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.
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-
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
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
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
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.
PART II
ITEM 5
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.
ITEM 6
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
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.
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.
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:
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.
Operating Expenses
The following table presents certain information regarding the Company's operating expenses during each of the last three fiscal years:
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.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents selected financial statistics and information for each of the past three fiscal years:
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."
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.
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.
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
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
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."
ITEM 8
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
All other schedules are omitted because they are not applicable.
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
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN MILLIONS)
ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME (IN MILLIONS)
The accompanying notes are an integral part of these consolidated financial statements.
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS)
The accompanying notes are an integral part of these consolidated financial statements.
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN MILLIONS)
The accompanying notes are an integral part of these consolidated financial statements.
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
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
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:
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(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.
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.
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
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:
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.
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:
The effective tax rate differed from statutory U.S. federal income tax rate as follows:
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.
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.
The following table summarizes stock option activity:
The following is additional information relating to options outstanding as of January 29, 1999:
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
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:
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.
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.
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:
The following is net revenues and long-lived asset information for geographic areas:
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:
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
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.
- --------------- (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
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information called for by Part III of Form 10-K (consisting of Item 10
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":
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 "*":
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* 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.
SCHEDULE II DELL COMPUTER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
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.
* 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.
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 "*":
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* Identifies Exhibit that consists of or includes a management contract or compensatory plan or arrangement.
+ Filed herewith.