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DELL INC (4331)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 10/30/2007
Filed Period 02/02/2007

Table of contents

  • Page 1
    DELL INC (4331) 10-K Annual report pursuant to section 13 and 15(d) Filed on 10/30/2007 Filed Period 02/02/2007

  • Page 2
    ... Employer Identification No.) Dell Inc. One Dell Way, Round Rock, Texas 78682 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (512) 338-4400 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 per share...

  • Page 3
    ... Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships...

  • Page 4
    ... and our internal reviews, and management's plan to remediate those deficiencies, see "Part II - Item 9A - Controls and Procedures." PART I ITEM 1 - BUSINESS General Dell listens to customers and delivers innovative technology and services they trust and value. As a leading technology company, we...

  • Page 5
    ...and software solutions tailored for their businesses and homes. • We offer customers choice. Customers can purchase systems and services from Dell via telephone, kiosks, and our website, www.dell.com, where they may review, configure, and price systems within our entire product line; order systems...

  • Page 6
    ...Financial Statements included in "Part II - Item 8 - Financial Statements and Supplementary Data." • Desktop PCs - Our customers can select from five lines of desktop computer systems. The OptiPlexTM line is designed to help business, government, and institutional customers manage their total cost...

  • Page 7
    ... print job and proactively prompting users to order replacement cartridges directly from Dell. - Displays. We offer a broad line of branded and non-branded display products, including flat panel monitors and projectors. In Fiscal 2007, we continued our leadership position in the flat panel monitor...

  • Page 8
    ... 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. We also maintain specific sales and marketing programs targeted at federal, state, and...

  • Page 9
    ...customer value. As a result of the intensely competitive environment during Fiscal 2007, as well as our decisions to de-emphasize lower priced, entry-level products, we lost 1.1 points of share during calendar 2006, finishing the year as the number two supplier of personal computer systems worldwide...

  • Page 10
    ....com's list of "Top Organizations for Multicultural Business Opportunities of 2006," which represents the top 50 Fortune 500 companies that best promote multicultural business opportunities. We have also been recognized as one of the best places to work by the Human Rights Campaign. 7

  • Page 11
    ..., which is based in Round Rock, Texas, covers the U.S., Canada, and Latin America. Within the Americas, our business is further segmented into Americas Business and U.S. Consumer. The Americas Business segment includes sales to corporate, government, healthcare, and education customers, while the...

  • Page 12
    ...Notes to Consolidated Financial Statements included in "Part II - Item 8 - Financial Statements and Supplementary Data." Our corporate headquarters are located in Round Rock, Texas. Our manufacturing and distribution facilities are located in Austin, Texas; Winston-Salem, North Carolina; Lebanon and...

  • Page 13
    ... trade protection measures, tax laws (including U.S. taxes on foreign operations), copyright levies, and foreign currency exchange rates. Any of these factors could adversely affect our operations and profitability. • Our profitability may be affected by our product, customer, and geographic sales...

  • Page 14
    ..., investors may lose confidence in our reported financial information, which could lead to a decline in our stock price, limit our ability to access the capital markets in the future, and require us to incur additional costs to improve our internal control systems and procedures. • Litigation...

  • Page 15
    ..., marketing, and staff resources we need, particularly in light of the reduction in the total number of equity shares granted to employees as part of their total compensation packages. New regulations and other factors could make it harder or more expensive for us to grant equitybased awards to...

  • Page 16
    ... rates by extending expiring leases or by finding alternative space. Americas Properties Description Principal Locations Owned (square feet) Leased (square feet) Headquarters Round Rock, Texas • Canada - Edmonton and Ottawa • El Salvador - San Salvador 2.1 million - Business Centers...

  • Page 17
    ..., we recently completed an expansion of a design center in India. In general, our Americas, EMEA, and APJ regions use properties within their geographies. However, business centers in the Philippines and India, which house sales, customer care, technical support, and administrative support functions...

  • Page 18
    ... filed an action against us in Delaware Chancery Court under Section 220 of the Delaware General Corporation Law, Baltimore County Employees' Retirement System v. Dell Inc., seeking inspection of certain of our books and records related to the internal investigation and government investigations. We...

  • Page 19
    ... in KSR v. Teleflex. Fact and expert discovery has closed, and the three actions have been consolidated. Trial is scheduled to begin in ...Sales Tax Claims Several state and local taxing jurisdictions have asserted claims against Dell Catalog Sales L.P. ("DCSLP"), an indirect wholly-owned subsidiary...

  • Page 20
    ..., and tax efficiencies. In connection with this internal restructuring, on December 28, 2006 we issued approximately 475 million shares of our common stock valued at $12.0 billion based on the closing price on The NASDAQ Stock Market on that date, to a wholly-owned subsidiary in return for an...

  • Page 21
    ... value" is equal to the average closing price of Dell common stock during the week immediately preceding the week in which the expiration date occurred. Payment will be made within 45 days after the date this report is filed, so long as the holder has executed an agreement providing for a release...

  • Page 22
    ...$113 million. Share Repurchase Program We have a share repurchase program that authorizes us to purchase shares of common stock in order to increase shareholder value and manage dilution resulting from shares issued under our equity compensation plans. However, we do not currently have a policy that...

  • Page 23
    ...change in the value of common stock relative to the indices at the end of each fiscal year and not for any interim period. Historical stock price performance is not necessarily indicative of future stock price performance. 2002 2003 End of Fiscal Year 2004 2005 2006 2007 Dell S&P 500 Index Dow...

  • Page 24
    ... Gross margin Operating income Income before income taxes Net income Earnings per common share: Basic Diluted Number of weighted-average shares outstanding: Basic Diluted Cash Flow & Balance Sheet Data: Net cash provided by operating activities(f) Cash, cash equivalents and investments Total assets...

  • Page 25
    ... in the fair value of the debt where the interest rate is hedged with interest rate swap agreements for all periods restated and (2) a correction in classification from both other current liabilities and other noncurrent liabilities related to the long-term portion of outstanding advances under...

  • Page 26
    .... February 3, 2006 January 28, January 30, 2005 2004 (in millions) January 31, 2003 Beginning retained earnings as reported Revenue Recognition: Software Other Revenue Recognition Warranty Liabilities Restructuring Reserves Other (Provision) benefit for income taxes Cumulative adjustments to...

  • Page 27
    ... fiscal year ended February 3, 2006: Fiscal 2006 Adjustments As Reported Revenue Other recognition reserves Software Warranty Restrucand sales Other liabilities turing accruals (in millions, except per share data) Provision for income tax(a) As Restated Net revenue Cost of net revenue Gross margin...

  • Page 28
    ...Gross margin Operating income Income before income taxes Net income Earnings per common share: Basic Diluted Number of weighted-average shares outstanding: Basic Diluted Cash Flow and Balance Sheet Data: Net cash provided by operating activities(d) Cash, cash equivalents and investments Total assets...

  • Page 29
    ... income tax benefit related to a revised estimate of taxes on the repatriation of earnings under the American Jobs Creation Act of 2004 recognized in the second quarter. The cash flows have been revised to reflect a closer approximation of the weighted-average exchange rates during the reporting...

  • Page 30
    ... Software Warranty Restrucand sales Other liabilities turing accruals (in millions, except per share data) Provision for income tax(a) As Restated Net revenue Cost of net revenue Gross margin Operating expenses: Selling, general, and administrative Research, development, and engineering Total...

  • Page 31
    ...Gross margin Operating income Income before income taxes Net income Earnings per common share: Basic Diluted Number of weighted-average shares outstanding: Basic Diluted Cash Flow and Balance Sheet Data: Net cash provided by operating activities(d) Cash, cash equivalents and investments Total assets...

  • Page 32
    ... to the long-term portion of outstanding advances under the DFS Credit Facilities for the periods from the third quarter of Fiscal 2004 through Fiscal 2007. Results include an income tax charge of $280 million related to the repatriation of earnings under the American Jobs Creation Act of 2004...

  • Page 33
    ... Software Warranty Restrucand Other(a) liabilities sales turing accruals (in millions, except per share data) Provision for income tax(b) As Restated Net revenue Cost of net revenue Gross margin Operating expenses: Selling, general, and administrative Research, development, and engineering Total...

  • Page 34
    ...Gross margin Operating income Income before income taxes Net income Earnings per common share: Basic Diluted Number of weighted-average shares outstanding: Basic Diluted Cash Flow and Balance Sheet Data: Net cash provided by operating activities(c) Cash, cash equivalents and investments Total assets...

  • Page 35
    ...deferral and amortization of revenue from extended warranty and enhanced service level agreements, and adjustments to the period end in-transit revenue deferrals. See Note 2 of Notes to Consolidated Financial Statements included in "Part II - Item 8 - Financial Statements and Supplementary Data" for...

  • Page 36
    ...warranty revenue associated with the sale of extended warranties and enhanced service level agreements. See Note 2 of Notes to Consolidated Financial Statements included in "Part II - Item 8 - Financial Statements and Supplementary Data" for additional details. Primarily represents the aggregate tax...

  • Page 37
    ...Gross margin Operating income Income before income taxes Net income Earnings per common share: Basic Diluted Number of weighted-average shares outstanding: Basic Diluted Cash Flow and Balance Sheet Data: Net cash provided by operating activities(d) Cash, cash equivalents and investments Total assets...

  • Page 38
    ... adjustments to the recognition of deferred warranty revenue associated with the sale of extended warranties and enhanced service level agreements. See Note 2 of Notes to Consolidated Financial Statements included in "Part II - Item 8 - Financial Statements and Supplementary Data" for additional...

  • Page 39
    ... and 250 accountants. Investigative teams were deployed in our three geographic regions - Americas (including our corporate functions), EMEA, and APJ. Information and documents were gathered from company personnel worldwide. Using proprietary search software, the investigative team evaluated over...

  • Page 40
    ... complete review of the various business unit financial results. These additional reviews identified issues involving, among other things, revenue recognition in connection with sales of third party software, amortization of revenue related to after-point-of-sale extended warranties, and accounting...

  • Page 41
    ... of desktop and notebook systems in the United States, and the number two supplier worldwide. Our past performance has been the result of a persistent focus on delivering directly to our customers relevant technology and services at the best value. Our business strategy is evolving. Historically we...

  • Page 42
    ... Year Ended February 3, 2006(b) January 28, 2005(c) % of % of Dollars Revenue Dollars Revenue As As As As Restated Restated Restated Restated (in millions, except per share amounts and percentages) Share position Net revenue Gross margin Operating expenses Operating income Income tax provision...

  • Page 43
    ... segment includes sales to corporate, government, healthcare, education, and small and medium business customers within the Americas region, while the U.S. Consumer segment primarily includes sales to individual consumers within the U.S. The EMEA region covers Europe, the Middle East, and Africa...

  • Page 44
    ... in desktop PC sales as wireless capabilities, falling prices, and a growing need for mobility have increased demand for notebooks. - Business - Americas Business grew revenue by 3% on flat unit growth in Fiscal 2007, compared to 12% revenue growth on 15% unit growth in Fiscal 2006. The slow down...

  • Page 45
    ...- Financial Statements and Supplementary Data." Revenue by Product and Service Categories We design, develop, manufacture, market, sell, and support a wide range of products that in many cases are customized to individual customer requirements. Our product categories include desktop computer systems...

  • Page 46
    ... includes Dell-branded printers, monitors not sold with systems, plasma and LCD televisions, projectors, and a multitude of competitively priced third-party printers, televisions, software, digital cameras, and other products) increased 8% year-over-year, compared to a 26% increase in Fiscal 2006...

  • Page 47
    ...Fiscal 2007 ending at 17.1%. In Fiscal 2006, our gross margin declined as a percentage of revenue while gross margin increased in absolute dollars as compared to Fiscal 2005. Our year-over-year decline was primarily due to a product charge of $338 million for estimated warranty costs of servicing or...

  • Page 48
    ... through direct hiring and replacing of temporary staff with regular employees. During Fiscal 2006, selling, general, and administrative expenses as a percentage of revenue increased compared to Fiscal 2005. The increase over Fiscal 2005 primarily related to increased advertising costs, headcount...

  • Page 49
    ... 2007. Included in stock-based compensation for Fiscal 2007 is the fair value of stock-based awards earned during the year, including restricted stock, restricted stock units, and stock options, as well as the discount associated with stock purchased under our employee stock purchase plan. Prior to...

  • Page 50
    ... 2008 effective tax rate to trend upwards primarily due to the impact of new U.S. transfer pricing rules and the impact of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 ("FIN 48"). On October 22, 2004, the American Jobs Creation...

  • Page 51
    ...are adequate compensation in relation to the associated servicing cost. In estimating the value of the retained interest, we make a variety of financial assumptions, including pool credit losses, payment rates, and discount rates. These assumptions are supported by both our historical experience and...

  • Page 52
    ... stock exceeds the option strike price on the day the employee exercises a stock option. The decline in tax benefits in Fiscal 2007 from Fiscal 2006 is due to fewer stock option exercises. Key Performance Metrics - Our direct business model allows us to maintain an efficient asset management system...

  • Page 53
    ... revenue occurring at the end of the period. This decline was offset by a one-day increase in days in accounts payable largely attributed to an increase in the number of suppliers with extended payment terms as compared to Fiscal 2006. We defer the cost of revenue associated with customer shipments...

  • Page 54
    ... the sale. Share Repurchase Program - We have a share repurchase program that authorizes us to purchase shares of common stock in order to increase shareholder value and manage dilution resulting from shares issued under our equity compensation plans. However, we do not currently have a policy that...

  • Page 55
    ...- and three-year U.S. Treasury Notes plus 4.45%. DFS is required to make quarterly principal payments if the value of the leased equipment securing the loans is less than the outstanding principal balance. At February 2, 2007 and February 3, 2006, outstanding advances from CIT totaled $122 million...

  • Page 56
    ...our long-term debt and related interest expense. Market Risk We are exposed to a variety of risks, including foreign currency exchange rate fluctuations and changes in the market value of our investments. In the normal course of business, we employ established policies and procedures to manage these...

  • Page 57
    ...economic and labor conditions, political instability, unexpected regulatory changes, trade protection measures, tax laws, copyright levies, and fluctuations in foreign currency exchange rates; • our ability to accurately predict product, customer, and geographic sales mix and seasonal sales trends...

  • Page 58
    ... of other companies may present new risks; • our ability to properly manage the distribution of our products and services; • effective hedging of our exposure to fluctuations in foreign currency exchange rates and interest rates; • obtaining licenses to intellectual property developed by...

  • Page 59
    ... generally include technical support, parts, and labor over a period ranging from one to three years. Factors that affect our warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to...

  • Page 60
    ... FINANCIAL STATEMENTS Page Financial Statements: Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Position at February 2, 2007 and February 3, 2006 (Restated) Consolidated Statements of Income for the fiscal years ended February 2, 2007, February 3, 2006...

  • Page 61
    ... financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Dell Inc. and its subsidiaries (the "Company") at February 2, 2007 and February 3, 2006, and the results of their operations and their cash flows for each of the three years...

  • Page 62
    ... America commensurate with the Company's financial reporting requirements and business environment. The control environment material weaknesses described above contributed to the material weaknesses related to the Company's period-end financial reporting process described below. Period-end financial...

  • Page 63
    ... of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements. In our opinion, management's assessment that the Company did not maintain effective internal control over financial reporting as of February 2, 2007, is fairly stated...

  • Page 64
    ... Contents DELL INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in millions) February 2, February 3, 2007 2006 As Restated Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Financing receivables, net Inventories Other Total current assets Property, plant...

  • Page 65
    Table of Contents DELL INC. CONSOLIDATED STATEMENTS OF INCOME (in millions, except per share amounts) Fiscal Year Ended February 3, 2006 As Restated February 2, 2007 January 28, 2005 As Restated Net revenue Cost of net revenue(1) Gross margin Operating expenses: Selling, general, and ...

  • Page 66
    ...368 17 18 Excess tax benefits from stock-based compensation (80) - - Tax benefits from employee stock plans - 224 249 Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies 37 (3) (16) Other 61 157 61 Changes in: Operating working capital 397 (53) 1,772...

  • Page 67
    ... of retained interests in securitized assets, net of taxes of $7 Total comprehensive income Stock issuances under employee plans Repurchases Stock-based compensation expense under SFAS 123(R) Tax benefit from employee stock plans Other and shares issued to subsidiaries Balances at February 2, 2007...

  • Page 68
    ... services. Dell markets and sells its products and services directly to its customers, which include large corporate, government, healthcare, and education accounts, as well as small-to-medium businesses and individual customers. Fiscal Year - Dell's fiscal year is the 52- or 53-week period ending...

  • Page 69
    ... in its Consolidated Statements of Financial Position and measure those instruments at fair value. Dell uses derivative instruments to hedge foreign exchange risk and interest rate risk. Dell uses purchased option and forward contracts designated as cash flow hedges to protect against the foreign...

  • Page 70
    ... support, parts, and labor over a period ranging from one to three years. Factors that affect Dell's warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy Dell's warranty...

  • Page 71
    ..., infrastructure costs, and administrative expenses directly related to research and development support. Website Development Costs - Dell expenses, as incurred, the costs of maintenance and minor enhancements to the features and functionality of its websites. Income Taxes - Deferred tax assets and...

  • Page 72
    ... notes to its financial statements. Under APB 25, when the exercise price of Dell's employee stock options equaled the market price of the underlying stock at the date of the grant, no compensation expense was recognized. Recently Issued Accounting Pronouncements - In February 2006, the FASB issued...

  • Page 73
    ... of FIN 48, Dell changed the classification of $1.1 billion of income tax liabilities from current to non-current liabilities because payment of cash is not anticipated within one year of the balance sheet date. In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering...

  • Page 74
    ..., SFAS 159 is effective for fiscal years beginning after November 15, 2007, which is Dell's Fiscal 2009. Management is currently evaluating the impact that this statement may have on Dell's results of operations and financial position, and has yet to make a decision on the elective adoption of...

  • Page 75
    ...of Dell's Fiscal 2007 financial statements and its assessment of internal controls over financial reporting. Dell's procedures included expanded account reviews and expanded balance sheet reconciliations to ensure all accounts were fully reconciled, supported, and appropriately documented. Dell also...

  • Page 76
    ... reserves for Software Warranty and income tax(a) sales Other liabilities accruals (in millions, except per share data) As Restated Net revenue Cost of net revenue Gross margin Operating expenses: Selling, general, and administrative Research, development, and engineering Total operating expenses...

  • Page 77
    ... reserves for Software Warranty and income tax(a) sales Other liabilities accruals (in millions, except per share data) As Restated Net revenue Cost of net revenue Gross margin Operating expenses: Selling, general, and administrative Research, development, and engineering Total operating expenses...

  • Page 78
    ... for Separately Priced Extended Warranty and Product Maintenance Contracts, Dell defers and amortizes the revenue from the sale of extended warranties and enhanced service level agreements over the service period of the associated agreement. In some instances Dell's accounting estimates of the...

  • Page 79
    ... liabilities, including employee benefits, accounts payable, litigation, sales commissions, payroll, employee bonuses, and supplier rebates. Dell extensively reviewed its accruals and underlying estimates, giving consideration to subsequent developments after the date of the financial statements, to...

  • Page 80
    ... Consolidated Statement of Financial Position at February 3, 2006. February 3, 2006 As Reported Adjustments (in millions) As Restated Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Financing receivables, net Inventories Other Total current assets Property...

  • Page 81
    ... and recording of the tax benefit of employee stock options which had an offsetting impact on accrued and other liabilities and stockholders equity; (iv) adjusting the fair value of long-term debt, where the interest rate is hedged with interest rate swap agreements; and (v) adjusting deferred...

  • Page 82
    ...fair value of foreign currency purchased option contracts is based on market quoted rates at the applicable balance sheet date and the Black-Scholes option pricing model. The estimates presented herein are not necessarily indicative of the amounts that Dell could realize in a current market exchange...

  • Page 83
    ...-term investments in the accompanying Consolidated Statements of Financial Position. Fair Value February 2, 2007 Unrealized Cost Gain (Loss) Fair Value February 3, 2006 Unrealized Cost Gain (Loss) As Restated (in millions) Debt securities: U.S. government and agencies U.S. corporate International...

  • Page 84
    ... revenue or cost of revenue in the same period the hedged transaction affects earnings. The ineffective portion of the change in fair value of a cash flow hedge is recognized currently in earnings and is reported as a component of investment and other income, net. Dell assesses hedge effectiveness...

  • Page 85
    ... the two- and three-year U.S. Treasury Notes plus 4.45%. DFS is required to make quarterly payments if the value of the leased equipment securing the loans is less than the outstanding principal balance. At February 2, 2007 and February 3, 2006, outstanding advances from CIT totaled $122 million and...

  • Page 86
    ... the term of the debt agreements. The Senior Notes and Senior Debentures generally contain no restrictive covenants, other than a limitation on liens on Dell's assets and a limitation on sale-leaseback transactions involving Dell property. Dell's inability to timely file its periodic reports with...

  • Page 87
    ... TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 4 - Income Taxes The provision for income taxes consists of the following: February 2, 2007 Fiscal Year Ended February 3, 2006 As Restated (in millions) January 28, 2005 As Restated Current: Domestic Foreign Tax repatriation (benefit) charge...

  • Page 88
    ... 2007 2006 As Restated (in millions) Deferred tax assets: Deferred revenue Inventory and warranty provisions Investment impairments and unrealized gains Provisions for product returns and doubtful accounts Capital loss Leasing and financing Credit carryforwards Stock-based and deferred compensation...

  • Page 89
    ...3, 2006, no shares of Junior Preferred Stock were issued or outstanding. Redeemable Common Stock Dell inadvertently failed to register with the SEC the sale of some shares under certain employee benefit plans. As a result, certain purchasers of common stock pursuant to those plans may have the right...

  • Page 90
    ...STATEMENTS (continued) Share Repurchase Program - Dell has a share repurchase program that authorizes it to purchase shares of common stock in order to increase shareholder value and manage dilution resulting from shares issued under Dell's equity compensation plans. However, Dell does not currently...

  • Page 91
    ... Stock Plans at February 2, 2007, February 3, 2006, and January 28, 2005, respectively. To satisfy stock option exercises, Dell has a policy of issuing new shares as opposed to repurchasing shares on the open market. Stock Option Agreements - The right to purchase shares pursuant to existing stock...

  • Page 92
    ... the table above represents the total pre-tax intrinsic value (the difference between Dell's closing stock price on February 2, 2007 and the exercise price, multiplied by the number of in-themoney options) that would have been received by the option holders had the holders exercised their options on...

  • Page 93
    ...stock awards but did not include stock-based compensation expense for employee stock options or the purchase discount under Dell's ESPP. Total stock-based compensation expense was $368 million for the fiscal year ended February 2, 2007. As a result of adopting SFAS 123(R), income before income taxes...

  • Page 94
    ... 123 to stock-based employee compensation: Fiscal Year Ended February 3, January 28, 2006 2005 As As Restated Restated (in millions, except per share data) Net income Deduct: Total share-based employee compensation determined under fair value method for all awards, net of related tax effects Net...

  • Page 95
    ... Years Ended February 3, 2006 January 28, 2005 Expected term: Stock options Employee stock purchase plan Risk-free interest rate (U.S. Government Treasury Note) Volatility Dividends 3.6 years 3 months 4.8% 26% 0% 3.8 years 3 months 3.9% 25% 0% 3.8 years 6 months 2.9% 36% 0% 401(k) Plan - Dell...

  • Page 96
    ... significant number of customers who elect to finance products sold by Dell. Dell also purchases loan and lease receivables facilitated by DFS on substantially the same terms and conditions as CIT. Dell's purchase of these assets allows Dell to retain a greater portion of the assets' future earnings...

  • Page 97
    ... customers with a revolving credit line for the purchase of products and services offered by Dell. From time to time, account holders may have the opportunity to finance their Dell purchases with special programs during which, if the outstanding balance is paid in full, no interest is charged...

  • Page 98
    ... components of retained interest balances and related cash flows: Fiscal Year Ended February 2, February 3, 2007 2006 As Restated (in millions) Retained interest: Retained interest at beginning of year New sales Distributions from conduits Net accretion Change in fair value for the period Retained...

  • Page 99
    ...amortized over the related servicing period. DFS validates that it is receiving fair value for its servicing efforts by performing market comparisons. The servicing liability is included in other current and non-current liabilities on Dell's Consolidated Statements of Financial Position. At February...

  • Page 100
    ... of Financial Position, are presented in the following tables: Fiscal Year Ended February 2, February 3, January 28, 2007 2006 2005 As As Restated Restated (in millions) Deferred revenue: Deferred revenue at beginning of year Revenue deferred for new extended warranty and service contracts sold...

  • Page 101
    ... the current year presentation of service obligations honored. There is no impact to the Consolidated Statements of Financial Position or Consolidated Statements of Income as a result of this change. Changes in cost estimates related to pre-existing warranties are aggregated with accruals for new...

  • Page 102
    ... Dell's financial statements, governmental investigations, known battery problems, business model, and insiders' sales of its securities. This action also includes Dell's independent registered public accounting firm, PricewaterhouseCoopers LLP, as a defendant. Four other putative class actions...

  • Page 103
    ... to rights holders through digital rights management systems. There are currently three levy cases involving other equipment manufacturers pending before the German Federal Supreme Court. Adverse decisions in these cases could ultimately impact Dell. The cases involve personal computers, printers...

  • Page 104
    ... based in Round Rock, Texas, covers the U.S., Canada, and Latin America. Within the Americas, Dell is further segmented into Business and U.S. Consumer. The Americas Business ("Business") segment includes sales to corporate, government, healthcare, education, and small and medium business customers...

  • Page 105
    ...5,465 49,121 February 2, 2007 Fiscal Year Ended February 3, 2006 As Restated (in millions) January 28, 2005 As Restated Consolidated operating income Americas: Business U.S. Consumer Americas EMEA APJ Consolidated segment operating income Stock-based compensation expense(a) Other product charges...

  • Page 106
    ... and capital expenditures by Dell's reportable segments for Fiscal 2007, Fiscal 2006, and Fiscal 2005 and assets for Fiscal 2007 and Fiscal 2006: February 2, 2007 Fiscal Year Ended February 3, 2006 As Restated (in millions) January 28, 2005 As Restated Depreciation: Americas: Business U.S. Consumer...

  • Page 107
    Table of Contents DELL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following is net revenue and long-lived asset information by geographic region: February 2, 2007 Fiscal Year Ended February 3, 2006 As Restated (in millions) January 28, 2005 As Restated Net revenue: United ...

  • Page 108
    Table of Contents DELL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) enhanced services of $652 million and $547 million in Fiscal 2006 and 2005, respectively. The following is net revenue by product groups: February 2, 2007 Fiscal Year Ended February 3, 2006 As Restated (in millions) ...

  • Page 109
    ... Fiscal Year Ended February 2, February 3, 2007 2006 As Restated (in millions) Supplemental Consolidated Statements of Financial Position Information: Accounts receivable: Gross accounts receivable Allowance for doubtful accounts Accounts receivable Inventories: Production materials Work-in...

  • Page 110
    ...2007 Fiscal Year Ended February 3, January 28, 2006 2005 As As Restated Restated (in millions) Supplemental Consolidated Statements of Cash Flows Information: Changes in operating working capital accounts: Accounts receivable, net Financing receivables, net Inventories Accounts payable Accrued and...

  • Page 111
    .... The following tables present selected unaudited Consolidated Statements of Income data for each quarter of Fiscal 2006: First Quarter As Reported Net revenue Gross margin Net income Earnings per common share: Basic Diluted Weighted-average shares outstanding: Basic Diluted $ 13,386 $ 2,491 $ 934...

  • Page 112
    ... Quarter (In millions, except per share data) Fiscal 2006 (As Restated) Net income as reported Revenue recognition: Software sales Other revenue recognition Revenue recognition Warranty liabilities Other reserves and accruals (Provision) benefit for income taxes Net impact of adjustments Net...

  • Page 113
    ... of Contents DELL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 13 - Subsequent Events On August 2, 2007, Dell announced the planned acquisition of ASAP Software, a leading software solutions and licensing services provider, and currently a subsidiary of Corporate Express. The...

  • Page 114
    ...issued financial statements described above, and the identification of certain material weaknesses in internal control over financial reporting (described below), which we view as an integral part of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have...

  • Page 115
    ... with the preparation of this Report, Dell's management, under the supervision and with the participation of the current Chief Executive Officer and current Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of February 2, 2007...

  • Page 116
    .... We have appointed a new Chief Accounting Officer and have strengthened that position, making it directly responsible for all accounting and financial reporting functions worldwide. In addition, we are implementing personnel resource plans, and training and retention programs, that are designed to...

  • Page 117
    ... our various business and finance leaders make full and complete representations concerning, and assume accountability for, the accuracy and integrity of their submitted financial results; - Extending the time between the end of a financial reporting period and the public release of financial and...

  • Page 118
    ... communications will emphasize the existence and availability of other reporting avenues or forums for all employees, such as their management chain, their Human Resources representatives, the Ethics Office, the Ombudsman's Office, the Legal Department, and direct contact with the Chief Financial...

  • Page 119
    ...Financial Officer in January 2007. In that role, he is responsible for all finance functions, including controller, corporate planning, tax, treasury operations, investor relations, corporate development, real estate, risk management, and internal audit. Mr. Carty has served as a member of our Board...

  • Page 120
    ... Club of New York. • Alan (A.G.) Lafley - Mr. Lafley has been a director since July 2006. He is the Chairman of the Board and Chief Executive Officer of The Procter & Gamble Company. Mr. Lafley joined Procter & Gamble in 1977, and has served in a variety of executive level positions since 1992...

  • Page 121
    ... been a director since February 1995. He is a special limited partner and a member of the Advisory Board of the investment firm Forstmann Little and Co. He is the former Chairman of the Board and Chief Executive Officer of Philip Morris Companies Inc., having served in those positions from September...

  • Page 122
    ..., Chief Executive Officer, and a director of Maxtor Corporation (now a part of Seagate Technology) from July 1996 to January 2003. Mr. Cannon has also worked at IBM's Storage Systems Division. He began his career in engineering at The Boeing Company, where he held a management position with the...

  • Page 123
    ... for corporate security on a worldwide basis. He currently sits on the board of directors for aDellante, our internal networking group responsible for the development of Hispanic employees within the company. Prior to joining Dell, he held human resource positions with NCR Corporation from...

  • Page 124
    ... of Marketing & e-business for the U.S. Consumer segment; and Director and General Manger of the U.S. Asset Recovery Business. Prior to joining Dell, Mr. Marmonti spent 16 years at AT&T in a variety of senior roles, including executive positions in sales and marketing, serving corporate customers...

  • Page 125
    ... be paid to our executive officers and the non-employee directors; reviews and approves, on behalf of the Board, all bonus and equity compensation to be paid to our other employees; and administers our stock-based compensation plans. The Leadership Development and Compensation Committee is comprised...

  • Page 126
    ... the Leadership Development and Compensation Committee, except that (a) no non-employee director may receive awards (not including awards in lieu of annual cash retainer) covering more than 50,000 shares of common stock in any year (other than the year the director joins the Board, when the limit is...

  • Page 127
    ...the market value of Dell common stock on the date the option is exercised and the exercise price. The following table sets forth the number of shares covered by awards made in Fiscal 2007. All of these awards, other than those made to Mr. Luce, were made on July 21, 2006, the date of the first Board...

  • Page 128
    ... members under specified conditions. The exercise price of the options is the fair market value of Dell common stock on the date of grant ($26.36 for the award to Mr. Luce on December 7, 2006, and $19.55 for the awards to the other non-employee directors on July 21, 2006). The grant date fair value...

  • Page 129
    ... behavior, and community leadership. The Leadership Development and Compensation Committee is committed to and responsible for designing, implementing, and administering a compensation program for executive officers that ensures appropriate linkage between pay, company performance, and results...

  • Page 130
    ...'s historical compensation; and comparisons to other executive officers (both those of the company and those of our peer group). Elements of the Total Compensation Package - The key elements of the compensation program for our executive officers are base salary, annual incentive bonus, long-term...

  • Page 131
    ... compensation assessment includes an evaluation of base salary, target annual incentive opportunities, long-term incentive grant values, and benefits for each of our executive officers relative to similar positions in the market. Each year, management develops the peer group for evaluating pay for...

  • Page 132
    ... Co. • Texas Instruments Inc. • Wal Mart Stores Inc. Market Positioning - The Leadership Development and Compensation Committee targets base salary and benefits at the median of competitive market practices and variable compensation (annual incentives and the grant value of long-term incentives...

  • Page 133
    ...salary close to the market median. Mr. Dell did not receive a raise because the committee determined that the key component of his compensation was performance-based bonus. Annual Incentive Bonus Design - The annual incentive bonus plan is designed to align executive officer pay with overall company...

  • Page 134
    ... above, the Leadership Development and Compensation Committee did not adjust the formulaic payout results, and no annual incentive payments were made to the executive officers. Long-Term Incentives Design - Long-term incentives are the most significant element of total executive officer compensation...

  • Page 135
    ... at fair market value on a fixed or predetermined date. All equity grants to executive officers require the approval of the Leadership Development and Compensation Committee. In general, awards under our annual long-term incentive grant process are made on predetermined Board meeting dates. Fiscal...

  • Page 136
    ...March 2006, the Leadership Development and Compensation Committee approved grants of stock options to each of the executive officers (other than Mr. Dell) as part of our annual stock option grants. These options had an exercise price equal to the fair market value of Dell common stock on the date of...

  • Page 137
    ...from the company before the first vesting date and, therefore, forfeited these amounts. Benefits and Perquisites Our policy is to provide limited benefits and perquisites for executive officers. While perquisites do not constitute a significant part of executive officer compensation, the Leadership...

  • Page 138
    ... is limited to the cost of hardware provided and is insignificant. Other - The executive officers participate in our other benefit plans on the same terms as other employees. These plans include medical, dental, and life insurance benefits; our 401(k) retirement savings plan; and our employee stock...

  • Page 139
    ... total compensation for the executive officers, the Leadership Development and Compensation Committee considered the effect of Section 162(m) of the Internal Revenue Code, which limits the deductibility of compensation paid to each "covered employee" (generally, the chief executive officer...

  • Page 140
    ... the market value of Dell common stock on the date the option is exercised and the exercise price. The terms of these awards are described in footnote (g) to the "Grants of Plan Based Awards" table below. Represents amounts earned under the Executive Annual Incentive Bonus Plan, the 2006 Long-Term...

  • Page 141
    ... Compensation" for each of the Named Executive Officers. Mr. Dell Mr. Carty Mr. Bell Mr. Felice Mr. Rollins Mr. Schneider Mr. Parra Engagement awards $ 401(k) matching contributions Term life insurance Financial counseling/tax prep Annual physical exam Security Sales award trip Director retainer...

  • Page 142
    ...was $19.91, and the closing price on December 29, 2006 (the last trading day prior to the January 2, 2007 grant date) was $25.09. These awards were made to Mr. Carty in his capacity as a member of the Board of Directors prior to his becoming an executive officer. These awards are subject to the same...

  • Page 143
    Table of Contents Option Awards Stock Awards Equity Incentive Plan Awards Market Payout Number of Value of Unearned Unearned Shares, Shares, Units or Units or Other Other Rights That Rights That Have Not Have Not Vested(a) Vested Name Number of Securities Underlying Unexercised Options Option ...

  • Page 144
    ...Unexercisable Price Option Expiration Date Number of Shares or Units of Stock that Have Not Vested Stock Awards Equity Incentive Plan Awards Market Payout Number of Value of Unearned Unearned Shares, Shares, Market Value Units or Units or of Shares or Other Other Units of Stock Rights That Rights...

  • Page 145
    ... 2008. These awards were granted to Mr. Carty in his capacity as a member of the Board of Directors prior to his becoming an executive officer. These options become exercisable ratably on January 2 of 2008 through 2012. Represents unvested restricted stock. Of these shares, 6,576 shares were granted...

  • Page 146
    ... the fair market value of the stock on the date of vesting. Represents the exercise of options granted to Mr. Carty in his capacity as a member of the Board of Directors prior to his becoming an executive officer. Mr. Carty paid cash to exercise these options and continues to hold the shares. Mr...

  • Page 147
    ...All values were computed as of the end of Fiscal 2007 based on the closing price of Dell common stock on the last day of Fiscal 2007 ($23.52). ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Equity Compensation Plans Equity Compensation Plans...

  • Page 148
    ... which permitted awards of fair market value stock options to non-executive employees. While there are still shares outstanding in this plan, the plan was terminated by the Board in November 2002, and options are no longer being awarded under this plan. EQUITY COMPENSATION PLANS Number of Securities...

  • Page 149
    ... power over the shares shown. Options Exercisable Within 60 Days Total as a Percentage of Shares Outstanding (if 1% or more)(a) Beneficial Owner Number of Shares Owned Total Beneficial Ownership Michael S. Dell One Dell Way Round Rock, Texas 78682 Southeastern Asset Management, Inc. 6410 Poplar...

  • Page 150
    ... Under our executive travel policy, which has been approved by the Leadership Development and Compensation Committee of the Board of Directors, we reimburse certain executive officers for the cost of using their private aircraft while traveling on Dell business. Our reimbursement covers the variable...

  • Page 151
    ... of our financial statements, including the audits of our employee benefit plans, contract compliance reviews, and accounting research. This category includes fees incurred for domestic and international income tax compliance and tax audit assistance, corporate-wide tax planning, and executive tax...

  • Page 152
    ...-related, tax, and permitted non-audit services. In cases where the Audit Committee's pre-approval is not covered by one of those approvals, a designated member of the Audit Committee has the delegated authority to pre-approve the provision of services, and such pre-approvals are then communicated...

  • Page 153
    ... - Financial Statements and Supplementary Data:" Page Financial Statements: Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Position at February 2, 2007 and February 3, 2006 (Restated) Consolidated Statements of Income for the fiscal years ended February...

  • Page 154
    ... Statements included in "Part II - Item 8 - Financial Statements and Supplementary Data." SCHEDULE II DELL INC. VALUATION AND QUALIFYING ACCOUNTS Balance at Beginning of Period Charged to Bad Debt Expense Write-Offs Charged to Allowance Balance at End of Period Description Fiscal Year Trade...

  • Page 155
    ... Exhibit 99.6 of Dell's Current Report on Form 8-K filed April 28, 1998, Commission File No. 0-17017) - Dell Computer Corporation 1989 Stock Option Plan, as amended and restated (incorporated by reference to Exhibit 10.4 of Dell's Annual Report on Form 10-K for the fiscal year ended January 31, 1993...

  • Page 156
    ...Exhibit - Amended and Restated Dell Computer Corporation Deferred Compensation Plan (incorporated by reference to Exhibit 10.6 to Dell's Annual Report on Form 10-K for the fiscal year ended January 30, 2004, Commission File No. 0-17017) 10.10* - Executive Incentive Bonus Plan, adopted July 18, 2003...

  • Page 157
    ... undersigned, thereunto duly authorized. DELL INC. Date: October 30, 2007 By: /s/ MICHAEL S. DELL Michael S. Dell Chairman and Chief Executive Officer 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...

  • Page 158
    Table of Contents Name Title Date /s/ SAMUEL A. NUNN, JR. Samuel A. Nunn, Jr. /s/ THOMAS W. SWEET Thomas W. Sweet 155 Director October 30, 2007 Vice President, Corporate Finance (principal accounting officer) October 30, 2007

  • Page 159
    ... into by Dell Inc., a Delaware corporation, having its principal office in Round Rock, Texas (hereinafter referred to as "Employer"): R E C I T A L S: WHEREAS, the Employer has previously established the Dell Inc. 401(k) Plan (the "Plan") for the benefit of those employees who qualify thereunder...

  • Page 160
    ... by such Participant for such Plan Year or four percent (4%) of such Participant's Annual Compensation for such Plan Year. The Participant shall not be required to complete a specified Period of Service or be employed on the last day of the Plan Year in order to share in this additional amount. No...

  • Page 161
    ... that makes it easy to obtain additional information about the Plan such as telephone numbers, addresses and, if applicable, electronic addresses, of individuals or offices from whom employees can obtain such plan information." 5. Section 3.2 of the Plan is hereby amended by adding the following new...

  • Page 162
    ... no later than the due date of the Employer's tax return for the Plan Year, the Employer shall make an additional Safe Harbor Matching Contribution to the Individual Accounts of any Participant or Former Participant who failed to receive a Safe Harbor Matching Contribution for such Plan Year that...

  • Page 163
    ... to whether the expenses exceed 7.5% of adjusted gross income); or (2) (3) Costs directly related to the purchase of a principal residence of the Participant (excluding mortgage payments); or Payment of tuition and related educational fees, and room and board expenses, for the next twelve months of...

  • Page 164
    ...sum distribution by the close of the second Plan Year following the Plan Year in which his employment is terminated, the nonvested portion of such terminated Participant's Employer Contribution Account as of the Valuation Date next preceding his Benefit Commencement Date shall become a forfeiture as...

  • Page 165
    ... amount needed to restore such forfeited amounts shall be a minimum required Employer Retirement Savings Contribution (which shall be made without regard to current or accumulated earnings and profits)." 14. Section 8.5 of the Plan is hereby amended, as underlined, to be and read as follows...

  • Page 166
    ... have a severance from employment if, in connection with a change in employment, the Employee's new employer maintains the Plan with respect to the Employee, by assuming sponsorship of the Plan or by accepting a transfer of Plan assets and liabilities (within the meaning of Code Section 414(e)) with...

  • Page 167
    Exhibit 10.8 IN WITNESS WHEREOF, the Employer has caused this instrument to be executed this 12th day of December, 2006. DELL INC. By: Its: Date: ATTEST: /s/ Robert Potts 9 /s/ Kathleen O. Angel Director, Global Benefits 12/12/06

  • Page 168
    ... and Services S.A. Dell Distribution (EMEA) Limited Magyarorszagi Kereskedelmi Kepviselet - Rep. Office Dell Products (Europe) B.V. - Ireland Branch Dell Direct Dell Products Dell Research Dell International Holdings VI (Ireland) Dell International Holdings XI Dell Computer Limited Dell S.p.A. Dell...

  • Page 169
    ... Office Ukraine Dell FZ - LLC Bracknell Boulevard Management Company Limited Dell Corporation Limited Dell Computer EEIG Dell Emerging Markets (EMEA) Limited Alienware Limited Dell Global Holdings I BV Dell Global Holdings II BV Dell Global Holdings III BV Dell Products Manufacturing Dell Services...

  • Page 170
    ... Private Ltd. Dell India R&D Center Private Limited ACS (India) Limited Dell Asia Pacific Sdn. - Indonesia Representative Office Dell Japan Inc. Dell Asia Pacific Sdn. Dell Global Procurement Malaysia Sdn. Bhd. Dell New Zealand Limited Dell International Services Philippines Inc. Dell Catalog Sales...

  • Page 171
    ... Dell Services L.P. Dell Federal Systems L.P. Dell World Trade L.P. Dell Marketing L.P. Dell USA L.P. Dell Receivables L.P. CPS Channel Partner Solutions L.P. Dell Computer Holdings Corp. Dell Computer Holdings L.P. Dell Ventures L.P. DCC Executive Security Inc. Dell Eastern Europe Corporation Dell...

  • Page 172
    Dell Credit Company L.L.C. International Americas - Dell Export Sales Corporation Dell America Latina Corp., Argentina Branch Dell Computadores do Brasil Ltda. Dell Procurement International Dell Computer de Chile Ltda Dell Colombia Inc., Colombia Branch Dell Technology Services Inc. S.R.L. Dell El ...

  • Page 173
    ... Dell Inc. (formerly Dell Computer Corporation) of our report dated October 29, 2007 relating to the financial statements, financial statement schedule, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial...

  • Page 174
    ...and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. October 30, 2007 /s/ MICHAEL S. DELL Michael S. Dell Chairman and Chief Executive Officer

  • Page 175
    ... in this report; The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15...

  • Page 176
    ... 13(a) of the Securities Exchange Act of 1934 and (b) information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Dell. /s/ MICHAEL S. DELL Michael S. Dell Chairman and Chief Executive Officer Date: October 30, 2007 /s/ DONALD...