EMC 2005 Annual Report Download - page 59

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the results of VMware from the date of acquisition. Pro forma results of operations for 2004 have not
been presented because the effects of the acquisition were not material to us. The purchase price has been allocated based on estimated fair values as of the
acquisition date (table in thousands):
Current assets $ 18,644
Property, plant and equipment 2,472
Other long-term assets 1,520
Goodwill 518,581
Intangible assets:
Developed technology (estimated useful lives of 4-5 years) 93,610
Support and subscription contracts (estimated useful lives of 9 years) 3,950
OEM contracts (estimated useful lives of 5 years) 5,570
Tradenames and trademarks (estimated useful lives of 5 years) 7,580
Non-solicitation agreements (estimated useful lives of 3 years) 40
Acquired IPR&D 15,200
Total intangible assets 125,950
Deferred compensation 47,300
Current liabilities (81,241)
Deferred income taxes (16,444)
Long-term liabilities (3,670)
Total purchase price $613,112
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 VMware'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 14%. 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 VMware.
The total weighted-average amortization period for the intangible assets is 4.8 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 goodwill is classified
within our VMware segment.
Of the $126.0 million of acquired intangible assets, $15.2 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
income statement. 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.
Pro forma Effect of the Acquisitions
The following pro forma information gives effect to the acquisition of Smarts and Captiva as if the acquisitions occurred on January 1, 2004. The pro
forma results are not necessarily indicative of what actually would have occurred had the acquisitions been in effect for the period presented (table in
thousands, except per share data):
(unaudited)
Year Ended December 31,
2005 2004
Revenue $ 9,739,602 $ 8,359,034
Net income 1,105,033 850,056
Net income per weighted average share, basic $ 0.46 $ 0.35
Net income per weighted average share, diluted $ 0.45 $ 0.35
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