-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, VCiDZi/Hs5fwwq6iIECMbfoZFD91ldGnvlePIhLHU8tzBkwelWnhNWxI2YcnGCTV au6AfrYXEDS/5fDzBUvEgA== 0000790070-94-000021.txt : 19940817 0000790070-94-000021.hdr.sgml : 19940817 ACCESSION NUMBER: 0000790070-94-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940702 FILED AS OF DATE: 19940812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMC CORP CENTRAL INDEX KEY: 0000790070 STANDARD INDUSTRIAL CLASSIFICATION: 3577 IRS NUMBER: 042680009 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09853 FILM NUMBER: 94543526 BUSINESS ADDRESS: STREET 1: 35 PARKWOOD DR CITY: HOPKINTON STATE: MA ZIP: 01748-9103 BUSINESS PHONE: 5084351000 MAIL ADDRESS: STREET 1: 171 SOUTH STREET CITY: HOPKINTON STATE: MA ZIP: 01748-9103 10-Q 1 EMC CORP. 10Q JULY 2, 1994 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarter Ended: July 2, 1994 Commission File Number 1-9853 EMC CORPORATION ------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-2680009 -------------------------------- ----------- (State or other jurisdiction of (I.R.S. Employer organization or incorporation) Identification Number) 171 South Street Hopkinton, Massachusetts 01748-9103 -------------------------------------------------------------- (Address of principal executive offices, including zip code) (508) 435-1000 ------------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ________ Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, par value $.01 per share 194,482,824 - - --------------------------------------- ------------ Class Outstanding as of July 2,1994 -2- EMC CORPORATION Page No. Part I - Financial Information Consolidated Balance Sheets July 2, 1994 and January 1, 1994 3 Consolidated Statements of Operations for the Three and Six Months Ended July 2, 1994 and July 3, 1993 4 Consolidated Statements of Cash Flows for the Six Months Ended July 2, 1994 and July 3, 1993 5 Notes to Interim Consolidated Financial Statements 6 - 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 15 Part II - Other Information 16 Signatures 17 Exhibit Index 18 -3- EMC CORPORATION CONSOLIDATED BALANCE SHEETS (amounts in thousands except share amounts) July 2, January 1, ASSETS 1994 1994 Current assets: Cash and cash equivalents $219,952 $345,300 Trade and notes receivable less allowance for doubtful accounts of $6,162 and $5,262, respectively 249,668 157,225 Inventories 182,839 118,263 Deferred income taxes 26,194 24,199 Other assets 9,260 5,023 Total current assets 687,913 650,010 Long-term investments, at cost 173,313 50,392 Notes receivable 24,496 21,808 Property, plant and equipment, net 130,908 96,480 Deferred income taxes 3,787 2,761 Other assets, net 15,318 8,195 Total assets $1,035,735 $829,646 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $2,155 $1,262 Accounts payable 95,613 44,179 Accrued expenses 76,280 59,755 Income taxes payable 14,700 20,892 Deferred revenue 9,083 7,046 Total current liabilities 197,831 133,134 Deferred revenue 2,942 3,389 Long-term obligations: 4 1/4% Convertible Subordinated Notes due 2001 229,600 200,000 6 1/4% Convertible Subord. Debentures due 2002 45,831 59,260 Notes payable 14,105 14,013 Capital lease obligations 413 756 Minority interest in consolidated subsidiaries 932 -- Total liabilities 491,654 410,552 Stockholders' equity: Series Preferred Stock, par value $.01; authorized 25,000,000 shares --- --- Common Stock, par value $.01; authorized 330,000,000 shares; issued 197,099,288 and 189,936,120, respectively; outstanding 194,482,824 and 187,328,124, respectively 1,971 1,899 Additional paid-in capital 247,090 226,668 Deferred compensation (3,055) (3,552) Retained earnings 296,454 193,045 Cumulative translation adjustment 2,264 1,537 Treasury stock, at cost, 2,616,464 and 2,607,996 shares, respectively (643) (503) Total stockholders' equity 544,081 419,094 Total liabilities and stockholders' equity $1,035,735 $829,646 The accompanying notes are an integral part of the consolidated financial statements. -4- EMC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands except per share amounts) (unaudited) Three Months Ended Six Months Ended July 2, July 3, July 2, July 3, 1994 1993 1994 1993 Revenues: Net sales $300,140 $173,516 $557,860 $306,369 Service and rental 7,976 6,026 17,314 11,946 308,116 179,542 575,174 318,315 Cost and expenses: Cost of sales and service 146,383 90,546 270,790 162,839 Research and development 26,245 12,755 48,593 24,167 Selling, general and administrative 59,725 38,221 111,329 71,061 Operating income 75,763 38,020 144,462 60,248 Investment income 4,951 2,186 9,930 3,390 Interest expense (3,793) (1,407) (7,595) (2,831) Other income/(expense), net 490 (861) (118) (1,842) Income before taxes 77,411 37,938 146,679 58,965 Income tax provision 22,842 11,050 43,270 17,164 Net income $54,569 $26,888 $103,409 $41,801 Net income per weighted average share, primary $0.26 $0.14 $0.49 $0.22 Net income per weighted average share, fully diluted $0.24 $0.13 $0.46 $0.20 Weighted average number of common shares outstanding, primary 217,064 198,020 215,640 190,475 Weighted average number of common shares outstanding, fully diluted 232,966 218,774 233,207 211,871 The accompanying notes are an integral part of the consolidated financial statements. -5- EMC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) (unaudited) For the Six Months Ended July 2, July 3, 1994 1993 Cash flows from operating activities: Net income $103,409 $41,801 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,084 9,761 Deferred income taxes (3,021) (8,736) Net (gain)/loss on disposal of property and equipment (295) 1,687 Minority interest in consolidated subsidiaries 932 --- Changes in assets and liabilities: Trade and notes receivable (94,844) (21,483) Inventories (64,680) (19,383) Other assets (12,035) 2,863 Accounts payable 51,596 6,520 Accrued expenses 16,540 18,571 Income taxes payable (6,192) 10,032 Deferred revenue 1,567 (940) Total adjustments (95,348) (1,108) Net cash provided by operating activities 8,061 40,693 Cash flows from investing activities: Additions to property and equipment, net (48,742) (20,261) Proceeds from sale of property and equipment 445 67 Purchase of long-term investments (122,921) (16,317) Net cash used by investing activities (171,218) (36,511) Cash flows from financing activities: Issuance of common stock, net of issuance costs 20,991 105,853 Purchase of treasury stock (140) --- Issuance of 4 1/4% convertible subordinated notes due 2001, net of issuance costs 29,350 --- Conversion of 6 1/4% convertible subordinated debentures due 2002 (13,429) (188) Payment of long-term and short-term obligations (895) (1,572) Issuance of long-term and short-term obligations 1,536 --- Net cash provided by financing activities 37,413 104,093 Effect of exchange rate changes on cash 396 (241) Net (decrease)/increase in cash and cash Equivalents (125,744) 108,275 Cash and cash equivalents at beginning of period 345,300 62,103 Cash and cash equivalents at end of period $219,952 $170,137 The accompanying notes are an integral part of the consolidated financial statements. -6- EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation Accounting The accompanying consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles. These statements include the accounts of EMC and its subsidiaries ("EMC" or the "Company"). Certain information and footnote disclosures normally included in the Company's annual consolidated financial statements have been condensed or omitted. The interim consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the results for the interim periods ended July 2, 1994 and July 3, 1993. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the entire fiscal year. It is suggested that these interim consolidated financial statements be read in conjunction with the audited consolidated financial statements for the year ended January 1, 1994, which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 24, 1994. Restatement for Pooling of Interests On August 31, 1993, EMC acquired, in separate transactions, Epoch Systems, Inc. ("Epoch") of Westborough, Massachusetts and Magna Computer Corporation ("Magna") of Salem, New Hampshire. Epoch designs, manufactures, markets and supports high performance client/server data management software. Magna manufactures and markets IBM compatible AS/400 tape storage products. Each of these acquisitions has been accounted for as a "pooling of interests" for accounting purposes, and accordingly all periods prior to the acquisition have been restated to include the results of Epoch and Magna. Epoch and Magna are now wholly-owned subsidiaries of EMC. Restatement for Stock Splits All share data in this document has been adjusted for all stock splits. Subsidiaries and Acquisitions Minority interest in consolidated subsidiaries represents the minority shareholders' proportionate share in the equity of EMC Japan K.K. ("EMC Japan") and Copernique, S.A. ("Copernique"), in which the Company acquired majority interests in the first quarter of 1994. At July 2, 1994 the Company owned a 60% interest in EMC Japan and a 93% interest in Copernique. During the first quarter of 1994, the Company acquired certain assets of Colorado-based Array Technology Corporation ("Array"), which specializes in RAID ("Redundant Arrays of Inexpensive Disks") technology, and a majority interest in Copernique, which specializes in high performance data management hardware and software systems. Other assets, non-current at July 2, 1994 included patents acquired in the purchase of Array of $7,272,000, net of approximately $400,000 of accumulated amortization. These assets are being amortized over their estimated useful life of five years. -7- EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 2. Inventories Inventories consist of: July 2,1994 January 1,1994 Purchased parts $ 14,457,000 $ 17,319,000 Work-in-process 112,170,000 46,348,000 Finished goods 56,212,000 54,596,000 $182,839,000 $118,263,000 3. Property, Plant and Equipment Property, plant and equipment consist of: July 2,1994 January 1,1994 Furniture and fixtures $ 5,505,000 $ 4,278,000 Equipment 144,107,000 102,670,000 Vehicles 1,091,000 923,000 Buildings and improvements 36,926,000 29,864,000 Land 1,870,000 1,870,000 Construction in progress 6,393,000 4,891,000 195,892,000 144,496,000 Accumulated depreciation and amortization (64,984,000) (48,016,000) $130,908,000 $96,480,000 4. Long-Term Obligations Convertible Subordinated Notes In December 1993, the Company issued $200,000,000 of 4 1/4% convertible subordinated notes due 2001 (the "Notes"). The Notes are generally convertible into shares of Common Stock of the Company at a conversion price of $19.84 per share, subject to adjustment in certain events. Interest is payable semi-annually and the Notes are redeemable at the option of the Company at set redemption prices (which range from 100.61% to 102.43% of principal), plus accrued interest, commencing January 1, 1997. In January 1994, the Company issued an additional $29,600,000 of Notes in accordance with overallotment provisions of this offering. Convertible Subordinated Debentures In March 1992, the Company issued $60,000,000 of 6 1/4% convertible subordinated debentures due 2002 (the "Debentures"). The Debentures are generally convertible at the option of the holder at any time prior to maturity into shares of Common Stock of the Company at a conversion price of $3.063 per share, subject to adjustment in certain events. Since their issuance, $14,169,000 of Debentures have been converted into Common Stock. Interest is payable semi-annually and the Debentures are redeemable at the option of the Company at set redemption prices (which range from 100.63% to 104.38% of principal), plus accrued interest, commencing April 1, 1995. -8- EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 5. Net Income Per Share Net income per share was computed on the basis of weighted average common and dilutive common equivalent shares outstanding. Primary and fully diluted weighted average shares outstanding for the three and six months ended July 2, 1994 considers the dilutive effect of the Notes. Fully diluted weighted average shares outstanding for the three and six months ended July 2, 1994 and July 3, 1993 considers the dilutive effects of the Debentures. 6.Other Contingencies On June 10, 1993, Storage Technology Corporation ("STK") filed suit against EMC in the United States District Court for the District of Colorado alleging that EMC is infringing three patents. In the complaint, STK seeks injunctive relief, unspecified damages, including treble damages plus attorney's fees and costs. On July 20, 1993, EMC answered the complaint and denied STK's allegations. In addition, EMC counterclaimed against STK alleging that the patents in suit are invalid and unenforceable. EMC has subsequently added counterclaims based on antitrust laws and implied license theories. In the counterclaims, EMC seeks unspecified damages, attorney's fees, costs and interest. Discovery in the matter is currently in process. A scheduling order has been entered and a trial date has been set for October 1994. Several motions, filed by both parties, are now pending before the Court. EMC is involved in other litigation which it considers routine and incidental to its business. Management does not expect the results of these actions to have a material adverse effect on EMC's business or financial condition. -9- EMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - Second Quarter of 1994 compared to Second Quarter of 1993 - - ------------------------------------------------------------------- Revenues Revenues for the quarter ended July 2, 1994 were $308,116,000 compared to $179,542,000 for the second quarter of 1993, an increase of $128,574,000 or 72%. Product revenues for the quarter ended July 2, 1994 were $300,140,000 compared to $173,516,000 for the second quarter of 1993, an increase of $126,624,000 or 73%. While the Company expects revenue to continue to grow in all of its markets throughout 1994, such growth may not, on a percentage basis, continue at the levels experienced in the second quarter of 1994. The increase in net sales was due primarily to the continued strong demand for the Company's Symmetrix and Harmonix series of Integrated Cached Disk Array ("ICDA") based products. Revenues from the Symmetrix series of products in the IBM Corporation ("IBM"), Unisys Corporation ("Unisys") and Compagnie des Machines Bull S.A. ("Bull") mainframe markets increased by $122,754,000 or 86%, from $142,903,000 in the second quarter of 1993 to $265,657,000 in the second quarter of 1994. Revenues from the Harmonix series of IBM compatible midrange disk products, increased by $1,205,000 or 6%, from $20,999,000 in the second quarter of 1993 to $22,204,000 in the second quarter of 1994. In the second quarter of 1994, the Company generated approximately 96% of its product revenues from sales of ICDA-based products versus approximately 94% in the same period a year ago. It is expected that revenues from ICDA-based products for the mainframe and midrange storage markets will remain the major component of the Company's revenues throughout 1994. Revenues on product sales into the markets of North and South America increased by $79,961,000, or 67% from $118,763,000 in the second quarter of 1993 to $198,724,000 in the second quarter of 1994. This increase was due to increased unit sales of the Symmetrix 5500 series of products in the IBM mainframe storage market, from which revenues increased $93,711,000 to $127,378,000 in the second quarter of 1994 versus $33,667,000 in the second quarter of 1993. Increases in Symmetrix 5500 product sales in this region were partially offset by decreases in sales of the Company's earlier versions of Symmetrix products. Revenues on product sales into the markets of Europe, Africa, and the Middle East increased by $35,888,000, or 71%, from $50,621,000 in the second quarter of 1993 to $86,509,000 in the same period of 1994, due primarily to growth in unit sales of the Symmetrix series of products in the IBM and Bull mainframe storage markets. Revenues on product sales into the markets in the Asia Pacific region increased by $10,775,000, or 261%, from $4,132,000 in the second quarter of 1993 to $14,907,000 in the second quarter of 1994, due to growth in unit sales of the Symmetrix series of products in the IBM mainframe storage market. The Company strengthened its sales presence in the Asia Pacific region with the formation of EMC Japan in January 1994. -10- EMC CORPORATION The Company has Original Equipment Manufacturer ("OEM") agreements with Bull and Unysis. Revenues from product sales of the Symmetrix series of products to Bull increased by $10,115,000, or 289%, from $3,497,000 in the second quarter of 1993 to $13,612,000 in the second quarter of 1994. Revenues from product sales of the Symmetrix series under the OEM agreement with Unisys increased by $495,000, or 5%, from $10,100,000 in the second quarter of 1993 to $10,595,000 in the second quarter of 1994. The Company purchases certain components and products from suppliers who the Company believes are currently the only suppliers of those components or products that meet the Company's requirements. Among the most important components that the Company uses are high density memory components ("DRAMs") and 5 1/4" and 3 1/4" disk drives, which the Company purchases from a small number of qualified suppliers, and in some instances, there is only a single source for such components. A failure by any supplier of high density DRAMs or disk drives to meet the Company's requirements for an extended period of time could have a material adverse effect on the Company. From time to time, the Company has experienced delays in deliveries of high density DRAMs and disk drives needed to satisfy orders for ICDA products. If such shortages were to intensify or the suppliers were not able to meet the Company's quarterly requirements in a timely manner, cancellation of some time-sensitive customer orders could occur. Cost of Sales and Service As a percentage of revenues, cost of sales and service amounted to 47.5% in the second quarter of 1994 versus 50.4% in the first quarter of 1993. The improvement in the cost of sales percentage was due primarily to increased sales in the higher margin Symmetrix series of products through the Company's direct sales force in 1994 over 1993. Research and Development Research and development ("R&D") expenses were $26,245,000 in the second quarter of 1994 compared to $12,755,000 in the comparable period in 1993, an increase of $13,490,000, or 106%. As a percentage of revenue, such expenses were 8.5% in the second quarter of 1994 and 7.1% in the same period in 1993. Increases in R&D spending reflect additional purchases of state-of-the-art CAE/CAD design tools and the cost of additional technical staff. Increases over second quarter 1993 levels reflect the costs of the Company's R&D facilities at Epoch and Copernique and at EMC's subsidiary in Israel. The Company expects to continue to spend substantial amounts for R&D throughout 1994. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses were 19.4% and 21.3% of revenues in the second quarters of 1994 and 1993, respectively. Total SG&A expenses increased by $21,504,000 or 56% from the second quarter 1993 level of $38,221,000, to $59,725,000 in the second quarter of 1994. This increase is due primarily to costs associated with additional sales and support personnel and their related overhead costs, both domestically and internationally, in connection -11- EMC CORPORATION with the Company's increased revenue levels and the Company's initiative to expand its OEM and international distribution programs. SG&A expenses are expected to increase throughout 1994 approximately in proportion to growth in revenues. Investment Income and Interest Expense Investment income was $4,951,000 in the second quarter of 1994 compared with $2,186,000 in the same period a year ago. Interest income was earned from investments in cash equivalents and long- term investments and, to a lesser extent, from sales-type leases of the Company's products. Investment income increased in 1994 primarily due to higher average cash balances throughout the quarter, compared to the similar period in 1993, caused primarily by the availability of funds received in December 1993 and January 1994 from the offering of the Notes. Interest expense increased from $1,407,000 in the second quarter of 1993 to $3,793,000 in the second quarter of 1994, mainly due to interest accruals required on the Notes. Other Income/(Expense), Net Other income, net, was $490,000 for the second quarter of 1994 compared with other expense, net, of $861,000 in the second quarter of 1993. Other income in 1994 related to gains on sales of assets of $441,000, $375,000 in technology fees, $240,000 from relief on importation tax, $147,000 of minority interest in subsidiary results and $546,000 of other miscellaneous income items, net of expenses, including $654,000 of currency transaction losses, $305,000 in amortization of charges deferred in the offerings of the Notes and Debentures, and $300,000 in amortization of intangibles. Other expense in the second quarter of 1993 was due primarily to a net loss on the disposal of certain assets of $1,000,000, and currency transaction losses of $270,000, net of other income of $409,000 primarily from technology license fees. Provision for Income Taxes The provision for income taxes was $22,842,000 and $11,050,000 in the second quarter of 1994 and 1993, respectively, which resulted in effective tax rates of 29.5% and 29.1%, respectively. The Company provides for income taxes based upon its estimate of full year earnings on a country-by-country basis. In addition, net operating loss carrybacks were not available in all countries in which the Company expects to, or did, experience losses in 1994 and 1993. Earnings Fluctuations Due to (i) customers' tendencies to make purchase decisions late in each fiscal quarter, (ii) the desire by customers to evaluate new, more expensive products for longer periods of time, (iii) the timing of product and technology announcements by the Company and its competitors, and (iv) fluctuating currency exchange rates, the Company's period to period revenues and earnings can fluctuate significantly. -12- EMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - For the first six months of 1994 compared to the first six months of 1993 - - ------------------------------------------------------------------- Revenues Revenues for the six months ended July 2, 1994 were $575,174,000 compared to $318,315,000 for the six months ended July 3, 1993, an increase of $256,859,000 or 81%. Product revenues for the first six months of 1994 were $557,860,000 compared to $306,369,000 for the first six months of 1993, an increase of $251,491,000 or 82%. While the Company expects revenue to continue to grow in its markets throughout 1994, such growth may not, on a percentage basis, continue at the levels experienced in the first half of 1994. The increase in net sales was due primarily to the continued strong demand for the Company's Symmetrix and Harmonix series of Integrated Cached Disk Array ("ICDA") based products. Revenues from the Symmetrix series of products in the IBM Corporation ("IBM"), Unisys Corporation ("Unisys") and Compagnie des Machines Bull S.A. ("Bull") mainframe markets increased by $233,373,000 or 96%, from $244,080,000 in the first six months of 1993 to $477,453,000 in the first six months of 1994. Revenues from the Harmonix series of IBM compatible midrange disk products, increased by $13,311,000 or 33%, from $40,233,000 in the first six months of 1993 to $53,544,000 in the first six months of 1994. The Company generated approximately 95% and 93% of its revenues from sales of ICDA-based products in the first six months of 1994 and 1993, respectively. It is expected that revenues from ICDA-based products for the mainframe and midrange storage markets will remain the major component of the Company's revenues throughout 1994. Revenues on product sales into the markets of North and South America increased by $170,303,000, or 86%, to $367,506,000 in the first six months of 1994 from $197,203,000 in the first six months of 1993. This increase was primarily due to increased unit sales of the Symmetrix 5500 series of products in the IBM mainframe storage market, from which revenues increased by $165,967,000 to $215,321,000 in the first six months of 1994 from $49,354,000 in the first six months of 1993. Revenues on product sales into the markets of Europe, Africa, and the Middle East increased by $65,733,000, or 69%, to $161,341,000 in the first six months of 1994 from $95,608,000 in the same period of 1993, due primarily to growth in unit sales of the Symmetrix series of products in the IBM and Bull mainframe storage markets. Revenues on product sales into the markets in the Asia Pacific region increased by $15,455,000, or 114%, to $29,013,000 in the first six months of 1994 from $13,558,000 in the same period of 1993, primarily due to growth in unit sales of the Symmetrix 5500 series of products in the IBM mainframe storage market. The Company strengthened its sales presence in the Asia Pacific region with the formation of EMC Japan in January 1994. -13- EMC CORPORATION The Company has OEM agreements with Bull and Unysis. Revenues from product sales of the Symmetrix series of products to Bull increased by $19,059,000, or 545%, from $3,497,000 in the first six months of 1993 to $22,556,000 in the first six months of 1994. Revenues from product sales of the Symmetrix series under the OEM agreement with Unisys decreased by $5,570,000, or 22%, from $24,759,000 in the first six months of 1993 to $19,189,000 in the first six months of 1994. The Company purchases certain components and products from suppliers who the Company believes are currently the only suppliers of those components or products that meet the Company's requirements. Among the most important components that the Company uses are high density memory components ("DRAMs") and 5 1/4" and 3 1/4" disk drives, which the Company purchases from a small number of qualified suppliers, and in some instances, there is only a single source for such components. A failure by any supplier of high density DRAMs or disk drives to meet the Company's requirements for an extended period of time could have a material adverse effect on the Company. From time to time, the Company has experienced delays in deliveries of high density DRAMs and disk drives needed to satisfy orders for ICDA products. If such shortages were to intensify or the suppliers were not able to meet the Company's quarterly requirements in a timely manner, cancellation of some time-sensitive customer orders could occur. Cost of Sales and Service As a percentage of revenues, cost of sales and service amounted to 47.1% in the first six months of 1994 versus 51.2% in the first six months of 1993. The improvement in the cost of sales percentage was due primarily to increased sales in the higher margin Symmetrix series of products through the Company's direct sales force in 1994 over 1993. Research and Development Research and development ("R&D") expenses were $48,593,000 and $24,167,000 in the first six months of 1994 and 1993, respectively, an increase of $24,426,000, or 101%. R&D expenses were 8.4% and 7.6% of revenues in the first six months of 1994 and 1993, respectively. Increases in R&D spending reflect additional purchases of state-of-the-art CAE/CAD design tools and the cost of additional technical staff. Increases in the first six months of 1994 over the same period in 1993 reflect the costs of the Company's R&D facilities at Epoch and Copernique and at EMC's subsidiary in Israel. The Company expects to continue to spend substantial amounts for R&D throughout 1994. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses were $111,329,000 and $71,061,000 in the first six months of 1994 and 1993, respectively, an increase of $40,268,000 or 57%. SG&A expenses were 19.4% and 22.3% of revenues in the first six months of 1994 and 1993, respectively. Increases in SG&A spending reflect costs associated with additional sales and -14- EMC CORPORATION their related overhead costs, both domestically and internationally, in connection with the Company's increased revenue levels and the Company's initiative to expand its OEM and international distribution programs. SG&A expenses are expected to increase throughout 1994 approximately in proportion to growth in revenues. Investment Income and Interest Expense Investment income was $9,930,000 and $3,390,000 in the first six months of 1994 and 1993, respectively. Interest income was earned from investments in cash equivalents and long-term investments and, to a lesser extent, from sales-type leases of the Company's products. Investment income in 1994 is higher primarily due to higher average cash balances throughout the period, primarily due to the availability of funds received in the December 1993 and January 1994 offerings of the Notes. Interest expense increased from $2,831,000 in the first six months of 1993 to $7,595,000 in the first six months of 1994, mainly due to interest accruals required on the Notes. Other Expense, Net Other expense was $118,000 and $1,842,000 in the first six months of 1994 and 1993, respectively. Other expense in 1994 included $1,249,000 of currency transaction losses, $566,000 in amortization of charges deferred in the offerings of the Notes and Debentures, $400,000 in amortization of patents, net of income from gains on sales of assets of $295,000, $750,000 in technology fees, $240,000 from relief on importation tax, $166,000 in minority interest in subsidiary and other miscellaneous income of $646,000. Other expense in the first six months of 1993 included a net loss on the disposal of certain assets of $1,687,000, $602,000 of currency transaction losses, $417,000 in technology license costs and $64,000 of other expenses, net of other income of $928,000 primarily from technology license fees. Provision for Income Taxes The provision for income taxes was $43,270,000 and $17,164,000 in the first six months of 1994 and 1993, respectively, which resulted in effective tax rates of 29.5% and 29.1%, respectively. The Company provides for income taxes based upon its estimate of full year earnings on a country-by-country basis. In addition, net operating loss carrybacks were not available in all countries in which the Company expects to, or did, experience losses in 1994 and 1993. Earnings Fluctuations Due to (i) customers' tendencies to make purchase decisions late in each fiscal quarter, (ii) the desire by customers to evaluate new, more expensive products for longer periods of time, (iii) the timing of product and technology announcements by the Company and its competitors, and (iv) fluctuating currency exchange rates, the Company's period to period revenues and earnings can fluctuate significantly. -15- EMC CORPORATION FINANCIAL CONDITION Since January 1, 1994, cash and cash equivalents decreased by $125,348,000 caused primarily by the Company's investment of approximately $122,921,000 of cash equivalents into long-term investments. Major sources of cash in the first six months of 1994 were the proceeds from the Company's issuance of $29,600,000 of Notes in January 1994 under the overallotment provision of the December 1993 offering, and increases in accounts payable and accrued expenses of $51,596,000 and $16,540,000, respectively. Major uses of cash in the first six months of 1994 included the purchase of Copernique stock, the acquisition of certain assets of Array, and increases in property, plant and equipment of $48,742,000 needed to support the continued growth of the Company. The Company's working capital decreased by $26,794,000 in the first six months of 1994 from $516,876,000 at January 1, 1994 to $490,082,000 at July 2, 1994. Net trade and notes receivable increased by $94,844,000, or 53%, during the first six months of 1994, supporting an 81% increase in revenues during the first six months of 1994 over the first six months of 1993. The increase in inventory, from $118,263,000 at January 1, 1994, to $182,839,000 at July 2, 1994 was necessary to support revenue volume increases primarily with respect to the Company's ICDA-based products. This increase is related to the inventory investment required to support the extensive test cycles and customer evaluations for the introduction of new higher cost products. Based on its current operating and capital expenditure forecasts, the Company believes its funds currently available and funds generated from operations, will be adequate to finance its operations. -16- EMC CORPORATION PART II. OTHER INFORMATION Item 1. Legal Proceedings On June 10, 1993, Storage Technology Corporation ("STK") filed suit against EMC in the United States District Court for the District of Colorado alleging that EMC is infringing three patents. In the complaint, STK seeks injunctive relief, unspecified damages, including treble damages plus attorney's fees and costs. On July 20, 1993, EMC answered the complaint and denied STK's allegations. In addition, EMC counterclaimed against STK alleging that the patents in suit are invalid and unenforceable. EMC has subsequently added counterclaims based on antitrust laws and implied license theories. In the counterclaims, EMC seeks unspecified damages, attorney's fees, costs and interest. Discovery in the matter is currently in process. A scheduling order has been entered and a trial date has been set for October 1994. Several motions, filed by both parties, are now pending before the Court. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders was held on May 11, 1994. There was no solicitation in opposition to the management's nominees as listed in the Company's proxy statement and all of such nominees were elected. The results of the votes were as follows: 1. Election of Class I Directors: The following Class I Directors were elected to serve until the 1997 Annual Meeting of Stockholders or Special Meeting in lieu thereof, and until that director's successor is elected and qualified: For Withheld John F. Cunningham 137,895,802 270,586 Richard J. Egan 137,900,142 266,246 There were no broker non-votes on any of the proposals. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Computation of Primary and Fully Diluted Net Income Per Share (filed herewith). (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company for the quarter ended July 2, 1994. -17- EMC CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EMC CORPORATION Date: August 12, 1994 By: /s/ W. Paul Fitzgerald W. Paul Fitzgerald Senior Vice President, Finance and Administration, Chief Financial Officer and Treasurer (Principal Financial Officer) By: /s/ Colin G. Patteson Colin G. Patteson Vice President and Controller (Principal Accounting Officer) -18- EMC CORPORATION EXHIBIT INDEX Exhibit 11.1 Computation of Primary and Fully Diluted Net Income Per Share EMC CORPORATION Exhibit 11.1 Computation of Primary and Fully Diluted Net Income Per Share (Amounts in thousands except share and per share data) Three Months Ended Six months Ended July 2, July 3, July 2, July 3, 1994 1993 1994 1993 Primary Net income $54,569 $26,888 $103,409 $41,801 Add back interest expense on convertible notes 2,440 -- 4,852 -- Less tax effect on interest expense on convertible notes (976) -- (1,941) -- Net income for purposes of calculating primary net income per share $56,033 $26,888 $106,320 $41,804 Weighted average shares outstanding during the period 192,986,404 182,911,374 190,729,785 175,562,174 Common equivalent shares 24,077,765 15,108,500 24,910,665 14,913,242 Common and common equivalent shares outstanding for purpose of calculating primary net income per share 217,064,169 198,019,874 215,640,450 190,475,416 Primary net income per share (Note 5) $0.26 $0.14 $0.49 $0.22 Fully Diluted Net income $54,569 $26,888 $103,409 $41,801 Add back interest expense on convertible notes and debt 3,156 936 6,488 1,872 Less tax effect on interest expense on convertible notes and debt (1,263) (356) (2,596) (712) Net income for purpose of calculating fully diluted net income per share $56,462 $27,468 $107,301 $42,961 Common and common equivalent shares outstanding for purpose of calculating primary net income per share 217,064,169 198,019,874 215,640,450 190,475,416 Incremental shares to reflect full dilution, primarily from convertible subordinated debentures 15,901,873 20,754,332 17,566,576 21,395,490 Total shares for purpose of calculating fully diluted net income per share 232,966,042 218,774,206 233,207,026 211,870,906 Fully diluted net income per share (Note 5) $0.24 $0.13 $0.46 $0.20 -----END PRIVACY-ENHANCED MESSAGE-----