EMC 2003 Annual Report Download - page 45

The consolidated financial statements include the results of LEGATO from the date of acquisition. The purchase price has been allocated based on
estimated fair values as of the acquisition date. The purchase price allocation is preliminary and a final determination of required purchase accounting
adjustments will be made upon the completion of our integration plans. The following represents the preliminary allocation of the purchase price (table in
thousands):
Current assets $ 81,998
Property, plant & equipment 29,922
Deferred income taxes 85,727
Goodwill 1,068,934
Intangible assets:
Customer relationships (estimated useful life of 9 years) 110,120
Developed technology (estimated useful life of 5 years) 64,730
Tradenames and trademarks (estimated useful life of 5 years) 3,024
Non-competition agreements (estimated useful life of 2 years) 227
Acquired in-process R&D ("IPR&D") 19,640
Total intangible assets 197,741
Deferred compensation 40,818
Other long-term assets 2,299
Current liabilities (134,737)
Long-term liabilities (21,252)
Total purchase price $ 1,351,450
In determining the purchase price allocation, we considered, among other factors, our intention to use the acquired assets, historical demand and
estimates of future demand of LEGATO's products and services. The fair value of intangible assets was primarily based upon the income approach. The rate
used to discount the net cash flows to their present values was based upon a weighted average cost of capital of 16%. The discount rate was determined after
consideration of market rates of return on debt and equity capital, the weighted average return on invested capital and the risk associated with achieving
forecast sales related to the technology and assets acquired from LEGATO.
The total weighted average amortization period for the intangible assets is 7.5 years. The intangible assets are being amortized based upon the pattern in
which the economic benefits of the intangible assets are being utilized. None of the goodwill is deductible for income tax purposes. The $1.1 billion of
goodwill is classified within our LEGATO products and services segment and information storage products segment in the amounts of $842.9 million and
$226.0 million, respectively.
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EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
Of the $197.7 million of acquired intangible assets, $19.6 million was allocated to IPR&D and was written off at the date of acquisition because the
IPR&D had no alternative uses and had not reached technological feasibility. The write-off is included in restructuring and other special charges in our
statement of operations. Six IPR&D projects were identified relating to information protection software and content and messaging software. The projects
relating to information protection software had a value of $16.3 million and the projects relating to content and messaging software had a value of
$3.3 million. The value assigned to IPR&D was determined utilizing the income approach by determining cash flow projections relating to the projects. The
stage of completion of each in process project was estimated to determine the discount rate to be applied to the valuation of the in process technology. Based
upon the level of completion and the risk associated with in process technology, a discount rate of 50% was deemed appropriate for valuing IPR&D.
In connection with the LEGATO acquisition, we commenced integration activities which have resulted in involuntary terminations and lease and
contract terminations. The liability for involuntary termination benefits covers approximately 100 employees, primarily in general and administrative and
engineering functions. We expect to pay the remaining balance for involuntary termination benefits in 2004. The liability for lease and other contractual
termination benefits will be paid over the remaining contract periods through 2011. We are working to finalize our integration plans which may result in
additional involuntary terminations, lease and other contractual terminations and employee relocations. We will finalize our integration plans and related
liabilities in 2004. Finalization of our plans may result in additional liabilities which will increase goodwill. The following summarizes the obligations
recognized in connection with the LEGATO acquisition and activity to date (table in thousands):
Category Obligation
Current
Utilization
Ending
Balance
Involuntary termination benefits $ 2,700 $ (1,363) $ 1,337
Lease and other contractual terminations 29,084 (899) 28,185
Total $ 31,784 $ (2,262) $29,522
Acquisition of Documentum, Inc.
In December 2003, we acquired all of the shares of outstanding common stock of Documentum, Inc. ("Documentum"). Documentum provides enterprise
content management software, enabling organizations to organize and manage unstructured data. We determined that the acquisition would provide us the
opportunity to expand our product offerings, enabling customers to implement a total information storage solution for managing unstructured content.
Additionally, the acquisition expanded our software-focused sales expertise and provided strong service capabilities. The aggregate purchase price was
approximately $1.8 billion, which consisted of $1.6 billion of Common Stock, $207.6 million in fair value of our stock options and $13.8 million of