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Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We purchase or license many sophisticated components and products from one or a limited number of qualified suppliers. If any of our suppliers were
to cancel or materially change contracts or commitments with us or fail to meet the quality or delivery requirements needed to satisfy customer orders for our
products, we could lose customer orders. We attempt to minimize this risk by finding alternative suppliers or maintaining adequate inventory levels to meet
our forecasted needs.
Accounting for Stock-Based Compensation
FAS No. 123, "Accounting for Stock-Based Compensation" defined a fair value method of accounting for stock options and other equity instruments.
Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period,
which is usually the vesting period. As provided for in FAS No. 123, we elected to apply Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for our stock-based compensation plans. Compensation expense is recognized on a straight line basis over the vesting period for
time-based restricted stock grants and stock options granted where the exercise price is below the market price on the date of the grant. For performance-based
restricted stock grants that have a graded vesting schedule, compensation expense is recognized on a straight line basis over the requisite service period for
each separately vesting portion of the award. The following is a reconciliation of net income per weighted average share had we adopted the fair value
recognition provisions of FAS No. 123 for the periods presented (table in thousands, except per share amounts):
2005
2004
2003
Net income $ 1,133,165 $ 871,189 $ 496,108
Add back: Stock compensation costs, net of tax, on stock-based awards 52,131 40,345 9,288
Less: Stock compensation costs, net of tax, had stock compensation expense been measured at fair value (371,681) (411,929) (389,957)
Incremental stock option expense per FAS No. 123, net of taxes (319,550) (371,584) (380,669)
Adjusted net income $ 813,615 $ 499,605 $ 115,439
Net income per weighted average share, basic – as reported $ 0.48 $ 0.36 $ 0.22
Net income per weighted average share, diluted – as reported $ 0.47 $ 0.36 $ 0.22
Adjusted net income per weighted average share, basic $ 0.34 $ 0.21 $ 0.05
Adjusted net income per weighted average share, diluted $ 0.34 $ 0.20 $ 0.05
The 2004 and 2003 amounts have been adjusted from the amounts reported in our Annual Report on Form 10-K for the fiscal year ended 2004 to be
calculated following the same method that will be utilized under FAS No. 123R. The total impact of the charge was to increase the incremental stock option
expense per FAS No. 123 net of taxes by $8.3 million in 2004 and $7.7 million in 2003.
The fair value of each option granted during 2005, 2004 and 2003 is estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
2005
2004
2003
Dividend yield None None None
Expected volatility 40.3% 46.4% 55.0%
Risk-free interest rate 4.02% 3.18% 3.27%
Expected life (in years) 4.0 4.2 5.0
The weighted average fair value of stock options granted at fair market value were as follows:
2005 $5.29
2004 $5.15
2003 $6.44
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