-----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, RNzpQn0nPhSgjJt/SAW95D0CjHaTobzxtpaF0O2oFqDEMnveXh65WtmjrfxLSdqu xcQIz652UiukBovZMnHk/w== 0000790070-94-000026.txt : 19941202 0000790070-94-000026.hdr.sgml : 19941202 ACCESSION NUMBER: 0000790070-94-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19941001 FILED AS OF DATE: 19941114 SROS: NONE 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: 94558919 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 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: October 1, 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 195,875,257 - - - -------------------------------------- ----------- Class Outstanding as of October 1, 1994 -2- EMC CORPORATION Page No. Part I - Financial Information Consolidated Balance Sheets October 1, 1994 and January 1, 1994 3 Consolidated Statements of Operations for the Three and Nine Months Ended October 1, 1994 and October 2, 1993 4 Consolidated Statements of Cash Flows for the Nine Months Ended October 1, 1994 and October 2, 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) October 1, January 1, ASSETS 1994 1994 Current assets: Cash and cash equivalents $232,252 $345,300 Trade and notes receivable less allowance for doubtful accounts of $6,596 and $5,262, respectively 295,719 157,225 Inventories 238,787 118,263 Deferred income taxes 35,509 24,199 Other assets 9,273 5,023 Total current assets 811,540 650,010 Long-term investments, at cost 167,978 50,392 Notes receivable 26,376 21,808 Property, plant and equipment, net 145,639 96,480 Deferred income taxes 5,440 2,761 Other assets, net 15,491 8,195 Total assets $1,172,464 $829,646 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $941 $1,262 Accounts payable 114,822 44,179 Accrued expenses 92,513 59,755 Income taxes payable 43,851 20,892 Deferred revenue 7,560 7,046 Total current liabilities 259,687 133,134 Deferred revenue 2,780 3,389 Long-term obligations: 4 1/4% Conv. Subordinated Notes due 2001 229,598 200,000 6 1/4% Conv. Subordinated Debentures due 2002 45,826 59,260 Notes payable 16,632 14,013 Capital lease obligations 287 756 Minority interest in consolidated subsidiaries 852 --- Total liabilities 555,662 410,552 Stockholders' equity: Series Preferred Stock, par value $.01; authorized 25,000,000 shares --- --- Common Stock, par value $.01; authorized 330,000,000 shares; issued 198,500,342 and 189,936,120, respectively; outstanding 195,875,257 and 187,328,124, respectively 1,985 1,899 Additional paid-in capital 249,663 226,668 Deferred compensation (2,806) (3,552) Retained earnings 365,849 193,045 Cumulative translation adjustment 2,763 1,537 Treasury stock, at cost, 2,625,085 and 2,607,996 shares, respectively (652) (503) Total stockholders' equity 616,802 419,094 Total liabilities and stockholders'equity $1,172,464 $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 Nine Months Ended October 1, October 2, October 1, October 2, 1994 1993 1994 1993 Revenues: Net sales $363,748 $209,857 $921,608 $516,226 Service and rental 7,834 5,890 25,148 17,836 371,582 215,747 946,756 534,062 Costs and expenses: Cost of sales and service 176,333 102,024 447,123 264,863 Research and development 32,407 16,504 81,000 40,671 Selling, general and administrative 63,940 42,895 175,269 113,956 Operating income 98,902 54,324 243,364 114,572 Investment income 5,619 2,317 15,549 5,707 Interest expense (3,652) (1,399) (11,247) (4,230) Other (expense), net (1,832) (652) (1,950) (2,494) Income before taxes 99,037 54,590 245,716 113,555 Income tax provision 29,642 16,103 72,912 33,267 Net income $69,395 $38,487 $172,804 $80,288 Net income per weighted average share, primary $0.32 $0.19 $0.82 $0.41 Net income per weighted average share, fully diluted$0.30 $0.18 $0.76 $0.38 Weighted average number of common shares outstanding, primary 218,331 201,003 216,558 194,041 Weighted average number of common shares outstanding, fully diluted 234,216 221,112 233,753 215,637 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 Nine Months Ended October 1, October 2, 1994 1993 Cash flows from operating activities: Net income $172,804 $80,288 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,556 15,977 Deferred income taxes (13,989) (8,534) Net loss on disposal of property and equipment 70 1,885 Minority interest in consolidated subsidiaries852 --- Changes in assets and liabilities: Trade and notes receivable (143,469) (66,718) Inventories (121,188) (44,555) Other assets (12,253) 3,108 Accounts payable 70,902 14,641 Accrued expenses 32,888 23,356 Income taxes payable (22,959) 5,732 Deferred revenue (92) (721) Total adjustments (140,764) (55,829) Net cash provided by operating activities 32,040 24,459 Cash flows from investing activities: Additions to property and equipment (71,358) (32,731) Proceeds from sale of property and equipment 445 562 Purchase of long-term investments (117,586) (22,866) Net cash used by investing activities (188,499) (55,035) Cash flows from financing activities: Issuance of common stock, net of issuance costs 10,391 107,542 Purchase of treasury stock (149) --- Issuance of 4 1/4% convertible subordinated notes due 2001, net of issuance costs 29,350 --- Payment long-term and short-term obligations (1,159) (2,043) Issuance long-term and short-term obligations 2,988 --- Net cash provided by financing activities 41,421 105,499 Effect of exchange rate changes on cash 1,990 486 Net (decrease)/increase in cash and cash equivalents (115,038) 74,923 Cash and cash equivalents at beginning of period 345,300 62,103 Cash and cash equivalents at end of period $232,252 $137,512 Non-Cash Activity: Conversion of Debentures and Notes 13,436 710 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 October 1, 1994 and October 2, 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 is now a wholly-owned subsidiary of EMC. As of August 27, 1994, Magna's business was consolidated into EMC and Magna's corporate entity was dissolved. 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. Copernique specializes in high performance data management hardware and software systems. At October 1, 1994 the Company had 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 Independent Disks") technology. Other assets, non-current at October 1, 1994 included patents acquired in the purchase of Array of $7,272,000, net of $848,000 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: October 1, 1994 January 1,1994 Purchased parts $ 14,086,000 $ 17,319,000 Work-in-process 148,427,000 46,348,000 Finished goods 76,274,000 54,596,000 $238,787,000 $118,263,000 3. Property, Plant and Equipment Property, plant and equipment consist of: October 1, 1994 January 1,1994 Furniture and fixtures $ 5,748,000 $ 4,278,000 Equipment 163,251,000 102,670,000 Vehicles 1,081,000 923,000 Buildings and improvements 41,896,000 29,864,000 Land 1,870,000 1,870,000 Construction in progress 4,380,000 4,891,000 218,226,000 144,496,000 Accumulated depreciation and amortization (72,587,000) (48,016,000) $145,639,000 $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. Since their issuance, $2,000 of Notes have been converted into Common Stock. 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, $14,174,000 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 nine months ended October 1, 1994 considers the dilutive effects of the Notes and stock options. Fully diluted weighted average shares outstanding for the three and nine months ended October 1, 1994 and October 2, 1993 considers the dilutive effects of the Debentures, in addition to the Notes and stock options. 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. In a hearing on October 12, 1994, two of the three patents in suit were dismissed by the Court with prejudice. Discovery in the matter is currently in process and expert witness reports have been exchanged. The trial date originally scheduled for October 24, 1994 has been postponed to an undetermined date. 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 - Third Quarter of 1994 compared to Third Quarter of 1993 - - - ------------------------------------------------------------------- Revenues Revenues for the quarter ended October 1, 1994 were $371,582,000 compared to $215,747,000 for the third quarter of 1993, an increase of $155,835,000 or 72%. Product revenues for the quarter ended October 1, 1994 were $363,748,000 compared to $209,857,000 for the third quarter of 1993, an increase of $153,891,000 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 third 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 $160,000,000 or 91%, from $176,176,000 in the third quarter of 1993 to $336,176,000 in the third quarter of 1994. Revenues from the Harmonix series of IBM compatible midrange disk products, increased by $2,324,000 or 9%, from $24,715,000 in the third quarter of 1993 to $27,039,000 in the third quarter of 1994. In the third quarter of 1994, the Company generated approximately 96% of its product revenues from sales of ICDA-based products versus approximately 93% 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 $74,111,000, or 50% from $148,827,000 in the third quarter of 1993 to $222,938,000 in the third quarter of 1994. This increase was due to increased unit sales of the Symmetrix 5500 series of products and the introduction in 1994 of the Symmetrix 5200 series of products, both in the IBM mainframe storage market. Symmetrix series 5500 revenues increased $99,987,000, or 161%, to $162,072,000 in the third quarter of 1994 versus $62,085,000 in the third quarter of 1993, and Symmetrix series 5200 revenues were $10,625,000 in the third quarter of 1994. Increases in sales of the Symmetrix 5500 product and the introduction of the Symmetrix 5200 product 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 $63,381,000, or 123%, from $51,678,000 in the third quarter of 1993 to $115,059,000 in the same period of 1994, due primarily to growth in unit sales of the Symmetrix series of products in the IBM, Unisys and Bull mainframe storage markets. Revenues on product sales into the markets in the Asia Pacific region increased by $16,398,000, or 175%, from $9,352,000 in the third quarter of 1993 to $25,750,000 in the third quarter of 1994, due to growth in unit sales of the Symmetrix series of products in the IBM mainframe -10- EMC CORPORATION storage market. The Company strengthened its sales presence in the Asia Pacific region with the formation of EMC Japan in January 1994. The Company has Original Equipment Manufacturer ("OEM") agreements with Bull and Unisys. Revenues from product sales of the Symmetrix series of products to Bull increased by $6,661,000, or 98%, from $6,799,000 in the third quarter of 1993 to $13,460,000 in the third quarter of 1994. Revenues from product sales of the Symmetrix series under the OEM agreement with Unisys increased by $6,452,000, or 93%, from $6,932,000 in the third quarter of 1993 to $13,384,000 in the third 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 was consistent at 47.5% and 47.3% in the third quarters of 1994 and 1993, respectively. Cost of sales and service percentage in the third quarter of 1993 improved from previous quarters in 1993 due to increased revenues in the 5500 product series as a percentage of total revenues. Research and Development Research and development ("R&D") expenses were $32,407,000 and $16,504,000 in the third quarters of 1994 and 1993, respectively, an increase of $15,903,000, or 96%. R&D expenses were 8.7% and 7.6% of revenues in the third quarters 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 over third quarter 1993 levels reflect the costs of the Company's R&D facilities at Epoch, Copernique and Array 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 $63,940,000 and $42,895,000 in the third quarters of 1994 and 1993, respectively, an increase of $21,015,000 or 49%. SG&A expenses were 17.2% and 19.9% of revenues in the third quarters of 1994 and 1993, respectively. The dollar increase is due primarily to costs associated with additional sales and support personnel -11- EMC CORPORATION and 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 $5,619,000 in the third quarter of 1994 compared with $2,317,000 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 $1,399,000 in the third quarter of 1993 to $3,652,000 in the third quarter of 1994, mainly due to interest accruals required on the Notes. Other Expense, Net Other expense, net, was $1,832,000 for the third quarter of 1994 compared with other expense, net, of $652,000 in the third quarter of 1993. Other expense in 1994 related to income items including $375,000 in technology fees and $312,000 of minority interest in subsidiary results, net of expenses including $448,000 in amortization of intangibles, $335,000 loss on sale of assets, $280,000 in amortization of charges deferred in the offerings of the Notes and Debentures, $283,000 in importation charges, $110,000 of currency transaction losses, and other losses totaling $1,063,000. Other expense in the third quarter of 1993 related primarily to currency transaction losses of $1,156,000 and other losses totaling $160,000, net of other income of $664,000 primarily from technology license fees. Provision for Income Taxes The provision for income taxes was $29,642,000 and $16,103,000 in the third quarter of 1994 and 1993, respectively, which resulted in effective tax rates of 29.9% and 29.5%, 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 - First nine months of 1994 compared to First nine months of 1993 - - - ------------------------------------------------------------------- Revenues Revenues for the nine months ended October 1, 1994 were $946,756,000 compared to $534,062,000 for the nine months ended October 2, 1993, an increase of $412,694,000 or 77%. Product revenues for the first nine months of 1994 were $921,608,000 compared to $516,226,000 for the first nine months of 1993, an increase of $405,382,000 or 79%. 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 nine months 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 $393,373,000 or 94%, from $420,256,000 in the first nine months of 1993 to $813,629,000 in the first nine months of 1994. Revenues from the Harmonix series of IBM compatible midrange disk products, increased by $15,636,000 or 24%, from $64,947,000 in the first nine months of 1993 to $80,583,000 in the first nine months of 1994. The Company generated approximately 96% and 91% of its product revenues from sales of ICDA-based products in the first nine 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 $244,414,000, or 71%, to $590,445,000 in the first nine months of 1994 from $346,031,000 in the first nine 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 $265,954,000, or 239%, to $377,393,000 in the first nine months of 1994 from $111,439,000 in the first nine months 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 $129,115,000, or 88%, to $276,400,000 in the first nine months of 1994 from $147,285,000 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 $31,853,000, or 139%, to $54,763,000 in the first nine months of 1994 from $22,910,000 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 Unisys. Revenues from product sales of the Symmetrix series of products to Bull increased by $25,719,000, or 250%, from $10,297,000 in the first nine months of 1993 to $36,016,000 in the first nine months of 1994. Revenues from product sales of the Symmetrix series under the OEM agreement with Unisys increased by $882,000, or 3%, from $31,691,000 in the first nine months of 1993 to $32,573,000 in the first nine months of 1994. Cost of Sales and Service As a percentage of revenues, cost of sales and service amounted to 47.2% in the first nine months of 1994 versus 49.6% in the first nine 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 $81,000,000 and $40,671,000 in the first nine months of 1994 and 1993, respectively, an increase of $40,329,000, or 99%. R&D expenses were 8.6% and 7.6% of revenues in the first nine 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 nine months of 1994 over the same period in 1993 reflect the costs of the Company's R&D facilities at Epoch, Copernique and Array 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 $175,269,000 and $113,956,000 in the first nine months of 1994 and 1993, respectively, an increase of $61,313,000 or 54%. SG&A expenses were 18.5% and 21.3% of revenues in the first nine months of 1994 and 1993, respectively. The dollar increase in SG&A spending reflects costs associated with additional sales and support personnel and 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. -14- EMC CORPORATION Investment Income and Interest Expense Investment income was $15,549,000 and $5,707,000 in the first nine 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 $4,230,000 in the first nine months of 1993 to $11,247,000 in the first nine months of 1994, mainly due to interest accruals required on the Notes. Other Expense, Net Other expense, net was $1,950,000 and $2,494,000 in the first nine months of 1994 and 1993, respectively. Other expense in 1994 included $1,359,000 of currency transaction losses, $800,000 in amortization of charges deferred in the offerings of the Notes and Debentures, $848,000 in amortization of patents and $396,000 in losses on sale of assets and other miscellaneous losses totaling $476,000, net of income from sales of assets of $326,000, technology fees of $1,125,000 and $478,000 in minority interest in subsidiary. Other expense in the first nine months of 1993 related to a net loss on disposal of assets of $1,885,000, technology license costs of $417,000, currency transaction losses of $1,757,000 and other expenses of $189,000, net of other income of $1,754,000 primarily from technology license fees. Provision for Income Taxes The provision for income taxes was $72,912,000 and $33,267,000 in the first nine months of 1994 and 1993, respectively, which resulted in effective tax rates of 29.7% and 29.3%, 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. -15- EMC CORPORATION FINANCIAL CONDITION Since January 1, 1994, cash and cash equivalents decreased by $113,048,000 caused primarily by the Company's transfer of approximately $117,586,000 of cash equivalents into long-term investments. Major sources of cash in the first nine months of 1994 included 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 $70,643,000 and $32,758,000, respectively. Major uses of cash in the first nine months of 1994 included the purchase of Copernique stock, the acquisition of certain assets of Array, and increases in property, plant and equipment of $71,358,000 needed to support the continued growth of the Company. The Company's working capital increased by $34,977,000 in the first nine months of 1994 from $516,876,000 at January 1, 1994 to $551,853,000 at October 1, 1994, mainly due to increased receivable and inventory balances. Current net trade and notes receivable increased by $138,494,000, or 88%, during the first nine months of 1994, supporting a 77% increase in revenues during the first nine months of 1994 over the first nine months of 1993. The increase in inventory, from $118,263,000 at January 1, 1994, to $238,787,000 at October 1, 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 Company's ICDA-based products. Based on its current operating and capital expenditure forecasts, the Company believes funds currently available and funds generated from operations will be adequate to finance its operations. In addition, the Company has available to it a $50 million line of credit that may be utilized from time to time. -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. In a hearing on October 12, 1994, two of the three patents in suit were dismissed by the Court with prejudice. Discovery in the matter is currently in process and expert witness reports have been exchanged. The originally scheduled trial date of October 24, 1994 has been postponed to an undetermined date. 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 October 1, 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: November 10, 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 Nine months Ended October 1, October 2, October 1, October 2, 1994 1993 1994 1993 Primary Net income $69,395 $38,487 $172,804 $80,288 Add back interest expense on convertible notes 2,440 -- 7,292 -- Less tax effect on interest expense on convertible notes (976) -- (2,917) -- Net income for purposes of calculating primary net income per share $70,859 $38,487 $177,179 $80,288 Weighted average shares outstanding during the period 195,075,782 184,394,752 192,189,894 178,193,432 Common equivalent shares 23,255,484 16,607,982 24,367,834 15,847,436 Common and common equivalent shares outstanding for purpose of calculating primary net income per share 218,331,266 201,002,734 216,557,728 194,040,868 Primary net income per share (Note 5) $0.32 $0.19 $0.82 $0.41 Fully Diluted Net income $69,395 $38,487 $172,804 $80,288 Add back interest expense on convertible notes and debt 3,156 927 9,644 2,799 Less tax effect on interest expense on convertible notes and debt (1,263) (371) (3,859) (1,083) Net income for purpose of calculating fully diluted net income per share $71,288 $39,043 $178,589 $82,004 Common and common equivalent shares outstanding for purpose of calculating primary net income per share 218,331,266 201,002,734 216,557,728 194,040,868 Incremental shares to reflect full dilution, primarily from convertible subordinated debentures 15,884,597 20,109,372 17,195,237 21,595,748 Total shares for purpose of calculating fully diluted net income per share 234,215,863 221,112,106 233,752,965 215,636,616 Fully diluted net income per share (Note 5) $0.30 $0.18 $0.76 $0.38 EX-27 2
5 1,000 9-MOS DEC-31-1994 OCT-01-1994 232,252 0 295,719 0 238,787 811,540 218,226 72,587 1,172,464 259,687 292,343 1,985 0 0 614,817 1,172,464 921,608 946,756 447,123 447,123 1,950 0 11,247 245,716 72,912 172,804 0 0 0 172,804 0.82 0.76
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