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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
 
 
 
 
 
☒
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 29, 2016
or
☐
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from            to           
 
Commission file number:
 
Denali Holding Inc.

(Exact name of registrant as specified in its charter)
 
 
Delaware
 
80-0890963
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
One Dell Way, Round Rock, Texas 78682
(Address of principal executive offices) (Zip Code)

1-800-289-3355 
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
 
Accelerated filer ☐
Non-accelerated filer ☒ (Do not check if a smaller reporting company)
 
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of the close of business on June 6, 2016, there were 306,551,222 shares of Denali's Series A common stock outstanding, 98,181,818 shares of Denali's Series B common stock outstanding, and 334,116 shares of Denali's Series C common stock outstanding.




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements.” The words “may,” “will,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “aim,” “seek” and similar expressions as they relate to us or our management are intended to identify these forward-looking statements. All statements by us regarding our expected financial position, revenues, cash flows and other operating results, business strategy, legal proceedings and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not turn out to be correct. Our results could be materially different from our expectations because of various risks, including the risks described in the section titled “Risk Factors — Risk Factors Relating to Denali, Dell and EMC — Risk Factors Relating to Denali and Dell” of the proxy statement/prospectus dated June 6, 2016 forming part of our registration statement on Form S-4 (Registration No. 333-208524) filed with the Securities and Exchange Commission. Any forward-looking statement speaks only as of the date as of which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances, including unanticipated events, after the date as of which such statement was made.



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TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS
DENALI HOLDING INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions; unaudited)
 
April 29,
2016
 
January 29,
2016
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
6,139

 
$
6,576

Accounts receivable, net
5,075

 
5,092

Short-term financing receivables, net
2,855

 
2,915

Inventories, net
1,655

 
1,643

Other current assets
3,321

 
3,508

Current assets held for sale
1,719

 
1,721

Total current assets
20,764

 
21,455

Property, plant, and equipment, net
1,684

 
1,755

Long-term investments
101

 
114

Long-term financing receivables, net
2,190

 
2,177

Goodwill
9,797

 
9,797

Intangible assets, net
8,663

 
9,190

Other non-current assets
680

 
634

Total assets
$
43,879

 
$
45,122

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 

 
 

Short-term debt
$
2,465

 
$
2,981

Accounts payable
12,412

 
12,761

Accrued and other
4,193

 
4,377

Short-term deferred revenue
4,414

 
4,257

Current liabilities held for sale
464

 
614

Total current liabilities
23,948

 
24,990

Long-term debt
10,679

 
10,650

Long-term deferred revenue
4,484

 
4,422

Other non-current liabilities
3,036

 
3,488

Total liabilities
42,147

 
43,550

Commitments and contingencies (Note 9)


 


Redeemable shares
165

 
106

Stockholders' equity:
 
 
 
Common stock and capital in excess of $.01 par value; shares authorized: 700 (Series A: 350, Series B: 150, Series C: 200); shares issued and outstanding: 405 (Series A: 307, Series B: 98) and 405 (Series A: 307, Series B: 98), respectively
5,681

 
5,727

Accumulated deficit
(3,883
)
 
(3,937
)
Accumulated other comprehensive loss
(356
)
 
(324
)
Total Denali stockholders’ equity
1,442

 
1,466

Non-controlling interest
125

 
—

Total stockholders' equity
1,567

 
1,466

Total liabilities and stockholders' equity
$
43,879

 
$
45,122


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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DENALI HOLDING INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions, except per share amounts; unaudited)

 
Three Months Ended
 
April 29, 2016
 
May 1, 2015
Net revenue:
 
 
 

Products
$
10,322

 
$
10,660

Services, including software related
2,212

 
2,178

Total net revenue
12,534

 
12,838

Cost of net revenue:
 
 
 
Products
8,887

 
9,456

Services, including software related
1,229

 
1,253

Total cost of net revenue
10,116

 
10,709

Gross margin
2,418

 
2,129

Operating expenses:
 
 
 
Selling, general, and administrative
2,246

 
2,139

Research, development, and engineering
333

 
325

Total operating expenses
2,579

 
2,464

Operating loss
(161
)
 
(335
)
Interest and other, net
(205
)
 
(179
)
Loss from continuing operations before income taxes
(366
)
 
(514
)
Income tax provision (benefit)
60

 
(38
)
Net loss from continuing operations
(426
)
 
(476
)
Income (loss) from discontinued operations, net of income taxes
481

 
(28
)
Net income (loss)
$
55

 
$
(504
)
 
 
 
 
Income (loss) per share - basic:
 

 
 

Continuing operations
$
(1.05
)
 
$
(1.17
)
Discontinued operations
1.19

 
(0.07
)
Earnings (loss) per share - basic
$
0.14

 
$
(1.24
)
 
 
 
 
Income (loss) per share - diluted:
 

 
 

Continuing operations
$
(1.05
)
 
$
(1.17
)
Discontinued operations
1.19

 
(0.07
)
Earnings (loss) per share - diluted
$
0.14

 
$
(1.24
)
 
 
 
 
Weighted-average shares outstanding:
 
 
 
Basic
405

 
405

Diluted
405

 
405

 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.




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DENALI HOLDING INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions; unaudited)

 
Three Months Ended
 
April 29, 2016
 
May 1, 2015
Net income (loss)
$
55

 
$
(504
)
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
Foreign currency translation adjustments
79

 
(33
)
 
 
 
 
Cash flow hedges
 
 
 
Change in unrealized gains (losses)
(165
)
 
(6
)
Reclassification adjustment for net (gains) losses included in net income (loss)
54

 
(184
)
Net change
(111
)
 
(190
)
 
 
 
 
Total other comprehensive loss, net of tax benefit of $11 and $13, respectively
(32
)
 
(223
)
Comprehensive income (loss), net of tax
$
23

 
$
(727
)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.




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DENALI HOLDING INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions; unaudited)
 
Three Months Ended
 
April 29, 2016
 
May 1, 2015
Cash flows from operating activities:
 
Net income (loss)
$
55

 
$
(504
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
692

 
718

Stock-based compensation expense
14

 
18

Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
27

 
4

Deferred income taxes
(586
)
 
(5
)
Provision for doubtful accounts — including financing receivables
26

 
40

Other
46

 
29

Changes in assets and liabilities, net of effects from acquisitions:
 
 
 
Accounts receivable
108

 
(259
)
Financing receivables
73

 
(68
)
Inventories
(20
)
 
170

Other assets
126

 
28

Accounts payable
(440
)
 
(600
)
Deferred revenue
163

 
133

Accrued and other liabilities
(347
)
 
(599
)
Change in cash from operating activities
(63
)
 
(895
)
Cash flows from investing activities:
 
 
 
Investments:
 
 
 

Purchases
—

 
(2
)
Maturities and sales
12

 
—

Capital expenditures
(92
)
 
(114
)
Proceeds from sale of facilities, land, and other assets
4

 
—

Collections on purchased financing receivables
16

 
25

Divestitures of businesses, net of cash transferred
—

 
8

Change in cash from investing activities
(60
)
 
(83
)
Cash flows from financing activities:
 
 
 
Contributions from non-controlling interests, net
102

 
—

Issuance of common stock under employee plans
—

 
1

Payments for debt issuance costs
(2
)
 
(6
)
Proceeds from debt
552

 
2,025

Repayments of debt
(1,041
)
 
(1,662
)
Other
2

 
—

Change in cash from financing activities
(387
)
 
358

Effect of exchange rate changes on cash and cash equivalents
73

 
(4
)
Change in cash and cash equivalents
(437
)
 
(624
)
Cash and cash equivalents at beginning of the period
6,576

 
5,398

Cash and cash equivalents at end of the period
$
6,139

 
$
4,774


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 — EMC MERGER TRANSACTION, DIVESTITURE AND BASIS OF PRESENTATION

EMC Merger Transaction — On October 12, 2015, Denali Holding Inc. (“Parent,” “Denali” or "Denali Holding") entered into an agreement and plan of merger (the “EMC merger agreement”) with EMC Corporation (“EMC”), Dell Inc. (“Dell”) and Universal Acquisition Co., a direct wholly-owned subsidiary of Parent (“EMC Merger Sub”). Pursuant to the EMC merger agreement, EMC Merger Sub will merge with and into EMC ("the EMC merger"), with EMC continuing as the surviving corporation and a wholly-owned subsidiary of Parent.

Upon the closing of the EMC merger, each share of EMC common stock, par value $0.01 per share ("EMC common stock") owned immediately prior to the effective time of the EMC merger (other than shares owned by Parent, EMC Merger Sub, EMC or any of its wholly-owned subsidiaries, and other than shares with respect to which EMC’s shareholders are entitled to and properly exercise appraisal rights) automatically will be converted into the right to receive the merger consideration, consisting of (1) $24.05 in cash, without interest, and (2) a number of shares of validly issued, fully paid and non-assessable Class V common stock of Parent (the “Class V Common Stock”) equal to the quotient (rounded to the nearest five decimal points) obtained by dividing (A) 222,966,450 by (B) the aggregate number of shares of EMC common stock issued and outstanding immediately prior to the effective time of the EMC merger, plus cash in lieu of any fractional shares. No fractional shares of Class V Common Stock will be issued in the EMC merger. The approximately 223 million shares of Class V Common Stock issuable in the EMC merger (assuming EMC shareholders are not entitled to or do not properly exercise appraisal rights) are intended to track and reflect the economic performance of approximately 65% of EMC’s current economic interest in the business of VMware, Inc. ("VMware"), which currently consists of approximately 343 million shares of VMware common stock. Based on the number of shares of EMC common stock Parent currently expects will be issued and outstanding immediately prior to the completion of the EMC merger, it is estimated that EMC shareholders will receive in the EMC merger approximately 0.111 shares of Class V Common Stock for each share of EMC common stock.

The EMC merger will be financed with a combination of equity and debt financing and cash on hand. Parent has obtained committed equity financing for up to $4.25 billion in the aggregate from Michael S. Dell, Chairman, Chief Executive Officer and founder of Dell, a separate property trust for the benefit of Mr. Dell's wife, MSDC Denali Investors, L.P. and MSDC Denali EIV, LLC (the “MSD Partners Funds”), funds affiliated with Silver Lake Partners, and an affiliate of Temasek Holdings (Private) Limited. Parent also has obtained debt financing commitments for up to $49.5 billion in the aggregate from financial institutions for the purpose of financing the EMC merger and refinancing certain existing indebtedness of Parent and EMC. The obligations of the lenders under Parent’s debt financing commitments are subject to a number of customary conditions. Parent’s debt financing commitments will terminate upon the earlier of the termination of the EMC merger agreement in accordance with its terms and December 16, 2016. In addition, each of Parent and EMC has agreed to make available a certain amount of cash on hand (at least $2.95 billion, in the case of Parent, and $4.75 billion, in the case of EMC) at the completion of the EMC merger for the purpose of financing the transactions contemplated by the EMC merger agreement.

The completion of the EMC merger is subject to specified conditions, including (a) approval by EMC’s shareholders, (b) the absence of an order or law prohibiting consummation of the transactions contemplated by the EMC merger agreement, (c) the effectiveness of the registration statement of Parent registering the shares of Class V Common Stock issuable in connection with the EMC merger and (d) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain foreign antitrust approvals. In addition, each party’s obligation to consummate the EMC merger is subject to other conditions, including (1) the accuracy of the other party’s representations and warranties (including the absence of a material adverse effect), (2) the other party’s compliance with its obligations, (3) receipt by each party of an opinion of counsel, dated as of the date of the EMC merger, as to certain tax matters and (4) the listing of the Class V Common Stock on the New York Stock Exchange or the Nasdaq Stock Market.

The EMC merger agreement contains specified termination rights for both Parent and EMC, including that either party may terminate the EMC merger agreement if the EMC merger is not consummated by December 16, 2016, if any governmental authority has adopted any law or regulation prohibiting or rendering the consummation of the EMC merger permanently illegal, or if any governmental authority has issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the EMC merger, and such order, decree or ruling has become final and nonappealable. If the EMC merger agreement is terminated under certain specified circumstances, including in connection with EMC’s entry into a definitive agreement for a superior proposal, EMC must pay Parent a termination fee of $2.5 billion. Further, if the EMC


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DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


merger agreement is terminated under specified circumstances and, within 12 months after the termination, EMC enters into a definitive agreement providing for, or consummates, an acquisition proposal, EMC will be obligated to pay Parent a termination fee of $2.5 billion. The EMC merger agreement also provides that Parent and Dell will be obligated to pay EMC a reverse termination fee of $4 billion under specified circumstances and, in certain instances, an alternative reverse termination fee of $6 billion.

Other than the recognition of certain expenses related to the EMC merger, there was no impact of the EMC merger on the accompanying Unaudited Condensed Consolidated Financial Statements.

Divestiture — On March 27, 2016, Dell entered into a definitive agreement with NTT Data International L.L.C. to divest substantially all of Dell Services, including the Dell Services Federal Government business, for cash consideration of approximately $3.1 billion. Dell Services includes business process outsourcing, application management, and infrastructure services. The pending transaction does not include the global support, deployment, and professional services offerings. In accordance with applicable accounting guidance, the results of Dell Services are presented as discontinued operations in the Condensed Consolidated Statements of Income (Loss) and, as such, have been excluded from both continuing operations and segment results for all periods presented. Further, the Company has reclassified the related assets and liabilities as held for sale in the accompanying Condensed Consolidated Statements of Financial Position. See Note 2 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information.

SecureWorks Initial Public Offering — On April 27, 2016, SecureWorks Corp. (“SecureWorks”) completed a registered underwritten initial public offering ("IPO") of its Class A common stock. Prior to the IPO, Denali owned indirectly, through Dell and Dell's subsidiaries, 100% of the outstanding equity interest in SecureWorks. As of April 29, 2016, Denali held approximately 86.8% of the outstanding equity interest in SecureWorks, which represented approximately 98.5% of the combined voting power of both classes of the SecureWorks common stock outstanding. The results of the SecureWorks operations are recorded in Corporate. See Note 12 and Note 15 of the Notes to the Unaudited Condensed Consolidated Financial Statements for more information.

Going-Private Transaction — On October 29, 2013, Dell was acquired by Denali in a merger transaction pursuant to an agreement and plan of merger, dated as of February 5, 2013, as amended. Denali is a Delaware corporation owned by Michael S. Dell and a separate property trust for the benefit of Mr. Dell’s wife, investment funds affiliated with Silver Lake Partners, the MSD Partners Funds, and certain members of Dell’s management and other investors. Mr. Dell serves as Chairman and Chief Executive Officer of Denali and Dell.

Basis of Presentation — The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of Denali Holding (individually and together with its consolidated subsidiaries, "the Company") as of April 29, 2016 and January 29, 2016, the results of its operations and corresponding comprehensive income (loss) for the three months ended April 29, 2016 and May 1, 2015, and its cash flows for three months ended April 29, 2016 and May 1, 2015. The accompanying Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and accompanying Notes in the Company's Annual Report for the fiscal year ended January 29, 2016 ("Fiscal 2016").

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the Company's Condensed Consolidated Financial Statements and the accompanying Notes. Actual results could differ materially from those estimates. The results of operations, comprehensive income (loss), and cash flows for the three months ended April 29, 2016 and May 1, 2015 are not necessarily indicative of the results to be expected for the full fiscal year or for any other fiscal period.

The Company's fiscal year is the 52- or 53-week period ending on the Friday nearest January 31. The fiscal year ending February 3, 2017 ("Fiscal 2017") will be a 53-week period.



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DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers — In May 2014, the Financial Accounting Standards Board ("FASB") issued amended guidance on the recognition of revenue from contracts with customers. The objective of the new standard is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The new standard requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB approved a one-year deferral of the effective date of this standard. Public entities are required to adopt the new standard for fiscal years, and interim periods within those years, beginning after December 15, 2017, with the option of applying the standard as early as the original effective date for public entities. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of the new guidance, the effective date, and the method of adoption.

Presentation of Debt Issuance Costs — In April 2015, the FASB issued amended guidance which changes the classification of debt issuance costs in the Consolidated Statements of Financial Position. The new guidance requires debt issuance costs to be presented as a direct deduction from the carrying amount of the related debt liability consistent with the presentation of debt discounts, rather than as an asset as currently presented. The guidance related to recognition and measurement of debt issuance costs remains unchanged. The Company implemented the new presentation in the three months ended April 29, 2016 on a retrospective basis, and except for the reclassification of debt issuance costs of $128 million as of January 29, 2016 in the accompanying Condensed Consolidated Statements of Financial Position, there was no other impact to the Consolidated Financial Statements.

Recognition and Measurement of Financial Assets and Financial Liabilities — In January 2016, the FASB issued amended guidance on Recognition and Measurement of Financial Assets and Financial Liabilities. The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Public entities must adopt the new guidance for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently evaluating the impact that the standard will have on the Consolidated Financial Statements.

Leases — In February 2016, the FASB issued amended guidance on the accounting for leasing transactions. The primary objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  Public entities must adopt the new guidance for reporting periods beginning after December 15, 2018, with early adoption permitted. Companies are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the impact that the standard will have on the Consolidated Financial Statements.

Improvements to Employee Share-Based Payment Accounting — In March 2016, the FASB issued amended guidance on the accounting for employee share-based payments. The topics that were amended in the update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Public entities must adopt the new guidance for fiscal years, and interim periods within those years, beginning after December 2016. The Company is currently evaluating the impact that the standard will have on the Consolidated Financial Statements.




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DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 2 —DISCONTINUED OPERATIONS

On March 27, 2016, Dell entered into a definitive agreement with NTT Data International L.L.C. to divest substantially all of Dell Services, including the Dell Services Federal Government business. Dell Services includes business process outsourcing, application management, and infrastructure services. The pending transaction does not include the global support, deployment, and professional services offerings. At the completion of the sale, total cash consideration, which may vary due to working capital adjustments included in the transaction agreement, is expected to be between $2.9 billion and $3.1 billion, which would result in an estimated pre-tax gain on sale of approximately $1.7 billion to $2.0 billion.

In connection with the sale, the Company expects to enter into various agreements that will provide a framework for the relationships between the parties after the sale, including, among others, a transition services agreement, intellectual property license agreements, and commercial support agreements.

In accordance with applicable accounting guidance, the Company concluded that Dell Services has met the criteria for discontinued operations reporting as of April 29, 2016. Accordingly, the Company reclassified the financial results of Dell Services to discontinued operations in the Condensed Consolidated Statements of Income (Loss) for all periods presented. The financial results of Dell Services are presented as “Income (loss) from discontinued operations, net of income taxes” on the accompanying Condensed Consolidated Statements of Income (Loss) for the three months ended April 29, 2016 and May 1, 2015. The Company reclassified the related assets and liabilities as “Current assets held for sale” and “Current liabilities held for sale” on the accompanying Condensed Consolidated Statements of Financial Position as of April 29, 2016 and January 29, 2016. The pending transaction is expected to close in the third quarter of Fiscal 2017, subject to the satisfaction of customary closing conditions, including approvals from regulatory authorities. Cash flows from the Company's discontinued operations are included in the Condensed Consolidated Statements of Cash Flows.

The following table presents key financial results of Dell Services included in “Income (loss) from discontinued operations, net of income taxes” for the three months ended April 29, 2016 and May 1, 2015:

 
Three Months Ended
 
April 29, 2016
 
May 1, 2015
 
(in millions)
Net revenue
$
674

 
$
700

Cost of net revenue
541

 
592

Operating expenses
113

 
102

Income from discontinued operations before income tax
20

 
6

Income tax provision (benefit) (a)
(461
)
 
34

Income (loss) from discontinued operations, net of income taxes
$
481

 
$
(28
)
____________________
(a) The tax benefit recorded during the three months ended April 29, 2016 is primarily due to temporary differences arising from outside basis differences in the stock entities to be disposed, offset by a valuation allowance.  The net deferred tax asset recorded based on the estimated amount realizable was $469 million.

Depreciation and amortization ceased upon determination that the held for sale criteria were met during the three months ended April 29, 2016. The significant cash flow items from discontinued operations for the three months ended April 29, 2016 and May 1, 2015 were as follows:
 
Three Months Ended
 
April 29, 2016
 
May 1, 2015
 
(in millions)
Depreciation and amortization
$
32

 
$
55

Capital expenditures
$
(19
)
 
$
(22
)


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DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


The following table presents the major classes of assets and liabilities as of April 29, 2016 and January 29, 2016 related to Dell Services which were classified as held for sale:
 
April 29,
2016
 
January 29,
2016
 
(in millions)
ASSETS
Current assets:
 

 
 

Accounts receivable, net
$
454

 
$
443

Other current assets
60

 
73

Total current assets
514

 
516

Property, plant, and equipment, net
514

 
515

Goodwill
252

 
252

Intangible assets, net
376

 
388

Other non-current assets
54

 
50

Total assets (a)
$
1,710

 
$
1,721

 
 
 
 
LIABILITIES
Current liabilities:
 

 
 

Accounts payable
$
138

 
$
173

Accrued and other
154

 
180

Short-term deferred revenue
77

 
82

Total current liabilities
369

 
435

Long-term deferred revenue
47

 
53

Other non-current liabilities
48

 
126

Total liabilities
$
464

 
$
614

____________________
(a) The table above excludes approximately $9 million of property, plant, and equipment, net as of April 29, 2016 which was classified as held for sale but was not related to the Dell Services divestiture.






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DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 3 — FAIR VALUE MEASUREMENTS

The following table presents the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of April 29, 2016 and January 29, 2016:

 
April 29, 2016 (a)
 
January 29, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Quoted
Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
Quoted
Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
(in millions)
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
3,256

 
$
—

 
$
—

 
$
3,256

 
$
3,832

 
$
—

 
$
—

 
$
3,832

Derivative instruments
—

 
38

 
—

 
38

 
—

 
195

 
—

 
195

Common stock purchase agreement
—

 
—

 
—

 
—

 
—

 
—

 
10

 
10

Total assets
$
3,256

 
$
38

 
$
—

 
$
3,294

 
$
3,832

 
$
195

 
$
10

 
$
4,037

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivative instruments
$
—

 
$
139

 
$
—

 
$
139

 
$
—

 
$
12

 
$
—

 
$
12

Debt - Other
—

 
—

 
—

 
—

 
—

 
—

 
28

 
28

Common stock purchase agreement
—

 
—

 
6

 
6

 
—

 
—

 
—

 
—

Total liabilities
$
—

 
$
139

 
$
6

 
$
145

 
$
—

 
$
12

 
$
28

 
$
40

____________________
(a) The Company did not transfer any securities between levels during the three months ended April 29, 2016.

The following section describes the valuation methodologies the Company uses to measure financial instruments at fair value:

Money Market Funds — The Company's money market funds are classified as cash equivalents with original maturities of 90 days or less and are recognized at fair value. The valuations of these securities are based on quoted prices in active markets for identical assets, when available, or pricing models whereby all significant inputs are observable or can be derived from or corroborated by observable market data. The Company reviews security pricing and assesses liquidity on a quarterly basis.

Derivative Instruments — The Company's derivative financial instruments consist primarily of foreign currency forward and purchased option contracts and interest rate swaps. The fair value of the portfolio is determined using valuation models based on market observable inputs, including interest rate curves, forward and spot prices for currencies, and implied volatilities. Credit risk is also factored into the fair value calculation of the Company's derivative instrument portfolio. See Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements for a description of the Company's derivative financial instrument activities.

Debt - Other — As of January 29, 2016, the Company recognized a portion of its short-term debt at fair value. This debt was represented by promissory notes issued on August 3, 2015 and September 14, 2015, which were extinguished during the three months ended April 29, 2016. The Company determined fair value using a discounted cash flow model which included significant unobservable inputs and assumptions.  The unobservable inputs used include projected cash outflows over varying possible maturity dates, weighted by the probability of those possible outcomes, along with assumed discount rates.

Common Stock Purchase Agreements — The equity financing agreements obtained by Parent in connection with the EMC merger transaction described in Note 1 of the Notes to the Unaudited Condensed Consolidated Financial Statements permit


13
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DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Michael S. Dell, the MSD Partners Funds, Silver Lake Partners, and Temasek Holdings (Private) Limited ("Temasek") to purchase Parent common stock at a fixed price per share contingent on the closing of the EMC merger transaction. Each agreement also provides for a price protection in the event additional equity investors purchase Parent common stock at a lower price. The agreements with Michael S. Dell, the MSD Partners Funds, and Silver Lake Partners are not required to be remeasured to fair value and are effectively capital commitments, because of the degree of control and influence such persons can exercise over Parent, including control over when and at what price Parent will issue new shares, as well as the fact that the equity agreements were entered into solely for the purpose of financing the EMC merger transaction. The provision relating to price protection is considered substantive to Temasek as an unrelated party. Consequently, the Company has recognized the contract as an asset or liability, initially recorded at fair value of zero, with subsequent changes in fair value recorded in earnings. As of April 29, 2016, the Company recorded a liability of $6 million related to the Temasek equity contract.

The Company determined the fair value of this forward contract using a Black-Scholes valuation model, which included significant unobservable inputs and assumptions. The unobservable inputs used include the current value of the Parent common stock, which was estimated based on a combination of a discounted cash flow methodology and a market approach, the probability of the EMC merger occurring, the time period to contract expiration, and the probability that Parent will issue its shares below the foregoing fixed price per share. Varying these inputs could materially alter the fair value recognized for this instrument.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis — Certain assets are measured at fair value on a nonrecurring basis and therefore are not included in the recurring fair value table above. These assets consist primarily of non-financial assets such as goodwill and intangible assets and investments accounted for under the cost method. See Note 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information about goodwill and intangible assets. Investments accounted for under the cost method are measured at fair value initially. Subsequently, when there is an indicator of impairment, the impairment is recognized.


14
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 4 — FINANCIAL SERVICES

Dell Financial Services

The Company offers or arranges various financing options and services for its business and consumer customers in the United States, Canada, Europe, and Mexico through Dell Financial Services and its affiliates (collectively, "DFS"). The key activities of DFS include the origination, collection, and servicing of customer receivables primarily related to the purchase of Dell products and services. New financing originations, which represent the amounts of financing provided by DFS to customers for equipment and related software and services, including third-party originations, were $0.8 billion and $0.9 billion for the three months ended April 29, 2016 and May 1, 2015, respectively.

The Company's financing receivables are aggregated into the following categories:

•
Revolving loans — Revolving loans offered under private label credit financing programs provide qualified customers with a revolving credit line for the purchase of products and services offered by Dell. These private label credit financing programs are referred to as Dell Preferred Account ("DPA") and Dell Business Credit ("DBC"). The DPA product is primarily offered to individual consumer customers, and the DBC product is primarily offered to small and medium-sized commercial customers. Revolving loans in the United States bear interest at a variable annual percentage rate that is tied to the prime rate. Based on historical payment patterns, revolving loan transactions are typically repaid within twelve months on average.

•
Fixed-term sales-type leases and loans — The Company enters into sales-type lease arrangements with customers who desire lease financing. Leases with business customers have fixed terms of generally two to four years. Future maturities of minimum lease payments as of April 29, 2016 were as follows: Fiscal 2017 - $1,232 million; Fiscal 2018 - $1,166 million; Fiscal 2019 - $587 million; Fiscal 2020 - $154 million; Fiscal 2021 and beyond - $29 million. The Company also offers fixed-term loans to qualified small businesses, large commercial accounts, governmental organizations, educational entities, and certain individual consumer customers. These loans are repaid in equal payments including interest and have defined terms of generally three to five years.

The following table summarizes the components of the Company's financing receivables segregated by portfolio segment as of April 29, 2016 and January 29, 2016:
 
April 29, 2016
 
January 29, 2016
 
Revolving
 
Fixed-term
 
Total
 
Revolving
 
Fixed-term
 
Total
 
(in millions)
Financing Receivables, net:
 

 
 

 
 
 
 
 
 
 
 
Customer receivables, gross
$
1,091

 
$
3,656

 
$
4,747

 
$
1,173

 
$
3,637

 
$
4,810

Allowances for losses
(107
)
 
(58
)
 
(165
)
 
(118
)
 
(58
)
 
(176
)
Customer receivables, net
984

 
3,598

 
4,582

 
1,055

 
3,579

 
4,634

Residual interest
—

 
463

 
463

 
—

 
458

 
458

Financing receivables, net
$
984

 
$
4,061

 
$
5,045

 
$
1,055

 
$
4,037

 
$
5,092

Short-term
$
984

 
$
1,871

 
$
2,855

 
$
1,055

 
$
1,860

 
$
2,915

Long-term
$
—

 
$
2,190

 
$
2,190

 
$
—

 
$
2,177

 
$
2,177




15
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


The following table summarizes the changes in the allowance for financing receivable losses for the respective periods:

 
Three Months Ended
 
April 29, 2016
 
May 1, 2015
 
Revolving
 
Fixed-term
 
Total
 
Revolving
 
Fixed-term
 
Total
 
(in millions)
Allowance for financing receivable losses:
 
 
 
 
 
 
 
 
 
 

Balance at beginning of period
$
118

 
$
58

 
$
176

 
$
145

 
$
49

 
$
194

Charge-offs, net of recoveries
(25
)
 
(3
)
 
(28
)
 
(31
)
 
(2
)
 
(33
)
Provision charged to income statement
14

 
3

 
17

 
20

 
6

 
26

Balance at end of period
$
107

 
$
58

 
$
165

 
$
134

 
$
53

 
$
187


The following table summarizes the aging of the Company's customer financing receivables, gross, including accrued interest, as of April 29, 2016 and January 29, 2016, segregated by class:

 
April 29, 2016
 
January 29, 2016
 
Current
 
Past Due 1 — 90 Days
 
Past Due > 90 Days
 
Total
 
Current
 
Past Due 1 — 90 Days
 
Past Due > 90 Days
 
Total
 
(in millions)
Revolving — DPA
$
764

 
$
81

 
$
28

 
$
873

 
$
812

 
$
99

 
$
36

 
$
947

Revolving — DBC
197

 
16

 
5

 
218

 
202

 
20

 
4

 
226

Fixed-term — Consumer and Small Commercial
244

 
8

 
2

 
254

 
315

 
13

 
1

 
329

Fixed-term — Medium and Large Commercial
3,254

 
123

 
25

 
3,402

 
3,131

 
171

 
6

 
3,308

Total customer receivables, gross
$
4,459

 
$
228

 
$
60

 
$
4,747

 
$
4,460

 
$
303

 
$
47

 
$
4,810




16
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Credit Quality

The following table summarizes customer receivables, gross, including accrued interest, by credit quality indicator segregated by class, as of April 29, 2016 and January 29, 2016. The categories shown in the table below segregate customer receivables based on the relative degrees of credit risk. The credit quality indicators for DPA revolving accounts are measured primarily as of each quarter-end date, while all other indicators are generally updated on a periodic basis.

For DPA revolving receivables shown in the table below, the Company makes credit decisions based on proprietary scorecards, which include the customer's credit history, payment history, credit usage, and other credit agency-related elements. The higher quality category includes prime accounts generally of a higher credit quality that are comparable to U.S. customer FICO scores of 720 or above. The mid-category represents the mid-tier accounts that are comparable to U.S. customer FICO scores from 660 to 719. The lower category is generally sub-prime and represents lower credit quality accounts that are comparable to U.S customer FICO scores below 660. For the DBC revolving receivables and fixed-term commercial receivables shown in the table below, an internal grading system is utilized that assigns a credit level score based on a number of considerations, including liquidity, operating performance, and industry outlook. The grading criteria and classifications for the fixed-term products differ from those for the revolving products as loss experience varies between these product and customer groups. The credit quality categories cannot be compared between the different classes as loss experience varies substantially between the classes.
 
April 29, 2016
 
January 29, 2016
 
Higher
 
Mid
 
Lower
 
Total
 
Higher
 
Mid
 
Lower
 
Total
 
(in millions)
Revolving — DPA
$
140

 
$
253

 
$
480

 
$
873

 
$
148

 
$
270

 
$
529

 
$
947

Revolving — DBC
$
65

 
$
65

 
$
88

 
$
218

 
$
68

 
$
65

 
$
93

 
$
226

Fixed-term — Consumer and Small Commercial
$
58

 
$
120

 
$
76

 
$
254

 
$
93

 
$
136

 
$
100

 
$
329

Fixed-term — Medium and Large Commercial
$
1,529

 
$
1,160

 
$
713

 
$
3,402

 
$
1,597

 
$
1,075

 
$
636

 
$
3,308



Securitizations and Structured Financing Debt

The Company transfers certain U.S. customer financing receivables to Special Purpose Entities ("SPEs") that meet the definition of a Variable Interest Entity ("VIE") and are consolidated, along with the associated debt, into the Company's Consolidated Financial Statements, as the Company is the primary beneficiary of those VIEs. These SPEs are bankruptcy remote legal entities with separate assets and liabilities. The purpose of these SPEs is to facilitate the funding of customer receivables in the capital markets.

The following table shows financing receivables held by the consolidated VIEs as of the respective dates:
 
April 29, 2016
 
January 29, 2016
 
(in millions)
Financing receivables held by consolidated VIEs, net:
 

 
 

Short-term, net
$
2,061

 
$
2,125

Long-term, net
1,212

 
1,215

Financing receivables held by consolidated VIEs, net
$
3,273

 
$
3,340


Financing receivables transferred via securitization through SPEs were $0.6 billion and $1.0 billion for the three months ended April 29, 2016 and May 1, 2015, respectively.

Some of the SPEs have entered into financing arrangements with multi-seller conduits that, in turn, issue asset-backed debt securities in the capital markets. The Company's risk of loss related to securitized receivables is limited to the amount by which


17
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


the Company's right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities. The Company provides credit enhancement to the securitization in the form of over-collateralization.

The Company's total structured financing debt, which is collateralized by financing receivables in the United States, Canada, and Europe, was $3.4 billion as of both April 29, 2016 and January 29, 2016 under the following programs:

•
The structured financing debt program in the United States, which is related to the fixed-term lease and loan securitization program and the revolving loan securitization program, was $1.5 billion and $1.3 billion as of April 29, 2016 and January 29, 2016, respectively. This debt is collateralized solely by the U.S financing receivables in the programs. The debt has a variable interest rate and the duration of this debt is based on the terms of the underlying financing receivables. As of April 29, 2016, the total debt capacity related to the securitization programs was $2.1 billion. The Company enters into interest swap agreements to effectively convert the portion of its structured financing debt from a floating rate to a fixed rate. See Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information about interest rate swaps.

The Company's securitization programs became effective on October 29, 2013. The revolving program, which was extended during the first quarter of Fiscal 2017, is effective for four and one-half years. The fixed term program, which was extended during the first quarter of Fiscal 2016, is effective for four and one-half years. The programs contain standard structural features related to the performance of the securitized receivables which include defined credit losses, delinquencies, average credit scores, and minimum collection requirements. In the event one or more of these criteria are not met and the Company is unable to restructure the program, no further funding of receivables will be permitted and the timing of the Company's expected cash flows from over-collateralization will be delayed. As of April 29, 2016, these criteria were met.

•
The Company may periodically issue asset-backed debt securities to private investors. As of April 29, 2016, the associated debt balance of these securities was $1.3 billion. The asset-backed debt securities are collateralized solely by the U.S. fixed-term financing receivables in the offerings, which are held by SPEs. The interest rate on these securities is fixed and ranges from 0.26% to 3.61% and the duration of these securities is based on the terms of the underlying financing receivables.

•
In connection with the Company's international financing operations, the Company has entered into revolving structured financing debt programs related to its fixed-term lease and loan products sold in Canada and Europe. As of April 29, 2016, the Canadian program, which was extended during the three months ended April 29, 2016, had a total debt capacity of $175 million. This program is effective for two years, beginning on April 15, 2016, and is collateralized solely by the Canadian financing receivables. The European program, which was extended during the three months ended May 1, 2015, is effective for four years, beginning on December 23, 2013. The program is collateralized solely by the European financing receivables and had a total debt capacity of $679 million as of April 29, 2016. The aggregate outstanding balances of the Canadian and European revolving structured loans as of April 29, 2016 and January 29, 2016 were $598 million and $559 million, respectively.

Financing Receivable Sales

To manage certain concentrations of customer credit exposure, the Company may sell selected fixed-term financing receivables to unrelated third parties on a periodic basis. During the three months ended April 29, 2016, the amount of financing receivables sold was $80 million. During the three months ended May 1, 2015, the Company did not have any material sales of financing receivables.



18
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 5 — DEBT

The following table summarizes the Company's outstanding debt as of the dates indicated:
 
April 29,
2016
 
January 29,
2016
 
(in millions)
Secured Debt
 

 
 

Structured financing debt
$
3,405

 
$
3,411

3.75% Floating rate due October 2018 ("Term Loan C Facility")
919

 
1,003

4.00% Floating rate due April 2020 ("Term Loan B Facility")
4,317

 
4,329

4.00% Floating rate due April 2020 ("Term Loan Euro Facility")
923

 
891

5.625% due October 2020 ("Senior First Lien Notes")
1,400

 
1,400

Unsecured Notes and Debentures
 
 
 
3.10% due April 2016
—

 
400

5.65% due April 2018
500

 
500

5.875% due June 2019
600

 
600

4.625% due April 2021
400

 
400

7.10% due April 2028
300

 
300

6.50% due April 2038
388

 
388

5.40% due September 2040
265

 
265

Other
62

 
93

Total debt, principal amount
13,479

 
13,980

Unamortized discount, net of unamortized premium
(216
)
 
(221
)
Debt issuance costs
(119
)
 
(128
)
Total debt, carrying value
$
13,144

 
$
13,631

Total short-term debt
$
2,465

 
$
2,981

Total long-term debt
$
10,679

 
$
10,650


To finance the acquisition of Dell by Denali Holding, the Company issued $13.9 billion in debt, which included borrowings under the Term Loan facilities and the ABL Credit Facility, proceeds from the sale of the Senior First Lien Notes and other notes, as well as borrowings under the structured financing debt programs. During the three months ended April 29, 2016, the Company repaid $0.4 billion of maturing Unsecured Notes and Debentures as well as $0.1 billion of Term Loan facilities.

Term Loan Facilities — The $1.5 billion Term Loan C Facility was issued on October 29, 2013, and provides for equal quarterly principal amortization in an annual amount equal to 10% of the original principal amount in the first year of the agreement and increasing annual percentage amounts in subsequent years with the payment of the outstanding balance due at maturity, in October 2018. The annual principal amortization percentage is currently 22.5%. The $4.7 billion Term Loan B Facility and the €0.7 billion Term Loan Euro Facility were issued on October 29, 2013, and provide for quarterly principal amortization in an annual amount equal to 1% of the original principal amount and payment of the outstanding balances due at maturity in April 2020. On June 10, 2015, the Company refinanced and amended the Term Loan facilities to reduce interest rate floors and margins and to modify certain covenant requirements. The refinancing increased the outstanding Term Loan Euro Facility to €0.8 billion, which was offset by a decrease in the Term Loan B Facility to $4.4 billion. Borrowings under the Term Loan facilities bear interest, payable quarterly, at a rate per annum equal to an applicable margin, plus, at the borrowers’ option, either (a) a base rate or (b) a LIBOR rate for the applicable currency, in each case, subject to interest rate floors. Under the Term Loan facilities, if the Company has excess cash flows that are not reinvested in working capital, strategic investments, or finance activities on an annual basis and if the Company’s secured leverage ratio falls within certain thresholds, a percentage of the excess cash flows is required to be applied to prepay secured debt.


19
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



Senior First Lien Notes — The Senior First Lien Notes were issued on October 7, 2013 in an aggregate principal amount of
$1.5 billion and are payable in full at maturity, in October 2020. As of April 29, 2016, the outstanding balance of these notes was $1.4 billion. Interest on the Senior First Lien Notes is payable semiannually.

ABL Credit Facility — On October 29, 2013, the Company entered into a secured ABL Credit Facility to support its working capital needs. The maximum aggregate borrowings under this revolving credit facility are approximately $2.0 billion. Borrowings under the ABL Credit Facility are subject to a borrowing base, which consists of certain receivables and inventory. Available borrowings under the ABL Credit Facility are reduced by draws on the facility as well as letters of credit. As of April 29, 2016, there were no draws on the facility and, after taking into account outstanding letters of credit, available borrowings totaled $1.6 billion. Borrowings under the facility bear interest at a rate per annum equal to an applicable margin, plus, at the borrowers’ option, either (a) a base rate, (b) a LIBOR rate or (c) certain other applicable rates. The applicable margin under the facility is determined based on excess liquidity as a percentage of the maximum borrowing amount under the facility. The ABL Credit Facility will expire in October 2018.

The borrowers under the Term Loan facilities and the ABL Credit Facility and the co-issuers of the Senior First Lien Notes are
subsidiaries of Dell Inc. Dell Inc. and substantially all of its domestic subsidiaries guarantee the borrowings under the Term
Loan facilities and the obligations under the Senior First Lien Notes. Dell Inc. and certain of its domestic subsidiaries guarantee the borrowings under the ABL Credit Facility. All borrowings and other obligations under the Term Loan facilities and the ABL Credit Facility generally are secured by first-priority or second-priority security interests in substantially all of the assets of Dell Inc., the borrowers under the facilities and the guarantors of the facilities, as well as by pledges of the equity interests of Dell Inc. and certain of its subsidiaries, and a portion of the equity interests of certain first-tier foreign subsidiaries of Dell Inc. All obligations under the Senior First Lien Notes are secured by a first-priority security interest in certain cash flow collateral and a second-priority security interest in other collateral securing the ABL Credit Facility.

Structured Financing Debt — As of both April 29, 2016 and January 29, 2016, the Company had $3.4 billion in outstanding structured financing debt, which was primarily related to the fixed-term lease and loan securitization programs and the revolving loan securitization programs. See Note 4 and Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements for further discussion of the structured financing debt and the interest rate swap agreements that hedge a portion of that debt.

Unsecured Notes and Debentures — The Company's Unsecured Notes and Debentures were issued by the Predecessor entity prior to the acquisition of Dell by Denali Holding. Interest on these borrowings is payable semiannually.

The total carrying value and estimated fair value of the outstanding Senior First Lien Notes and Unsecured Notes and Debentures, including the current portion, were $3.7 billion and $3.8 billion, respectively, as of April 29, 2016 and $4.1 billion and $4.2 billion, respectively, as of January 29, 2016. The total carrying value and estimated fair value of the Term Loan facilities, including the current portion, were $6.0 billion and $6.2 billion, respectively, as of April 29, 2016 and $6.1 billion and $6.2 billion, respectively, as of January 29, 2016. The fair value of the outstanding Senior First Lien Notes, the outstanding Unsecured Notes and Debentures, and the Term Loan facilities was determined based on observable market prices in a less active market and was categorized as Level 2 in the fair value hierarchy. The fair values of the other short-term debt and the structured financing debt approximate their carrying values due to their short-term maturities.



20
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


As of April 29, 2016, aggregate future maturities of the Company's debt were as follows:
 
Maturities by Fiscal Year
 
2017 (remaining nine months)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
(in millions)
Structured Financing Debt
$
1,593

 
$
1,202

 
$
553

 
$
49

 
$
8

 
$
—

 
$
3,405

Term Loan Facilities and Senior First Lien Notes
300

 
428

 
334

 
53

 
6,444

 
—

 
7,559

Unsecured Notes and Debentures
—

 
—

 
500

 
600

 
—

 
1,353

 
2,453

Other
25

 
9

 
2

 
—

 
—

 
26

 
62

Total maturities, principal amount
1,918

 
1,639

 
1,389

 
702

 
6,452

 
1,379

 
13,479

Associated carrying value adjustments
(2
)
 
(1
)
 
(17
)
 
(3
)
 
(138
)
 
(174
)
 
(335
)
Total maturities, carrying value amount
$
1,916

 
$
1,638

 
$
1,372

 
$
699

 
$
6,314

 
$
1,205

 
$
13,144



Covenants and Restricted Net Assets — The credit agreements for the Term Loan facilities and the ABL Credit Facility and the indenture governing the Senior First Lien Notes contain covenants restricting the ability of the Company and its restricted subsidiaries, subject to specified exceptions, to incur additional debt, create liens on certain assets to secure debt, pay dividends and make other restricted payments, make certain investments, sell or transfer certain assets, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets, and enter into certain transactions with affiliates. The Company designated certain subsidiaries as unrestricted subsidiaries for all purposes of credit agreements and the indenture as of August 1, 2015, the impact of which was not material to its financial position as of April 29, 2016 or results of operations for the three months then ended. The indentures governing the Unsecured Notes and Debentures contain covenants limiting the Company's ability to create certain liens, enter into sale-and-lease back transactions, and consolidate or merge with, or convey, transfer, or lease all or substantially all of its assets to, another person. The credit agreements and all such indentures contain customary events of default, including failure to make required payments, failure to comply with covenants, and the occurrence of certain events of bankruptcy and insolvency. The ABL Credit Facility requires compliance with conditions that must be satisfied prior to any borrowing and maintenance of a minimum fixed charge coverage ratio. The Company was in compliance with all financial covenants as of April 29, 2016.




21
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 6 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivative Instruments

As part of its risk management strategy, the Company uses derivative instruments, primarily forward contracts, purchased options, and interest rate swaps to hedge certain foreign currency and interest rate exposures. The Company's objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge the exposures, thereby reducing volatility of earnings and protecting the fair values of assets and liabilities. For derivatives designated as cash flow hedges, the Company assesses hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative and recognizes any ineffective portion of the hedge in earnings as a component of interest and other, net. Hedge ineffectiveness recognized in earnings was not material during the three months ended April 29, 2016 and May 1, 2015.

Foreign Exchange Risk

The Company uses forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. The risk of loss associated with purchased options is limited to premium amounts paid for the option contracts. 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. The majority of these contracts typically expire in twelve months or less.

During the three months ended April 29, 2016 and May 1, 2015, the Company did not discontinue any cash flow hedges related to foreign exchange contracts that had a material impact on the Company's results of operations due to the probability that the forecasted cash flows would not occur.

The Company uses forward contracts to hedge monetary assets and liabilities denominated in a foreign currency. These contracts generally expire in three months or less, are considered economic hedges, and are not designated for hedge accounting. The change in the fair value of these instruments represents a natural hedge as their gains and losses offset the changes in the underlying fair value of the monetary assets and liabilities due to movements in currency exchange rates.

In connection with the expanded offerings of DFS in Europe, forward contracts are used to hedge financing receivables denominated in foreign currencies. The majority of these contracts expire within three years or less and are not designated for hedge accounting.

Interest Rate Risk

The Company uses interest rate swaps to hedge the variability in cash flows related to the interest rate payments on structured financing debt. The interest rate swaps economically convert the variable rate on the structured financing debt to a fixed interest rate to match the underlying fixed rate being received on fixed-term customer leases and loans. These contracts are not designated for hedge accounting and most expire within three years or less.

Interest rate swaps are utilized to manage the interest rate risk, at a portfolio level, associated with DFS operations in Europe. The interest rate swaps economically convert the fixed rate on financing receivables to a three-month Euribor floating rate basis in order to match the floating rate nature of the banks' funding pool. These contracts are not designated for hedge accounting and most expire within three years or less.



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DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Notional Amounts of Outstanding Derivative Instruments

The notional amounts of the Company's outstanding derivative instruments were as follows as of the dates indicated:
 
 
April 29, 2016
 
January 29, 2016
 
 
(in millions)
Foreign Exchange Contracts
 
 

 
 

Designated as cash flow hedging instruments
 
$
3,731

 
$
3,947

Non-designated as hedging instruments
 
788

 
985

Total
 
$
4,519

 
$
4,932

 
 
 
 
 
Interest Rate Contracts
 
 
 
 
Non-designated as hedging instruments
 
$
1,202

 
$
1,017


Effect of Derivative Instruments on the Consolidated Statements of Financial Position and the Consolidated Statements of Income (Loss)

Derivatives in
Cash Flow
Hedging Relationships
 
Gain (Loss)
Recognized
in Accumulated
OCI, Net
of Tax, on
Derivatives
(Effective Portion)
 
Location of Gain (Loss)
Reclassified
from Accumulated
OCI into Income
(Effective Portion)
 
Gain (Loss)
Reclassified
from Accumulated
OCI into Income
(Effective Portion)
 
Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
(in millions)
For the three months ended April 29, 2016
 
 
 
 
 
 
 
 
 

 
Total net revenue
 
$
(45
)
 
 
 
 
Foreign exchange contracts
 
$
(165
)
 
Total cost of net revenue
 
(8
)
 
 
 
 
Interest rate contracts
 
—

 
Interest and other, net
 
—

 
Interest and other, net
 
$
(1
)
Total
 
$
(165
)
 
 
 
$
(53
)
 
 
 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
For the three months ended May 1, 2015
 
 
 
 
 
 
 
 
 

 
Total net revenue
 
$
173

 
 
 
 
Foreign exchange contracts
 
$
(6
)
 
Total cost of net revenue
 
11

 
 
 
 
Interest rate contracts
 
—

 
Interest and other, net
 
—

 
Interest and other, net
 
$
—

Total
 
$
(6
)
 
 
 
$
184

 
 
 
$
—



23
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DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Fair Value of Derivative Instruments in the Consolidated Statements of Financial Position
The Company presents its foreign exchange derivative instruments on a net basis in the Condensed Consolidated Statements of Financial Position due to the right of offset by its counterparties under master netting arrangements. The fair value of those derivative instruments presented on a gross basis as of each date indicated below was as follows:
 
 
April 29, 2016
 
 
Other Current
Assets
 
Other Non-
Current Assets
 
Other Current
Liabilities
 
Other Non-Current
Liabilities
 
Total
Fair Value
 
 
 
 
(in millions)
 
 
Derivatives Designated as Hedging Instruments
Foreign exchange contracts in an asset position
 
$
12

 
$
—

 
$
24

 
$
—

 
$
36

Foreign exchange contracts in a liability position
 
(3
)
 
—

 
(44
)
 
—

 
(47
)
Net asset (liability)
 
9

 
—

 
(20
)
 
—

 
(11
)
Derivatives not Designated as Hedging Instruments
Foreign exchange contracts in an asset position
 
49

 
3

 
80

 
—

 
132

Foreign exchange contracts in a liability position
 
(23
)
 
—

 
(193
)
 
(3
)
 
(219
)
Interest rate contracts in an asset position
 
—

 
—

 
—

 
—

 
—

Interest rate contracts in a liability position
 
—

 
—

 
—

 
(3
)
 
(3
)
Net asset (liability)
 
26

 
3

 
(113
)
 
(6
)
 
(90
)
Total derivatives at fair value
 
$
35

 
$
3

 
$
(133
)
 
$
(6
)
 
$
(101
)
 
 
 
 
 
 
 
 
 
 
 
 
 
January 29, 2016
 
 
Other Current
Assets
 
Other Non-
Current Assets
 
Other Current
Liabilities
 
Other Non-Current
Liabilities
 
Total
Fair Value
 
 
 
 
(in millions)
 
 
Derivatives Designated as Hedging Instruments
Foreign exchange contracts in an asset position
 
$
100

 
$
—

 
$
—

 
$
—

 
$
100

Foreign exchange contracts in a liability position
 
(11
)
 
—

 
—

 
—

 
(11
)
Net asset (liability)
 
89

 
—

 
—

 
—

 
89

Derivatives not Designated as Hedging Instruments
Foreign exchange contracts in an asset position
 
301

 
1

 
—

 
—

 
302

Foreign exchange contracts in a liability position
 
(198
)
 
—

 
(5
)
 
(3
)
 
(206
)
Interest rate contracts in an asset position
 
—

 
2

 
—

 
—

 
2

Interest rate contracts in a liability position
 
—

 
—

 
—

 
(4
)
 
(4
)
Net asset (liability)
 
103

 
3

 
(5
)
 
(7
)
 
94

Total derivatives at fair value
 
$
192

 
$
3

 
$
(5
)
 
$
(7
)
 
$
183




24
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DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


The following table presents the gross amounts of the Company's derivative instruments, amounts offset due to master netting agreements with the Company's various counterparties, and the net amounts recognized in the Condensed Consolidated Statements of Financial Position.
 
April 29, 2016
 
Gross Amounts of Recognized Assets/ (Liabilities)
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets/ (Liabilities) Presented in the Statement of Financial Position
 
Gross Amounts not Offset in the Statement of Financial Position
 
Net Amount
 
Financial Instruments
 
Cash Collateral Received or Pledged
 
 
(in millions)
Derivative Instruments
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
168

 
$
(130
)
 
$
38

 
$
—

 
$
—

 
$
38

Financial liabilities
(269
)
 
130

 
(139
)
 
—

 
—

 
(139
)
Total Derivative Instruments
$
(101
)
 
$
—

 
$
(101
)
 
$
—

 
$
—

 
$
(101
)
 
 
 
 
 
 
 
 
 
 
 
 
 
January 29, 2016
 
Gross Amounts of Recognized Assets/ (Liabilities)
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets/ (Liabilities) Presented in the Statement of Financial Position
 
Gross Amounts not Offset in the Statement of Financial Position
 
Net Amount
 
Financial Instruments
 
Cash Collateral Received or Pledged
 
 
(in millions)
Derivative Instruments
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
404

 
$
(209
)
 
$
195

 
$
—

 
$
—

 
$
195

Financial liabilities
(221
)
 
209

 
(12
)
 
—

 
—

 
(12
)
Total Derivative Instruments
$
183

 
$
—

 
$
183

 
$
—

 
$
—

 
$
183




25
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 7 — GOODWILL AND INTANGIBLE ASSETS

In connection with the acquisition of Dell by Denali Holding on October 29, 2013, all of the Company’s tangible and intangible assets and liabilities were accounted for and recognized at fair value on the transaction date. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed was accounted for and recognized as goodwill. Accordingly, on the date of the going-private transaction, there was no excess fair value for any of the Company's goodwill reporting units.

Goodwill

The following table presents goodwill allocated to the Company's business segments as of April 29, 2016 and January 29, 2016, and changes in the carrying amount of goodwill for the respective periods:
 
Client Solutions
 
Enterprise Solutions Group
 
Dell Software Group
 
Corporate
 
Total
 
(in millions)
Balances at January 29, 2016
$
4,428

 
$
3,907

 
$
1,406

 
$
56

 
$
9,797

Goodwill recognized during the period
—

 
—

 
—

 
—

 
—

Adjustments
—

 
—

 
—

 
—

 
—

Balances at April 29, 2016
$
4,428

 
$
3,907

 
$
1,406

 
$
56

 
$
9,797


Goodwill and indefinite-lived intangible assets are tested for impairment annually during the third fiscal quarter and whenever events or circumstances may indicate that an impairment has occurred. Based on the results of the annual impairment test, which was a qualitative and quantitative test, no impairment of goodwill or indefinite-lived intangible assets existed for any reporting unit as of October 30, 2015. As a result of this analysis, it was determined that the excess of fair value over carrying amount was greater than 15% for all of the Company's goodwill reporting units, with the exception of Dell Software Group, which had an excess of fair value over carrying amount of 14%. Management will continue to monitor the Dell Software Group goodwill reporting unit and consider potential impacts to the impairment assessment. The announcement of the divestiture of Dell Services during the three months ended April 29, 2016 created a triggering event that required assessment of goodwill. As a result of this assessment, the Company determined no impairment existed as of April 29, 2016. Further, the Company did not have any accumulated goodwill impairment charges as of April 29, 2016.

Management exercised significant judgment related to the above assessment, including the identification of goodwill reporting units, assignment of assets and liabilities to goodwill reporting units, assignment of goodwill to reporting units, and determination of the fair value of each goodwill reporting unit. The fair value of each goodwill reporting unit is generally estimated using a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, the estimation of the long-term growth rate of the Company's business, and the determination of the Company's weighted average cost of capital. Changes in these estimates and assumptions could materially affect the fair value of the goodwill reporting unit, potentially resulting in a non-cash impairment charge.







26
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DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Intangible Assets

The Company's intangible assets as of April 29, 2016 and January 29, 2016, were as follows:
 
 
April 29, 2016
 
January 29, 2016
 
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
 
 
(in millions)
Customer relationships
 
$
10,193

 
$
(4,099
)
 
$
6,094

 
$
10,193

 
$
(3,706
)
 
$
6,487

Technology
 
2,115

 
(1,183
)
 
932

 
2,115

 
(1,062
)
 
1,053

Trade names
 
334

 
(132
)
 
202

 
334

 
(119
)
 
215

Finite-lived intangible assets
 
12,642

 
(5,414
)
 
7,228

 
12,642

 
(4,887
)
 
7,755

Indefinite-lived intangible assets
 
1,435

 
—

 
1,435

 
1,435

 
—

 
1,435

Total intangible assets
 
$
14,077

 
$
(5,414
)
 
$
8,663

 
$
14,077

 
$
(4,887
)
 
$
9,190


Amortization expense related to finite-lived intangible assets was approximately $527 million and $529 million during the three months ended April 29, 2016 and May 1, 2015, respectively. There were no material impairment charges related to intangible assets during the three months ended April 29, 2016 and May 1, 2015.

Estimated future annual pre-tax amortization expense of finite-lived intangible assets as of April 29, 2016 over the next five fiscal years and thereafter is as follows:
Fiscal Years
(in millions)
2017 (remaining nine months)
$
1,562

2018
1,853

2019
1,773

2020
901

2021
621

Thereafter
518

Total
$
7,228



27
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 8 — WARRANTY AND DEFERRED EXTENDED WARRANTY REVENUE

The Company records a liability for its standard limited warranties at the time of sale for the estimated costs that may be incurred. The liability for standard warranties is included in accrued and other current liabilities and other non-current liabilities in the Condensed Consolidated Statements of Financial Position.

Changes in the Company's liabilities for standard limited warranties are presented in the following table for the periods indicated.
 
Three Months Ended
 
April 29, 2016
 
May 1, 2015
 
(in millions)
Warranty liability:
 
 
 
Warranty liability at beginning of period
$
574

 
$
679

Costs accrued for new warranty contracts and changes in estimates for pre-existing warranties (a) (b)
200

 
202

Service obligations honored
(213
)
 
(206
)
Warranty liability at end of period
$
561

 
$
675

Current portion
$
383

 
$
446

Non-current portion
$
178

 
$
229

____________________
(a)
Changes in cost estimates related to pre-existing warranties are aggregated with accruals for new standard warranty contracts. The Company's warranty liability process does not differentiate between estimates made for pre-existing warranties and new warranty obligations.
(b)
Includes the impact of foreign currency exchange rate fluctuations.

Revenue from the sale of extended warranties is recognized over the term of the contract or when the service is completed, and the costs associated with these contracts are recognized as incurred. Deferred extended warranty revenue is included in deferred revenue in the Condensed Consolidated Statements of Financial Position.

Changes in the Company's liabilities for deferred revenue related to extended warranties are presented in the following table for the periods indicated.
 
Three Months Ended
 
April 29, 2016
 
May 1, 2015
 
(in millions)
Deferred extended warranty revenue:
 
 
 
Deferred extended warranty revenue at beginning of period
$
7,229

 
$
6,573

Revenue deferred for new extended warranties (a)
1,148

 
1,055

Service revenue recognized
(943
)
 
(875
)
Deferred extended warranty revenue at end of period
$
7,434

 
$
6,753

Current portion
$
3,407

 
$
3,037

Non-current portion
$
4,027

 
$
3,716

____________________
(a)
Includes the impact of foreign currency exchange rate fluctuations.


28
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 9 — COMMITMENTS AND CONTINGENCIES

Legal Matters — The Company is involved in various claims, suits, assessments, investigations, and legal proceedings that arise from time to time in the ordinary course of its business, including those identified below, consisting of matters involving consumer, antitrust, tax, intellectual property, and other issues on a global basis. The Company accrues a liability when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals at least quarterly and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated and therefore accruals have not been made. The following is a discussion of the Company's significant legal matters and other proceedings:

EMC Merger Litigation — The Company, Dell, and Universal Acquisition Co. (“Universal”) have been named as defendants in fifteen putative class-action lawsuits brought by purported EMC shareholders and VMware stockholders challenging the proposed merger between the Company, Dell, and Universal on the one hand, and EMC on the other. Those suits are captioned as follows: (1) IBEW Local No. 129 Benefit Fund v. Tucci, Civ. No. 1584-3130-BLS1 (Mass. Super. Ct., Suffolk Cnty. filed Oct. 15, 2015); (2) Barrett v. Tucci, Civ. No. 15-6023-A (Mass. Super. Ct, Middlesex Cnty. filed Oct. 16, 2015); (3) Graulich v. Tucci, Civ. No. 1584-3169-BLS1 (Mass. Super. Ct, Suffolk Cnty. filed Oct. 19, 2015; (4) Vassallo v. EMC Corp., Civ. No. 1584-3173-BLS1 (Mass. Super. Ct, Suffolk Cnty. filed Oct. 19, 2015); (5) City of Miami Police Relief & Pension Fund v. Tucci, Civ. No. 1584-3174-BLS1 (Mass. Super. Ct. Suffolk Cnty. filed Oct. 19, 2015); (6) Lasker v. EMC Corp., Civ. No. 1584-3214-BLS1 (Mass. Super. Ct. Suffolk Cnty. filed Oct. 23, 2015); (7) Walsh v. EMC Corp., Civ. No. 15-13654 (D. Mass. filed Oct. 27, 2015); (8) Local Union No. 373 U.A. Pension Plan v. EMC Corp., Civ. No. 1584-3253-BLS1 (Mass. Super. Ct. Suffolk Cnty. filed Oct. 28, 2015); (9) City of Lakeland Emps.’ Pension & Ret. Fund v. Tucci, Civ. No. 1584-3269-BLS1 (Mass. Super. Ct. Suffolk Cnty. filed Oct. 28, 2015); (10) Ma v. Tucci, Civ. No. 1584-3281-BLS1 (Mass. Super. Ct. Suffolk Cnty. filed Oct. 29, 2015); (11) Stull v. EMC Corp., Civ. No. 15-13692 (D. Mass. filed Oct. 30, 2015); (12) Jacobs v. EMC Corp., Civ. No. 15-6318-H (Mass. Super. Ct. Middlesex Cnty. filed Nov. 12, 2015); (13) Ford v. VMware, Inc., C.A. No. 11714-VCL (Del. Ch. filed Oct. 17, 2015); (14) Pancake v. EMC Corp., Civ. No. 16-10040 (D. Mass. filed Jan. 11, 2016); and (15) Booth Family Trust v. EMC Corp. Civ. No. 16-10114 (D. Mass. filed Jan. 26, 2016).

The fifteen lawsuits seek, among other things, injunctive relief enjoining the EMC merger, rescission of the EMC merger if consummated, an award of fees and costs, or an award of damages.
The complaints in the IBEW, Barrett, Graulich, Vassallo, City of Miami, Lasker, Local Union No. 373, City of Lakeland, and Ma actions generally allege that the EMC directors breached their fiduciary duties to EMC shareholders in connection with the EMC merger by, among other things, failing to maximize shareholder value and agreeing to provisions in the EMC merger agreement that discourage competing bids. The complaints generally further allege that there were various conflicts of interest in the proposed transaction. The IBEW, Graulich, City of Miami, and Ma plaintiffs brought suit against the Company, Dell, and Universal for injunctive relief. The Barrett, Vassallo, Lasker, Lakeland, and Local Union No. 373 plaintiffs brought suit against the Company, Dell, and Universal as alleged aiders and abettors. After consolidating the nine complaints, by decision dated December 7, 2015, the Suffolk County, Massachusetts Superior Court, Business Litigation Session, dismissed all nine complaints for failure to make a demand on the EMC board of directors. On January 21, 2016, the plaintiffs in the consolidated actions appealed. That appeal is pending.
The complaints in the Walsh, Stull, Pancake, and Booth actions allege that the EMC directors breached their fiduciary duties to EMC shareholders in connection with the EMC merger by, among other things, failing to maximize shareholder value and agreeing to provisions in the EMC merger agreement that discourage competing bids. The complaints generally further allege that there were various conflicts of interest in the proposed transaction and that the preliminary SEC Form S-4 filed by the Company on December 14, 2015 in connection with the transaction contained material misstatements and omissions, in violation of Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act”) and SEC Rule 14a-9 promulgated thereunder (“Rule 14a-9”). Under the amended complaints, the plaintiffs in the Walsh, Stull, and Pancake actions have brought suit against the Company, Dell, and Universal under


29
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Section 20(a) of the Exchange Act as alleged controlling persons of EMC. The plaintiffs in the Booth action have brought suit against the Company, Dell, and Universal under Section 14(a) of the Exchange Act and Rule 14a-9.

The amended complaints in the Jacobs and Ford actions allege that EMC, as the majority stockholder of VMware, and the individual defendants, who are directors of EMC, VMware, or both, breached their fiduciary duties to minority stockholders of VMware, Inc. ("VMware"), in connection with the proposed EMC merger by allegedly entering into or approving a merger that favors the interests of EMC and Dell at the expense of the minority stockholders. Under the amended complaint, the plaintiffs in the Jacobs action have brought suit against the Company, Dell, and Universal as alleged aiders and abettors. No oral argument date has been set for the motions to dismiss/motions to stay the Jacobs action. Under the amended complaint, the plaintiffs in the Ford action have brought suit against the Company and individual defendants for alleged breach of fiduciary duties to VMware and its stockholders, or, alternatively, against the Company, Dell, and Universal for aiding and abetting the alleged breach of fiduciary duties by EMC and VMware’s directors. On November 17, 2015, the plaintiffs in the Ford action moved for a preliminary injunction and for expedited discovery. Certain defendants filed motions to dismiss the amended complaint in the Ford action on February 26, 2016 and February 29, 2016. On March 7, 2016, the defendants moved to stay or dismiss the Jacobs action in favor of the Ford action. On April 19, 2016, EMC, the Company, Dell, Universal, and certain of the individual defendants filed briefs in support of the previously filed motions to dismiss.

No trial dates have been set in any of these actions. The outcome of these lawsuits is uncertain, and additional lawsuits may be brought or additional claims advanced concerning the EMC merger. An adverse judgment for monetary damages could have an adverse effect on the Company’s operations. A preliminary injunction could delay or jeopardize the completion of the EMC merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin the completion of the EMC merger.

Appraisal Proceedings — Holders of shares of Dell common stock who did not vote on September 12, 2013 in favor of the proposal to adopt the amended going-private transaction agreement and who properly demanded appraisal of their shares and who otherwise comply with the requirements of Section 262 of the Delaware General Corporate Law ("DGCL") are entitled to seek appraisal for, and obtain payment in cash for the judicially determined "fair value" (as defined pursuant to Section 262 of the DGCL) of, their shares in lieu of receiving the going-private transaction consideration. This appraised value could be more than, the same as, or less than the $13.75 per share going-private transaction consideration. Dell has recorded a liability of $13.75 for each share with respect to which appraisal has been demanded and as to which the demand has not been withdrawn, together with interest at the statutory rate discussed below. As of April 29, 2016, this liability was approximately $602 million, including $81 million in accrued interest.

Between October 29, 2013 and February 25, 2014, former Dell stockholders filed petitions in thirteen separate matters commencing appraisal proceedings in the Delaware Court of Chancery in which they seek a determination of the fair value of a total of approximately 38 million shares of Dell common stock plus interest, costs, and attorneys' fees. These matters have been consolidated as In Re Appraisal of Dell (C.A. No. 9322-VCL). The trial took place during the week of October 5, 2015. The parties expect a ruling sometime in 2016.
The appraisal proceedings are being conducted in accordance with the rules of the Delaware Court of Chancery. In these proceedings, the Court of Chancery will determine the fair value of the shares as to which appraisal has been properly demanded, exclusive of any element of value arising from the accomplishment or expectation of the going-private transaction. Unless the Court of Chancery in its discretion determines otherwise for good cause shown, interest on such fair value from the effective time of the going-private transaction through the date of payment of the judgment will be compounded quarterly and will accrue at a per annum rate of 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time. Any payment in respect of the shares subject to appraisal rights will be required to be paid in cash.

The outcome of the appraisal proceedings is uncertain. A judgment determining fair value in excess of the recorded liability of $13.75 per share noted above for any shares properly subject to appraisal could have a material adverse effect on the Company's results of operations and liquidity. In this regard, petitioners are seeking $28.61 per share, plus interest. Dell, by contrast, believes that the fair value of Dell on the day the going-private transaction was completed was $12.68. The number of shares subject to appraisal demands, including shares held by those parties


30
Table of Contents
DENALI HOLDING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


who have sought appraisal but not filed petitions, originally was 38,766,982. By orders dated June 27 and September 10, 2014, and May 13, May 14, July 13 and July 28, 2015, the Court of Chancery dismissed claims of holders of approximately 2,530,322 shares for failure to comply with the statutory requirements for seeking appraisal. On July 30, 2015, Dell moved for summary judgment seeking to dismiss claims of holders of an additional 30,730,930 shares (as well as a number of shares previously disqualified on other grounds) because those shares were voted in favor of the going-private transaction, and thus failed to comply with the statutory requirements for seeking appraisal. On May 11, 2016, the Court of Chancery granted Dell's motion and dismissed the appraisal claims of the shareholders of the 30,730,930 shares, determining that they were entitled to the merger consideration without interest. The Court of Chancery ruled on May 31, 2016, that the fair value of Dell Inc. shares as of October 29, 2013, the date the going-private transaction became effective, was $17.62 per share. This ruling would entitle the holders of the remaining 5,505,730 shares to $17.62 per share, plus interest at a statutory rate, compounded quarterly. The Court of Chancery’s decisions are subject to review on appeal. An unfavorable ruling on appeal could have a material adverse effect on the Company’s results of operations and liquidity. In consideration of the May 11, 2016 and May 31, 2016 rulings, the Company believes it was adequately reserved for the appraisal proceedings as of April 29, 2016.

Securities Litigation — On May 22, 2014, a securities class action seeking compensatory damages was filed in the United States District Court for the Southern District of New York, captioned the City of Pontiac Employee Retirement System vs. Dell Inc. et. al. (Case No. 1:14-cv-03644).  The action names as defendants Dell Inc. and certain current and former executive officers, and alleges that Dell made false and misleading statements about Dell’s business operations and products between February 22, 2012 and May 22, 2012, which resulted in artificially inflated stock prices. The case was transferred to the United States District Court for the Western District of Texas, where the defendants filed a motion to dismiss. The motion is fully briefed and a ruling is expected in 2016. The defendants believe the claims asserted are without merit and the risk of material loss is remote.

Copyright Levies — The Company's obligation to collect and remit copyright levies in certain European Union ("EU") countries may be affected by the resolution of legal proceedings pending in Germany against various companies, including Dell's German subsidiary, and elsewhere in the EU against other companies in Dell's industry. The plaintiffs in those proceedings, some of which are described below, generally seek to impose or modify the levies with respect to sales of such equipment as multifunction devices, phones, personal computers, and printers, alleging that such products enable the copying of copyrighted materials. Some of the proceedings also challenge whether the levy schemes in those countries comply with EU law. Certain EU member countries that do not yet impose levies on digital devices are expected to implement legislation to enable them to extend existing levy schemes, while some other EU member countries are expected to limit the scope of levy schemes and their applicability in the digital hardware environment. Dell, other companies, and various industry associations have opposed the extension of levies to the digital environment and have advocated alternative models of compensation to rights holders. The Company continues to collect levies in certain EU countries where it has determined that based on local laws it is probable that it has a payment obligation. The amount of levies is generally based on the number of products sold and the per-product amounts of the levies, which vary. The Company accrues a liability when it believes that it is both probable that a loss has been incurred and when it can reasonably estimate the amount of the loss.