-----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, UCoEQKF0pp3vDX5YOBUvzRtdnI8KStnV0gmaIH+5qrZemFuN7JQbTiyjhgxz8WE3 fAuYfSp2G332WNWLHdTzog== 0000790070-99-000011.txt : 19990514 0000790070-99-000011.hdr.sgml : 19990514 ACCESSION NUMBER: 0000790070-99-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: SEC FILE NUMBER: 001-09853 FILM NUMBER: 99620719 BUSINESS ADDRESS: STREET 1: 35 PARKWOOD DRIVE CITY: HOPKINTON STATE: MA ZIP: 01748-9103 BUSINESS PHONE: 5084351000 MAIL ADDRESS: STREET 1: 35 PARKWOOD DRIVE 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: March 31, 1999 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) 35 Parkwood Drive 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 506,165,804 ______________________________________ ________________________________ Class Outstanding as of March 31, 1999 EMC CORPORATION Page No Part I-Financial Information Consolidated Balance Sheets at March 31, 1999 and 3 December 31, 1998 Consolidated Statements of Income for the Three Months 4 Ended March 31, 1999 and 1998 Consolidated Statements of Cash Flows for the Three 5 Months Ended March 31, 1999 and 1998 Consolidated Statements of Comprehensive Income for the 6 Three Months Ended March 31, 1999 and 1998 Notes to Interim Consolidated Financial Statements 7-11 Management's Discussion and Analysis of Financial 12-16 Condition and Results of Operations Part II-Other Information 17 Signatures 18 Exhibit Index 19 2 EMC CORPORATION PART I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) (unaudited) March 31, December 31, 1999 1998 ASSETS Current assets: Cash and cash equivalents $816,283 $705,177 Short-term investments 694,886 825,298 Trade and notes receivable less allowance for doubtful accounts of $7,798 and $6,562 in 1999 and 1998, respectively 983,739 984,412 Inventories 526,624 485,844 Deferred income taxes 55,557 49,682 Other assets 67,935 54,400 Total current assets 3,145,024 3,104,813 Long-term investments 763,964 562,360 Notes receivable, net 37,233 34,870 Property, plant and equipment, net 666,379 637,534 Deferred income taxes 10,574 7,974 Intangible and other assets, net 235,454 221,020 Total assets $4,858,628 $4,568,571 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 23,763 $ 29,361 Accounts payable 190,853 173,285 Accrued expenses 269,177 246,894 Income taxes payable 176,165 167,580 Deferred revenue 48,031 36,073 Total current liabilities 707,989 653,193 Deferred income taxes 49,433 50,591 Long-term obligations: 3 1/4% convertible subordinated notes due 2002 491,841 517,500 Notes payable 13,761 21,396 Other liabilities 1,521 1,755 Total liabilities 1,264,545 1,244,435 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 506,165,804 and 503,633,490 in 1999 and 1998, respectively 5,062 5,036 Additional paid-in capital 897,560 830,238 Deferred compensation (27,118) (17,022) Retained earnings 2,725,395 2,504,719 Unrealized gain/(loss) on investments (5,085) 979 Cumulative translation adjustment (1,731) 186 Accumulated other comprehensive income/(expense) (6,816) 1,165 Total stockholders' equity 3,594,083 3,324,136 Total liabilities and stockholders' equity $4,858,628 $4,568,571 The accompanying notes are an integral part of the consolidated financial statements. 3 EMC CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited) For the Three Months Ended March 31, March 31, 1999 1998 Revenues: Net sales $1,055,546 $805,933 Service and rental 72,409 22,418 1,127,955 828,351 Costs and expenses: Cost of sales and service 527,409 431,136 Research and development 100,722 65,675 Selling, general and administrative 224,599 153,496 Operating income 275,225 178,044 Investment income 25,582 22,507 Interest expense (5,194) (4,730) Other expense, net (1,378) (1,001) Income before taxes 294,235 194,820 Income tax provision 73,559 48,705 Net income $220,676 $146,115 Net income per weighted average share, basic $ 0.44 $ 0.29 Net income per weighted average share, diluted $ 0.41 $ 0.28 Weighted average shares, basic 504,477 497,234 Weighted average shares, diluted 545,646 535,120 The accompanying notes are an integral part of the consolidated financial statements. 4 EMC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) For the Three Months Ended March 31, March 31, 1999 1998 Cash flows from operating activities: Net income $220,676 $146,115 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Depreciation and amortization 65,826 43,530 Deferred income taxes (9,633) (453) Net loss on disposal of property and equipment 79 163 Tax benefit from stock options exercised 13,320 3,925 Minority interest (184) 239 Changes in assets and liabilities: Trade and notes receivable (3,823) 49,295 Inventories (40,967) (21,330) Other assets (36,539) (25,650) Accounts payable 16,074 29,193 Accrued expenses 22,639 (7,116) Income taxes payable 9,326 (65) Deferred revenue 11,811 8,916 Net cash provided by operating activities 268,605 226,762 Cash flows from investing activities: Additions to property, plant and equipment (72,488) (54,974) Proceeds from sales of property and equipment - 4 Capitalized software development costs (10,202) (8,014) Maturity/(purchase) of short-term and long-term investments, net (77,256) 90,642 Net cash provided/(used) by investing activities (159,946) 27,658 Cash flows from financing activities: Issuance of common stock 15,326 4,469 Payment of long-term and short-term obligations (13,623) (7,881) Issuance of long-term and short-term obligations 390 1,224 Net cash provided/(used) by financing activities 2,093 (2,188) Effect of exchange rate changes on cash 354 (500) Net increase in cash and cash equivalents 110,752 252,232 Cash and cash equivalents at beginning of period 705,177 954,595 Cash and cash equivalents at end of period $816,283 $1,206,327 Non-cash activity-conversion of 3 1/4% convertible subordinated notes $ 25,659 - The accompanying notes are an integral part of the consolidated financial statements. 5 EMC CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) (unaudited) For the Three Months Ended March 31, March 31, 1999 1998 Net income $220,676 $146,115 Other comprehensive expense, net of tax: Foreign currency translation adjustments, net of tax of $(479) and $(85) (1,438) (254) Unrealized losses on investment securities and derivatives: Unrealized holding losses arising during the period, net of tax $(1,516) and $(98) (4,548) (293) Other comprehensive expense (5,986) (547) Comprehensive income $214,690 $145,568 The accompanying notes are an integral part of the consolidated financial statements. 6 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) 1. Basis of Presentation Company EMC Corporation and its subsidiaries (''EMC'' or the ''Company'') design, manufacture, market and support a wide range of enterprise systems and software products and related services for the worldwide enterprise storage market. EMC's products provide solutions for a wide range of customer information storage requirements, from the highest performance mission critical applications to extremely high capacity business support applications. EMC's solutions integrate with major open systems operating systems such as UNIX and Windows NT as well as major mainframe operating systems. EMC's products are sold as storage solutions for customers utilizing a variety of computer system platforms including, but not limited to, IBM and IBM-compatible mainframe, Hewlett-Packard Company (''HP''), NEC Corporation, Siemens Nixdorf Informationssysteme AG, Unisys Corporation, Sequent Computer Systems, Inc., Compagnie des Machines Bull S.A. and other open systems and mainframe platforms. 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 March 31, 1999 and 1998. 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, 1998, which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 1999. 2. Inventories Inventories consist of: March 31, December 31, 1999 1998 Purchased Parts $ 34,193 $ 29,562 Work-in-process 311,636 283,815 Finished goods 180,795 172,467 $526,624 $485,844 7 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share amounts) 3. Net Income Per Share Calculation of earnings per share is as follows: For the Three Months Ended March 31, March 31, 1999 1998 Basic: Net income $ 220,676 $ 146,115 Weighted average shares, basic 504,476,983 497,234,497 Net income per share, basic $ 0.44 $ 0.29 Diluted: Net income $ 220,676 $ 146,115 Add back of interest expense on convertible notes 4,205 4,205 Less tax effect of interest expense on convertible notes (1,682) (1,682) Net income for calculating diluted earnings per share $ 223,199 $ 148,638 Weighted average shares 504,476,983 497,234,497 Weighted common stock equivalents 41,169,107 37,885,113 Total weighted average shares, diluted 545,646,090 535,119,610 Net income per share, diluted $ 0.41 $ 0.28 4. Litigation In December 1997, NewFrame Corporation Ltd. (''NewFrame'') filed suit against the Company in the United States District Court for the District of Massachusetts. The suit contains a variety of allegations relating to the Company's use of NewFrame's software developments, including various contract claims and breach of fiduciary duty, and seeks monetary damages relating primarily to lost future profits. The Company filed a motion to dismiss the complaint, which was granted in part. The parties reached a negotiated resolution of this matter in April 1999. In January 1998, Storage Technology Corporation (''STK'') filed suit against the Company in the United States District Court for the Northern District of California alleging that the Company was infringing a patent covering virtual tape and seeking preliminary and permanent injunctions and unspecified damages. The Company's response raised as an affirmative defense that EMC was licensed to promote the use of, market, sell and make virtual tape products pursuant to a patent license agreement between EMC and STK dated April 11, 1996 (the ''License Agreement''). After a trial held in August 1998, the court ruled that EMC is licensed to promote the use of, market, sell and make virtual tape products pursuant to the License Agreement. The Court found that STK's suit was without foundation and awarded costs to EMC. In October 1998, STK filed an appeal of the Court's ruling. The Company is a party to other 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, results of operations or financial condition. 8 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share amounts) 5. Adoption of New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board (''FASB'') issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in either current earnings or accumulated other comprehensive income/(expense), depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in fair value of an asset, liability or firm commitment, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the fair value of the hedged item. For cash-flow hedge transactions, in which the Company is hedging the variability of cash flows related to a variable rate asset, liability or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in accumulated other comprehensive income/(expense). The gains and losses on the derivative instrument that are reported in accumulated other comprehensive income/(expense) will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current earnings. The Company adopted SFAS 133 on January 1, 1999. As a result of this adoption, all derivatives are recognized on the balance sheet at fair value. The Company uses derivatives to hedge foreign currency cash flows on a continuing basis for periods consistent with its net asset and forecasted exposures. Since the Company is using foreign exchange derivative contracts to hedge foreign exchange exposures, the changes in the value of the derivatives are highly effective in offsetting changes in the fair value or cash flows of the hedged item. Any ineffective portion of the derivatives is recognized in current earnings, which represented an immaterial amount in the first quarter of 1999. The ineffective portion of the derivatives is primarily related to option premiums and discounts or premiums on forward contracts. All derivative contracts generally mature within six months. The Company hedges its net asset (balance sheet) position with forward exchange contracts. Since these derivatives hedge existing net assets that are denominated in foreign currencies, the contracts do not qualify for hedge accounting under SFAS 133. The changes in fair value from these contracts as well as the underlying exposures are generally offsetting, and are recorded in other income/expense on the income statement. The Company uses forward exchange and option contracts to hedge a portion of its forecasted transactions. These derivatives are designated as cash-flow hedges, and changes in their fair value are carried in accumulated other comprehensive income/(expense) until the underlying forecasted transaction occurs. Once the underlying forecasted transaction is realized, the appropriate gain or loss from the derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income/(expense) to the income statement, in revenue and expense, as appropriate. In the event the underlying forecasted transaction does not occur, the amount recorded in accumulated other comprehensive income/(expense) will be reclassified to the other income/expense line of the income statement in the then- current period. As a result of adoption of SFAS 133, the Company recorded an unrealized gain of $340 in accumulated other comprehensive income/(expense) to recognize the fair value of derivative instruments that are designated as cash-flow hedging instruments. In addition, net realized losses of $2,720 from derivatives designated as cash-flow hedging instruments have been recorded in accumulated other comprehensive income/(expense). The Company recorded in revenue and expense as appropriate, approximately $3,450 in net gains from cash flow hedges related to items forecasted for the first quarter of 1999. The amount that will be reclassified from other accumulated comprehensive income/(expense) to earnings over the next twelve months is a charge of approximately $2,380. The Company did not record any cumulative adjustment to earnings from derivatives designated as fair value hedges, as these hedges were previously carried at fair value, with all changes in fair value recorded to the income statement. 9 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share amounts) As permitted with the adoption of SFAS133, the Company also reclassified $602,575 of held-to-maturity securities as "available for sale." This reclassification resulted in an immaterial adjustment recorded to accumulated other comprehensive income/(expense) to reflect the difference between the carrying cost and market value of these securities. The net unrealized loss on available for sale securities at March 31, 1999 was $2,705. 6. Segment Information The Company operates exclusively in the enterprise storage market. Substantially all of the Company's revenues are generated from the sale or license of storage-related hardware and software and the sale of related services. The classes of products and services are included in the following table: March 31, March 31, 1999 1998 Enterprise storage hardware $ 861,121 $698,755 Enterprise storage software 155,419 65,994 Enterprise switching products 39,007 41,184 Service and rental 72,408 22,418 Total revenue $1,127,955 $828,351 The Company's sales are attributed to geographic areas according to the customer's location. Revenues and identifiable assets by geographic area are included in the following table: Europe, North/Latin Middle East, Asia Intercompany Consolidated America Africa Pacific Eliminations Total Sales March 31, 1999 $ 720,536 $ 339,600 $ 67,819 - $1,127,955 March 31, 1998 489,265 262,082 77,004 - 828,351 Identifiable assets March 31, 1999 $3,280,152 $1,548,144 $151,216 $(120,884) $4,858,628 December 31, 1998 3,162,263 1,437,871 147,379 (178,942) 4,568,571 7. Subsequent Events At the Annual Meeting of Stockholders held on May 5, 1999, the Company's stockholders elected Michael J. Cronin, Maureen E. Egan and W. Paul Fitzgerald to the Board of Directors for a three-year term, approved the amendment to the Company's Articles of Organization to increase the number of shares of authorized common stock to 3,000,000,000 shares, and approved the addition of 8,500,000 shares of common stock to the Company's 1993 Stock Option Plan and the addition of 2,200,000 shares of common stock to the Company's 1989 Employee Stock Purchase Plan. 10 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except share and per share amounts) The Company's Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend on February 24, 1999. Implementation of the stock split was subject to stockholder approval of an increase in the number of shares of authorized common stock to 3,000,000,000 shares, which approval was received at the Company's Annual Meeting of Stockholders. The stock split will be payable on or about May 28, 1999 to stockholders of record as of the close of business on May 14, 1999. Because stockholder approval was pending as of the end of the first quarter of 1999, financial information contained elsewhere in this document has not been adjusted to reflect the impact of the stock split. Earnings per share amounts, after giving retroactive effect to the two-for-one stock split, are presented below for all of the per share amounts disclosed in the financial statements and the notes to the financial statements. Q1 1999 Q1 1998 Net income per weighted average $0.22 $0.15 share, basic Net income per weighted averages $0.20 $0.14 share, diluted Weighted average shares, basic 1,008,953,966 994,468,994 Weighted average shares, diluted 1,091,292,180 1,070,239,220 11 EMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with ''Factors That May Affect Future Results'' set forth on page 16 and in EMC's other filings with the U.S. Securities and Exchange Commission. All dollar amounts in this Management's Discussion and Analysis are in millions. Results of Operations - First Quarter of 1999 compared to First Quarter of 1998 Revenues Total revenues for the first quarter of 1999 were $1,128.0 compared to $828.4 for the first quarter of 1998, an increase of $299.6 or 36%. Enterprise systems revenues from products sold directly and through resellers and original equipment manufacturers ("OEMs") were $861.1 in the first quarter of 1999, compared to $698.8 in the first quarter of 1998, an increase of $162.3 or 23%. The increase was due to continued strong demand for the Company's Symmetrix series of products. These products address the growing demand for enterprise-wide storage solutions, allowing users to move, store and protect mission critical information in UNIX, Windows NT and mainframe environments. Enterprise software revenues from products sold directly and through resellers and OEMs were $155.4 in the first quarter of 1999 compared to $66.0 in the first quarter of 1998, an increase of $89.4 or 136%. The increase in software revenues was primarily due to increased licenses of enterprise storage software on Symmetrix systems both newly shipped and already installed, and the successful introduction of new and enhanced software products. Revenues from products sold by McDATA Corporation, primarily the ESCON Director series of products, were $39.0 in the first quarter of 1999, compared to $41.2 in the first quarter of 1998, a decrease of $2.2 or 5%, due primarily to the product transition from ESCON-based to fibre-channel-based directors. Service and rental revenues were $72.4 in the first quarter of 1999, compared to $22.4 in the first quarter of 1998, an increase of $50.0 or 223%, primarily as a result of the growth of EMC professional services and the revenues from the professional services businesses Groupe MCI and Millennia III, Inc., acquired during the second and third quarters of 1998. In January 1999, EMC and HP extended their worldwide reseller agreement for another three years. Revenues under this agreement were $146.7 and $156.8, or 13% and 19% of total revenues, for the first quarters of 1999 and 1998, respectively. On May 5, 1999, HP announced that it had entered into joint technology and OEM agreements with Hitachi, Limited and Hitachi Data Systems for high- end enterprise storage systems. In March 1999, the Company announced a five-year strategic technology and business alliance with IBM. Under the terms of the accord, the Company will continue to purchase IBM disk drives for incorporation into EMC's Symmetrix Enterprise Storage systems. The alliance also provides for a broad patent cross-license between the two companies for storage and other technologies. Revenues on sales into the North American markets were $704.1 in the first quarter of 1999 compared to $481.7 in the first quarter of 1998, an increase of $222.4 or 46%. The revenue growth reflects continued strong demand for the Company's products and services. Revenues on sales into the markets of Europe, the Middle East and Africa were $339.6 in the first quarter of 1999 compared to $262.1 in the first quarter of 1998, an increase of $77.5 or 30%. 12 Revenues on sales into the markets of the Asia Pacific region were $67.8 in the first quarter of 1999 compared to $77.0 in the first quarter of 1998, a decrease of $9.2 or 12%. The decrease is principally attributable to the current economic trends affecting the Asia Pacific markets. Revenues on sales into the markets of Latin America were $16.5 in the first quarter of 1999 compared to $7.5 in the first quarter of 1998, an increase of $9.0 or 119%. The increase was primarily due to the Company's efforts to expand its business in this region. Gross Margins Gross margins increased to 53.2% of revenues in the first quarter of 1999, compared to 48.0% of revenues in the first quarter of 1998. This increase is primarily attributable to increased licensing of the Company's enterprise software, which has higher gross margins than sales of enterprise systems. Other factors contributing to the increase include the impact of component cost declines being greater than the impact of product price declines and a trend towards larger configurations of enterprise systems. The Company currently believes that product price declines will continue. Research and Development Research and development ("R&D") expenses were $100.7 and $65.7 in the first quarters of 1999 and 1998, respectively, an increase of $35.0 or 53%. R&D expenses were 8.9% and 7.9% of revenues in the first quarters of 1999 and 1998, respectively. The increase reflects the Company's ongoing research and development efforts in a variety of areas, including EMC Enterprise Storage Network technologies, enhancements to the Symmetrix family of products, new and enhanced enterprise storage software products and fibre channel connectivity. The Company expects to continue to spend substantial amounts for R&D for the balance of 1999 and thereafter. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses were $224.6 and $153.5 in the first quarters of 1999 and 1998, respectively, an increase of $71.1 or 46%. SG&A expenses were 19.9% and 18.5% of revenues in the first quarters of 1999 and 1998, respectively. The dollar increase primarily reflects the Company's objective of building an infrastructure to achieve broader coverage and greater account depth around the world and to expand its technical sales organization to support the current and expected growth in software revenues. Investment Income and Interest Expense Investment income was $25.6 in the first quarter of 1999 compared with $22.5 in the first quarter of 1998. Interest income was earned from investments in cash equivalents and short and long- term investments. Investment income increased in the first quarter of 1999 primarily due to higher cash and investment balances which were derived from operations. Interest expense increased to $5.2 in the first quarter of 1999 from $4.7 in the first quarter of 1998. Provision for Income Taxes The provision for income taxes was $73.6 and $48.7 in the first quarters of 1999 and 1998, respectively, which resulted in an effective tax rate of 25.0% in each period. The effective tax rate is mainly attributable to the realization of benefits associated with the Company's various tax strategies and benefits related to offshore manufacturing. 13 Financial Condition Cash and cash equivalents and short and long-term investments were $2,275.1 and $2,092.8 at March 31, 1999 and December 31, 1998, respectively, an increase of $182.3. Cash provided by operating activities for the first three months of 1999 was $268.6, generated primarily from net income. Cash used by investing activities was $159.9, principally from the purchases of short and long-term investments and additions to property, plant and equipment. Cash provided by financing activities was $2.1, principally from the issuance of common stock from stock option exercises, offset by payments of short and long-term obligations. At March 31, 1999, the Company had available for use its credit line of $50.0 and may elect to borrow at any time. Based on its current operating and capital expenditure forecasts, the Company believes that the combination of funds currently available, funds generated from operations and its available line of credit will be adequate to finance its ongoing operations. Adoption of New Accounting Pronouncement In June 1998, FASB issued SFAS 133. SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in either current earnings or accumulated other comprehensive income/(expense), depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in fair value of an asset, liability or firm commitment, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the fair value of the hedged item. For cash-flow hedge transactions, in which the Company is hedging the variability of cash flows related to a variable rate asset, liability or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in accumulated other comprehensive income/(expense). The gains and losses on the derivative instrument that are reported in accumulated other comprehensive income/(expense) will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current earnings. The Company adopted SFAS 133 on January 1, 1999. (See Note 5 to the Company's Interim Consolidated Financial Statements.) Year 2000 Issues The information provided below constitutes a ''Year 2000 Readiness Disclosure'' under the Year 2000 Information and Readiness Disclosure Act. Certain computer hardware and software is unable to appropriately interpret the upcoming calendar year 2000. These systems and software refer to years in terms of their final two digits only and may interpret the year 2000 as the year 1900 in error. Therefore, they will need to be modified prior to the year 2000 in order to remain functional. The Company has established a Year 2000 program that involves assessing the Company's key hardware and software, assessing Year 2000 compliance by third parties with which the Company has a material relationship, assessing Year 2000 compliance of the Company's products, and modifying and testing hardware and software in the Company's internal systems and products, where necessary. The Company has completed an assessment of the hardware and software in its core business information systems and has substantially completed the necessary modifications. The Company has also completed an assessment of the hardware and software in other information systems used in its operations and has completed a majority of the necessary modifications. In addition, the Company has completed an assessment of the hardware and software used in its business that is not supported by the Company's information system department. A majority of the necessary modifications have also been completed for such hardware and software. 14 The Company has contacted key vendors and suppliers and other third parties whose systems failures could potentially have a significant impact on the Company's operations. The Company has received certifications of Year 2000 compliance from many of its key vendors and suppliers. The Company continues to make progress in receiving certifications of Year 2000 compliance from other key vendors and suppliers and in assessing questionnaire responses and related information from such third parties. The Company has designed and tested the current versions of its Symmetrix series of products and the current versions of its other products to be Year 2000 compliant. Some of the Company's customers are running earlier versions of its Symmetrix series of products and other products that have not been tested for Year 2000 compliance. The Company has made upgrades available for the older versions of its Symmetrix series of products and for certain other of its older products so that such products will test as Year 2000 compliant. The Company currently anticipates that the assessment and remediation phases of its Year 2000 conversion program will be substantially complete by the middle of 1999, although the testing phase and the contingency planning phase, if any, will continue extensively throughout 1999. The Company does not anticipate that the total cost of such program will have a material effect on its business, results of operations or financial condition. The most reasonably likely worst case scenarios regarding the Year 2000 issue would include a hardware failure, the corruption or loss of data contained in the Company's internal information systems, a failure affecting the Company's key vendors, suppliers or customers, the failure of infrastructure services provided by government agencies or other third parties, and customer dissatisfaction related to the performance of the Company's products. The Company continues to assess the need for a Year 2000 contingency plan. However, the Company anticipates that its Year 2000 conversion program will be completed far enough in advance of January 1, 2000 so as to formulate a contingency plan at such time, if necessary. The Company expects its contingency plan, if developed, would include, among other things, manual ''work- arounds'' for hardware and software failures, as well as substitution of systems, if required. Further information about the Company's Year 2000 readiness is available at the Company's website at http://www.emc.com/challenges/supplmts/complnc/y2k_comp.htm. There can be no assurance that conversion of the Company's hardware and software will be successful, that key third parties will have successful conversion programs, that the Company's products do not contain undetected errors or defects associated with Year 2000 date functions, or that other factors relating to Year 2000 compliance, including but not limited to litigation, will not have a material adverse effect on the Company's business, results of operations or financial condition. Euro Conversion On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the Euro. The Euro is currently the common legal currency in such countries. The Euro trades on currency exchanges and is available for non-cash transactions. The participating countries are issuing sovereign debt exclusively in Euros, and have redenominated outstanding sovereign debt. The participating countries no longer control their own monetary policies by directing independent interest rates for the legacy currencies. Instead, the authority to direct monetary policy, including money supply and official interest rates for the Euro, is exercised by the European Central Bank. The legacy currencies will remain legal tender in the participating countries as denominations of the Euro between January 1, 1999 and January 1, 2002 ( the ''transition period''). During the transition period, public and private parties may pay for goods and services using either the Euro or the participating country's legacy currency on a ''no compulsion, no prohibition'' basis. However, conversion rates are no longer computed directly from one legacy currency to another. Instead, a triangular process is applied whereby an amount denominated in one legacy currency is first converted into the Euro. The resultant Euro-denominated amount is then converted into the third legacy currency. 15 The Company has developed and implemented the necessary modifications for the technical adaptation of its internal IT and other systems to accommodate Euro-denominated transactions. The Company is continuing to assess certain business implications of conversion to the Euro, including the long term competitive implications of the conversion and the impact on market risk with respect to financial instruments. Management is also continuing to evaluate other impacts of this conversion on the Company, including the potential actions which may or may not be taken by the Company's competitors and suppliers. 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) component quality and availability; (ii) delays in the development of new technology and the transition to new products; (iii) competitive factors, including but not limited to pricing pressures, in the computer storage market; (iv) the relative and varying rates of product price and component cost declines; (v) economic trends in various geographic markets and fluctuating currency exchange rates; (vi) deterioration or termination of the agreements with certain of the Company's resellers or OEMs; (vii) the uneven pattern of quarterly sales; (viii) risks associated with acquisitions; (ix) Year 2000 issues; and (x) other one-time events and other important factors disclosed previously and from time to time in EMC's other filings with the U.S. Securities and Exchange Commission. 16 EMC CORPORATION PART II. OTHER INFORMATION Item 1. Legal Proceedings In December 1997, NewFrame Corporation Ltd. (''NewFrame'') filed suit against the Company in the United States District Court for the District of Massachusetts. The suit contains a variety of allegations relating to the Company's use of NewFrame's software developments, including various contract claims and breach of fiduciary duty, and seeks monetary damages relating primarily to lost future profits. The Company filed a motion to dismiss the complaint, which was granted in part. The parties reached a negotiated resolution of this matter in April 1999. In January 1998, Storage Technology Corporation (''STK'') filed suit against the Company in the United States District Court for the Northern District of California alleging that the Company was infringing a patent covering virtual tape and seeking preliminary and permanent injunctions and unspecified damages. The Company's response raised as an affirmative defense that EMC was licensed to promote the use of, market, sell and make virtual tape products pursuant to a patent license agreement between EMC and STK dated April 11, 1996 (the ''License Agreement''). After a trial held in August 1998, the court ruled that EMC is licensed to promote the use of, market, sell and make virtual tape products pursuant to the License Agreement. The Court found that STK's suit was without foundation and awarded costs to EMC. In October 1998, STK filed an appeal of the Court's ruling. The Company is a party to other 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, results of operations or financial condition. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Amendment to EMC Corporation's Restated Articles of Organization, as amended (filed herewith). 27 Financial Data Schedule (filed herewith). (b) Reports on Form 8-K On February 25, 1999, the registrant filed a report on Form 8-K reporting under Item 5, Board approval of a 2-for-1 stock split of its common stock to be effected in the form of a 100% stock dividend, with a record date of May 14, 1999 and a distribution date of May 28, 1999, subject to obtaining stockholder approval of an amendment to the registrant's charter to increase the number of shares of authorized common stock. 17 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: May 13, 1999 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) 18 EXHIBIT INDEX Exhibit 3.1 Articles of Amendment to EMC Corporation's Restated Articles of Organization, as amended (filed herewith). Exhibit 27 Financial Data Schedule (filed herewith). 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 3-MOS DEC-31-1999 MAR-31-1999 816,283 694,886 983,739 7,798 526,624 3,145,024 666,379 400,019 4,858,628 707,989 491,841 0 0 5,062 3,589,021 4,858,628 1,055,546 1,127,955 527,409 852,730 0 0 5,194 294,235 73,559 220,676 0 0 0 220,676 .44 .41
EX-3 3 Exhibit 3.1 Federal Identification No. 04-2680009 THE COMMONWEALTH OF MASSACHUSETTS William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 ARTICLES OF AMENDMENT (General Laws, Chapter 156B, Section 72) We, Michael C. Ruettgers, President, and Paul T. Dacier, Assistant Clerk of EMC Corporation, located at 171 South Street, Hopkinton, Massachusetts 01748, certify that these Articles of Amendment affecting article numbered 3 of the Articles of Organization were duly adopted at a meeting held on May 5, 1999, by vote of 407,169,325 shares of Common Stock of 504,863,524 shares outstanding, being at least a majority of each type, class or series outstanding and entitled to vote thereon. To change the number of shares and the par value (if any) of any type, class or series of stock which the corporation is authorized to issue, fill in the following: The total presently authorized is: With Par Value Stocks Type Number of Shares Par Value _______________________________________________________ Common 750,000,000 $.01 Preferred 25,000,000 $.01 Change the total authorized to: With Par Value Stocks Type Number of Shares Par Value ______________________________________________________ Common 3,000,000,000 $.01 Preferred 25,000,000 $.01 The foregoing amendment(s) will become effective when these Articles of Amendment are filed in accordance with General Laws, Chapter 156B, Section 6 unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. Later effective date:___________________________. SIGNED UNDER THE PENALTIES OF PERJURY, this 5th day of May, 1999. /s/ Michael C. Ruettgers, President /s/ Paul T. Dacier, Assistant Clerk THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF AMENDMENT (General Laws, Chapter 156B, Section 72) ____________________________________________________________ I hereby approve the within Articles of Amendment, and the filing fee in the amount of $_________ having been paid, said article is deemed to have been filed with me this __________ day of _____________________, 1999. Effective date:______________________________________________________ WILLIAM FRANCIS GALVIN Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION Photocopy of document to be sent to: Paul T. Dacier, Esq. Vice President and General Counsel EMC Corporation 171 South St. Hopkinton, MA 01748 Telephone: 508-435-1000 -----END PRIVACY-ENHANCED MESSAGE-----