Dell 1998 Annual Report Download - page 28

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.
JANUARY 29, FEBRUARY 1,
1999 1998
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(IN MILLIONS)
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
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Total debt securities....................................... 1,093 552
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Total marketable securities....................... $2,661 $1,524
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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
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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