EMC 2003 Annual Report Download - page 24

Financial Condition
• Comparison of Fiscal 2003 to 2002
Cash and cash equivalents and short and long-term investments were $6,907.6 and $5,685.6 at December 31, 2003 and 2002, respectively, an increase of
$1,222.0.
Cash provided by operating activities was $1,521.2 in 2003 compared to $1,445.7 in 2002. The increase was primarily attributable to improved
profitability in our business, an increase in deferred revenues associated with a greater volume of software and hardware maintenance contracts and
professional services engagements and $152.3 in income tax refunds, net of payments. Such increase was partially offset by an increase in inventories due to
our Symmetrix product transition and a $107.4 contribution to fund a portion of the Data General pension plan liability.
Cash used for investing activities was $1,313.2 and $1,576.4 in 2003 and 2002, respectively. Capital additions were $368.5 and $391.1 in 2003 and 2002,
respectively. The decrease in capital additions resulted from our cost containment measures. The reduction in capital additions contributed to a decline in
depreciation and amortization expense. Depreciation and amortization expense declined from $653.7 in 2002, to $520.7 for 2003. We expect depreciation and
amortization expense to increase in 2004, primarily as a result of the intangible assets acquired in connection with the acquisitions of LEGATO, Documentum
and VMware. Capitalized software development costs were $113.4 and $126.7 in 2003 and 2002. Net purchases and maturities of investments, consisting of
debt securities, were $1,093.4 and $1,011.6 in 2003 and 2002. Additionally, as a result of our acquisition of LEGATO and Documentum, our cash position
increased by $323.9.
Cash used for financing activities was $40.1 in 2003 compared to $311.2 in 2002. In 2003, we repurchased 11.5 million shares of our common stock, par
value $.01 per share ("Common Stock"), at a cost of $127.0. In 2002, we repurchased 49.5 million shares of our Common Stock at a cost of $363.9. As of
December 31, 2003, we had repurchased 62.1 million shares of the 300.0 million shares of Common Stock authorized for repurchase by our Board of
Directors. From time to time, we enter into Rule 10b-5-1 plans to facilitate our share repurchases. Partially offsetting these uses of cash was the generation of
$112.6 and $80.9 in 2003 and 2002, respectively, from the exercise of stock options.
In December 2003, we assumed, through our acquisition of Documentum, $125.0 in senior convertible notes that mature on April 1, 2007 (the "Notes").
The Notes bear interest at a rate of 4.5% per annum. Holders of the Notes are entitled to convert the Notes, at any time before the close of business on April 1,
2007, subject to prior redemption or repurchase of the Notes, into shares of our Common Stock at a conversion price of $13.80 per share. The Notes may be
redeemed by us on or after April 5, 2005 at a price of 101.8% through April 1, 2006 and at a price of 100.9% from April 2, 2006 through March 31, 2007. The
Notes will effectively rank behind all other secured debt to the extent of the value of the assets securing those debts. The Notes do not contain any restrictive
financial covenants. The Notes have been recorded at the fair market value as of the date of the acquisition of Documentum, with a portion allocated to the
conversion component. The fair market value of the debt component of $130.0 will be adjusted to the debt's face value of $125.0 using the effective interest
method through April 1, 2007. The fair market value of the conversion component of $26.3 has been allocated to additional paid-in capital.
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In January 2004, we purchased all the outstanding shares of preferred and common stock of VMware for $625.0. In addition, we issued 6.3 million
options to purchase shares of our Common Stock in exchange for all outstanding options to purchase shares of VMware common stock.
We have available for use credit lines of $50.0 in the United States and $50.0 in Brazil. The Brazilian line requires us to borrow in Brazilian currency. As
of December 31, 2003, we had $1.2 outstanding on the Brazilian line of credit and there were no borrowings outstanding on the U.S. line of credit. The
Brazilian credit line bears interest at the rate quoted by the lender (18.8% at December 31, 2003) and requires us to meet certain financial covenants with
respect to limitations on losses and maintaining minimum levels of cash and investments. In the event the covenants are not met, the lender may require us to
provide collateral to secure the outstanding balance. As of December 31, 2003, we were in compliance with the covenants. The Brazilian line of credit is
denominated in local currency and as such, bears an interest rate commensurate with local currency short-term interest rates.
We derive revenues from both selling and leasing activity. We customarily sell the notes receivable resulting from our leasing activity. Generally, we do
not retain any recourse on the sale of these notes. If recourse is retained, we assess and provide for any estimated exposure. We also lend certain fixed income
securities to generate investment income. We have entered into various agreements to loan fixed income securities generally on an overnight basis. Under
these securities lending agreements, the value of the collateral is equal to 102% of the fair market value of the loaned securities. The collateral is generally
cash, U.S. government-backed securities or letters of credit. At December 31, 2003, there were no outstanding securities lending transactions.
Based on our current operating and capital expenditure forecasts, we believe that the combination of funds currently available, funds to be generated
from operations and our available lines of credit will be adequate to finance our ongoing operations for the next twelve months.
To date, inflation has not had a material impact on our financial results.
• Comparison of Fiscal 2002 to 2001
Cash and cash equivalents and short and long-term investments were $5,685.6 and $5,083.6 at December 31, 2002 and 2001, respectively, an increase of
$602.0.
Cash provided by operating activities was $1,445.7 in 2002 compared to $1,631.3 in 2001. The decline was primarily attributable to a lower level of cash
generated from working capital in 2002 compared to 2001. The 2002 reduction in working capital was driven by a reduction in cash generated from collecting
accounts and notes receivable due to lower revenue levels in 2002 compared to 2001. Partially offsetting this reduction were increases in deferred revenue
attributable to increased sales of maintenance contracts.
Cash used for investing activities was $1,576.4 and $1,513.6 in 2002 and 2001, respectively. Capital additions were $391.1 and $889.3 in 2002 and 2001,
respectively. The decrease in capital additions resulted from measures we took to reduce costs, which were initiated in the second half of 2001. Capitalized