10-Q 1 a10-q.txt 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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, 2000 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 2,180,377,107 ----------------------------------- ---------------------------- CLASS OUTSTANDING AS OF JUNE 30, 2000
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- EMC CORPORATION
PAGE NO -------- Part I--Financial Information Consolidated Balance Sheets at June 30, 2000 and December 31, 1999................................................ 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 2000 and 1999..................... 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999............................ 5 Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2000 and 1999....... 6 Notes to Interim Consolidated Financial Statements........ 7-14 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 15-22 Part II--Other Information.................................. 23 Signatures.................................................. 24 Exhibit Index............................................... 25
2 EMC CORPORATION PART I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 2000 1999 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $1,794,925 $1,109,409 Short-term investments.................................... 544,567 714,730 Trade and notes receivable less allowance for doubtful accounts of $38,302 and $34,279 in 2000 and 1999, respectively............................................ 1,792,678 1,625,438 Inventories............................................... 757,869 618,885 Deferred income taxes..................................... 155,731 147,471 Other assets.............................................. 98,403 104,463 ---------- ---------- Total current assets........................................ 5,144,173 4,320,396 Long-term investments....................................... 1,325,065 1,349,599 Notes receivable, net....................................... 120,822 76,756 Property, plant and equipment, net.......................... 1,225,790 1,023,179 Deferred income taxes....................................... 93,579 108,587 Intangible and other assets, net............................ 525,296 294,771 ---------- ---------- Total assets............................................ $8,434,725 $7,173,288 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations.................. $ 10,852 $ 9,116 Accounts payable.......................................... 429,590 370,055 Accrued expenses.......................................... 639,688 611,052 Income taxes payable...................................... 306,207 249,234 Deferred revenue.......................................... 220,479 158,458 ---------- ---------- Total current liabilities................................... 1,606,816 1,397,915 Deferred income taxes....................................... 146,574 125,353 Long-term obligations: 3 1/4% convertible subordinated notes due 2002............ -- 460,399 6% convertible subordinated notes due 2004................ -- 212,750 Notes payable............................................. 15,136 13,460 Other liabilities......................................... 31,237 11,625 ---------- ---------- Total liabilities....................................... 1,799,763 2,221,502 ---------- ---------- Commitments and contingencies Stockholders' equity: Series Preferred Stock, par value $.01; authorized 25,000 shares, none outstanding................................ -- -- Common Stock, par value $.01; authorized 3,000,000 shares; issued 2,180,377 and 2,078,550, in 2000 and 1999, respectively............................................ 21,804 20,786 Additional paid-in capital................................ 2,640,788 1,695,994 Deferred compensation..................................... (53,005) (30,282) Retained earnings......................................... 4,060,845 3,299,821 Accumulated other comprehensive income/(expense).......... (35,470) (34,533) ---------- ---------- Total stockholders' equity.............................. 6,634,962 4,951,786 ---------- ---------- Total liabilities and stockholders' equity............ $8,434,725 $7,173,288 ========== ==========
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 FOR THE THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ----------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Revenues: Net sales........................................ $1,935,472 $1,469,598 $3,560,919 $2,782,823 Service.......................................... 210,455 178,044 407,606 348,124 ---------- ---------- ---------- ---------- 2,145,927 1,647,642 3,968,525 3,130,947 Costs and expenses: Cost of sales.................................... 756,608 691,128 1,407,488 1,339,862 Cost of service.................................. 145,824 120,303 286,003 237,460 Research and development......................... 194,286 139,706 356,066 269,074 Selling, general and administrative.............. 506,149 335,993 954,268 646,909 ---------- ---------- ---------- ---------- Operating income................................... 543,060 360,512 964,700 637,642 Investment income.................................. 48,051 29,550 88,694 58,158 Interest expense................................... (2,956) (8,244) (9,827) (16,962) Other income/(expense), net........................ (433) 949 (1,069) 213 ---------- ---------- ---------- ---------- Income before taxes................................ 587,722 382,767 1,042,498 679,051 Income tax provision............................... 158,685 96,896 281,474 170,855 ---------- ---------- ---------- ---------- Net income......................................... $ 429,037 $ 285,871 $ 761,024 $ 508,196 ========== ========== ========== ========== Net income per weighted average share, basic....... $ 0.20 $ 0.14 $ 0.36 $ 0.25 ========== ========== ========== ========== Net income per weighted average share, diluted..... $ 0.19 $ 0.13 $ 0.34 $ 0.23 ========== ========== ========== ========== Weighted average shares, basic..................... 2,174,291 2,057,559 2,140,049 2,053,494 Weighted average shares, diluted................... 2,240,805 2,214,676 2,238,031 2,213,362
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 SIX MONTHS ENDED ------------------------ JUNE 30, JUNE 30, 2000 1999 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 761,024 $ 508,196 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Depreciation and amortization........................... 254,650 191,096 Deferred income taxes................................... 30,719 (28,499) Net (gain)/loss on disposal of property and equipment... 13,835 4,614 Tax benefit from stock options exercised................ 120,521 17,060 Minority interest....................................... 828 (165) Changes in assets and liabilities net of acquired assets and liabilities: Trade and notes receivable............................ (176,817) (167,370) Inventories........................................... (139,575) (23,003) Other assets.......................................... (37,523) (40,020) Accounts payable...................................... 60,497 79,487 Accrued expenses...................................... 22,000 26,329 Income taxes payable.................................. 56,973 49,265 Deferred revenue...................................... 50,117 15,627 Other liabilities..................................... (6) (4,625) ---------- --------- Net cash provided by operating activities............. 1,017,243 627,992 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment.............. (386,162) (242,365) Capitalized software development costs.................. (52,460) (39,539) Maturity/(purchase) of short-term and long-term investments, net...................................... 197,447 (375,875) Business acquisitions net of cash acquired.............. (198,251) -- ---------- --------- Net cash used by investing activities................. (439,426) (657,779) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock................................ 111,316 23,641 Redemption of 6% convertible subordinated notes......... (155) -- Payment of long-term and short-term obligations......... (8,146) (29,716) Issuance of long-term and short-term obligations........ 9,009 1,900 ---------- --------- Net cash provided/(used) by financing activities...... 112,024 (4,175) ---------- --------- Effect of exchange rate changes on cash..................... (4,325) (1,130) Net increase/(decrease) in cash and cash equivalents........ 689,841 (33,962) Cash and cash equivalents at beginning of period............ 1,109,409 835,466 ---------- --------- Cash and cash equivalents at end of period.................. $1,794,925 $ 800,374 ========== ========= Non-cash activity --conversion of 3 1/4% convertible subordinated notes................................... $ 460,399 $ 25,864 --conversion of 6% convertible subordinated notes................................................ 212,595 -- --stock issued in business acquisitions................ 11,372 --
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 FOR THE SIX MONTHS ENDED MONTHS ENDED ------------------- ------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 -------- -------- -------- -------- Net income.......................................... $429,037 $285,871 $761,024 $508,196 Other comprehensive income/(expense), net of tax: Foreign currency translation adjustments, net of tax of $(2,180), $290, $(1,806), and $(349)..... (161) (326) (3,487) (3,844) Unrealized gains/(losses) on investment securities and derivatives: Unrealized holding gains/(losses) arising during the period, net of tax of $1,024, $(2,295), $200, and $(4,316)............................ 5,023 (4,633) 2,550 (12,455) -------- -------- -------- -------- Other comprehensive income/(expense)................ 4,862 (4,959) (937) (16,299) -------- -------- -------- -------- Comprehensive income................................ $433,899 $280,912 $760,087 $491,897 ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 6 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT 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 hardware and software and provide services for the storage, management, protection and sharing of electronic information. These integrated solutions enable organizations to create an electronic information infrastructure, or what EMC calls an E-Infostructure. EMC is the leading supplier of these solutions, which are comprised of enterprise storage systems, networks, software and services. EMC's products are sold to customers utilizing a variety of the world's most popular computing platforms for key applications, including electronic commerce, data warehousing and transaction processing. 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, 2000 and 1999. 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, 1999, which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2000. 2. INVENTORIES Inventories consist of:
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ Purchased parts............................................. $ 55,383 $ 38,204 Work in process............................................. 493,119 379,679 Finished goods.............................................. 209,367 201,002 -------- -------- $757,869 $618,885 ======== ========
7 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of:
JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------ Furniture and fixtures...................................... $ 107,974 $ 101,954 Equipment................................................... 1,381,029 1,237,247 Buildings and improvements.................................. 450,095 439,924 Land........................................................ 45,881 32,451 Construction in progress.................................... 216,181 106,304 ---------- ---------- 2,201,160 1,917,880 Accumulated depreciation.................................... (975,370) (894,701) ---------- ---------- $1,225,790 $1,023,179 ========== ==========
4. NET INCOME PER SHARE Calculation of earnings per share is as follows:
FOR THE THREE MONTHS ENDED --------------------- JUNE 30, JUNE 30, 2000 1999 --------- --------- BASIC: Net income.................................................. $ 429,037 $ 285,871 Weighted average shares, basic.............................. 2,174,291 2,057,559 Net income per share, basic................................. $ 0.20 $ 0.14 ========= ========= DILUTED: Net income.................................................. $ 429,037 $ 285,871 Add back of interest expense on 3 1/4% Notes................ -- 3,936 Less tax effect of interest expense on 3 1/4% Notes......... -- (1,574) --------- --------- Net income for calculating diluted earnings per share....... $ 429,037 $ 288,233 Weighted average shares..................................... 2,174,291 2,057,559 Weighted common stock equivalents........................... 66,514 157,117 --------- --------- Total weighted average shares, diluted...................... 2,240,805 2,214,676 Net income per share, diluted............................... $ 0.19 $ 0.13 ========= =========
8 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. NET INCOME PER SHARE (CONTINUED)
FOR THE SIX MONTHS ENDED --------------------- JUNE 30, JUNE 30, 2000 1999 --------- --------- BASIC: Net income.................................................. $ 761,024 $ 508,196 Weighted average shares, basic.............................. 2,140,049 2,053,494 Net income per share, basic................................. $ 0.36 $ 0.25 ========= ========= DILUTED: Net income.................................................. $ 761,024 $ 508,196 Add back of interest expense on 3 1/4% Notes................ 2,987 8,141 Less tax effect of interest expense on 3 1/4% Notes......... (1,195) (3,256) --------- --------- Net income for calculating diluted earnings per share....... $ 762,816 $ 513,081 Weighted average shares..................................... 2,140,049 2,053,494 Weighted common stock equivalents........................... 97,982 159,868 --------- --------- Total weighted average shares, diluted...................... 2,238,031 2,213,362 Net income per share, diluted............................... $ 0.34 $ 0.23 ========= =========
The calculation of earnings per share excludes the Company's 6% convertible subordinated notes due 2004 (the "6% Notes") as the effect of the conversion would be antidilutive. 5. EQUITY TRANSACTIONS CONVERTIBLE NOTES In March 1997, the Company sold $517.5 of its 3 1/4% convertible subordinated notes due 2002 (the "3 1/4% Notes"). On March 15, 2000, all of the outstanding 3 1/4% Notes were converted into Common Stock. In May 1997, Data General Corporation sold $212.8 of the 6% Notes, which were assumed by the Company in connection with the acquisition of Data General in 1999. The 6% Notes were generally convertible into shares of common stock at a conversion price of approximately $41.91 per share, subject to adjustment in certain events. As of June 30, 2000, $212.6 of the 6% Notes were converted into EMC Common Stock. The Company paid approximately one hundred fifty-five thousand dollars to redeem the remaining 6% Notes. STOCK SPLIT On May 3, 2000, the Company announced a two-for-one stock split in the form of a 100% stock dividend with a record date of May 19, 2000 and a distribution date of June 5, 2000. Share and per share amounts have been restated to reflect the stock splits for all periods presented. 9 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 6. LITIGATION The Company is a party to certain 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. 7. DERIVATIVES 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 immaterial amounts for all periods presented. The ineffective portion of the derivatives is primarily related to option premiums and to discounts or premiums on forward contracts. All derivative contracts generally mature within six months. The Company uses foreign currency forward 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. The Company recorded in revenue and expense approximately $1,835 and $8,306 in net gains from cash flow hedges related to items forecasted for the second quarter and first six months of 2000, respectively. The amount that will be reclassified from accumulated other comprehensive income/(expense) to earnings over the next twelve months is a loss of approximately $569, net of tax. 8. BUSINESS ACQUISITIONS In January 2000, the Company acquired all of the outstanding common stock of Softworks, Inc. by means of a tender offer, whereby all the shares of Softworks were converted into the right to receive cash. Also in January 2000, the Company acquired all of the outstanding common stock of Terascape Software, Inc. The aggregate cost of these transactions was approximately $209 million, net of cash acquired of approximately $28 million. The Company accounted for each acquisition as a purchase transaction. The consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not material to the Company on either an individual or an aggregate basis. The Company calculated amounts allocated to in-process research and development ("IPRD") using established valuation techniques and expensed such amounts in the quarter that each acquisition was consummated because technological feasibility of the in-process technology had not been achieved and no alternate future use has been established. The Company computed its valuations of IPRD for 10 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 8. BUSINESS ACQUISITIONS (CONTINUED) the acquisitions using a discounted cash flow analysis on the anticipated income stream to be generated by the purchased technology. During the first quarter, the Company recorded a $3,300 charge to research and development expense representing the write-off of IPRD associated with both acquisitions. The excess of the purchase price over the estimated value of the net tangible assets was allocated to various intangible assets, consisting primarily of developed technology and goodwill, as well as other intangible assets. The value of developed technology was based upon future discounted cash flows relating to the existing product's projected income stream. Intangible assets, including goodwill, are being amortized on a straight-line basis over their estimated useful lives, which is a maximum of five years. 9. RESTRUCTURING, MERGER AND OTHER CHARGES During the fourth quarter of 1999, the Company approved and implemented a restructuring program in connection with its acquisition of Data General Corporation. The restructuring plan, which is expected to be completed by December 2000, provides for the consolidation of the Company's operations and elimination of duplicative facilities worldwide. Accordingly, during the fourth quarter of 1999, the Company recorded a charge of approximately $170.6 million related to employee termination benefits, facility closure costs, asset disposals, and other exit costs which the Company has recorded in operating expenses. The total cash impact of the charge is approximately $140.7 million of which $52.4 million was paid in 1999 and $43.5 million was paid in 2000. The program included a net reduction of the workforce by approximately 1,100, employees approximately 59% of whom are or were based in North America and 23% of whom are or were based in Europe. The employee separations affect the majority of business functions and job classes. As of June 30, 2000, employee separations due to restructuring actions totaled approximately 900. During fiscal year 1998, Data General recorded a charge of $82.4 million related to a restructuring program. The charge included employee termination benefits, asset write-downs, and other exit costs. The total cash impact of the restructuring charge is approximately $58.5 million of which $46.0 million was paid prior to December 31, 1999 and $1.5 million was paid during the first six months of 2000. As of June 30, 2000, the remaining accruals of $14.3 million from the 1998 restructuring program are primarily related to excess vacant rental properties in Europe. The amounts charged against the established provisions described above were as follows:
BALANCE CURRENT BALANCE DECEMBER 31, 1999 UTILIZATION JUNE 30, 2000 ----------------- ----------- ------------- Employee termination benefits.......................... $ 75,481 $36,997 $38,484 Lease abandonments..................................... 18,655 1,491 17,164 Asset write-downs...................................... 4,116 3,245 871 Other exit costs....................................... 11,195 7,115 4,080 -------- ------- ------- $109,447 $48,848 $60,599 ======== ======= =======
11 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. SEGMENT INFORMATION The Company operates in the following three segments: storage products, server products and services. The majority of the Company's revenues are generated from the sale of storage hardware and software products. The Company designs, manufactures, markets and supports open systems server products through its Data General division. The Company also provides a wide range of services to both storage and server customers. The following table presents revenues for groups of similar storage products and similar services:
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED ----------------------- ----------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- STORAGE PRODUCTS: Enterprise storage hardware................... $1,340,325 $ 985,514 $2,471,837 $1,846,634 Enterprise storage software................... 350,257 178,635 620,245 334,054 Enterprise switching products (McDATA)........ 37,062 45,819 75,970 84,826 CLARiiON storage products..................... 138,529 105,748 235,273 208,713 ---------- ---------- ---------- ---------- Total storage products........................ $1,866,173 $1,315,716 $3,403,325 $2,474,227 ========== ========== ========== ========== SERVICES: Storage related services...................... $ 134,437 $ 84,169 $ 250,842 $ 159,117 Server related services....................... 76,018 93,875 156,764 189,007 ---------- ---------- ---------- ---------- Total service revenue......................... $ 210,455 $ 178,044 $ 407,606 $ 348,124 ========== ========== ========== ==========
The Company's management makes financial decisions and allocates resources based on product segments. The Company's financial reporting focuses on the revenues and gross profit for the product segments. The Company does not allocate marketing, engineering or administrative expenses to product segments, as management does not use this information to measure the performance of the operating segments. The revenues and gross margins attributable to these segments are included in the following table:
STORAGE SERVER FOR THE THREE MONTHS ENDED PRODUCTS PRODUCTS SERVICES CONSOLIDATED -------------------------- ---------- -------- -------- ------------ JUNE 30, 2000 Revenues......................................... $1,866,173 $ 69,299 $210,455 $2,145,927 Gross profit..................................... 1,152,588 26,276 64,631 1,243,495 JUNE 30, 1999 Revenues......................................... $1,315,716 $153,882 $178,044 $1,647,642 Gross profit..................................... 728,506 49,964 57,741 836,211
12 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. SEGMENT INFORMATION (CONTINUED)
STORAGE SERVER FOR THE SIX MONTHS ENDED PRODUCTS PRODUCTS SERVICES CONSOLIDATED ------------------------ ---------- -------- -------- ------------ JUNE 30, 2000 Revenues......................................... $3,403,325 $157,594 $407,606 $3,968,525 Gross profit..................................... 2,093,891 59,540 121,603 2,275,034 JUNE 30, 1999 Revenues......................................... $2,474,227 $308,596 $348,124 $3,130,947 Gross profit..................................... 1,341,997 100,964 110,664 1,553,625
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:
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED ----------------------- ----------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- SALES North America................................. $1,328,653 $1,048,803 $2,479,717 $1,987,075 Latin America................................. 40,432 47,566 78,953 72,597 Europe, Middle East, Africa................... 571,436 444,060 1,065,438 877,499 Asia Pacific.................................. 205,406 107,213 344,417 193,776 ---------- ---------- ---------- ---------- Consolidated Total............................ $2,145,927 $1,647,642 $3,968,525 $3,130,947 ========== ========== ========== ==========
JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------ IDENTIFIABLE ASSETS North America............................................... $4,810,724 $4,630,506 Latin America............................................... 80,550 73,195 Europe, Middle East, Africa................................. 3,204,298 2,245,460 Asia Pacific................................................ 354,834 306,266 Intercompany eliminations................................... (15,681) (82,139) ---------- ---------- Consolidated Total.......................................... $8,434,725 $7,173,288 ========== ==========
11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" subsequently updated by SAB 101A and SAB 101B ("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company is required to adopt SAB 101 no later than the fourth quarter of fiscal 2000. The Company is currently evaluating the impact of SAB 101 on its results of operations and financial position. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an interpretation of APB 13 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of previously fixed stock options or awards, and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The Company does not expect FIN 44 to have a material impact on its results of operations and financial position. In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("FAS") No. 138, "Accounting for Certain Derivative Instruments--an amendment of FAS 133" ("Accounting for Derivative Instruments and Hedging Activities"). This statement amends the accounting and reporting standards for certain derivative instruments and hedging activities. The Company is required to adopt FAS 138 no later than the third quarter of fiscal 2000 and is currently evaluating the impact, if any, of FAS 138 on its results of operations and financial position. 12. SUBSEQUENT EVENT On August 9, 2000, the Company completed the initial public offering of 12,500 shares of Class B common stock of its majority owned subsidiary McDATA Corporation. The offering represents approximately 12% of the McDATA common stock outstanding. All of these shares were offered by McDATA at a price of $28 per share. McDATA has granted the underwriters an option to purchase up to 1,875 additional shares of Class B common stock to cover over-allotments, if any, within 30 days of the offering date. 14 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 22 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--SECOND QUARTER OF 2000 COMPARED TO SECOND QUARTER OF 1999 REVENUES Total revenues for the second quarter of 2000 were $2,145.9 compared to $1,647.6 for the second quarter of 1999, representing an increase of $498.3 or 30%. Enterprise storage hardware revenues from products sold directly and through resellers and original equipment manufacturers were $1,340.3 in the second quarter of 2000, compared to $985.5 in the second quarter of 1999, representing an increase of $354.8, or 36%. The increase in enterprise systems revenues was due to increased sales volume resulting from continued strong demand for the Company's Symmetrix series of products and the successful introduction of new Symmetrix, Celerra and Connectrix 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 storage software revenues from products sold directly and through resellers and original equipment manufacturers were $350.3 in the second quarter of 2000 compared to $178.6 in the second quarter of 1999, representing an increase of $171.7, or 96%. 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 enterprise switching products sold directly by McDATA, including the ESCON Director series of products, were $37.1 in the second quarter of 2000 compared to $45.8 in the second quarter of 1999, representing a decrease of $8.7, or 19%. The decrease was due to the product transition from ESCON-based to fibre channel-based directors which resulted in a decrease in ESCON revenues that was partially offset by an increase in fibre channel revenues. The Company anticipates that revenues from ESCON directors will continue to decline. Revenues from the CLARiiON line of storage products, excluding related service revenues, were $138.5 in the second quarter of 2000, compared to $105.7 in the second quarter of 1999, representing an increase of $32.8, or 31%. The increase reflects a significant increase in sales volume from direct sales channels offset by a decrease in sales volume from indirect channels. Total storage product revenues were $1,866.2 in the second quarter of 2000, compared to $1,315.7 in the second quarter of 1999, representing an increase of $550.5, or 42%. The increase is due primarily to sales of enterprise storage hardware and software. Revenues from AViiON server products were $69.3 in the second quarter of 2000 compared to $153.9 in the second quarter of 1999, representing a decrease of $84.6, or 55%. The decrease in revenue was primarily the result of reduced volume due to the refocusing of the AViiON business on the most profitable product lines combined with the effect of closing certain international sales offices. Overall service revenues were $210.5 in the second quarter of 2000 compared to $178.0 in the second quarter of 1999, an increase of $32.5 or 18%. Storage service revenues were $134.4 in the 15 second quarter of 2000 compared to $84.2 in the second quarter of 1999, an increase of $50.2, or 60%. These increases were primarily related to increased maintenance revenues on enterprise storage hardware and software products. Server service revenues from the Company's Data General division were $76.0 in the second quarter of 2000 compared to $93.9 in the second quarter of 1999, a decrease of $17.9, or 19%. The decrease is primarily due to the refocusing of the AViiON business combined with the effect of closing certain international sales offices. Total revenues from storage products and services were $2,000.6 in the second quarter of 2000, compared to $1,399.9 in the second quarter of 1999, representing an increase of $600.7, or 43%. Total revenues from server products and services were $145.3 in the second quarter of 2000, compared to $247.8 in the second quarter of 1999, representing a decrease of $102.5, or 41%. Revenues on sales into the North American markets were $1,328.7 in the second quarter of 2000 compared to $1,048.8 in the second quarter of 1999, an increase of $279.9, or 27%. The revenue growth reflects strong demand for the Company's storage products and services, which increased by 37% compared to the second quarter of 1999. This growth was offset by a decrease in AViiON server revenues due to the refocusing of the business on the most profitable product lines. Revenues on sales into the markets of Europe, the Middle East and Africa were $571.4 in the second quarter of 2000 compared to $444.1 in the second quarter of 1999, an increase of $127.3, or 29%. The increase is primarily due to strong demand for the Company's storage products and services, which increased by 42% compared to the second quarter of 1999. This growth was offset by decreased revenues from AViiON products due to the closing of certain regional sales offices acquired in connection with the acquisition of Data General Corporation in 1999. Revenues on sales into the markets of the Asia Pacific region were $205.4 in the second quarter of 2000 compared to $107.2 in the second quarter of 1999, an increase of $98.2, or 92%. The increase was primarily due to the Company's efforts to expand its business in this region combined with continued strong demand for the Company's storage products and services, which increased by 111% compared to the second quarter of 1999. This growth was offset by decreased revenues from AViiON products due to the closing of certain regional sales offices acquired in connection with the acquisition of Data General Corporation in 1999. Revenues on sales into the markets of Latin America were $40.4 in the second quarter of 2000 compared to $47.6 in the second quarter of 1999, a decrease of $7.2, or 15%. The decrease was primarily due to decreased revenues from AViiON products due to the closing of certain regional offices acquired in connection with the acquisition of Data General Corporation in 1999. The Company's storage products and services increased by 10% compared to the second quarter of 1999. GROSS MARGINS Overall gross margins increased to 57.9% of revenues in the second quarter of 2000, compared to 50.8% of revenues in the second quarter of 1999. Product gross margins increased to 60.9% in the second quarter of 2000, compared to 53.0% in the second quarter of 1999. This increase in product margins was primarily attributable to increased licensing of the Company's enterprise software products, which have higher gross margins than sales of the Company's hardware products. Software revenue as a percentage of total revenues increased to 16% in the second quarter of 2000 from 11% in the second quarter of 1999. Other factors affecting product gross margins include the impact of component cost declines being greater than the impact of product price declines. The Company currently believes that product price declines will continue. Service gross margins decreased to 30.7% in the second quarter of 2000, compared to 32.4% in the second quarter of 1999. The decrease in service margins from 1999 to 2000 was primarily due to a 16 decrease in service revenues for Data General products caused by the closure of certain international sales offices. RESEARCH AND DEVELOPMENT Research and development ("R&D") expenses were $194.3 and $139.7 in the second quarters of 2000 and 1999, respectively, an increase of $54.6, or 39%. R&D expenses were 9.1% and 8.5% of revenues in the second quarters of 2000 and 1999, respectively. The increase in R&D spending levels from 1999 to 2000 reflects the Company's ongoing research and development efforts in a variety of areas, including EMC Enterprise Storage Network technologies, network attached storage products, enhancements to the Symmetrix family of products, new enterprise storage software products and fibre channel connectivity products. The Company expects to continue to spend substantial amounts for R&D for the balance of 2000 and thereafter. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative ("SG&A") expenses were $506.1 and $336.0 in the second quarters of 2000 and 1999, respectively, an increase of $170.1, or 51%. SG&A expenses were 23.6% and 20.4% of revenues in the second quarters of 2000 and 1999, respectively. The increase in spending levels was primarily due to the Company's efforts to build 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 increased to $48.1 in the second quarter of 2000 from $29.6 in the second quarter of 1999. Interest income was earned primarily from investments in cash equivalents and short and long-term investments. Investment income increased in the second quarter 2000 primarily due to higher cash and investment balances which were derived from operations. Interest expense decreased to $3.0 in the second quarter of 2000 from $8.2 in the second quarter of 1999 primarily due to conversion of the Company's 3 1/4% convertible subordinated notes due 2002 (the "3 1/4% Notes") during March 2000 and the Company's 6% convertible subordinated notes due 2004 (the "6% Notes") during May 2000. PROVISION FOR INCOME TAXES The provision for income taxes was $158.7 and $96.9 in the second quarters of 2000 and 1999, respectively, which resulted in effective tax rates of 27.0% and 25.3%, respectively. The effective tax rate is less than U.S. statutory rates due to the Company's various tax strategies and benefits related to offshore manufacturing. 17 RESULTS OF OPERATIONS--FIRST SIX MONTHS OF 2000 COMPARED TO FIRST SIX MONTHS OF 1999 REVENUES Total revenues for the first six months of 2000 were $3,968.5 compared to $3,130.9 for the first six months of 2000, representing an increase of $837.6, or 27%. Enterprise storage hardware revenues from products sold directly and through resellers and original equipment manufacturers were $2,471.8 in the first six months of 2000, compared to $1,846.6 in the first six months of 1999, representing an increase of $625.2, or 34%. The increase in enterprise systems revenues was due to increased sales volume resulting from continued strong demand for the Company's Symmetrix series of products and the successful introduction of new hardware 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 storage software revenues from products sold directly and through resellers and original equipment manufacturers were $620.2 in the first six months of 2000 compared to $334.1 in the first six months of 1999, representing an increase of $286.1, or 86%. 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 enterprise switching products sold directly by McDATA, including the ESCON Director series of products, were $76.0 in the first six months of 2000 compared to $84.8 in the first six months of 1999, representing a decrease of $8.8, or 10%. The decrease was due to the product transition from ESCON-based to fibre channel-based directors, resulting in a decrease in ESCON revenues that was offset by an increase in fibre channel revenues. The Company anticipates that revenues from ESCON directors will continue to decline. Revenues from the CLARiiON line of storage products, excluding related service revenues, were $235.3 in the first six months of 2000, compared to $208.7 in the first six months of 1999, representing an increase of $26.6, or 13%. The increase reflects an increase in revenues from direct sales channels offset by a decrease in sales volume from indirect channels. Total storage product revenues were $3,403.3 in the first six months of 2000, compared to $2,474.2 in the first six months of 1999, representing an increase of $929.1 or 38%. The increase is due primarily to sales of enterprise storage hardware and software. Revenues from AViiON server products were $157.6 in the first six months of 2000 compared to $308.6 in the first six months of 1999, representing a decrease of $151.0, or 49%. The decrease in revenue was primarily the result of reduced volume due to the refocusing of the AViiON business on the most profitable product lines combined with the effect of closing certain international sales offices. Overall service revenues were $407.6 in the first six months of 2000 compared to $348.1 in the first six months of 1999, an increase of $59.5, or 17%. Storage service revenues were $250.8 in the first six months of 2000 compared to $159.1 in the first six months of 1999, an increase of $91.7, or 58%. These increases are primarily related to increased maintenance revenues on enterprise storage hardware and software products. Server service revenues from the Company's Data General division were $156.8 in the first six months of 2000 compared to $189.0 in the first six months of 1999, a decrease of $32.2 or 17%. The decrease is primarily due to the refocusing of the AViiON business combined with the effect of closing certain international sales offices. Total revenues from storage products and services were $3,654.2 in the first six months of 2000, compared to $2,633.3 in the first six months of 1999, representing an increase of $1,020.9, or 39%. Total revenues from server products and services were $314.4 in the first six months of 2000, compared to $497.6 in the first six months of 1999, representing a decrease of $183.2 or 37%. 18 Revenues on sales into the North American markets were $2,479.7 in the first six months of 2000 compared to $1,987.1 in the first six months of 1999, an increase of $492.6, or 25%. The revenue growth reflects strong demand for the Company's storage products and services, which increased by 35% compared to the first six months of 1999. This growth was offset by a decrease in AViiON server revenues due to the refocusing of the business on the most profitable product lines. Revenues on sales into the markets of Europe, the Middle East and Africa were $1,065.4 in the first six months of 2000 compared to $877.5 in the first six months of 1999, an increase of $187.9, or 21%. The increase is primarily due to strong demand for the Company's storage products and services, which increased by 33% compared to the first six months of 1999. This growth was offset by decreased revenues from AViiON products due to the closing of certain regional sales offices acquired in connection with the acquisition of Data General Corporation in 1999. Revenues on sales into the markets of the Asia Pacific region were $344.4 in the first six months of 2000 compared to $193.8 in the first six months of 1999, an increase of $150.6, or 78%. The increase was primarily due to the Company's efforts to expand its business in this region combined with continued strong demand for the Company's storage products and services, which increased by 94% compared to the first six months of 1999. This growth was offset by decreased revenues from AViiON products due to the closing of certain regional sales offices acquired in connection with the acquisition of Data General Corporation in 1999. Revenues on sales into the markets of Latin America were $79.0 in the first six months of 2000 compared to $72.6 in the first six months of 1999, an increase of $6.4, or 9%. The increase was primarily due to increased sales of the Company's storage products and services, which increased by 42% compared to the first six months of 1999. This growth was offset by decreased revenues from AViiON products due to the closing of certain regional offices acquired in connection with the acquisition of Data General Corporation in 1999. GROSS MARGINS Overall gross margins increased to 57.3% of revenues in the first six months of 2000, compared to 49.6% of revenues in the first six months of 1999. Product gross margins increased to 60.5% in the first six months of 2000, compared to 51.9% in the first six months of 1999. This increase in product margins is primarily attributable to increased licensing of the Company's enterprise software products, which has higher gross margins than sales of the Company's hardware products. Software revenue as a percentage of total revenues increased to 16% in the first six months of 2000 from 11% in the first six months of 1999. Other factors affecting product gross margins include the impact of component cost declines being greater than the impact of product price declines. The Company currently believes that product price declines will continue. Service gross margins decreased to 29.8% in the first six months of 2000, compared to 31.8% in the first six months of 1999. The decrease in service margins from 1999 to 2000 is primarily due to a decrease in service revenues for Data General products caused by the closure of certain international sales offices. RESEARCH AND DEVELOPMENT Research and development ("R&D") expenses were $356.1 and $269.1 in the first six months of 2000 and 1999, respectively, an increase of $87.0, or 32%. R&D expenses were 9.0% and 8.6% of revenues in the first six months of 2000 and 1999, respectively. The increase in R&D spending levels from 1999 to 2000 reflects the Company's ongoing research and development efforts in a variety of areas, including EMC Enterprise Storage Network technologies, network attached storage products, enhancements to the Symmetrix family of products, new enterprise storage software products and fibre 19 channel connectivity products. The Company expects to continue to spend substantial amounts for R&D for the balance of 2000 and thereafter. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative ("SG&A") expenses were $954.3 and $646.9 in the first six months of 2000 and 1999, respectively, an increase of $307.4, or 48%. SG&A expenses were 24.0% and 20.7% of revenues in the first six months of 2000 and 1999, respectively. The increase in spending levels from 1999 to 2000 is primarily due to the Company's efforts to build 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 increased to $88.7 in the first six months of 2000 from $58.2 in the first six months of 1999. Interest income was earned primarily from investments in cash equivalents and short and long-term investments. Investment income increased in the first six months of 2000 primarily due to higher cash and investment balances which were derived from operations. Interest expense decreased to $9.8 in the first six months of 2000 from $17.0 in the first six months of 1999 primarily due to conversion of the Company's 3 1/4% Notes during March 2000 and the Company's 6% Notes during May 2000. PROVISION FOR INCOME TAXES The provision for income taxes was $281.5 and $170.9 in the first six months of 2000 and 1999, respectively, which resulted in effective tax rates of 27.0% and 25.2%, respectively. The effective tax rate is less than U.S. statutory rates due to the Company's various tax strategies and benefits related to offshore manufacturing. RESTRUCTURING, MERGER AND OTHER CHARGES During the fourth quarter of 1999, the Company approved and implemented a restructuring program in connection with its acquisition of Data General Corporation. The restructuring plan, which is expected to be completed by December 2000, provides for the consolidation of the Company's operations and elimination of duplicative facilities worldwide. Accordingly, during the fourth quarter of 1999, the Company recorded a charge of approximately $170.6 related to employee termination benefits, facility closure costs, asset disposals, and other exit costs which the Company has recorded in operating expenses. The total cash impact of the charge is approximately $140.7, of which $52.4 was paid in 1999 and $43.5 was paid in 2000. The program included a net reduction of the workforce by approximately 1,100 employees, approximately 59% of whom are or were based in North America and 23% of whom are or were based in Europe. The employee separations affect the majority of business functions and job classes. As of June 30, 2000, employee separations due to restructuring actions totaled approximately 900. During fiscal year 1998, Data General recorded a charge of $82.4 related to a restructuring program. The charge included employee termination benefits, asset write-downs, and other exit costs. The total cash impact of the restructuring charge is approximately $58.5, of which $46.0 was paid prior to December 31, 1999 and $1.5 was paid during the first six months of 2000. As of June 30, 2000, the remaining accruals of $14.3 from the 1998 restructuring program are related to excess vacant rental properties in Europe. 20 The amounts charged against the established provisions described above were as follows:
BALANCE CURRENT BALANCE DECEMBER 31, 1999 UTILIZATION JUNE 30, 2000 (IN THOUSANDS) ----------------- ----------- ------------- Employee termination benefits.......................... $ 75,481 $36,997 $38,484 Lease abandonments..................................... 18,655 1,491 17,164 Asset write-downs...................................... 4,116 3,245 871 Other exit costs....................................... 11,195 7,115 4,080 -------- ------- ------- $109,447 $48,848 $60,599 ======== ======= =======
FINANCIAL CONDITION Cash and cash equivalents and short and long-term investments were $3,664.6 and $3,173.7 at June 30, 2000 and December 31, 1999, respectively, an increase of $490.9. Cash provided by operating activities for the first six months of 2000 was $1,017.2, generated primarily from net income. Cash used by investing activities was $439.4, principally from the acquisition of Softworks, Inc. and additions to property, plant and equipment. Cash provided by financing activities was $112.0, principally from the issuance of common stock from stock option exercises. In March 1997, the Company sold $517.5 of the 3 1/4% Notes. On March 15, 2000, all of the outstanding 3 1/4% Notes were converted into Common Stock. In May 1997, Data General Corporation sold $212.8 of the 6% Notes, which were assumed by the Company in connection with the acquisition of Data General in 1999. The 6% Notes were generally convertible into shares of EMC common stock at a conversion price of approximately $41.91 per share, subject to adjustment in certain events. As of June 30, 2000, $212.6 of the 6% Notes were converted into EMC common stock. The Company paid approximately one hundred fifty-five thousand dollars to redeem the remaining 6% Notes. At June 30, 2000, 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. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" subsequently updated by SAB 101A and SAB 101B ("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company is required to adopt SAB 101 no later than the fourth quarter of fiscal 2000. The Company is currently evaluating the impact of SAB 101 on its results of operations and financial position. In March 2000, the Financial Accounting Standard Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of previously fixed stock options or awards, and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The Company does not expect FIN 44 to have a material impact on its results of operations and financial position. 21 In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("FAS") No. 138, "Accounting for Certain Derivative Instruments--an amendment of FAS 133" ("Accounting for Derivative Instruments and Hedging Activities"). This statement amends the accounting and reporting standards for certain derivative instruments and hedging activities. The Company is required to adopt FAS 138 no later than the third quarter of fiscal 2000 and is currently evaluating the impact, if any, of FAS 138 on its results of operations and financial position. YEAR 2000 ISSUES The information provided below constitutes a "Year 2000 Readiness Disclosure" under the Year 2000 Information and Readiness Disclosure Act. To date, EMC has not experienced, and is not aware of, any significant Year 2000 problems or disruptions in any of its internal systems or products and has not received any notification from any of its key vendors, suppliers or other third parties of any significant Year 2000 problems or disruptions. EMC had established a Year 2000 program to assess and remediate potential systems and software problems in interpreting certain dates. EMC also received certifications or statements of Year 2000 compliance from all of its key vendors and suppliers and developed a contingency plan to address the most reasonably likely worst-case scenarios for Year 2000 problems or disruptions. The total cost of EMC's Year 2000 program has not had, and EMC does not anticipate that the total cost of this program will have a material effect on its business, results of operations or financial condition; however, EMC cannot, at this time, be assured that Year 2000 problems or disruptions in its internal systems or products, or in the systems or products of third parties will not have such a material effect on its business, results of operations or financial condition. 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 and server markets; (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 original equipment manufacturers and other indirect channel participants; (vii) the uneven pattern of quarterly sales; (viii) risks associated with strategic investments and acquisitions; (ix) the ability to attract and retain highly qualified employees; 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. 22 EMC CORPORATION PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to certain 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders was held on May 3, 2000. There was no solicitation in opposition to 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 an amendment to the Company's 1993 Stock Option Plan to increase the number of shares available for grant under the plan by 20,000,000, and an amendment to the Company's 1989 Employee Stock Purchase Plan as described in the Company's Proxy Statement. The results of the votes for each of these proposals were as follows: 1. Election of Class I Directors:
FOR WITHHELD ----------- ---------- Richard J. Egan..................................... 815,712,098 73,088,076 Alfred M. Zeien..................................... 871,944,029 16,856,145
In addition to these directors, the Company's other incumbent directors (Michael J. Cronin, John R. Egan, Maureen E. Egan, W. Paul Fitzgerald, Joseph F. Oliveri and Michael C. Ruettgers) had terms that continued after the 2000 Annual Meeting. 2. To amend the Company's 1993 Stock Option Plan: For:........................................................ 702,808,424 Against:.................................................... 181,610,595 Abstain:.................................................... 4,381,155
3. To amend the Company's 1989 Employee Stock Purchase Plan: For:........................................................ 874,686,857 Against:.................................................... 9,885,473 Abstain:.................................................... 4,227,844
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 27 Financial Data Schedule (filed herewith). (B) REPORTS ON FORM 8-K The Company did not file any current report on Form 8-K during the quarter ended June 30, 2000. 23 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 By: /s/ WILLIAM J. TEUBER, JR. -------------------------------------------- William J. Teuber, Jr. SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND CHIEF Date: August 11, 2000 ACCOUNTING OFFICER)
24 EXHIBIT INDEX Exhibit 27 Financial Data Schedule (filed herewith) 25