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Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
technological feasibility. The write-off is included in restructuring and other special charges in our statement of operations. Three IPR&D projects were
identified relating to virtual machine software. 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, we deemed a discount rate of
50% as appropriate for valuing IPR&D.
In connection with the VMware acquisition, we commenced integration activities which have resulted in recognizing a $3.8 million liability for lease
obligations, of which $1.1 million was paid in 2004. The liability will be paid over the remaining lease periods through 2007.
Acquisition of LEGATO Systems, Inc.
In October 2003, we acquired all of the shares of outstanding common stock of LEGATO Systems, Inc. ("LEGATO"). LEGATO developed, marketed and
supported software products and services for information protection and recovery, hierarchal storage management, automated availability, e-mail and content
management. We determined that the acquisition would expand our portfolio of open storage software, provide software-focused sales expertise, extensive
channel partner relationships and strong service capabilities. The aggregate purchase price was approximately $1.4 billion, which consisted of $1.2 billion of
our common stock, $141.5 million in fair value of our stock options and $15.4 million of transaction costs, which primarily consisted of fees paid for financial
advisory, legal and accounting services. We issued approximately 106 million shares of our common stock, the fair value of which was based upon a five-day
average of the closing price two days before and two days after the terms of the acquisition were agreed to and publicly announced. The fair value of our stock
options issued to employees was estimated using a Black-Scholes option pricing model. The fair value of the stock options was estimated assuming no
expected dividends and the following weighted-average assumptions:
Expected life (in years) 4.0
Expected volatility 60.0%
Risk free interest rate 2.0%
The intrinsic value allocated to the unvested options issued in the transaction that had yet to be earned as of the transaction date was approximately
$31.2 million and has been recorded as deferred compensation in the purchase price allocation.
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