Dell 2001 Annual Report Download - page 52

Table of Contents
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 8 — Related Party Transactions
The Company is currently a partner in Dell Financial Services L.P. ("DFS"). Through a series of transactions more fully described below, Tyco International
Ltd. ("Tyco") became the other venture partner in DFS. The joint venture brought together two parties with complementary interests: the Company wanted to
enable sales of its products to customers who desired a financing option, and Tyco wanted a steady source of originations for its financial services business.
The existence of the joint venture allows the Company to provide customers with various financing alternatives and asset management services as a part of the
total service package offered to the customer, while Tyco, as a financial services company, is the entity that finances the transaction between DFS and the
customer.
In the course of its relationship with DFS, the Company sells equipment to DFS or to the customer, and DFS enters into financing arrangements (primarily
leases and installment loans, respectively) with the Company's customers. Subsequent to origination, DFS sells the loan or lease receivable stream to Tyco,
and DFS remits the product sales invoice amounts to the Company. The Company recognizes revenue from the sale of equipment to DFS in accordance with
the Company's revenue recognition policy (see Note 1) because leases between DFS and the customer qualify as direct financing leases and loans are the
result of the customers' direct purchase of equipment from the Company. Neither Tyco nor DFS have any recourse to the Company. DFS originated financing
arrangements for the Company's customers totaling $2.7 billion in fiscal 2002, $2.5 billion in fiscal 2001 and $1.8 billion in fiscal 2000. The Company
receives origination fees from DFS (which totaled $70 million, $66 million and $20 million during fiscal 2002, 2001 and 2000, respectively), and includes
those fees in net revenue.
In accordance with the partnership agreement between the Company and Tyco, losses generated by DFS are allocated to Tyco. Net income in DFS is allocated
70% to the Company and 30% to Tyco, after Tyco has recovered any cumulative losses. The Company includes its share of DFS net income in investment
and other income. Although the Company has a 70% equity interest in DFS, because the Company cannot and does not exercise control over DFS, the
investment is accounted for under the equity method. The Company's investment in DFS at February 1, 2002 was $19 million. Equity income in DFS and any
intercompany balances were immaterial to the Company's results of operations and financial position for fiscal 2002, 2001 and 2000. Had the Company been
required to consolidate DFS, the impact to the Company's reported revenue and earnings would not have been material for fiscal 2002, 2001 and 2000.
DFS was formed in 1998 by the Company and Newcourt Credit Group, Inc. ("Newcourt"). In fiscal 2000, Newcourt was acquired by The CIT Group, Inc.
("CIT") and subsequently, in fiscal 2002, CIT was acquired by Tyco. Tyco is currently assessing whether to spin-off or sell its financial services company to a
third party. While the Company cannot predict with certainty how these transactions will affect DFS, the Company currently does not believe that either of
these alternatives will have a material adverse effect on the Company's financial condition or results of operations.
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