EMC 2008 Annual Report Download - page 66

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Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
Securities Lending Agreements
We participate in securities lending agreements with financial institutions to enhance investment income. Securities are loaned to independent brokers for
which we receive cash collateral equal to 102% of the fair market value of the securities. The loaned securities remain on our balance sheet as we maintain
ownership while the investments are on loan. Our securities lending agent has provided us with a 100% counterparty indemnification in the event of borrower
default. As of December 31, 2008, we had received $412.3 million in cash collateral which has been subsequently invested in short-term investments. The
liability to repay the cash collateral is classified as securities lending payable on our consolidated balance sheet. At December 31, 2007, there were no
outstanding securities lending transactions.
Accounting for Stock-Based Compensation
We account for stock-based compensation in accordance with FAS No. 123R, "Shared-Based Payment" ("FAS No. 123R") using the modified transition
method. FAS No. 123R requires recognizing compensation costs for all shared-based payment awards made to employees and directors based upon the
awards' estimated grant date fair value. FAS No. 123R covers employee stock options, restricted stock, restricted stock units and employee stock purchases
related to our employee stock purchase plan.
Under the modified prospective transition method, FAS No. 123R applies to new equity awards and to equity awards modified, repurchased or canceled
after the adoption date. Additionally, compensation cost for the portion of awards granted prior to the adoption date for which the requisite service has not
been rendered as of the January 1, 2006 adoption date shall be recognized as the requisite service is rendered. The compensation cost for that portion of
awards shall be based on the grant-date fair value of those awards as calculated in the prior period pro forma disclosures under FAS No. 123, "Accounting for
Stock-Based Compensation" ("FAS No. 123"). Changes to the grant-date fair value of equity awards granted before the effective date are precluded. The
compensation cost for those earlier awards shall be attributed to periods beginning on or after the adoption date using the attribution method that was used
under FAS No. 123, which was the straight-line method. Instead of recognizing forfeitures only as they occur, we now estimate an expected forfeiture rate
which is factored in to determine our annual expense. Deferred compensation which related to those earlier awards has been eliminated against additional
paid-in capital. FAS No. 123R also changed the reporting of tax-related amounts within the statement of cash flows. The gross amount of windfall tax benefits
resulting from stock-based compensation is reported as financing inflows.
For stock options, we have selected the Black-Scholes option-pricing model to determine the fair value of our stock option awards. For stock options,
restricted stock and restricted stock units, we recognize compensation cost on a straight-line basis over the awards' vesting periods for those awards which
contain only a service vesting feature. For awards with a performance condition vesting feature, when achievement of the performance condition is deemed
probable we recognize compensation cost on a graded-vesting basis over the awards' expected vesting periods.
In connection with the adoption of FAS No. 123R, we recorded a cumulative effect adjustment in the first quarter of 2006 of $0.2 million related to the
application of an estimated forfeiture rate on our previously recognized expense on unvested restricted stock and restricted stock units.
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