-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R8ZZpRuAtnN+eMiMnOYWFq8ojeZn5WexzpySsfjURVweFv0WPDLkT+bokQJTV0/v ljLiyxBgpsj1vStA+Zkl8Q== 0000790070-97-000022.txt : 19970814 0000790070-97-000022.hdr.sgml : 19970814 ACCESSION NUMBER: 0000790070-97-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMC CORP CENTRAL INDEX KEY: 0000790070 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] 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: 97657567 BUSINESS ADDRESS: STREET 1: 171 SOUTH STREET 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: June 30, 1997 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 246,712,315 - -------------------------------------- ------------------------------ Class Outstanding as of June 30, 1997 Page No. Part I - Financial Information Consolidated Balance Sheets June 30, 1997 and December 31, 1996 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 1997 and June 29, 1996 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and June 29, 1996 5 Notes to Interim Consolidated Financial Statements 6-8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-16 Part II - Other Information 17 Signatures 20 Exhibit Index 21 CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
June 30, December 31, ASSETS 1997 1996 Current assets: Cash and cash equivalents $759,126 $496,377 Short-term investments 409,424 230,981 Trade and notes receivable less allowance for doubtful accounts of $7,612 and $7,368 in 1997 and 1996, respectively 701,608 627,409 Inventories 446,985 336,581 Deferred income taxes 38,957 43,421 Other assets 28,567 19,367 Total current assets 2,384,667 1,754,136 Long-term investments 145,038 113,500 Notes receivable, net 24,316 20,013 Property, plant and equipment, net 318,769 276,387 Deferred income taxes 13,468 16,664 Intangible and other assets, net 155,367 112,846 Total assets $3,041,625$2,293,546 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term obligations $8,218 $7,058 Accounts payable 154,880 172,871 Accrued expenses 115,442 122,562 Income taxes payable 122,973 104,899 Deferred revenue 7,013 10,112 Total current liabilities 408,526 417,502 Deferred revenue 1,206 2,019 Deferred income taxes 39,985 46,002 Long-term obligations: 3 1/4% convertible subordinated notes due 2002 517,500 --- 4 1/4% convertible subordinated notes due 2001 --- 142,720 Notes payable and other noncurrent liabilities 39,723 48,514 Total liabilities 1,006,940 656,757 Commitments and contingencies Stockholders' equity: Series Preferred Stock, par value $.01; authorized 25,000,000 --- --- shares, none outstanding Common Stock, par value $.01; authorized 750,000,000 shares; issued 246,712,315 and 238,239,672 shares, in 1997 and 1996, respectively 2,467 2,382 Additional paid-in capital 622,022 463,687 Deferred compensation (5,437) (7,027) Retained earnings 1,412,495 1,172,828 Cumulative translation adjustment 3,138 4,919 Total stockholders' equity 2,034,685 1,636,789 Total liabilities and stockholders' equity $3,041,625$2,293,546 The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited)
For the Three Months Ended For the Six Months Ended June 30, June 29, June 30, June 29, 1997 1996 1997 1996 Revenues: Net sales $694,511 $533,235 $1,295,411 $1,042,419 Service and rental 18,950 11,782 36,487 24,085 713,461 545,017 1,331,898 1,066,504 Costs and expenses: Cost of sales and service 384,545 304,941 720,530 598,105 Research and development 53,446 39,632 101,537 74,950 Selling, general and administrative 114,640 87,159 212,264 168,922 Operating income 160,830 113,285 297,567 224,527 Investment income 17,412 8,041 29,096 14,366 Interest expense (4,640) (2,997) (6,042) (6,056) Other income / (expense), net (369) (210) 1,728 (3) Income before taxes 173,233 118,119 322,349 232,834 Income tax provision 44,434 31,065 82,682 61,235 Net income $128,799 $87,054 $239,667 $171,599 Net income per weighted average share, primary $0.50 $0.36 $0.94 $0.70 Net income per weighted average share, fully diluted $0.50 $0.36 $0.93 $0.70 Weighted average number of common shares outstanding, primary 263,950 248,517 259,413 248,569 Weighted average number of common shares outstanding, fully diluted 264,039 248,574 259,612 248,621 The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
For the Six Months Ended June 30, June 29, 1997 1996 Cash flows from operating activities: Net income $239,667 $171,599 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 59,635 36,275 Deferred income taxes, net 1,643 12,703 Net loss on disposal of property and equipment 366 290 Tax benefit from stock options exercised 5,740 --- Changes in assets and liabilities: Trade and notes receivable (78,258) 24,995 Inventories (110,227) 47,685 Other assets (49,207) (21,444) Accounts payable (18,097) 6,416 Accrued expenses (7,000) (15,380) Income taxes payable 18,203 (11,225) Deferred revenue (3,927) 4,863 Net cash provided by operating activities 58,538 256,777 Cash flows from investing activities Additions to property, plant and equipment (82,289) (56,319) Purchase of patents --- (6,333) Proceeds from disposal of property and equipment 313 826 Capitalized software development costs (12,400) (12,493) Maturities/(purchases) of short-term and long-term investments, net (209,981) (60,271) Net cash used by investing activities (304,357) (134,590) Cash flows from financing activities: Issuance of common stock 11,998 11,269 Repurchase of shares for treasury --- (16,370) Redemption of 4 1/4% notes due 2001 (65) --- Issuance of 3 1/4% notes due 2002, net of issuance costs 506,671 --- Payment of long-term and short-term obligations (9,050) (444) Issuance of long-term and short-term obligations 1,419 3,142 Net cash provided (used) by financing activities 510,973 (2,403) Effect of exchange rate changes on cash (2,405) 750 Net increase in cash and cash equivalents 265,154 119,784 Cash and cash equivalents at beginning of period 496,377 379,628 Cash and cash equivalents at end of period $759,126 $500,162 Non-cash activity: Conversion of 4 1/4% notes to common stock, net of issuance costs $140,682 $100 Patents acquired by notes and other payables --- $37,416 The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation Company EMC Corporation and its subsidiaries ("EMC" or the "Company") design, manufacture, market and support a wide range of storage- related hardware and software products and related services for the Enterprise Storage market. Enterprise Storage provides shared storage of information from all types of computers, including both mainframe and open systems computers. EMC's products are sold as storage solutions for customers utilizing a variety of computer system platforms, including, but not limited to, International Business Machines Corporation ("IBM") and IBM-compatible mainframe, Unisys Corporation, Compagnie des Machines Bull S.A., Hewlett- Packard Company ("HP"), NCR Corporation, Sequent Computer Systems, Inc., and Siemens Nixdorf Informationssysteme AG. 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. 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 June 30, 1997 and June 29, 1996. Certain prior year amounts have been reclassified to conform with the 1997 presentation. 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 December 31, 1996, which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 1997. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 2. Inventory
June 30, 1997 December 31, 1996 Inventories consist of: (in thousands) Purchased parts $23,425 $ 16,610 Work-in-process 269,262 210,445 Finished goods 154,298 109,526 $446,985 $336,581
3. Long-Term Obligations In March 1997, the Company sold in a private placement under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), $517.5 million of 31/4% convertible subordinated notes due 2002 (the "31/4% Notes"). The 31/4% Notes are generally convertible into shares of common stock of the Company at a conversion price of $45.31 per share, subject to adjustment in certain events. Interest is payable semiannually and the 31/4% Notes are redeemable at the option of the Company at set redemption prices (which range from 100.65% to 101.30% of principal), plus accrued interest, commencing March 15, 2000. The Company has filed a Registration Statement on Form S-3 with the Securities and Exchange Commission under the Securities Act, which became effective on June 26, 1997, permitting the resale, on a registered basis, of the Notes and of the shares of common stock issuable upon conversion of the Notes from time to time by the securityholders named or to be named therein. 4. 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 used in the per share computations reflect the dilutive effects of the 31/4% Notes for the three and six months ended June 30, 1997, and of the 41/4% convertible subordinated notes due 2001 (the "41/4% Notes") for the six months ended June 30, 1997 and for the three and six months ended June 29, 1996. The dilutive effects of outstanding stock options are reflected in all periods presented. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" which is effective for fiscal years ending after December 15, 1997. This Statement replaces the presentation of primary earnings per share ("EPS") with a presentation of basic EPS, which excludes dilutive securities. It also requires a reconciliation of the basic EPS to diluted EPS and dual presentation on the face of the income statement. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS Pro forma net income per share for the three and six months ended June 30, 1997 and June 29, 1996, respectively, as computed under the new standard is as follows: For the three months ended June 30, 1997 June 29, 1996 Net income per weighted average share, basic $0.52 $0.38 Net income per weighted average share, diluted $0.50 $0.36 For the six months ended June 30, 1997 June 29, 1996 Net income per weighted average share, basic $0.97 $0.74 Net income per weighted average share, diluted $0.94 $0.70 5. Common Stock At the Annual Meeting of the Company on May 7, 1997, the stockholders approved an amendment to the Company's Articles of Organization to increase the number of shares of authorized common stock to 750,000,000. 6. Litigation The Company is a party to litigation which it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material adverse effect on the Company's business or financial condition. 7. Derivatives Financial Reporting Release No. 48, issued by the Securities and Exchange Commission, requires enhanced disclosures regarding accounting policies for and market risks inherent in derivatives and other financial instruments. Note M of the notes to the financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 describes the Company's use of derivatives and its related accounting policy. There have been no significant changes to the policy set forth in Note M through June 30, 1997. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - Second Quarter of 1997 compared to Second Quarter of 1996 (in thousands) - ------------------------------------------------------------------- Revenues The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the risk factors set forth on page 16 and in EMC's other filings at the U.S. Securities and Exchange Commission. Total revenues for the second quarter ended June 30, 1997 were $713,461 compared to $545,017 for the second quarter of 1996, an increase of $168,444 or 31%. The increase in revenues was due primarily to the continued strong demand for the Company's Symmetrix series of products, particularly the Symmetrix 3000 series of products for the open systems market. In January 1997, EMC announced six new Symmetrix products, which represented 85% of Symmetrix product revenues for the second quarter ended June 30, 1997. These new products address the growing demand for Enterprise Storage. Revenues from products sold directly and through original equipment manufacturers ("OEM's") and resellers into the mainframe storage market, which include Symmetrix products operating primarily in the Multiple Virtual Storage ("MVS") environment, were $310,963 in the second quarter of 1997, compared to $309,494 in the second quarter of 1996. The marginal increase of $1,469 compared to the overall revenue growth rate reflects the continuing market transition from proprietary mainframe storage to products operating in an open systems environment. Revenues from products sold directly and through OEM's and resellers into the open systems storage market, which include the Symmetrix products operating in an open systems environment and other products, were $333,264 in the second quarter of 1997, compared to $169,582 in the second quarter of 1996, an increase of $163,682 or 97%. This was the first quarter in which open systems revenue levels exceeded mainframe revenue levels. The Company expects further growth in the open systems revenue levels and revenue as a percentage of total revenue in this market throughout 1997. (See, however, "Factors that May Affect Future Results.") Revenues from products sold by McDATA Corporation, a wholly-owned subsidiary of EMC ("McDATA"), which include the ESCON Director series of products, were $49,551 in the second quarter of 1997, compared to $45,980 in the second quarter of 1996, an increase of $3,571 or 8%. Revenues from all other products, which include the midrange series of products, were $733 in the second quarter of 1997, compared to $8,179 in the second quarter of 1996, a decrease of $7,446 or 91%. The decrease is primarily attributable to the declines in midrange revenues, which declines are expected to continue. Midrange revenue levels are not expected to be material in the remainder of 1997 and thereafter. Software revenues were $40,838 and $14,885 in the second quarters of 1997 and 1996, respectively. Software revenues are included in the product revenues for the respective mainframe and open systems markets. Revenues from service and rental income were $18,950 in the second quarter of 1997, compared to $11,782 in the second quarter of 1996, an increase of $7,168 or 61%, due to a broadening base of customers under service agreements. In October 1995, the Company entered into a reseller agreement with HP under which HP markets and resells the Symmetrix 3000 series of systems worldwide for connection to HP's 9000 series computers. This agreement was expanded to enable HP to also market and resell this family of systems for connection to HP's 3000 series computers. The current agreement extends through August 1998. Revenues for the second quarter of 1997 and 1996 under this agreement were $118,597 and $66,719, or 17% and 12% of total revenues, respectively. Revenues on sales into the North American markets were $400,512 in the second quarter of 1997 compared to $327,185 in the second quarter of 1996, an increase of $73,327, or 22%. This increase was due primarily to increased revenue levels from sales of the Symmetrix series of products in the open systems storage market. Revenues on sales into all markets outside North America were $312,949 or 44% of total revenues in the second quarter of 1997 compared to $217,832 or 40% of total revenues for the second quarter of 1996. The Company expects further increases in international sales as a percentage of total revenues throughout 1997. (See, however, "Factors that May Affect Future Results.") Revenues on sales into the markets of Europe, Africa and the Middle East were $238,841 in the second quarter of 1997 compared to $166,034 in the second quarter of 1996, an increase of $72,807, or 44%, due primarily to increased revenue levels from sales of the Symmetrix series of products in the open systems storage market. Revenues on sales into the markets of the Asia Pacific region were $68,176 in the second quarter of 1997 compared to $48,110 in the second quarter of 1996, an increase of $20,066, or 42%, due to increased revenue levels from sales of the Symmetrix series of products, primarily in the open systems storage market. Revenues on sales into the markets of South America were $5,932 in the second quarter of 1997 compared to $3,688 in the second quarter of 1996, an increase of $2,244 or 61%. Gross Margins Gross margins increased to 46.1% of revenues in the second quarter of 1997, compared to 44.0% of revenues in the second quarter of 1996. This increase is primarily attributable to increasing sales of software which have a greater gross margin than hardware sales. Other factors impacting gross margins to a lesser extent in the second quarter include the rates of component cost declines and price declines which were about equal, and revenues attributable to new Symmetrix products. The Company currently believes that price declines will continue in the mainframe and open systems environments. Research and Development Research and development ("R&D") expenses were $53,446 and $39,632 in the second quarters of 1997 and 1996, respectively, an increase of $13,814, or 35%. R&D expenses were 7.5% and 7.3% of revenues in the second quarters of 1997 and 1996, respectively. The increase was partially due to the cost of additional technical staff, particularly to support development of products for the Enterprise Storage market, and is also attributable to expenses associated with computer equipment acquired to facilitate this development. The Company expects to continue to spend substantial amounts for R&D for the balance of 1997 and thereafter. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses were $114,640 and $87,159 in the second quarters of 1997 and 1996, respectively, an increase of $27,481 or 32%. SG&A expenses were 16.1% and 16.0% of revenues in the second quarters of 1997 and 1996, respectively. The dollar increase is due primarily to costs associated with additional worldwide sales and support personnel and their related overhead costs. These costs are attributable to the Company's increased revenue levels and the Company's initiatives to expand sales of its Enterprise Storage products. The Company has expanded its international direct sales force, as well as its OEM, reseller, alliance and partnership programs with applications, systems and database vendors. SG&A expenses are expected to increase in dollar terms for the balance of 1997 and thereafter. Investment Income and Interest Expense Investment income was $17,412 in the second quarter of 1997 compared with $8,041 in the same period a year ago. Interest income was earned from investments in cash equivalents, and short and long-term investments. Investment income increased in 1997 primarily due to higher cash and investment balances which were derived from operations and the 31/4% Notes that were issued in March of 1997. Interest expense increased by $1,643 to $4,640 in the second quarter of 1997 from $2,997 in the second quarter of 1996. The increase is attributable to the issuance of the 31/4% Notes in March of 1997. Provision for Income Taxes The provision for income taxes was $44,434 and $31,065 in the second quarters of 1997 and 1996, respectively, which resulted in an effective tax rate of 25.6% in the second quarter of 1997 and 26.3% in the second quarter of 1996. The decrease in the effective tax rate is mainly attributable to the realization of benefits associated with the continued progress on the Company's various tax strategies. The Company provides for income taxes based upon its estimate of full year earnings on a country-by-country basis. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - First Six Months of 1997 compared to First Six Months of 1996 (in thousands) - ------------------------------------------------------------------- Revenues The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the risk factors set forth on page 16 and in EMC's other filings at the U.S. Securities and Exchange Commission. Total revenues for the six months ended June 30, 1997 were $1,331,898 compared to $1,066,504 for the first six months of 1996, an increase of $265,394 or 25%. The increase in revenues was due primarily to the continued strong demand for the Company's Symmetrix series of products, particularly the Symmetrix 3000 series of products for the open systems market. In January 1997, EMC announced six new Symmetrix products, which represented 77% of the first six months Symmetrix product revenues. These new products address the growing need for Enterprise Storage. Revenues from products sold directly and through OEM's and resellers into the mainframe storage market, which include Symmetrix products operating primarily in the MVS environment, were $590,929 in the first six months of 1997, compared to $618,649 in the first six months of 1996, a decrease of $27,720 or 4%. The trend in the mainframe revenue levels reflects a continuing market transition from proprietary mainframe storage to products operating in an open systems environment. Revenues from products sold directly and through OEM's and resellers into the open systems storage market, which include the Symmetrix products operating in an open systems environment and other products, were $607,702 in the first six months of 1997, compared to $316,289 in the first six months of 1996, an increase of $291,413 or 92%. The Company expects further growth in the open systems revenue levels and revenue as a percentage of total revenue in this market throughout 1997. (See, however, "Factors that May Affect Future Results.") Revenues from products sold by McDATA, which include the ESCON Director series of products, were $93,083 in the first six months of 1997, compared to $85,276 in the first six months of 1996, an increase of $7,807 or 9%. Revenues from all other products, which include the midrange series of products, were $3,697 in the first six months of 1997, compared to $22,205 in the first six months of 1996, a decrease of $18,508 or 83%. The decrease is primarily attributable to the declines in midrange revenues, which declines are expected to continue. Midrange revenue levels are not expected to be material in the remainder of 1997 and thereafter. Software revenues were $67,370 and $26,633 in the first six months of 1997 and 1996, respectively. Software revenues are included in the product revenues for the respective mainframe and open systems markets. Revenues from service and rental income were $36,487 in the first six months of 1997, compared to $24,085 in the first six months of 1996, an increase of $12,402 or 51%, due to a broadening base of customers under service agreements. In October 1995, the Company entered into a reseller agreement with HP under which HP markets and resells the Symmetrix 3000 series of systems worldwide for connection to HP's 9000 series computers. This agreement was expanded to enable HP to also market and resell this family of systems for connection to HP's 3000 series computers. The current agreement extends through August 1998. Revenues for the first six months of 1997 and 1996 under this agreement were $226,114 and $113,316, or 17% and 11% of total revenues, respectively. Revenues on sales into the North American markets were $762,158 in the first six months of 1997 compared to $634,802 in the first six months of 1996, an increase of $127,356, or 20%. This increase was due primarily to increased revenue levels from sales of the Symmetrix series of products in the open systems storage market. Revenues on sales into all markets outside North America were $569,740 or 43% of total revenues in the first six months of 1997 compared to $431,702 or 40% of total revenues for the first six months of 1996. The Company expects further increases in international sales as a percentage of total revenues throughout 1997. (See, however, "Factors that May Affect Future Results.") Revenues on sales into the markets of Europe, Africa and the Middle East were $435,056 in the first six months of 1997 compared to $329,259 in the first six months of 1996, an increase of $105,797, or 32%, due primarily to increased revenue levels from sales of the Symmetrix series of products in the open systems storage market. Revenues on sales into the markets of the Asia Pacific region were $127,101 in the first six months of 1997 compared to $96,227 in the first six months of 1996, an increase of $30,874, or 32%, due to increased revenue levels from sales of the Symmetrix series of products, primarily in the open systems storage market. Revenues on sales into the markets of South America were $7,583 in the first six months of 1997 compared to $6,216 in the first six months of 1996, a increase of $1,367 or 22%. Gross Margins Gross margins increased to 45.9% of revenues in the first six months of 1997, compared to 43.9% of revenues in the first six months of 1996. This increase is primarily attributable to increasing sales of software which have a greater gross margin than hardware sales. Other factors impacting gross margins to a lesser extent in the second quarter include the rates of component cost declines and price declines which were about equal, and revenues attributable to new Symmetrix products. The Company currently believes that price declines will continue in the mainframe and open systems environments. Research and Development R&D expenses were $101,537 and $74,950 in the first six months of 1997 and 1996, respectively, an increase of $26,587, or 35%. R&D expenses were 7.6% and 7.0% of revenues in the first six months of 1997 and 1996, respectively. The increase was partially due to the cost of additional technical staff, particularly to support development of products for the Enterprise Storage market, and is also attributable to expenses associated with computer equipment acquired to facilitate this development. The Company expects to continue to spend substantial amounts for R&D for the balance of 1997 and thereafter. Selling, General and Administrative SG&A expenses were $212,264 and $168,922 in the first six months of 1997 and 1996, respectively, an increase of $43,342 or 26%. SG&A expenses were 15.9% and 15.8% of revenues in the first six months of 1997 and 1996, respectively. The dollar increase is due primarily to costs associated with additional worldwide sales and support personnel and their related overhead costs. These costs are attributable to the Company's increased revenue levels and the Company's initiatives to expand sales of its Enterprise Storage products. The Company has expanded its international direct sales force, as well as its OEM, reseller, alliance and partnership programs with applications, systems and database vendors. SG&A expenses are expected to increase in dollar terms for the balance of 1997 and thereafter. Investment Income and Interest Expense Investment income was $29,096 in the first six months of 1997 compared with $14,366 in the same period a year ago. Interest income was earned from investments in cash equivalents, and short and long-term investments. Investment income increased in 1997 primarily due to higher cash and investment balances which were derived from operations and the 31/4% Notes that were issued in March of 1997. Interest expense for the six months ended June 30, 1997 and June 29, 1996 relates primarily to the 31/4% Notes and 41/4% Notes, respectively. Provision for Income Taxes The provision for income taxes was $82,682 and $61,235 in the first six months of 1997 and 1996, respectively, which resulted in an effective tax rate of 25.6% in the first six months of 1997 and 26.3% in the first six months of 1996. The decrease in the effective tax rate is mainly attributable to the realization of benefits associated with the continued progress on the Company's various tax strategies. The Company provides for income taxes based upon its estimate of full year earnings on a country-by- country basis. FINANCIAL CONDITION Cash and cash equivalents and short and long-term investments were $1,313,588 and $840,858 at June 30, 1997 and December 31, 1996, respectively, an increase of $472,730. Cash provided by operating activities for the first six months of 1997 was $58,538, generated primarily from net income and offset by an increase in working capital, primarily driven by an increase in inventory related to the transition to the new Symmetrix products. Cash used by investing activities was $304,357, principally for the purchase of short and long-term investments and additions to property, plant and equipment. Cash provided by financing activities was $510,973, principally from the issuance of the 31/4% Notes in March of 1997. At June 30, 1997, the Company had available for use its credit line of $50 million. The Company may elect to borrow at any time. Based on its current operating and capital expenditure forecasts, the Company believes funds currently available, funds generated from operations and its available line of credit will be adequate to finance its operations, as well as potential acquisitions. Financial Reporting Release No. 48, issued by the Securities and Exchange Commission, requires enhanced disclosures regarding accounting policies for and market risks inherent in derivatives and other financial instruments. Note M of the notes to the financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 describes the Company's use of derivatives and its related accounting policy. There have been no significant changes to the policy set forth in Note M through June 30, 1997. FACTORS THAT MAY AFFECT FUTURE RESULTS This Quarterly Report on Form 10-Q contains forward-looking statements as defined under the Federal Securities Laws. Actual results could differ materially from those projected in the forward- looking statements as a result of certain risk factors, including but not limited to: (i) a failure by any supplier of high density DRAMs, disk drives or other components to meet EMC's requirements for an extended period of time; (ii) the transition to new products; (iii) the historic and recurring "hockey stick" pattern of the Company's sales by which a disproportionate percentage of a quarter's total sales occur in the last month and weeks and days of each quarter; (iv) the "hockey stick" pattern of the Company's sales, making it extremely difficult to predict near-term demand and adjust production capacity accordingly; (v) competitive factors, including but not limited to pricing pressures, in the computer storage market; (vi) fluctuating currency exchange rates; (vii) the relative and varying rates of product price and component cost declines; (viii) termination of the agreements with certain of the Company's OEM's or resellers; (ix) other one-time events and other important factors disclosed previously and from time to time in EMC's other filings at the U.S. Securities and Exchange Commission. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders was held on May 7, 1997. There was no solicitation in opposition to the management's nominees as listed in the Company's proxy statement and all such nominees were elected as Class I directors for a three-year term. In addition, the stockholders approved amendments to the Company's Articles of Organization to increase the number of shares of authorized common stock, $.01 par value, to 750,000,000 shares and to increase the number of shares available for grant under the Company's 1993 Stock Option Plan to 14,000,000 shares. The results of the votes for each of these proposals were as follows:
1. Election of Class I Directors: For Withheld Richard J. Egan 216,675,329 3,889,171 John F. Cunningham 217,442,237 3,122,263 In addition to these directors, the Company's other incumbent directors (John R. Egan, Michael J. Cronin, Maureen E. Egan, W. Paul Fitzgerald, Joseph F. Oliveri and Michael C. Ruettgers) had terms that continued after the 1997 Annual Meeting. 2. To amend the Company's Articles of Organization: For: 206,706,502 Against: 13,259,781 Abstain: 594,497 Broker Non-Votes: 3,720 3. To amend the Company's 1993 Stock Option Plan: For: 183,432,945 Against: 36,174,846 Abstain: 952,989 Broker Non-Votes: 3,720
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). 27 Financial Data Schedule (filed herewith). (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company for the quarter ended June 30, 1997. 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, 1997 By: /s/ Colin G. Patteson Colin G. Patteson Senior Vice President, Chief Administrative Officer and Treasurer (Principal Financial Officer) By: /s/ William J. Teuber, Jr. William J. Teuber, Jr. Vice President and Chief Financial Officer (Principal Accounting Officer) EXHIBIT INDEX Exhibit 11.1 Computation of Primary and Fully Diluted Net Income Per Share Exhibit 27 Financial Data Schedule Exhibit 11.1 Computation of Primary and Fully Diluted Net Income Per Share (unaudited) (Amounts in thousands except per share data)
Three Months Ended Six Months Ended June 30, June 29, June 30, June 29, 1997 1996 1997 1996 Primary Net income $128,799 $87,054 $239,667 $171,599 Add back interest expense 4,205 2,438 5,092 4,878 on convertible notes Less tax effect on interest (1,682) (975) (2,037) (1,951) expense on convertible notes Net income for purposes of calculating primary $131,322 $88,517 $242,722 $174,526 net income per share Weighted average shares outstanding during the 246,238,335 231,702,179 246,018,384 231,177,705 period Common equivalent shares 17,711,405 16,814,653 13,394,664 17,391,703 Common and common equivalent shares outstanding for purpose 263,949,740 248,516,832 259,413,048 248,569,408 of calculating primary net income per share Primary net income per $0.50 $0.36 $0.94 $0.70 share (Note 4) Fully Diluted Net income $128,799 $87,054 $239,667 $171,599 Add back interest expense on 4,205 2,438 5,092 4,878 convertible notes Less tax effect on interest expense on (1,682) (975) (2,037) (1,951) convertible notes Net income for purpose of calculating fully $131,322 $88,517 $242,722 $174,526 diluted net income per share Common and common equivalent shares outstanding for purpose 263,949,740 248,516,832 259,413,048 248,569,408 of calculating primary net income per share Incremental shares to 89,659 57,210 198,914 51,239 reflect full dilution Total shares for purpose of calculating fully 264,039,399 248,574,042 259,611,962 248,620,647 diluted net income per share Fully diluted net income $0.50 $0.36 $0.93 $0.70 per share (Note 4)
EX-27 2
5 This schedule contains summary financial information extracted from EMC Corporation financial statements and is qualified in its entirety by reference to such financial statements. 1000 6-MOS DEC-31-1997 JUN-30-1997 759,126 409,424 701,608 7,612 446,985 2,384,667 318,769 59,635 3,041,625 408,526 517,500 2,467 0 0 2,032,218 3,041,625 1,295,411 1,331,898 720,530 1,034,331 0 0 6,042 322,349 82,682 239,667 0 0 0 239,667 0.94 0.93
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