Dell 2006 Annual Report Download - page 86

Table of Contents
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
to the third party were recognized as cash outflows from operating activities in the Consolidated Statement of Cash Flows.
Long-Term Debt and Interest Rate Risk Management
In April 1998, Dell issued $200 million 6.55% fixed rate senior notes with the principal balance due April 15, 2008 (the
"Senior Notes") and $300 million 7.10% fixed rate senior debentures with the principal balance due April 15, 2028 (the
"Senior Debentures"). Interest on the Senior Notes and Senior Debentures is paid semi-annually, on April 15 and
October 15. The Senior Notes and Senior Debentures rank equally and are redeemable, in whole or in part, at the election of
Dell 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 Dell's assets and a limitation on sale-leaseback transactions involving Dell property.
Dell's inability to timely file its periodic reports with the SEC constituted a technical breach of the covenants to which the
Senior Notes and the Senior Debentures are subject. Those covenants specify that a "Notice of Default" must be issued, and
Dell must have failed to cure the deficiency within 90 days of the notice, before the debt is callable by the holders. Because
Dell has not received a "Notice of Default," Dell is not in default of these debt covenants; therefore, the Senior Notes and the
Senior Debentures are classified as long-term liabilities at February 2, 2007. With the filing of its past due periodic reports
with the SEC, Dell is no longer in breach of the covenants.
Concurrent with the issuance of the Senior Notes and Senior Debentures, Dell entered into interest rate swap agreements
converting Dell'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 investments 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 plus 0.4% and 0.8% for the Senior Notes and Senior Debentures, respectively. As a
result of the interest rate swap agreements, Dell's effective interest rates for the Senior Notes and Senior Debentures were
5.8% and 6.1%, respectively, for Fiscal 2007.
The interest rate swap agreements are designated as fair value hedges. Although the Senior Notes and Senior Debentures
allow for settlement before their stated maturity, such settlement would always be at an amount greater than the fair value of
the Senior Notes and Senior Debentures. Accordingly, the Senior Notes and Senior Debentures are not considered to be
pre-payable as defined by SFAS 133 and related interpretations. The changes in the fair value of the interest rate swaps are
assessed in accordance with SFAS 133.
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