains or losses would not be
realized unless the investments are sold.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
There are numerous factors that 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, as well as 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 ready 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."
YEAR 2000
The following disclosure is a Year 2000 readiness disclosure statement pursuant
to the Year 2000 Readiness and Disclosure Act.
State of Readiness
The Company established a formal Year 2000 readiness program in February 1997.
The Company's Year 2000 program consists of two separate initiatives, the
Millennium Project and the Product Group Y2K Project.
The purpose of the Millennium Project is to assess the Year 2000 readiness of
the Company's component and service providers and the Company's internal systems
and devices. The Company identified and assessed its internal systems and
devices and, where remedial steps were required to make those systems Year 2000
ready, prioritized the remedial steps to be taken. As of March 31, 1999, the
Company had completed its assessment and renovation of all mission critical
internal systems and devices and believes all are substantially Year 2000 ready.
However, because the full ramifications of the Year 2000 issue will not be fully
realized until after the Year 2000 date change, the Company can provide no
assurances that its internal systems and devices will not be adversely affected
by the Year 2000 date change.
25
<PAGE> 27
The Company has also identified, through the Millennium Project, its critical
component and service providers and is contacting each such vendor to assess
that vendor's Year 2000 readiness. The Company has assigned each such vendor a
priority rating based on the criticality of the function it provides to the
Company. The Company is assessing the Year 2000 readiness of each critical
vendor. Through March 31, 1999, the Company had received written responses from
approximately 50% of its critical vendors, and expects to complete a review of
all of its critical vendors by no later than June 30, 1999. Because the Company
is relying on information provided to it by third parties to assess the Year
2000 readiness of such vendors, the Company cannot provide assurances that all
of its critical vendors are or will be Year 2000 ready. Therefore, the Company
cannot provide assurances that the Company will not be adversely affected by the
Year 2000 date change.
Through the Product Group Y2K Project, the Company is analyzing the Year 2000
readiness status of the computer hardware manufactured by the Company, to
provide an effective means of communicating the readiness status to customers,
and to implement an ongoing testing and monitoring program to help enable all
new Dell computer hardware offerings to meet the Company's Year 2000 readiness
standards. The Company has analyzed and continues to analyze the Year 2000
status of the computer hardware manufactured by the Company. All Dell-branded
hardware products shipped after January 1, 1997 meet the Company's Year 2000
readiness standards. Dell-branded hardware manufactured prior to that time can
generally be updated to meet the Company's Year 2000 readiness standards through
BIOS upgrades or software patches. The Company has created a Web site at
www.dell.com/year2000, which contains detailed information about the Year 2000
issue, the Company's Year 2000 readiness standards and its Year 2000 program.
Through the Web site, customers can assess the Year 2000 readiness of their
hardware and can obtain software patches and BIOS upgrades from the Company,
free of charge, to help prepare the hardware for the Year 2000 rollover.
Customers without Internet access may request free copies of the software
patches and BIOS upgrades by telephone or mail. The Company's Year 2000
readiness program applies only to Dell-branded hardware manufactured and
Dell-branded software developed by the Company. Although the Company has
attempted to ascertain the Year 2000 status of third party software and
peripherals loaded on or distributed with Company computer systems, it does not
and cannot guarantee the Year 2000 status of any software or peripherals
provided by third parties.
Costs
The Company currently does not expect that the total costs of its Year 2000
readiness program will be material to its financial condition or results of
operation. All costs are charged to expense as incurred, and do not include
potential costs related to any customers or other claims or the cost of internal
software and hardware replaced in the normal course of business.
Risks/Contingency Plans
The Company believes that the most likely worst case scenarios would involve the
interruption of crucial suppliers as a result of infrastructure failures or
third party vendor failures. As a result, the Company is developing contingency
plans that will address each of the most likely worst case scenarios. Such
contingency plans are expected to be completed no later than September 30, 1999.
The Company believes that it is taking appropriate steps to assess and address
its Year 2000 issues and currently does not expect that its business will be
adversely affected by the Year 2000 issue in any material respect. Nevertheless,
achieving Year 2000 readiness is dependent on many factors, some of which are
not completely within the Company's control. Should either the Company's
internal systems and devices or the internal systems and devices of one or more
critical vendors fail
26
<PAGE> 28
to achieve Year 2000 readiness, the Company's business and its results of
operations could be adversely affected.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." See Note 1 of Notes to Consolidated Financial
Statements included in "Item 8 -- Financial Statements and Supplementary Data."
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Response to this item is included in "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Market Risk."
27
<PAGE> 29
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Accountants......................... 29
Consolidated Statement of Financial Position at January
29, 1999 and
February 1, 1998....................................... 30
Consolidated Statement of Income for the three fiscal
years ended January 29, 1999........................... 31
Consolidated Statement of Cash Flows for the three fiscal
years ended January 29, 1999........................... 32
Consolidated Statement of Stockholders' Equity for the
three fiscal years ended January 29, 1999.............. 33
Notes to Consolidated Financial Statements................ 34
Financial Statement Schedule:
For the three fiscal years ended January 29, 1999
Schedule II -- Valuation and Qualifying Accounts....... 53
</TABLE>
All other schedules are omitted because they are not applicable.
28
<PAGE> 30
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, 1999 and February 1,
1998, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended January 29, 1999, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the accompanying index, presents fairly,
in all material respects, the information required to be set forth therein when
read in conjunction with the consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule 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.
PRICEWATERHOUSECOOPERS LLP
Austin, Texas
February 16, 1999
29
<PAGE> 31
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
JANUARY 29, FEBRUARY 1,
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 520 $ 320
Marketable securities..................................... 2,661 1,524
Accounts receivable, net.................................. 2,094 1,486
Inventories............................................... 273 233
Other..................................................... 791 349
------ ------
Total current assets.............................. 6,339 3,912
Property, plant and equipment, net.......................... 523 342
Other....................................................... 15 14
------ ------
Total assets...................................... $6,877 $4,268
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $2,397 $1,643
Accrued and other......................................... 1,298 1,054
------ ------
Total current liabilities......................... 3,695 2,697
Long-term debt.............................................. 512 17
Other....................................................... 349 261
Commitments and contingent liabilities...................... -- --
------ ------
Total liabilities................................. 4,556 2,975
------ ------
Stockholders' equity:
Preferred stock and capital in excess of $.01 par value;
shares issued and outstanding: none.................... -- --
Common stock and capital in excess of $.01 par value;
shares issued and outstanding: 2,543 and 2,575,
respectively........................................... 1,781 747
Retained earnings......................................... 606 607
Other..................................................... (66) (61)
------ ------
Total stockholders' equity........................ 2,321 1,293
------ ------
Total liabilities and stockholders' equity........ $6,877 $4,268
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 32
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
JANUARY 29, FEBRUARY 1, FEBRUARY 2,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net revenue............................................... $18,243 $12,327 $7,759
Cost of revenue........................................... 14,137 9,605 6,093
------- ------- ------
Gross margin............................................ 4,106 2,722 1,666
------- ------- ------
Operating expenses:
Selling, general and administrative..................... 1,788 1,202 826
Research, development and engineering................... 272 204 126
------- ------- ------
Total operating expenses........................ 2,060 1,406 952
------- ------- ------
Operating income................................ 2,046 1,316 714
Financing and other....................................... 38 52 33
------- ------- ------
Income before income taxes and extraordinary loss....... 2,084 1,368 747
Provision for income taxes................................ 624 424 216
------- ------- ------
Income before extraordinary loss........................ 1,460 944 531
Extraordinary loss, net of taxes.......................... -- -- (13)
------- ------- ------
Net income.............................................. $ 1,460 $ 944 $ 518
======= ======= ======
Basic earnings per common share (in whole dollars):
Income before extraordinary loss........................ $ 0.58 $ 0.36 $ 0.19
Extraordinary loss, net of taxes........................ -- -- (0.01)
------- ------- ------
Earnings per common share............................... $ 0.58 $ 0.36 $ 0.18
======= ======= ======
Diluted earnings per common share (in whole dollars)...... $ 0.53 $ 0.32 $ 0.17
======= ======= ======
Weighted average shares outstanding:
Basic................................................... 2,531 2,631 2,838
Diluted................................................. 2,772 2,952 3,126
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 33
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
JANUARY 29, FEBRUARY 1, FEBRUARY 2,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 1,460 $ 944 $ 518
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization...................... 103 67 47
Tax benefits of employee stock plans............... 444 164 37
Other.............................................. 11 24 29
Changes in:
Operating working capital............................... 367 365 622
Non-current assets and liabilities...................... 51 28 109
-------- -------- -------
Net cash provided by operating activities....... 2,436 1,592 1,362
-------- -------- -------
Cash flows from investing activities:
Marketable securities:
Purchases............................................ (16,459) (12,305) (9,538)
Maturities and sales................................. 15,341 12,017 8,891
Capital expenditures.................................... (296) (187) (114)
-------- -------- -------
Net cash used in investing activities........... (1,414) (475) (761)
-------- -------- -------
Cash flows from financing activities:
Purchase of common stock................................ (1,518) (1,023) (495)
Issuance of common stock under employee plans........... 212 88 57
Proceeds from issuance of long-term debt, net of
issuance costs....................................... 494 -- --
Cash received from sale of equity options and other..... -- 37 --
Repurchase of 11% senior notes.......................... -- -- (95)
-------- -------- -------
Net cash used in financing activities........... (812) (898) (533)
-------- -------- -------
Effect of exchange rate changes on cash................... (10) (14) (8)
-------- -------- -------
Net increase in cash...................................... 200 205 60
Cash at beginning of period............................... 320 115 55
-------- -------- -------
Cash at end of period..................................... $ 520 $ 320 $ 115
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 34
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK AND
CAPITAL IN EXCESS
OF PAR VALUE
------------------ RETAINED
SHARES AMOUNT EARNINGS OTHER TOTAL
------- ------- -------- ----- -------
<S> <C> <C> <C> <C> <C>
Balances at January 28, 1996................ 2,990 $ 430 $ 570 $(27) $ 973
Net income................................ -- -- 518 -- 518
Stock issuance under employee plans,
including tax benefits................. 25 65 -- (18) 47
Purchase and retirement of 246 million
shares................................. (246) (22) (388) -- (410)
Purchase and reissuance of 76 million
shares for employee plans and preferred
stock conversion....................... -- -- (55) (6) (61)
Reclassification of put options........... -- (279) -- -- (279)
Other..................................... -- 1 2 15 18
----- ------ ------- ---- -------
Balances at February 2, 1997................ 2,769 195 647 (36) 806
Net income................................ -- -- 944 -- 944
Stock issuance under employee plans,
including tax benefits................. 84 274 -- (11) 263
Purchase and retirement of 278 million
shares................................. (278) (39) (984) -- (1,023)
Reclassification of put options........... -- 279 -- -- 279
Other..................................... -- 38 -- (14) 24
----- ------ ------- ---- -------
Balances at February 1, 1998................ 2,575 747 607 (61) 1,293
Net income................................ -- -- 1,460 -- 1,460
Stock issuance under employee plans,
including tax benefits................. 117 1,092 -- (7) 1,085
Purchase and retirement of 149 million
shares................................. (149) (60) (1,458) -- (1,518)
Other..................................... -- 2 (3) 2 1
----- ------ ------- ---- -------
Balances at January 29, 1999................ 2,543 $1,781 $ 606 $(66) $ 2,321
===== ====== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 35
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- Dell Computer Corporation, a Delaware corporation
(including its consolidated subsidiaries, the "Company") designs, develops,
manufactures, markets, services and supports a wide range of computer systems,
including desktop computer systems, notebook computers and enterprise systems
(includes servers, workstations and storage products), and also markets
software, peripherals and service and support programs. The Company is managed
on a geographic basis with those geographic segments being the Americas, Europe
and Asia-Pacific and Japan regions. The Company markets and sells its computer
products and services under the Dell(R) brand name directly to its various
customer groups. These customer groups include large corporate, government,
medical and education accounts, as well as small-to-medium businesses and
individuals. The Company conducts operations worldwide through wholly owned
subsidiaries; such operations are primarily concentrated in the North America,
Europe and Asia-Pacific and Japan regions.
Fiscal Year -- During fiscal year 1999, the Company changed its fiscal year from
the 52 or 53 week period ending on the Sunday nearest January 31 to the Friday
nearest January 31. The change in fiscal year had no material effect on the
Company's consolidated financial statements.
Principles of Consolidation -- The accompanying consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and include the accounts of the Company. All significant intercompany
transactions and balances have been eliminated.
Use of Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of management's
estimates. These estimates are subjective in nature and involve judgements that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at fiscal year end and the reported amounts of
revenues and expenses during the fiscal year. Actual results could differ from
those estimates.
Marketable Securities -- The Company's marketable securities are classified as
available-for-sale securities and are reported at fair value. Unrealized gains
and losses are reported, net of taxes, as a component of stockholders' equity.
Unrealized losses are charged against income when a decline in fair value is
determined to be other than temporary. The specific identification method is
used to determine the cost of securities sold. Gains and losses on marketable
securities are included in Financing and Other when realized. The Company
accounts for highly liquid investments with maturities of three months or less
at date of acquisition as marketable securities and reflects the related cash
flows as investing cash flows. As a result, a significant portion of its gross
marketable securities purchases, maturities and sales activity disclosed as
investing cash flows is related to highly liquid investments.
Inventories -- Inventories are stated at the lower of cost or market with cost
being determined on a first-in, first-out basis.
Property, Plant and Equipment -- Property, plant and equipment are carried at
depreciated cost. Depreciation is provided using the straight-line method over
the estimated economic lives of the assets, which range from 10 to 30 years for
buildings and two to five years for all other assets. Leasehold improvements are
amortized over the shorter of five years or the lease term.
Foreign Currency Translation -- The majority of the Company's international
sales are made by international subsidiaries which have the U.S. dollar as their
functional currency. International subsidiaries which have the U.S. dollar as
the functional currency are remeasured into U.S. dollars using current rates of
exchange for monetary assets and liabilities and historical rates of exchange
for nonmonetary assets. Gains and losses from remeasurement are included in
Financing and
34
<PAGE> 36
Other. The Company's subsidiaries that do not have the U.S. dollar as their
functional currency translate assets and liabilities at current rates of
exchange in effect at the balance sheet date. The resulting gains and losses
from translation are included as a component of stockholders' equity. Items of
revenue and expense for the Company's international subsidiaries are translated
using the monthly average exchange rates in effect for the period in which the
items occur.
Foreign Currency Hedging Instruments -- The Company enters into foreign currency
exchange contracts to hedge its foreign currency risks. These contracts are
designated at inception as a hedge and measured for effectiveness both at
inception and on an ongoing basis. Realized and unrealized gains or losses and
premiums paid on foreign currency purchased option contracts that are designated
and effective as hedges of probable anticipated, but not firmly committed,
foreign currency transactions are deferred and recognized in income as a
component of net revenue, cost of revenue and/or operating expenses in the same
period as the hedged transaction. Forward contracts designated as hedges of
probable anticipated or firmly committed transactions are accounted for on a
mark-to-market basis, with realized and unrealized gains or losses recognized in
the accompanying consolidated statement of income.
Equity Instruments Indexed to the Company's Common Stock -- Proceeds received
upon the sale of equity instruments and amounts paid upon the purchase of equity
instruments are recorded as a component of stockholders' equity. Subsequent
changes in the fair value of the equity instrument contracts are not recognized.
If the contracts are ultimately settled in cash, the amount of cash paid or
received is recorded as a component of stockholders' equity.
Revenue Recognition -- Sales revenue is recognized at the date of shipment to
customers. Provision is made for an estimate of product returns and doubtful
accounts and is based on historical experience. Revenue from separately priced
service and extended warranty programs is deferred and recognized over the
extended warranty period.
Warranty and Other Post-sales Support Programs -- The Company provides currently
for the estimated costs that may be incurred under its initial warranty and
other post-sales support programs.
Advertising Costs -- Advertising costs are charged to expense as incurred.
Advertising expenses for fiscal years 1999, 1998 and 1997 were $199 million,
$137 million and $87 million, respectively.
Stock-Based Compensation -- The Company applies the intrinsic value method in
accounting for its stock option and employee stock purchase plans. Accordingly,
no compensation expense has been recognized for options granted with an exercise
price equal to market value at the date of grant or in connection with the
employee stock purchase plan.
Income Taxes -- The provision for income taxes is based on income before taxes
as reported in the accompanying consolidated statement of income. Deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Earnings Per Common Share -- Basic earnings per share is based on the weighted
effect of all common shares issued and outstanding, and is calculated by
dividing net income by the weighted average shares outstanding during the
period. Diluted earnings per share is calculated by dividing net income 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
35
<PAGE> 37
all potentially dilutive common shares outstanding. The following table sets
forth the computation of basic and diluted earnings per share for each of the
past three fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
JANUARY 29, FEBRUARY 1, FEBRUARY 2,
1999 1998 1997
----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income................................................ $1,460 $ 944 $ 518
Weighted average shares outstanding:
Basic................................................... 2,531 2,631 2,838
Employee stock options and other........................ 241 321 288
------ ------ ------
Diluted................................................. 2,772 2,952 3,126
====== ====== ======
Earnings per common share(a):
Basic................................................... $ 0.58 $ 0.36 $ 0.18
Diluted................................................. $ 0.53 $ 0.32 $ 0.17
</TABLE>
- ---------------
(a) Includes extraordinary loss of $0.01 basic per common share for fiscal year
1997.
Comprehensive Income -- The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," in the fiscal year
ended January 29, 1999. 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 $1,459 million, $923 million and $517 million, respectively, for
fiscal years 1999, 1998 and 1997, was not materially different from reported net
income.
Segment Information -- The Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," in the fiscal year ended
January 29, 1999. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position, but did affect the disclosure of
segment information as illustrated in Note 11.
Recently Issued Accounting Pronouncement -- 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 of SFAS No.
133 on its consolidated financial statements.
Reclassifications -- Certain prior year amounts have been reclassified to
conform to the fiscal year 1999 presentation.
36
<PAGE> 38
NOTE 2 -- FINANCIAL INSTRUMENTS
DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of marketable securities, long-term debt and related interest
rate derivative instruments has been estimated based upon market quotes from
brokers. The fair value of foreign currency forward contracts has been estimated
using market quoted rates of foreign currencies at the applicable balance sheet
date. The estimated fair value of foreign currency purchased option contracts is
based on market quoted rates at the applicable balance sheet date and the Black-
Scholes options pricing model. Considerable judgment is necessary in
interpreting market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. Changes in assumptions
could significantly affect the estimates.
Cash, accounts receivable, accounts payable and accrued and other liabilities
are reflected in the accompanying consolidated statement of financial position
at fair value because of the short-term maturity of these financial instruments.
MARKETABLE SECURITIES
The following table summarizes by major security type the cost of the Company's
holdings of marketable securities, which approximates fair value on both dates.
<TABLE>
<CAPTION>
JANUARY 29, FEBRUARY 1,
1999 1998
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Mutual funds, principally invested in debt securities....... $1,298 $ 800
Preferred stock............................................. 270 172
Debt securities:
U.S. corporate and bank debt.............................. 689 307
State and municipal securities............................ 328 190
U.S. government and agencies.............................. 33 40
International corporate and bank debt..................... 43 15
------ ------
Total debt securities....................................... 1,093 552
------ ------
Total marketable securities....................... $2,661 $1,524
====== ======
</TABLE>
At January 29, 1999, debt securities with a carrying amount of $831 million
mature within one year; the remaining debt securities mature within five years.
The Company's gross realized gains and losses on the sale of marketable
securities for fiscal years 1999, 1998 and 1997, were not material.
FOREIGN CURRENCY INSTRUMENTS
The Company uses foreign currency purchased option contracts and forward
contracts to reduce its exposure to currency fluctuations involving probable
anticipated, but not firmly committed, transactions and transactions with firm
foreign currency commitments. These transactions include international sales by
U.S. dollar functional currency entities, foreign currency denominated purchases
of certain components and intercompany shipments to certain international
subsidiaries. The risk of loss associated with purchased options is limited to
premium amounts paid for the option contracts. Foreign currency purchased
options generally expire in 12 months or less. At January 29, 1999, the Company
held purchased option contracts with a notional amount of $1 billion, a net
asset value of $48 million and a combined net realized and unrealized deferred
loss of $21 million. At February 1, 1998, the Company held purchased option
contracts with a notional amount of $2 billion, a net asset value of $69 million
and a combined net realized and unrealized deferred loss of $2 million. The risk
of loss associated with forward contracts is equal to the exchange rate
differential from the time the contract is entered into until the time it is
settled. Transactions with firm
37
<PAGE> 39
foreign currency commitments are generally hedged using foreign currency forward
contracts for periods not exceeding three months. At January 29, 1999, the
Company held forward contracts with a notional amount of $1 billion, a net
liability value of $24 million and a combined net realized and unrealized
deferred gain of $1 million. At February 1, 1998, the Company held forward
contracts with a notional amount of $800 million, a net asset value of $26
million and a net realized and unrealized deferred gain of $10 million.
LONG-TERM DEBT AND INTEREST RATE RISK MANAGEMENT
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 6.08% and 6.44%, respectively, for fiscal year 1999.
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.
During fiscal year 1997, the Company repurchased $95 million of its outstanding
$100 million 11% senior notes due August 15, 2000. As a result of the
repurchase, the Company recorded an extraordinary loss of $13 million (net of
tax benefit of $7 million).
The difference between the Company's carrying amounts and fair value of its
long-term debt and related interest rate swaps was not material at January 29,
1999 and February 1, 1998.
NOTE 3 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
JANUARY 29, FEBRUARY 1, FEBRUARY 2,
1999 1998 1997
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Domestic................................................ $567 $362 $252
Foreign................................................. 86 41 34
Deferred.................................................. (29) 21 (70)
---- ---- ----
Provision for income taxes................................ $624 $424 $216
==== ==== ====
</TABLE>
Income before income taxes and extraordinary loss included approximately $529
million, $309 million and $191 million related to foreign operations in fiscal
years 1999, 1998 and 1997, respectively.
38
<PAGE> 40
The Company has not recorded a deferred income tax liability of approximately
$263 million for additional taxes that would result from the distribution of
certain earnings of its foreign subsidiaries, if they were repatriated. The
Company currently intends to reinvest indefinitely these undistributed earnings
of its foreign subsidiaries.
The components of the Company's net deferred tax asset (included in other
current assets) are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 29, FEBRUARY 1, FEBRUARY 2,
1999 1998 1997
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Deferred service contract revenue....................... $118 $124 $107
Inventory and warranty provisions....................... 45 24 21
Provisions for product returns and doubtful accounts.... 25 20 31
Other................................................... (51) (62) (26)
---- ---- ----
Net deferred tax asset.................................. $137 $106 $133
==== ==== ====
</TABLE>
The effective tax rate differed from statutory U.S. federal income tax rate as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 29, FEBRUARY 1, FEBRUARY 2,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory rate............................. 35.0% 35.0% 35.0%
Foreign income taxed at different rates................. (7.0)% (4.6)% (6.2)%
Other................................................... 2.0% 0.6% 0.2%
---- ---- ----
Effective tax rates..................................... 30.0% 31.0% 29.0%
==== ==== ====
</TABLE>
NOTE 4 -- FINANCING ARRANGEMENTS
The Company maintains a $250 million revolving credit facility, which expires in
June 2002. At February 1, 1998, the Company had a $150 million receivables
securitization facility. The receivables securitization facility was cancelled
during fiscal year 1999. Commitment fees for both facilities are payable
quarterly and are based on specific liquidity requirements. Commitment fees paid
in fiscal years 1999, 1998 and 1997 were not material to the Company. At January
29, 1999 and February 1, 1998, these facilities were unused.
NOTE 5 -- PREFERRED STOCK
Authorized Shares -- The Company has the authority to issue five million shares
of preferred stock, par value $.01 per share. At January 29, 1999 and February
1, 1998, no shares of preferred stock were issued or outstanding.
Series A Junior Participating Preferred Stock -- In conjunction with the
distribution of Preferred Share Purchase Rights (see Note 8 -- Preferred Share
Purchase Rights), the Company's Board of Directors designated 200,000 shares of
preferred stock as Series A Junior Participating Preferred Stock ("Junior
Preferred Stock") and reserved such shares for issuance upon exercise of the
Preferred Share Purchase Rights. At January 29, 1999 and February 1, 1998, no
shares of Junior Preferred Stock were issued or outstanding.
39
<PAGE> 41
NOTE 6 -- COMMON STOCK
Authorized Shares -- 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.
Stock Splits -- On each of March 6, 1998, September 4, 1998 and March 5, 1999,
the Company effected a two-for-one common stock split by paying a 100% stock
dividend to stockholders of record as of February 27, 1998, August 28, 1998 and
February 26, 1999, respectively. All share and per share information included in
the accompanying consolidated financial statements and related notes have been
restated to reflect these stock splits.
Stock Repurchase Program -- The Board of Directors has authorized the Company to
repurchase up to one billion shares of its common stock in open market or
private transactions. During fiscal years 1999 and 1998, the Company repurchased
149 million and 278 million shares of its common stock, respectively, for an
aggregate cost of $1.5 billion and $1.0 billion, respectively. The Company
utilizes equity instrument contracts to facilitate its repurchase of common
stock. At January 29, 1999 and February 1, 1998, the Company held equity
instrument contracts that relate to the purchase of 49 million and 200 million
shares of common stock, respectively, at an average cost of $14 and $11 per
share, respectively. Additionally, at January 29, 1999 and February 1, 1998, the
Company had outstanding put obligations covering 33 million and 218 million
shares, respectively, at an average exercise price of $11 and $10, respectively.
The equity instruments are exercisable only at date of expiration, with the
expiration dates ranging from the first quarter of fiscal year 2000 through the
fourth quarter of fiscal year 2000. The outstanding put obligations at January
29, 1999 and February 1, 1998 permitted net-share settlement at the Company's
option and, therefore, did not result in a put obligation liability on the
accompanying consolidated statement of financial position. The equity
instruments did not have a material effect on diluted earnings per common share
for fiscal years 1999 and 1998.
NOTE 7 -- BENEFIT PLANS
Incentive and Employee Stock Purchase Plans -- The Dell Computer Corporation
Incentive Plan (the "Incentive Plan"), which is administered by the Compensation
Committee of the Board of Directors, provides for the granting of incentive
awards in the form of stock options, stock appreciation rights ("SARs"),
restricted stock, stock and cash to directors, executive officers and key
employees of the Company and its subsidiaries, and certain other persons who
provide consulting or advisory services to the Company.
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 agreements typically vest
pro-rata at each option anniversary date over a five-year period. Stock options
must be exercised within 10 years from date of grant. Stock options are
generally issued at fair market value. Under the Incentive Plan, each
nonemployee director of the Company automatically receives nonqualified stock
options annually.
40
<PAGE> 42
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------
JANUARY 29, 1999 FEBRUARY 1, 1998 FEBRUARY 2, 1997
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
(SHARE DATA IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 439 $ 2.25 451 $ 0.97 374 $ 0.53
Granted............................ 60 19.94 86 6.80 171 1.65
Canceled........................... (26) 2.63 (19) 1.55 (27) 0.59
Exercised.......................... (110) 1.29 (79) 0.76 (67) 0.38
---- --- ---
Outstanding at end of year......... 363 5.40 439 2.25 451 0.97
==== === ===
Exercisable at year-end.......... 103 2.27 98 0.84 75 0.45
</TABLE>
The following is additional information relating to options outstanding as of
January 29, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OF EXERCISE CONTRACTUAL OF EXERCISE
EXERCISE PRICE RANGE SHARES PRICE LIFE (YEARS) SHARES PRICE
- -------------------- ------ -------- ------------ ------- ---------
(SHARE DATA IN MILLIONS)
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 0.99............................ 127 $ 0.60 5.76 53 $ 0.59
1.00 - 2.49............................ 94 1.50 7.24 23 1.51
2.50 - 4.99............................ 41 3.62 7.86 17 3.57
5.00 - 12.49............................ 49 9.05 8.31 7 9.34
12.50 - 41.55............................ 52 22.07 9.27 3 15.36
--- ---
363 103
=== ===
</TABLE>
During fiscal years 1999, 1998 and 1997, the Company granted one million shares,
two million shares and 10 million shares, respectively, of restricted stock. For
substantially all restricted stock grants, at the date of grant, the recipient
has all rights of a stockholder, subject to certain restrictions on
transferability and a risk of forfeiture. Restricted shares typically vest over
a seven-year period beginning on the date of grant. The Company records unearned
compensation equal to the market value of the restricted shares on the date of
grant and charges the unearned compensation to expense over the vesting period.
There were 162 million, 40 million and 116 million shares of common stock
available for future grants under the Incentive Plan at January 29, 1999,
February 1, 1998 and February 2, 1997, respectively.
The Company also has an employee stock purchase plan that qualifies under
Section 423 of the Internal Revenue Code and permits substantially all employees
to purchase shares of common stock. Participating employees may purchase common
stock through payroll deductions at the end of each participation period at a
purchase price equal to 85% of the lower of the fair market value of the common
stock at the beginning or the end of the participation period. Common stock
reserved for future employee purchases under the plan aggregated 47 million
shares at January 29, 1999, 52 million shares at February 1, 1998 and 62 million
shares at February 2, 1997. Common stock issued under this plan totaled five
million shares in fiscal year 1999, nine million shares in fiscal year 1998 and
13 million shares in fiscal year 1997.
The weighted average fair value of stock options at date of grant was $11.77,
$4.06, and $0.93 per option for options granted during fiscal years 1999, 1998,
and 1997, respectively. Additionally, the weighted average fair value of the
purchase rights under the employee stock purchase plan granted
41
<PAGE> 43
in fiscal years 1999, 1998, and 1997 was $2.51, $1.53, and $0.51 per right,
respectively. The weighted average fair value of options and purchase rights
under the employee stock purchase plan was determined based on the Black-Scholes
model, utilizing the following assumptions:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------
JANUARY 29, 1999 FEBRUARY 1, 1998 FEBRUARY 2, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Expected term:
Stock options............................ 5 years 5 years 5 years
Employee stock purchase plan............. 6 months 6 months 6 months
Interest rate.............................. 5.42% 6.28% 6.40%
Volatility................................. 52.12% 54.92% 56.54%
Dividends.................................. 0% 0% 0%
</TABLE>
Had the Company accounted for its incentive plan and employee stock purchase
plan by recording compensation expense based on the fair value at the grant date
on a straight-line basis over the vesting period, stock-based compensation costs
would have reduced pretax income by $194 million ($136 million, net of taxes),
$100 million ($69 million, net of taxes) and $22 million ($16 million, net of
taxes) in fiscal years 1999, 1998 and 1997, respectively. The pro forma effect
on diluted earnings per common share would have been a reduction of $0.05, $0.02
and $0.01 for fiscal years 1999, 1998 and 1997, respectively. The pro forma
effect on basic earnings per common share would have been a reduction of $0.05,
$0.03 and $0.01 for fiscal years 1999, 1998 and 1997, respectively.
401(k) Plan -- The Company has a defined contribution retirement plan that
complies with Section 401(k) of the Internal Revenue Code. Substantially all
employees in the U.S. are eligible to participate in the plan. The Company
matches 100% of each participant's voluntary contributions, subject to a maximum
Company contribution of 3% of the participant's compensation. The Company's
contributions during fiscal years 1999, 1998 and 1997 were $21 million, $20
million and $13 million, respectively.
NOTE 8 -- PREFERRED SHARE PURCHASE RIGHTS
On November 29, 1995, the Board of Directors declared a dividend of one
Preferred Share Purchase Right (a "Right") for each outstanding share of common
stock. The distribution of the Rights was made on December 13, 1995, to the
stockholders of record on that date. Each Right entitles the holder to purchase
one thirty-two thousandth of a share of Junior Preferred Stock at an exercise
price of $225 per one-thousandth of a share.
If a person or group acquires 15% or more of the outstanding common stock, each
Right will entitle the holder (other than such person or any member of such
group) to purchase, at the Right's then current exercise price, the number of
shares of common stock having a market value of twice the exercise price of the
Right. If exercisable, the Rights contain provisions relating to merger or other
business combinations. In certain circumstances, the Board of Directors may, at
its option, exchange part or all of the Rights (other than Rights held by the
acquiring person or group) for shares of common stock at an exchange rate of one
share of common stock for each Right.
The Company will be entitled to redeem the Rights at $.001 per Right at any time
before a 15% or greater position has been acquired by any person or group.
Additionally, the Company may lower the 15% threshold to not less than the
greater of (a) any percentage greater than the largest percentage of common
stock known by the Company to be owned by any person (other than Michael S.
Dell) or (b) 10%. The Rights expire on November 29, 2005.
Neither the ownership nor the further acquisition of common stock by Michael S.
Dell will cause the Rights to become exercisable or nonredeemable or will
trigger the other features of the Rights.
42
<PAGE> 44
NOTE 9 -- COMMITMENTS, CONTINGENCIES AND CERTAIN CONCENTRATIONS
Lease Commitments -- The Company maintains master lease facilities providing the
capacity to fund up to $820 million. The combined facilities provide for the
ability of the Company to lease certain real property, buildings and equipment
(collectively referred to as the "Properties") to be constructed or acquired.
Rent obligations for the Properties commence on various dates. At January 29,
1999, $222 million of the combined facilities had been utilized.
The leases have initial terms of five years with an option to renew for two
successive years, subject to certain conditions. The Company may, at its option,
purchase the Properties during or at the end of the lease term for 100% of the
then outstanding amounts expended by the lessor to complete the Properties. If
the Company does not exercise the purchase option, the Company will guarantee a
residual value of the Properties as determined by the agreement (approximately
$189 million and $36 million at January 29, 1999 and February 1, 1998,
respectively).
The Company leases other 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 lease payments under all non-cancelable leases as of January 29,
1999 are as follows: $31 million in 2000; $27 million in 2001; $18 million in
2002; $14 million in 2003; $11 million in 2004; and $324 million thereafter.
Rent expense under all of the Company's leases totaled $58 million, $36 million
and $33 million for fiscal years 1999, 1998 and 1997, respectively.
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.
Certain Concentrations -- All of the Company's foreign currency exchange and
interest rate derivative instruments involve elements of market and credit risk
in excess of the amounts recognized in the accompanying consolidated financial
statements. The counterparties to the 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 counterparties to these
financial instruments. The Company does not anticipate nonperformance by any of
the counterparties.
The Company's marketable securities are placed with high quality financial
institutions and companies. The Company currently invests primarily in debt
securities that have maturities of less than three years. Management believes
that no significant concentration of credit risk for marketable securities
exists for the Company.
The Company markets and sales its products and services to large corporate,
government, medical and education customers, small-to-medium businesses and
individuals. Its receivables from such parties are well diversified.
The Company purchases a number of components from single sources. In some cases,
alternative sources of supply are not available. In other cases, the Company may
establish a working relationship with a single source, even when multiple
suppliers are available, if the Company believes it is advantageous to do so due
to performance, quality, support, delivery, capacity or price considerations. If
the supply of a critical single-source material or component were delayed or
curtailed, the Company's ability to ship the related product in desired
quantities and in a timely manner could be adversely affected. Even where
alternative sources of supply are available, qualification of the alternative
suppliers and establishment of reliable supplies could result in delays and a
possible loss of sales, which could affect operating results adversely.
43
<PAGE> 45
NOTE 10 -- RELATED PARTY TRANSACTIONS
During fiscal year 1998, the Company and Newcourt Credit Group Inc. ("Newcourt")
formed a joint venture, Dell Financial Services L.P. ("DFS"), to provide leasing
and other financial services to the Company's customers. The Company has a 70%
equity interest in DFS; however, as the Company does not exercise control over
DFS, it accounts for the investment under the equity method. During fiscal year
1999, DFS originated financing arrangements for the Company's customers totaling
$895 million. The Company's investment in DFS at January 29, 1999 and February
1, 1998, was not material to the Company's financial position or results of
operations.
NOTE 11 -- SEGMENT INFORMATION
As described in Note 1, the Company adopted SFAS No. 131 in fiscal year 1999.
The Company has three reportable business segments: the Americas, Europe and
Asia-Pacific and Japan regions.
The Company conducts operations worldwide and is managed on a geographic basis,
with those geographic segments being the Americas, Europe and Asia-Pacific and
Japan regions. The Americas segment, which is based in Round Rock, Texas, covers
the U.S., Canada and Latin America. The European segment, which is based in
Bracknell, England, covers the European countries and also some countries in the
Middle East and Africa. The Asia-Pacific/Japan segment covers the Pacific Rim,
including Japan, Australia and New Zealand, and is based in Hong Kong (for areas
other than Japan) and Kawasaki, Japan (for Japan). The Company's operations are
primarily concentrated in the North America, Europe and Asia-Pacific and Japan
regions.
The accounting policies of the geographic segments are the same as those
described in the summary of significant accounting policies. The Company
allocates resources to and evaluates performance of its geographic segments
based on operating income. Transfers between geographic areas are recorded using
internal transfer prices set by the Company.
The table below presents information about the Company's reportable segments:
<TABLE>
<CAPTION>
FISCAL YEAR 1999
--------------------------------------------------------------
ASIA PACIFIC
AMERICAS EUROPE AND JAPAN ELIMINATIONS CONSOLIDATED
-------- ------ ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenue from unaffiliated customers..... $12,420 $4,674 $1,149 $ -- $18,243
Transfers between geographic segments....... 33 5 1 (39) --
------- ------ ------ ---- -------
Total net revenue.................. $12,453 $4,679 $1,150 $(39) $18,243
======= ====== ====== ==== =======
Operating income............................ $ 1,802 $ 446 $ 78 $ -- $ 2,326
======= ====== ====== ====
Corporate expenses.......................... (280)
-------
Total operating income............. $ 2,046
=======
Depreciation and amortization............... $ 59 $ 29 $ 8 $ -- $ 96
======= ====== ====== ====
Corporate depreciation and amortization..... 7
-------
Total depreciation and
amortization..................... $ 103
=======
Identifiable assets......................... $ 1,640 $1,017 $ 234 $ -- $ 2,891
======= ====== ====== ====
General corporate assets.................... 3,986
-------
Total assets....................... $ 6,877
=======
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
FISCAL YEAR 1998
--------------------------------------------------------------
ASIA PACIFIC
AMERICAS EUROPE AND JAPAN ELIMINATIONS CONSOLIDATED
-------- ------ ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenue from unaffiliated customers..... $8,531 $2,956 $840 $ -- $12,327
Transfers between geographic segments....... 67 17 -- (84) --
------ ------ ---- ---- -------
Total net revenue.................. $8,598 $2,973 $840 $(84) $12,327
====== ====== ==== ==== =======
Operating income............................ $1,152 $ 255 $ 33 $ -- $ 1,440
====== ====== ==== ====
Corporate expenses.......................... (124)
-------
Total operating income............. $ 1,316
=======
Depreciation and amortization............... $ 42 $ 16 $ 5 $ -- $ 63
====== ====== ==== ====
Corporate depreciation and amortization..... 4
-------
Total depreciation and
amortization..................... $ 67
=======
Identifiable assets......................... $1,363 $ 605 $172 $ -- $ 2,140
====== ====== ==== ====
General corporate assets.................... 2,128
-------
Total assets....................... $ 4,268
=======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1997
--------------------------------------------------------------
ASIA PACIFIC
AMERICAS EUROPE AND JAPAN ELIMINATIONS CONSOLIDATED
-------- ------ ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenue from unaffiliated customers..... $5,279 $2,004 $476 $ -- $ 7,759
Transfers between geographic segments....... 50 32 -- (82) --
------ ------ ---- ---- -------
Total net revenue.................. $5,329 $2,036 $476 $(82) $ 7,759
====== ====== ==== ==== =======
Operating income (loss)..................... $ 609 $ 193 $ (6) $ -- $ 796
====== ====== ==== ====
Corporate expenses.......................... (82)
-------
Total operating income............. $ 714
=======
Depreciation and amortization............... $ 31 $ 11 $ 3 $ -- $ 45
====== ====== ==== ====
Corporate depreciation and amortization..... 2
-------
Total depreciation and
amortization..................... $ 47
=======
Identifiable assets......................... $ 903 $ 390 $125 $ -- $ 1,418
====== ====== ==== ====
General corporate assets.................... 1,575
-------
Total assets....................... $ 2,993
=======
</TABLE>
The following is net revenues and long-lived asset information for geographic
areas:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 29, 1999 FEBRUARY 1, 1998 FEBRUARY 2, 1997
---------------- ---------------- ----------------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenues
U.S........................................ $11,668 $ 7,987 $4,957
Other foreign countries.................... 6,575 4,340 2,802
------- ------- ------
Total net revenues................. $18,243 $12,327 $7,759
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 29, 1999 FEBRUARY 1, 1998 FEBRUARY 2, 1997
---------------- ---------------- ----------------
(IN MILLIONS)
<S> <C> <C> <C>
Long-lived assets
U.S........................................ $ 348 $ 258 $ 175
Other foreign countries.................... 175 84 60
------- ------- ------
Total long-lived assets............ $ 523 $ 342 $ 235
======= ======= ======
</TABLE>
45
<PAGE> 47
Foreign net revenue is based on the location of the customers. Net revenue and
long-lived assets from no single foreign country was material to the Company's
consolidated net revenues and long-lived assets for fiscal years 1999, 1998 and
1997.
The following is net revenues by product groups:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 29, 1999 FEBRUARY 1, 1998 FEBRUARY 2, 1997
---------------- ---------------- ----------------
(IN MILLIONS)
<S> <C> <C> <C>
Desktop computer systems..................... $10,979 $ 8,022 $5,441
Notebook computers........................... 3,859 2,210 1,271
Enterprise systems........................... 2,193 1,028 289
Other........................................ 1,212 1,067 758
------- ------- ------
Totals............................. $18,243 $12,327 $7,759
======= ======= ======
</TABLE>
No single customer accounted for more than 10% of the Company's consolidated net
revenues during fiscal years 1999, 1998 and 1997.
NOTE 12 -- SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
JANUARY 29, FEBRUARY 1,
1999 1998
----------- -----------
(IN MILLIONS)
<S> <C> <C>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF FINANCIAL POSITION
INFORMATION
Accounts receivable:
Gross accounts receivable................................. $2,124 $1,514
Allowance for doubtful accounts........................... (30) (28)
------ ------
$2,094 $1,486
====== ======
Inventories:
Production materials...................................... $ 234 $ 189
Work-in-process and finished goods........................ 39 44
------ ------
$ 273 $ 233
====== ======
Other current assets:
Income tax receivable..................................... $ 387 $ --
Other..................................................... 404 349
------ ------
$ 791 $ 349
====== ======
Property, plant and equipment:
Land and buildings........................................ $ 172 $ 137
Computer equipment........................................ 205 135
Machinery and other equipment............................. 252 171
Leasehold improvements.................................... 146 66
------ ------
Total property, plant and equipment....................... 775 509
Accumulated depreciation and amortization................. (252) (167)
------ ------
$ 523 $ 342
====== ======
Accrued and other current liabilities:
Accrued compensation...................................... $ 355 $ 236
Deferred revenue on warranty contracts.................... 204 193
Other..................................................... 739 625
------ ------
$1,298 $1,054
====== ======
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
JANUARY 29, FEBRUARY 1,
1999 1998
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Other noncurrent liabilities:
Deferred revenue on warranty contracts.................... $ 237 $ 225
Other..................................................... 112 36
------ ------
$ 349 $ 261
====== ======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
JANUARY 29, FEBRUARY 1, FEBRUARY 2,
1999 1998 1997
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME INFORMATION
Research, development and engineering expenses:
Research and development expenses....................... $ 209 $ 145 $ 88
Engineering expenses.................................... 63 59 38
----- ----- -----
$ 272 $ 204 $ 126
===== ===== =====
Financing and other:
Interest expense........................................ $ (26) $ (3) $ (7)
Investment and other income, net........................ 64 55 40
----- ----- -----
$ 38 $ 52 $ 33
===== ===== =====
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
INFORMATION
Changes in operating working capital accounts:
Accounts receivable, net................................ $(598) $(638) $(200)
Inventories............................................. (41) 16 177
Accounts payable........................................ 743 638 581
Accrued and other liabilities........................... 255 644 141
Other, net.............................................. 8 (295) (77)
----- ----- -----
$ 367 $ 365 $ 622
===== ===== =====
Supplemental cash flow information:
Income taxes paid....................................... $ 138 $ 180 $ 178
Interest paid........................................... 19 3 12
</TABLE>
47
<PAGE> 49
NOTE 13 -- UNAUDITED QUARTERLY RESULTS
The following tables contain selected unaudited consolidated statement of income
and stock sales price data for each quarter of fiscal years 1999 and 1998.
<TABLE>
<CAPTION>
FISCAL YEAR 1999
-------------------------------------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue............................................. $5,173 $4,818 $4,331 $3,920
Gross margin............................................ 1,161 1,086 985 873
Net income.............................................. 425 384 346 305
Earnings per common share(a)(b):
Basic................................................. $ 0.17 $ 0.15 $ 0.14 $ 0.12
Diluted............................................... $ 0.15 $ 0.14 $ 0.12 $ 0.11
Number of weighted average shares outstanding(b):
Basic................................................. 2,527 2,527 2,529 2,547
Diluted............................................... 2,749 2,762 2,785 2,799
Stock sales prices per share(b):
High.................................................. $50.19 $34.63 $29.56 $21.06
Low................................................... 29.78 20.38 19.31 12.61
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998
-------------------------------------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue............................................. $3,737 $3,188 $2,814 $2,588
Gross margin............................................ 822 718 624 558
Net income.............................................. 285 248 214 198
Earnings per common share(a)(b):
Basic................................................. $ 0.11 $ 0.09 $ 0.08 $ 0.07
Diluted............................................... $ 0.10 $ 0.09 $ 0.07 $ 0.07
Number of weighted average shares outstanding(b):
Basic................................................. 2,564 2,613 2,652 2,699
Diluted............................................... 2,823 2,884 2,915 2,937
Stock sales prices per share(b):
High.................................................. $12.63 $12.98 $10.84 $ 5.75
Low................................................... 8.75 9.13 5.53 3.74
</TABLE>
- ---------------
(a) Earnings per common share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly per common share
information may not equal the annual earnings per common share.
(b) All share, per share and stock sales price information has been
retroactively restated to reflect the two-for-one splits of common stock.
See Note 6 -- Common Stock.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
<PAGE> 50
PART III
The information called for by Part III of Form 10-K (consisting of Item
10 -- Directors and Executive Officers of the Registrant, Item 11 -- Executive
Compensation, Item 12 -- Security Ownership of Certain Beneficial Owners and
Management and Item 13 -- Certain Relationships and Transactions), to the extent
not set forth herein under "Item 1 -- Business -- Executive Officers of the
Company," is incorporated by reference from the Company's definitive proxy
statement, which will be filed with the Securities and Exchange Commission
within 120 days after the end of the fiscal year to which this Report relates.
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following financial statements are filed as a part of this Report under
"Item 8 -- Financial Statements and Supplementary Data":
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 29
Consolidated Statement of Financial Position at January 29,
1999 and February 1, 1998................................. 30
Consolidated Statement of Income for the three fiscal years
ended January 29, 1999.................................... 31
Consolidated Statement of Cash Flows for the three fiscal
years ended January 29, 1999.............................. 32
Consolidated Statement of Stockholders' Equity for the three
fiscal years ended January 29, 1999....................... 33
Notes to Consolidated Financial Statements.................. 34
</TABLE>
FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as a part of this Report
under "Schedule II" immediately preceding the signature page: Schedule II
-- Valuation and Qualifying Accounts for the three fiscal years ended January
29, 1999. All other schedules called for by Form 10-K are omitted because they
are inapplicable or the required information is shown in the financial
statements, or notes thereto, included herein.
EXHIBITS
The following exhibits are filed as a part of this Report, with each exhibit
that consists of or includes a management contract or compensatory plan or
arrangement being identified with an "*":
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1 -- Certificate of Incorporation, dated October 21, 1987 and
filed October 22, 1987 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended July 30, 1995,
Commission File No. 0-17017)
3.2 -- Certificate of Amendment to the Certificate of
Incorporation, dated May 6, 1988 and filed May 9, 1988
(incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
</TABLE>
49
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.3 -- Certificate of Amendment to the Certificate of
Incorporation, dated June 19, 1991 and filed June 21,
1991 (incorporated by reference to Exhibit 3.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.4 -- Certificate of Amendment to the Certificate of
Incorporation, dated June 19, 1992 and filed July 10,
1992 (incorporated by reference to Exhibit 3.4 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.5 -- Certificate of Designation of Series A Convertible
Preferred Stock, dated August 24, 1993 and filed August
25, 1993 (incorporated by reference to Exhibit 3.5 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.6 -- Certificate of Correction Filed to Correct Certain Errors
in the Certificate of Amendment of Certificate of
Incorporation Filed in the Office of the Secretary of
State of Delaware on May 9, 1988, and in the Certificate
of Amendment of Certificate of Incorporation Filed in the
Office of the Secretary of State of Delaware on July 10,
1992, dated April 27, 1994 and filed May 5, 1994
(incorporated by reference to Exhibit 3.6 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.7 -- Certificate of Amendment to Certificate of Incorporation,
dated July 31, 1995 and filed August 3, 1995
(incorporated by reference to Exhibit 3.7 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.8 -- Certificate of Designations of Series A Junior
Participating Preferred Stock, dated November 29, 1995
and filed December 4, 1995 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended October 29, 1995,
Commission File No. 0-17017)
3.9 -- Certificate of Amendment to Certificate of Incorporation,
dated and filed July 18, 1997 (incorporated by reference
to Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended August 3, 1997,
Commission File No. 0-17017)
3.10 -- Certificate of Amendment to Certificate of Incorporation,
dated and filed August 12, 1998 (incorporated by
reference to Exhibit 4 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 12,
1998, Commission File No. 0-17017)
3.11 -- Restated Bylaws, as adopted on November 29, 1995
(incorporated by reference to Exhibit 3.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 29, 1995, Commission File No.
0-17017)
4.1 -- Rights Agreement, dated as of November 29, 1995
(incorporated by reference to Exhibit 4 to the Company's
Quarterly Report on Form 8-K, dated November 29, 1995,
and filed with the Securities and Exchange Commission on
November 30, 1995)
4.2 -- Indenture, dated as of April 27, 1998, between Dell
Computer Corporation and Chase Bank of Texas, National
Association (incorporated by reference to Exhibit 99.2 of
the Company's Current Report on Form 8-K filed April 28,
1998, Commission File No. 0-17017)
</TABLE>
50
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.3 -- Officers' Certificate pursuant to Section 301 of the
Indenture establishing the terms of the Company's 6.55%
Senior Notes Due 2008 (incorporated by reference to
Exhibit 99.3 of the Company's Current Report on Form 8-K
filed April 28, 1998, Commission File No. 0-17017)
4.4 -- Officers' Certificate pursuant to Section 301 of the
Indenture establishing the terms of the Company's 7.10%
Senior Debentures Due 2028 (incorporated by reference to
Exhibit 99.3 of the Company's Current Report on Form 8-K
filed April 28, 1998, Commission File No. 0-17017)
4.5 -- Form of the Company's 6.55% Senior Notes Due 2008
(incorporated by reference to Exhibit 99.5 of the
Company's Current Report on Form 8-K filed April 28,
1998, Commission File No. 0-17017)
4.6 -- Form of the Company's 7.10% Senior Debentures Due 2028
(incorporated by reference to Exhibit 99.6 of the
Company's Current Report on Form 8-K filed April 28,
1998, Commission File No. 0-17017)
10.1* -- Dell Computer Corporation 1986 Incentive Stock Option
Plan, as amended (incorporated by reference to Exhibit 4c
to the Company's Registration Statement on Form S-8,
Registration No. 33-24621)
10.2* -- Dell Computer Corporation 1987 Incentive Stock Option
Plan, as amended (incorporated by reference to Exhibit 4d
to the Company's Registration Statement on Form S-8,
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 to the Company's Registration
Statement on Form S-8, Registration No. 33-24621)
10.4* -- Dell Computer Corporation 1989 Stock Option Plan, as
amended and restated (incorporated by reference to
Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1993, Commission
File No. 0-17017)
10.5* -- Dell Computer Corporation 1993 Stock Option Plan
(incorporated by reference to Exhibit 10.36 to the
Company's Registration Statement on Form S-4,
Registration No. 33-69680)
10.6* -- Dell Computer Corporation Incentive Plan (incorporated by
reference to Exhibit 4.6 to the Company's Registration
Statement on Form S-8, Registration No. 33-54577)
10.7* -- First Amendment to Dell Computer Corporation Incentive
Plan, dated as of July 21, 1995 (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 30,
1995, Commission File No. 0-17071)
10.8* -- Second Amendment to Dell Computer Corporation Incentive
Plan, dated as of November 29, 1995 (incorporated by
reference to Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 28, 1996,
Commission File No. 0-17017)
10.9* -- Third Amendment to Dell Computer Corporation Incentive
Plan, dated as of July 18, 1997 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 3, 1997,
Commission File No. 0-17017)
10.10* -- Fourth Amendment to Dell Computer Corporation Incentive
Plan, dated as of September 12, 1997 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended November 2,
1997, Commission File No. 0-17017)
</TABLE>
51
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.11* -- Fifth Amendment to Dell Computer Corporation Incentive
Plan, dated as of November 21, 1997 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-K for the fiscal year ended February 1, 1998,
Commission File No. 0-17017)
10.12* -- Dell Computer Corporation Deferred Compensation Plan
(incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year
ended February 3, 1991, Commission File No. 0-17017)
10.13* -- Amendment to Deferred Compensation Plan, adopted on
August 25, 1995 (incorporated by reference to Exhibit
10.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 28, 1996, Commission File No.
0-17017)
10.14*+ -- Executive Incentive Bonus Plan, adopted July 17, 1998
10.15* -- Amended and Restated Dell Computer Corporation 1998 Broad
Based Stock Option Plan, effective October 30, 1998
(incorporated by reference to Exhibit 99 to the Company's
report on Form 10-Q for the fiscal quarter ended November
1, 1998, Commission File No. 0-17017)
21+ -- Subsidiaries of the Company
23+ -- Consent of PricewaterhouseCoopers LLP
27+ -- Financial Data Schedule
</TABLE>
- ---------------
* Identifies Exhibit that consists of or includes a management contract or
compensatory plan or arrangement.
+ Filed herewith.
REPORTS ON FORM 8-K
On December 21, 1998, the Company filed a Current Report on Form 8-K reporting a
change in the fiscal year end of the Company under "Item 8 -- Change in Fiscal
Year." No financial statements were included in such filing.
52
<PAGE> 54
SCHEDULE II
DELL COMPUTER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO WRITE-OFFS BALANCE
FISCAL BEGINNING BAD DEBT CHARGED TO AT END OF
YEAR DESCRIPTION OF PERIOD EXPENSE ALLOWANCE PERIOD
- ------ ----------- ---------- ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1999................. Allowance for doubtful accounts $28 $13 $11 $30
1998................. Allowance for doubtful accounts $31 $10 $13 $28
1997................. Allowance for doubtful accounts $29 $12 $10 $31
</TABLE>
53
<PAGE> 55
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.
DELL COMPUTER CORPORATION
By: /s/ MICHAEL S. DELL
----------------------------------
Michael S. Dell,
Chairman of the Board,
Chief Executive Officer
and Director
Date: April 27, 1999
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>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ MICHAEL S. DELL Chairman of the Board, Chief April 27, 1999
- ----------------------------------------------------- Executive Officer (principal
Michael S. Dell executive officer) and Director
/s/ DONALD J. CARTY Director April 27, 1999
- -----------------------------------------------------
Donald J. Carty
/s/ PAUL O. HIRSCHBIEL, JR. Director April 27, 1999
- -----------------------------------------------------
Paul O. Hirschbiel, Jr.
/s/ MICHAEL H. JORDAN Director April 27, 1999
- -----------------------------------------------------
Michael H. Jordan
/s/ THOMAS W. LUCE, III Director April 27, 1999
- -----------------------------------------------------
Thomas W. Luce, III
/s/ KLAUS S. LUFT Director April 27, 1999
- -----------------------------------------------------
Klaus S. Luft
/s/ CLAUDINE B. MALONE Director April 27, 1999
- -----------------------------------------------------
Claudine B. Malone
/s/ ALEX J. MANDL Director April 27, 1999
- -----------------------------------------------------
Alex J. Mandl
/s/ MICHAEL A. MILES Director April 27, 1999
- -----------------------------------------------------
Michael A. Miles
* Director
- -----------------------------------------------------
Mary Alice Taylor
</TABLE>
54
<PAGE> 56
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ THOMAS J. MEREDITH Senior Vice President and Chief April 27, 1999
- ----------------------------------------------------- Financial Officer (principal
Thomas J. Meredith financial officer)
/s/ JAMES M. SCHNEIDER Senior Vice President -- Finance April 27, 1999
- ----------------------------------------------------- (principal accounting officer)
James M. Schneider
</TABLE>
* Ms. Taylor did not become a director of the Company until fiscal year 2000.
Accordingly, Ms. Taylor did not participate in the preparation or review of
this Report related to fiscal year 1999.
55
<PAGE> 57
EXHIBIT INDEX
The following exhibits are filed as a part of this Report, with each exhibit
that consists of or includes a management contract or compensatory plan or
arrangement being identified with an "*":
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1 -- Certificate of Incorporation, dated October 21, 1987 and
filed October 22, 1987 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended July 30, 1995,
Commission File No. 0-17017)
3.2 -- Certificate of Amendment to the Certificate of
Incorporation, dated May 6, 1988 and filed May 9, 1988
(incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.3 -- Certificate of Amendment to the Certificate of
Incorporation, dated June 19, 1991 and filed June 21,
1991 (incorporated by reference to Exhibit 3.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.4 -- Certificate of Amendment to the Certificate of
Incorporation, dated June 19, 1992 and filed July 10,
1992 (incorporated by reference to Exhibit 3.4 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.5 -- Certificate of Designation of Series A Convertible
Preferred Stock, dated August 24, 1993 and filed August
25, 1993 (incorporated by reference to Exhibit 3.5 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.6 -- Certificate of Correction Filed to Correct Certain Errors
in the Certificate of Amendment of Certificate of
Incorporation Filed in the Office of the Secretary of
State of Delaware on May 9, 1988, and in the Certificate
of Amendment of Certificate of Incorporation Filed in the
Office of the Secretary of State of Delaware on July 10,
1992, dated April 27, 1994 and filed May 5, 1994
(incorporated by reference to Exhibit 3.6 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.7 -- Certificate of Amendment to Certificate of Incorporation,
dated July 31, 1995 and filed August 3, 1995
(incorporated by reference to Exhibit 3.7 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.8 -- Certificate of Designations of Series A Junior
Participating Preferred Stock, dated November 29, 1995
and filed December 4, 1995 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended October 29, 1995,
Commission File No. 0-17017)
3.9 -- Certificate of Amendment to Certificate of Incorporation,
dated and filed July 18, 1997 (incorporated by reference
to Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended August 3, 1997,
Commission File No. 0-17017)
3.10 -- Certificate of Amendment to Certificate of Incorporation,
dated and filed August 12, 1998 (incorporated by
reference to Exhibit 4 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 12,
1998, Commission File No. 0-17017)
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.11 -- Restated Bylaws, as adopted on November 29, 1995
(incorporated by reference to Exhibit 3.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 29, 1995, Commission File No.
0-17017)
4.1 -- Rights Agreement, dated as of November 29, 1995
(incorporated by reference to Exhibit 4 to the Company's
Quarterly Report on Form 8-K, dated November 29, 1995,
and filed with the Securities and Exchange Commission on
November 30, 1995)
4.2 -- Indenture, dated as of April 27, 1998, between Dell
Computer Corporation and Chase Bank of Texas, National
Association (incorporated by reference to Exhibit 99.2 of
the Company's Current Report on Form 8-K filed April 28,
1998, Commission File No. 0-17017)
4.3 -- Officers' Certificate pursuant to Section 301 of the
Indenture establishing the terms of the Company's 6.55%
Senior Notes Due 2008 (incorporated by reference to
Exhibit 99.3 of the Company's Current Report on Form 8-K
filed April 28, 1998, Commission File No. 0-17017)
4.4 -- Officers' Certificate pursuant to Section 301 of the
Indenture establishing the terms of the Company's 7.10%
Senior Debentures Due 2028 (incorporated by reference to
Exhibit 99.3 of the Company's Current Report on Form 8-K
filed April 28, 1998, Commission File No. 0-17017)
4.5 -- Form of the Company's 6.55% Senior Notes Due 2008
(incorporated by reference to Exhibit 99.5 of the
Company's Current Report on Form 8-K filed April 28,
1998, Commission File No. 0-17017)
4.6 -- Form of the Company's 7.10% Senior Debentures Due 2028
(incorporated by reference to Exhibit 99.6 of the
Company's Current Report on Form 8-K filed April 28,
1998, Commission File No. 0-17017)
10.1* -- Dell Computer Corporation 1986 Incentive Stock Option
Plan, as amended (incorporated by reference to Exhibit 4c
to the Company's Registration Statement on Form S-8,
Registration No. 33-24621)
10.2* -- Dell Computer Corporation 1987 Incentive Stock Option
Plan, as amended (incorporated by reference to Exhibit 4d
to the Company's Registration Statement on Form S-8,
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 to the Company's Registration
Statement on Form S-8, Registration No. 33-24621)
10.4* -- Dell Computer Corporation 1989 Stock Option Plan, as
amended and restated (incorporated by reference to
Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1993, Commission
File No. 0-17017)
10.5* -- Dell Computer Corporation 1993 Stock Option Plan
(incorporated by reference to Exhibit 10.36 to the
Company's Registration Statement on Form S-4,
Registration No. 33-69680)
10.6* -- Dell Computer Corporation Incentive Plan (incorporated by
reference to Exhibit 4.6 to the Company's Registration
Statement on Form S-8, Registration No. 33-54577)
10.7* -- First Amendment to Dell Computer Corporation Incentive
Plan, dated as of July 21, 1995 (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 30,
1995, Commission File No. 0-17071)
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.8* -- Second Amendment to Dell Computer Corporation Incentive
Plan, dated as of November 29, 1995 (incorporated by
reference to Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 28, 1996,
Commission File No. 0-17017)
10.9* -- Third Amendment to Dell Computer Corporation Incentive
Plan, dated as of July 18, 1997 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 3, 1997,
Commission File No. 0-17017)
10.10* -- Fourth Amendment to Dell Computer Corporation Incentive
Plan, dated as of September 12, 1997 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended November 2,
1997, Commission File No. 0-17017)
10.11* -- Fifth Amendment to Dell Computer Corporation Incentive
Plan, dated as of November 21, 1997 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-K for the fiscal year ended February 1, 1998,
Commission File No. 0-17017)
10.12* -- Dell Computer Corporation Deferred Compensation Plan
(incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year
ended February 3, 1991, Commission File No. 0-17017)
10.13* -- Amendment to Deferred Compensation Plan, adopted on
August 25, 1995 (incorporated by reference to Exhibit
10.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 28, 1996, Commission File No.
0-17017)
10.14*+ -- Executive Incentive Bonus Plan, adopted July 17, 1998
10.15* -- Amended and Restated Dell Computer Corporation 1998 Broad
Based Stock Option Plan, effective October 30, 1998
(incorporated by reference to Exhibit 99 to the Company's
report on Form 10-Q for the fiscal quarter ended November
1, 1998, Commission File No. 0-17017)
21+ -- Subsidiaries of the Company
23+ -- Consent of PricewaterhouseCoopers LLP
27+ -- Financial Data Schedule
</TABLE>
- ---------------
* Identifies Exhibit that consists of or includes a management contract or
compensatory plan or arrangement.
+ Filed herewith.
<PAGE> 1
EXHIBIT 10.14
DELL COMPUTER CORPORATION
EXECUTIVE INCENTIVE BONUS PLAN
Dell Computer Corporation, a Delaware corporation (the "Company") adopts this
Executive Incentive Bonus Plan (the "Plan") for the purpose enhancing the
Company's ability to attract and retain highly qualified executives and to
provide additional financial incentives to such executives to promote the
success of the Company and its subsidiaries.
Remuneration payable under the Plan is intended to constitute "qualified
performance-based compensation" for purposes of Section 162(m) of the Internal
Revenue Code of 1986, as amended, and Section 1.162-27 of the Treasury
Regulations promulgated thereunder, and the Plan shall be construed consistently
with such intention. The "performance goal" necessary for the payment of
remuneration under the Plan will be the achievement of positive Consolidated Net
Income (as defined below).
1. Definitions. As used herein, the following terms shall have the respective
meanings indicated:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended,
or the corresponding provisions of any subsequent federal internal revenue
law.
(c) "Committee" shall mean the Compensation Committee of the Board or
such other committee appointed by the Board to administer the Plan;
provided, however, that in any event the Committee shall be comprised of
not less than two directors of the Company, each of whom shall qualify in
all respects as an "outside director" for purposes of Section 162(m) of the
Code and Section 1.162-27(e)(3) of the Regulations.
(d) "Company" shall mean Dell Computer Corporation, a Delaware
corporation.
(e) "Consolidated Net Income" shall mean, for any Fiscal Quarter or
Fiscal Year, the net income before extraordinary items reported in the
Company's quarterly or annual consolidated statement of income included in
the applicable Quarterly Report on Form 10-Q (in the case of a Fiscal
Quarter) or Annual Report on Form 10-K (in the case of a Fiscal Year), as
filed with the Securities Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
(f) "Eligible Executive" shall mean the Company's Chief Executive
Officer and each other executive officer of the Company that the Committee
determines, in its discretion, is or may be a "covered employee" of the
Company within the meaning Section 162(m) of the Code and Section
1.162-27(c)(2) of the Regulations.
(g) "Incentive Bonus" shall mean, for each Eligible Executive, an
annual bonus opportunity amount determined by the Committee pursuant to
Section 3 below.
(h) "Regulations" shall mean the Treasury Regulations promulgated
under the Code, as amended from time to time.
2. Administration of the Plan. The Plan shall be administered by the Committee,
which shall have full power and authority to construe, interpret and administer
the Plan and shall have the exclusive right to establish, adjust, pay or decline
to pay the Incentive Bonus for each Eligible Executive. Such power and authority
shall include the right to exercise discretion to reduce by any amount the
Incentive Bonus payable to any Eligible Executive; provided, however, that the
exercise of such discretion with respect to any Eligible Executive shall not
have the effect of increasing the Incentive Bonus that is payable to any other
Eligible Executive. All Committee actions under the Plan shall be taken in
accordance with the applicable provisions of the Company's By-laws and the
Committee's Charter.
56
<PAGE> 2
EXHIBIT 10.14
3. Eligibility. Eligibility under this Plan is limited to Eligible Executives
designated by the Committee in its sole and absolute discretion.
4. Awards.
(a) Not later than the 90th day of each fiscal year of the Company, the
Committee, in its sole and absolute discretion, shall designate one or more
Eligible Executives as participants in the Plan for such fiscal year and shall
specify the terms and conditions for the determination and payment of an
Incentive Bonus to each such Eligible Executive for such fiscal year. After the
end of such 90-day period, the Committee may designate additional Eligible
Executives so long as, within 30 days following each such additional
designation, the Committee specifies the terms and conditions for the
determination and payment of an Incentive Bonus to such additional Eligible
Executive.
(b) The Committee may condition the payment of an Incentive Bonus upon the
satisfaction of such objective or subjective standards as the Committee shall
determine to be appropriate, in its sole and absolute discretion, and shall
retain the discretion to reduce the amount of any Incentive Bonus that would
otherwise be payable to an Eligible Executive (including a reduction in such
amount to zero).
(c) The Incentive Bonus payable to an Eligible Executive with respect to any
fiscal year shall not exceed 0.5% of the Consolidated Net Income for such fiscal
year; provided, however, that the maximum Incentive Bonus payable to any
individual who becomes an Eligible Executive after the end of the 90-day period
referred to in subsection (a) of this Section shall be 0.5% of the Consolidated
Net Income for the fiscal quarters after the fiscal quarter in which such
individual became an Eligible Executive.
5. Committee Certification. As soon as reasonably practicable after the end of
each fiscal year of the Company, the Committee shall determine whether the
stated performance goal as been achieved and the amount of the Incentive Bonus
to be paid to each Eligible Executive for such fiscal year and shall certify
such determinations in writing.
6. Payment of Incentive Bonuses. Subject to any election duty and validly made
by an Eligible Executive with respect to the deferral or all or a portion of his
or her Incentive Bonus or the payment of all or a portion of his or her
Incentive Bonus in some form other than cash, Incentive Bonuses shall be paid in
cash at such times and on such terms as are determined by the Committee in its
sole and absolute discretion.
7. No Right to Bonus or Continued Employment. Neither the establishment of the
Plan, the provision for or payment of any amounts hereunder nor any action of
the Company, the Board or the Committee with respect to the Plan shall be held
or construed to confer upon any person (a) any legal right to receive, or any
interest in, an Incentive Bonus or any other benefit under the Plan or (b) any
legal right to continue to serve as an officer or employee of the Company or any
subsidiary or affiliate of the Company. The Company expressly reserves any and
all rights to discharge any Eligible Executive without incurring liability to
any person under the Plan or otherwise. Notwithstanding any other provision
hereof and notwithstanding the fact that the stated performance goal has been
achieved or the individual Incentive Bonus amounts have been determined, the
Company shall have no obligation to pay any Incentive Bonus hereunder unless the
Committee otherwise expressly provides by written contract or other written
commitment.
8. Withholding. The Company shall have the right to withhold, or require an
Eligible Executive to remit to the Company, an amount sufficient to satisfy any
applicable federal, state, local or foreign withholding tax requirements imposed
with respect to the payment of any Incentive Bonus.
9. Nontransferability. Except as expressly provided by the Committee, the rights
and benefits under the Plan are personal to an Eligible Executive and shall not
be subject to any voluntary or involuntary alienation, assignment, pledge,
transfer or other disposition.
57
<PAGE> 3
EXHIBIT 10.14
10. Unfunded Plan. The Company shall have no obligation to reserve or otherwise
fund in advance any amounts that are or may in the future become payable under
the Plan. Any funds that the Company, acting in its sole and absolute
discretion, determines to reserve for future payments under the Plan may be
commingled with other funds of the Company and need not in any way be segregated
from other assets or funds held by the Company. An Eligible Executive's rights
to payment under the Plan shall be limited to those of a general creditor of the
Company.
11. Adoption, Amendment, Suspension and Termination of the Plan.
(a) Subject to the approval of the Plan by the holders of a majority of the
Company common stock represented and voting on the proposal at the annual
meeting of Company stockholders to be held on July 17, 1998 (or any adjournment
thereof), the Plan shall be effective for the fiscal year of the Company
commencing February 2, 1998 and shall continue in effect until the fifth
anniversary of the date of such stockholder approval, unless earlier terminated
as provided below. Upon such approval of the Plan by the Company's stockholders,
all Incentive Bonuses awarded under the Plan on or after February 2, 1998 shall
be fully effective as if the stockholders had approved the Plan on or before
February 2, 1998.
(b) Subject to the limitations set forth in this subsection, the Board may at
any time suspend or terminate the Plan and may amend it from time to time in
such respects as the Board may deem advisable; provided, however, that the Board
shall not amend the Plan in any of the following respects without the approval
of stockholders then sufficient to approve the Plan in the first instance:
(1) To increase the maximum amount of Incentive Bonus that may be paid
under the Plan or otherwise materially increase the benefits accruing to
any Eligible Executive under the Plan;
(2) To materially modify the requirements as to eligibility for
participation in the Plan;
(3) To change the material terms of the stated performance goal.
(c) No Incentive Bonus may be awarded during any suspension or after termination
of the Plan, and no amendment, suspension or termination of the Plan shall,
without the consent of the person affected thereby, alter or impair any rights
or obligations under any Incentive Bonus previously awarded under the Plan.
12. Governing Law. The validity, interpretation and effect of the Plan, and the
rights of all persons hereunder, shall be governed by and determined in
accordance with the laws of the State of Delaware, other than the choice of law
rules thereof.
* * * * *
The foregoing Executive Incentive Bonus Plan was duly approved and adopted by
the Board of Directors of Dell Computer Corporation, a Delaware corporation (the
"Company), by Unanimous Written Consent dated May 28, 1998, and was duly
approved by the Company's stockholders for approval at the annual meeting of
stockholders held on July 17, 1998.
/s/ THOMAS B. GREEN
------------------------------------
Thomas B. Green,
Secretary
58
<PAGE> 1
EXHIBIT 21
<TABLE>
<S> <C>
DCC Executive Security Inc.................................. Delaware
Dell Asia Pacific Sdn....................................... Malaysia
Dell Asia Pacific SDN. Liaison Office....................... India
Dell Catalog Sales Corporation.............................. Delaware
Dell Catalog Sales L.P...................................... Texas
Dell Computadores do Brasil LTDA............................ Brazil
Dell Computer (China) Co. Ltd. (Xiamen)..................... China
Dell Computer (FZE)......................................... Dubia
Dell Computer (Italia) S.p.A................................ Italy
Dell Computer (Proprietary) Ltd............................. South Africa
Dell Computer (Thailand) Co., Ltd........................... Thailand
Dell Computer AB............................................ Sweden
Dell Computer AS............................................ Denmark
Dell Computer AS............................................ Norway
Dell Computer Asia LTD...................................... Hong Kong
Dell Computer Asia Pte. Ltd................................. Singapore
Dell Computer BV............................................ Netherlands
Dell Computer Corporation................................... Delaware
Dell Computer Corporation................................... Ontario, Canada
Dell Computer Corporation................................... South Korea
Dell Computer Corporation K.K............................... Japan
Dell Computer Corporation Limited........................... United Kingdom
Dell Computer de Argentina Corp............................. Delaware
Dell Computer de Chile Corp................................. Delaware
Dell Computer de Chile Ltda................................. Chile
Dell Computer de Colombia Corp.............................. Delaware
Dell Computer de Mexico, S.A. de C.V........................ Mexico
Dell Computer EEIG.......................................... United Kingdom
Dell Computer Ges.m.b.H .................................... Austria
Dell Computer GmbH.......................................... Germany
Dell Computer Holdings (Europe) B.V......................... Netherlands
Dell Computer Holdings (Europe) Investments, C.V............ Netherlands
Dell Computer Holdings Corporation.......................... Delaware
Dell Computer Holdings L.P.................................. Texas
Dell Computer International (II) -- Comercio de Computadores
Sociedad Unipissal LDA.................................... Madiera, Portugal
Dell Computer International Transactions LDA................ Madiera, Portugal
Dell Computer Limited....................................... Ireland
Dell Computer Limited....................................... New Zealand
Dell Computer NV............................................ Belgium
Dell Computer Poland, Sp.z.o.o.............................. Poland
Dell Computer PTY. Limited.................................. Australia
Dell Computer S.A........................................... France
Dell Computer S.A........................................... Spain
Dell Computer SA............................................ Switzerland
Dell Computer Services de Mexico de C.V..................... Mexico
Dell Computer sro........................................... Czech Republic
Dell DFS Corporation........................................ Delaware
Dell DFS/GP, Inc............................................ Delaware
Dell Direct (an Unlimited Irish company).................... Ireland
Dell Direct Sales Corporation............................... Delaware
</TABLE>
59
<PAGE> 2
<TABLE>
<S> <C>
Dell Direct Sales L.P....................................... Texas
Dell Distribution (EMEA) Limited............................ United Kingdom
Dell Eastern Europe Corporation............................. Delaware
Dell Export Sales Corporation............................... Barbados
Dell Financial Services L.P................................. Texas
Dell Foundation, Inc........................................ D.C.
Dell Funding Corporation.................................... Delaware
Dell Gen. P. Corp........................................... Delaware
Dell International Incorporated............................. Delaware
Dell Marketing Corporation.................................. Delaware
Dell Marketing L.P.......................................... Texas
Dell Products (an unlimited Irish company).................. Ireland
Dell Products (Asia) BV..................................... Netherlands
Dell Products (Europe) B.V.................................. Netherlands
Dell Products Corporation................................... Delaware
Dell Products II (an unlimited Irish company)............... Ireland
Dell Products L.P........................................... Texas
Dell Quebec Inc............................................. Quebec
Dell Receivables Gen. P. Corp............................... Delaware
Dell Receivables L.P........................................ Texas
Dell Research (an unlimited Irish company).................. Ireland
Dell USA Corporation........................................ Delaware
Dell USA L.P................................................ Texas
Dell World Trade L.P........................................ Texas
DFS/SPV L.P................................................. Texas
OY Dell Computer AB......................................... Finland
</TABLE>
60
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 33-24621, 33-54577, 33-31812, 33-63273, 333-66415
and 333-58039) of Dell Computer Corporation of our report dated February 16,
1999 appearing on page 29 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Austin, Texas
April 27, 1999
61
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DELL
COMPUTER CORPORATION FINANCIAL STATEMENTS AS OF AND FOR THE FISCAL YEAR ENDED
JANUARY 29, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-1999
<PERIOD-END> JAN-29-1999
<CASH> 520
<SECURITIES> 2,661
<RECEIVABLES> 2,124
<ALLOWANCES> 30
<INVENTORY> 273
<CURRENT-ASSETS> 6,339
<PP&E> 775
<DEPRECIATION> 252
<TOTAL-ASSETS> 6,877
<CURRENT-LIABILITIES> 3,695
<BONDS> 512
0
0
<COMMON> 1,781
<OTHER-SE> 540
<TOTAL-LIABILITY-AND-EQUITY> 6,877
<SALES> 18,243
<TOTAL-REVENUES> 18,243
<CGS> 14,137
<TOTAL-COSTS> 14,137
<OTHER-EXPENSES> 272<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> 2,084
<INCOME-TAX> 624
<INCOME-CONTINUING> 1,460
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,460
<EPS-PRIMARY> .58
<EPS-DILUTED> .53
<FN>
<F1>Item consists of research, development and engineering.
</FN>
</TABLE>
