-----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, I80Lw0LfG9HhIRF+CLwxHVMqP/SX/VjhOwvA1upYoTCWBDMCU54yFJZpLEQZ9mOB sOU4owbGCCKNFf+MBnG/EQ== 0000927016-97-000617.txt : 19970228 0000927016-97-000617.hdr.sgml : 19970228 ACCESSION NUMBER: 0000927016-97-000617 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970227 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMC CORP CENTRAL INDEX KEY: 0000790070 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 042680009 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09853 FILM NUMBER: 97546117 BUSINESS ADDRESS: STREET 1: 171 SOUTH STREET CITY: HOPKINTON STATE: MA ZIP: 01748-9103 BUSINESS PHONE: 5084351000 MAIL ADDRESS: STREET 1: 171 SOUTH STREET CITY: HOPKINTON STATE: MA ZIP: 01748-9103 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-9853 EMC CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2680009 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF ORGANIZATION OR INCORPORATION) IDENTIFICATION NUMBER) 171 SOUTH STREET HOPKINTON, MASSACHUSETTS 01748 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (508) 435-1000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED: ------------------- ----------------------------------------- Common Stock, $.01 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None 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. X Yes ______ No _______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of voting stock held by nonaffiliates of the registrant was $8,974,421,370 as of January 31, 1997. The number of shares of Common Stock, $.01 par value, outstanding as of January 31, 1997 was 245,752,403. DOCUMENTS INCORPORATED BY REFERENCE The information required in response to Part III of Form 10-K is hereby incorporated by reference to the specified portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 7, 1997. FORWARD LOOKING STATEMENTS This Annual Report contains forward-looking statements as defined under the Federal Securities Laws. Actual results could vary materially. Factors that could cause actual results to vary materially are described herein and in other documents. Readers should pay particular attention to the considerations described in the section of this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors that May Affect Future Results." Readers should also carefully review the risk factors described in the other documents the Company files from time to time with the Securities and Exchange Commission. ITEM 1. BUSINESS EMC Corporation and its subsidiaries ("EMC" or the "Company") design, manufacture, market and support a wide range of storage-related hardware, software and service products for the multi-billion dollar market for mainframe, open systems and network attached storage systems. Since the introduction of its first Symmetrix Integrated Cached Disk Array ("ICDA") in 1991, EMC has rapidly become a leading supplier of intelligent enterprise storage and retrieval technology for both mainframe and open systems environments. These products are sold as storage solutions for customers utilizing a variety of the world's most popular computer system platforms, including, but not limited to, International Business Machines Corporation ("IBM") and IBM-compatible mainframes, Unisys Corporation ("Unisys"), Compagnie des Machines Bull S.A. ("Bull"), Hewlett-Packard Company ("HP"), NCR Corporation ("NCR"), Sequent Computer Systems, Inc. ("Sequent") and other open systems platforms. EMC's products provide solutions for a wide range of customer storage requirements, from the highest performance mission critical applications to extremely high capacity business support applications. The Company's objective is to continue to be an enterprise storage solutions leader in the Information Technology ("IT") industry. EMC develops its products by integrating technologically advanced, industry standard components and devices with Company-designed proprietary hardware and software technology. The Company differentiates its products by incorporating hardware and software features that provide competitive advantages for EMC customers through high performance, high availability and heterogeneous connectivity. In the late 1980's, open systems computing, frequently referred to as client server computing, was emerging as a new, flexible and distributed model for development of new business applications. This contrasted with mainframe computing, characterized at that time by proprietary operating systems and large scale, centralized high performance computing platforms. The flexibility and distributed nature of open systems became the solution for customer departments or divisions that required quick turn-around of application changes to meet new market demands. Many customers considered open systems to be the alternative to the mainframe approach they had been dependent upon for years. A shift in focus toward development of new applications in the open systems market began increasing the need for more robust storage solutions. Historically, the use of both mainframe and open systems as key business application development platforms were looked at from a Central Processing Unit ("CPU")-centric approach, where the computing platform was placed at the center of a customer's Information Systems ("IS") architecture with all other required elements placed on the periphery. As the new applications became more important to companies' businesses, the volume of information increased significantly, as did the importance to such companies of managing such information to gain competitive advantage. EMC believes that companies are re- evaluating the way they manage information and have determined that a new information-centric model is required to satisfy the protection, management and sharing of mission critical information across the enterprise. This information-centric computing model defines what EMC believes is a significant growth opportunity, the Enterprise Storage market. An Enterprise Storage system stores and retrieves data from all major computing platforms, including mainframe and open systems environments. It acts as a shared central repository for information, providing common management, protection and information sharing capabilities. The product 2 attributes provided by Enterprise Storage are expected to meet the demands of emerging enterprise application developments, such as Data Warehousing and Data Mining, Internet/Intranets, Year 2000 Compliance and European Currency Conversion. These developments are all considered to be major storage growth drivers for the IT industry. Enterprise Storage encompasses delivering a full suite of integrated products that combine EMC core competencies in the areas of hardware, software, and services with complementary third party products from selected partners and/or acquisitions. EMC believes it is highly qualified to meet its customers' needs for consolidation and sharing of information across platforms in an Enterprise Storage environment. The Company's principal hardware products are based on ICDA technology, which combines high-speed semiconductor cache memory managed by advanced caching algorithms, with industry standard disk drives. These products include two families of Symmetrix high speed ICDA-based storage systems, the Symmetrix 5000 family (introduced in 1992) and the Symmetrix 3000 family (introduced in June 1995), for the IBM and IBM-compatible mainframe, Unisys and Bull mainframe, IBM AS/400 and open systems storage markets. The customers for the Company's products are located worldwide and represent a cross section of industries and government agencies that range in size from FORTUNE 1000 companies to small businesses, and national to local governments. EMC products continue to be accepted widely by both existing customers and new accounts, including the top telecommunications companies worldwide and the largest banks in the United States. The Company has added more than 1,000 new customers in each of the last two years. The Company markets its products worldwide through a network of direct sales representatives, resellers, distributors and original equipment manufacturers ("OEMs"), including HP, NCR and Sequent. EMC, a Massachusetts corporation, was incorporated in 1979 and has its corporate headquarters located at 171 South Street, Hopkinton, Massachusetts. COMPANY STRATEGY The Company's strategy incorporates the following key elements: innovative architectural design, proprietary software technology, multi-channel distribution focus and alliances. Innovative Architectural Design EMC believes its growth is partially the result of its ability to deliver advanced technologies to market quickly while maintaining a consistent platform upon which its customers can expand capacity, performance, connectivity and intelligent functionality. The Company's common hardware architecture on which its principal products are based, called MOSAIC:2000, is based upon a modular design and industry standard interfaces that allow new technologies to be incorporated more rapidly than with traditional architectures. Since 1991, MOSAIC:2000 has enabled Symmetrix high-performance storage to connect to an increasing variety of computer platforms, and assisted in extending the useful life of customers' storage and other computer-related assets, such as the CPU and networks. This architectural hardware design has enabled the Company to expand its offerings in existing markets and has enabled the Company to enter new, strategic markets quickly with proven storage products and services. Proprietary Software Technology With intelligent storage systems taking an increasingly central role in information-centric computing environments, a major strategic asset of the Company is the proprietary software utilized to provide primary and extended functionality for the Company's storage products. These software products are either EMC controller-based or host-based software. Controller-based software resides within the EMC system, while host-based software resides within the customer's CPU. This proprietary software provides significant flexibility, enabling the Company to scale hardware platforms for many customer application requirements. 3 The primary functionality provided by the controller-based core software is advanced intelligence to the ICDA architecture; integrating industry standard hardware components, such as high speed cache memory, disk drives and other devices to enhance the performance, reliability, availability, connectivity and functionality of the Company's storage systems. Extended software technology is delivered via EMC's Intelligent Storage Architecture ("ISA") overlay to the MOSAIC:2000 hardware design. The ISA architecture enables an integration of controller and host-based software products that provide enterprise wide storage solutions in the areas of information sharing, business continuity, and information management applications. Certain Application Programming Interface ("API") modules have also been designed to allow further integration of EMC's Symmetrix family with selected independent software products, thus allowing customers to leverage and extend their software investments. Controller-based software is offered in both the mainframe and open systems storage markets. Examples of this software include: Symmetrix Remote Data Facility ("SRDF"), providing customer solutions to significantly reduce or eliminate the costs and business risk associated with planned and unplanned outages; Symmetrix Data Migration Services ("SDMS"), which is a combined software and services offering that enables customers to migrate mainframe data non-disruptively from older technology disk devices to Symmetrix 5000 systems while applications remain on-line; Symmetrix Enterprise Storage Platform ("Symmetrix ESP"), which the Company believes is the first step to the ultimate sharing of information across platform boundaries, which enables a single system from the Symmetrix 5000 family to simultaneously store both mainframe and open systems data; and Symmetrix Multihost Transfer Facility ("SMTF") information sharing software, which enables high performance bulk data transfer between mainframe and open systems platforms with minimal CPU intervention and without using expensive and slower network resources. The Company's host-based software products address the increasing complexity of enterprise information management. These products, the Symmetrix Manager and SRDF Host Component software for the mainframe and the Open Symmetrix Manager for open systems, offer a variety of monitoring and configuration control options for the Enterprise Storage environment. The Company also offers turnkey software solutions to address high-performance network attached storage backup and recovery requirements via EMC Data Manager ("EDM"), introduced in March 1996. Multi-Channel Distribution Focus The Company's strategy is to continue to use multiple channels of distribution to expand its worldwide markets for Enterprise Storage solutions. Specific targeted storage markets include: the IBM and IBM-compatible mainframe storage market, the open systems market, and the network attached storage market. In addition, the Company has adopted a multi-channel distribution approach to sell its products in those large geographic markets of the world which the Company believes have a demand for its products. Alliances The Company has entered into and intends to continue to enter into alliances with leading relational database companies, including, Oracle Corporation, Informix Software, Inc. and Sybase, Inc., and major independent software vendors in the applications arena. EMC's strategy is to work with leading software companies to provide added value to its customers, enhancing enterprise implementations and business effectiveness. ENTERPRISE STORAGE MARKET The Company intends to continue to focus on the three core sectors of the Enterprise Storage market: mainframe, open systems and network-attached storage. 4 Mainframe Market The mainframe storage market is estimated to be a multi-billion dollar market, which the Company has penetrated with its ICDA-based products. In 1991, EMC delivered the first Symmetrix series for the IBM and IBM- compatible mainframe storage market. Mainframes play an important role as enterprise information servers and are a key element of enterprise computing due to the following factors: recent emergence of information-centric computing models; the need for customers to leverage investments in legacy applications, processes and personnel; and new developments in lower-cost hardware technology. The Company believes this will increase the need for enterprise storage solutions. Symmetrix was the first commercially available intelligent disk storage system for this marketplace that integrated highly sophisticated controller software with large amounts of cache memory and arrays of industry standard 5.25", and more recently, 3.5" disk drives. This combination continues to provide customers with unique advantages and capabilities including: high performance disk storage; operating system independence for easy integration into existing computer environments; built-in redundancy and availability features allowing for higher data availability and continuous operations; and small footprint and low environmental requirements for low cost of ownership. Since the first Symmetrix model, with a maximum capacity of 24 gigabytes ("GB"), the Company has continued to enhance and increase the capabilities of the Symmetrix family. The Company's current mainframe product offering is the Symmetrix 5000 family which was expanded in January 1997. The Symmetrix 5000 family members share a common architecture and components, with the main differentiator being capacity and host connectivity capabilities. The Symmetrix 5000 family offers mainframe storage capacity from approximately 34 GB up to approximately 3 terabytes ("TB"). The Company believes that the Symmetrix 5000 family offers the highest performance and availability storage in the mainframe market. A significant factor in Symmetrix market success has been the unique controller-based software that all Symmetrix 5000 family members support. These include SRDF and SDMS as business continuance solutions, Symmetrix ESP for simultaneous support of mainframe and open systems computers, SMTF for high performance file transfer between mainframe and open systems computers, and application-specific software to satisfy unique computing needs of various industries such as transportation and finance. Additionally, EMC offers mainframe host-based software products, including Symmetrix Manager and SRDF Host Component, that improve the management of specific EMC systems and products. In March 1996, EMC entered a new segment of the mainframe market with a unique solution for high capacity applications that require disk-based storage and better application response time than can be provided by traditional off- line storage offerings. Extended-Online Storage ("EOS") has defined a new tier in the storage hierarchy, between traditional online disk storage and offline storage, such as tape or optical disk. EOS is targeted at specific business support applications that previously had no appropriate online storage platform. EOS provides over one TB of maximum capacity. Revenues to the mainframe market represented approximately 55%, 74%, and 85%, respectively, of EMC's 1996, 1995 and 1994 revenues. Open Systems Market The multi-billion dollar open systems market continues to demonstrate rapid growth in storage requirements primarily driven by continued deployment of new client/server applications. This market is characterized by a broad mix of computing platforms that offer customers the ability to quickly develop new applications required for today's highly competitive business environment. These computing platforms are offered by the largest computer manufacturers worldwide, including IBM, HP, NCR and Sequent. In June of 1995, EMC capitalized 5 on its MOSAIC:2000 architecture and quickly brought products to the open systems market with the introduction of the Symmetrix 3000 family. The Symmetrix 3000 family delivered the performance, capacity, availability and features of mainframe-class storage to large-scale open database and other applications such as Data Warehousing and Internet/Intranets. Through its platform-independent technology, the Symmetrix 3000 family provides users of large relational databases and demanding client/server applications with fast, highly intelligent storage for multiple, heterogeneous UNIX, Windows NT, AS/400 and other open systems platforms. The Symmetrix 3000 family was expanded in January 1997 and supports storage capacity from approximately 34 GB to approximately 3 TB. In August 1996, the Company also made available EOS to satisfy the high-capacity requirements for new and emerging business support applications being developed on open systems platforms. The Symmetrix 3000 family also supports the SRDF software for mission critical information availability requirements, Symmetrix ESP for simultaneous support of mainframe and open systems computers and SMTF for high performance file transfer between mainframe and open systems computers. Additionally, EMC offers open systems host-based software products that improve the management of specific EMC systems and products, including Open Symmetrix Manager and the SRDF Control Option. In March 1996, the Company introduced EDM, an integrated network storage backup solution with intelligent proprietary software providing resource management to integrated disk and automated tape library hardware components. EDM offers high-performance, integrated network backup and recovery. EMC is currently engaging in research and development of software technology for the combined mainframe and open systems market in the areas of intelligent extracting and loading of customer databases. The Company believes that its investment in core technologies related to logical data management will accelerate adoption of the Company's Enterprise Storage model and facilitate consolidation and sharing of customer information. By late 1995, the new Symmetrix 3000 systems were quickly penetrating this highly competitive open systems market. In November 1995, EMC announced alliances with both HP and NCR (formerly AT&T Global Information Solutions), under which these two leading UNIX-based server suppliers now market Symmetrix 3000 systems worldwide with their high-end servers. In 1996, EMC expanded its existing reseller and OEM relationships with HP and Bull. In January 1997, EMC signed an agreement with Sequent to market and resell the Symmetrix 3000 family of products worldwide into its market. See "Reseller and OEM Channels." Revenues to the open systems market represented approximately 33% and 11% of EMC's revenues in 1996 and 1995, respectively. Network Attached Storage Market The network attached storage market is estimated to have high potential for storage requirements, which EMC's products have only recently begun to penetrate. The proliferation of local and wide-area networks has resulted in customers' reliance on networks for sharing large computer files (including image and video). This practice has resulted in significant network bottlenecks impacting companies' ability to effectively run business applications and the inefficient use of expensive network resources. In 1996, EMC announced availability of Symmetrix Network File Storage ("SNFS") and Symmetrix Network Media Server ("SNMS"), new high performance network attached storage solutions. This combination of EMC developed proprietary software, network director hardware components and the performance and availability attributes of Symmetrix focus on breaking the information bottlenecks that plague conventional CPU-based, general purpose file servers and on meeting the need for faster access to large quantities of information directly across the network. 6 EMC is currently engaging in research and development of products for the network attached storage market in the areas of video storage and retrieval, centralized backup repository and other network data access services, such as the Internet. In December 1995, the Company completed the acquisition of McDATA Corporation ("McDATA"). McDATA designs, manufactures, markets and supports high performance information switching products, delivering innovative networking solutions for large-scale computing applications, including local, metropolitan and wide-area connectivity. McDATA's primary product is the ESCON Director, a high-speed fiber-optic-based network switch designed to connect computers and peripherals within data center environments. The ESCON Director is marketed by IBM under an exclusive OEM agreement with McDATA. The Company continues to evaluate joint technology ventures with McDATA to help position EMC at the center of the Enterprise Storage market, thereby permitting EMC to play an even more critical role in helping EMC's customers establish information-centric computing strategies. MARKETING AND CUSTOMERS EMC markets its products through multiple distribution channels, including its direct sales force, selected distributors and OEMs. The Company has a direct sales presence throughout North America, Europe, South Africa and the Asia Pacific region and uses distributors as its primary distribution channel in other areas of the world. Over the past two years, the Company has expanded its sales and marketing organizations significantly in all major geographies of the world. In the second half of 1996, EMC began selling direct in Israel and established a subsidiary in Brazil, its first direct sales presence in Latin America. During 1996, the Company derived 59% of its product revenue from shipments into North and South America, 32% from shipments into Europe, the Middle East and Africa, and 9% from shipments into the Asia Pacific region. The Company has dedicated personnel to support the needs of its customers in the mainframe and open systems markets and also of its distributors and OEM customers, both domestically and internationally. RESELLER AND OEM CHANNELS The Company believes that the MOSAIC:2000 architectural philosophy, and the flexibility it provides, make its products well suited for sale by resellers and OEMs in partnership with the Company. The Company believes that with its new open systems capabilities introduced in 1995 and 1996, revenues from the reseller and OEM market will increase. In response to the anticipated growth in the open systems market, the Company increased its sales channel capabilities by signing agreements with a number of Value Added Resellers ("VARs"), Systems Integrators ("SIs") and distributors during 1996. The Company's products are maintained and serviced by the Company, the reseller, distributor or OEM, or authorized third party providers. Since January 1992, EMC has had an agreement with Unisys for the sale of Unisys-compatible Symmetrix systems. Unisys has worldwide marketing rights to the Symmetrix and certain other products for use with Unisys systems, subject to certain terms and conditions. In February 1993, the Company first entered into an OEM agreement with Bull, granting Bull exclusive worldwide marketing rights, with the exception of Japan, to certain Symmetrix products for use with Bull mainframe computers as Bull's solution for all high speed disk requirements. In June 1995, certain systems in the Symmetrix 5000 family were added to this agreement. In March 1996, the Company extended this agreement to add the Symmetrix ESP for Bull's new generation of Sagister UNIX multiframe servers. In April 1996, an agreement was entered into with Bull to sell EMC's Symmetrix 3000 family of open systems products for connection to Bull's Escala and DPR/20 computers. On October 31, 1995, the Company entered into a reseller agreement with HP under which HP markets and resells the Symmetrix 3000 family of systems worldwide for connection to HP's 9000 series computers. The agreement currently extends to June 30, 1997. In August 1996, EMC expanded its reseller agreement with HP to 7 enable HP to market and sell EMC's Symmetrix 3000 family of open systems products worldwide for connection to HP's 3000 series computers. On November 2, 1995, the Company entered into an OEM agreement with NCR under which NCR markets and sells the Symmetrix 3000 family of systems under an NCR label worldwide for connection to NCR's WorldMark brand of enterprise server systems. The agreement currently extends to November 2, 1998. On January 29, 1997, the Company entered into a reseller agreement with Sequent under which Sequent will market and resell the Symmetrix 3000 family of systems worldwide for connection to Sequent's Symmetry series and NUMA-Q series computers. The agreement currently extends to January 29, 1999. The Company continues to maintain and grow long-standing relationships with key resellers and OEMs on a worldwide basis. In addition, the Company will continue to evaluate additional resellers and OEMs to satisfy business expansion in targeted worldwide markets. In 1996, the Company derived 19% of its product revenues from reseller and OEM channels. OPERATIONS EMC's products utilize the Company's engineering designs, with industry standard and semi-custom components and subsystems. EMC's products are assembled and tested primarily at the Company's facilities in Massachusetts and Cork, Ireland. Product components manufactured by subcontractors in the U.S. and Europe are assembled in accordance with production standards and quality controls established by EMC. The Company believes its present level of manufacturing capacity, along with its current plans for expansion, will be sufficient to accommodate its requirements. The Company has implemented a Total Quality Management philosophy to ensure the quality of its designs, manufacturing process and suppliers. The Company's operations in Massachusetts currently hold an ISO 9001 Certificate of Registration from National Quality Assurance, Ltd. This internationally recognized endorsement of ongoing quality management represents the highest level of certification available. The Company's Irish manufacturing operation holds ISO 9002 registration. The Company's principal manufacturing operation in Hopkinton, Massachusetts has also been awarded Class A MRP II status by an independent evaluation organization. COMPETITION In the mainframe storage market, EMC competes primarily with IBM, and to a lesser extent, Hitachi Data Systems and Amdahl Corporation. The Company believes that it has a number of competitive advantages over these companies, especially in the areas of product performance, value-added software capabilities, time to market enhancements and cost of ownership. In the open systems market, the Company's primary competition is provided by systems vendors, including IBM, Digital Equipment Corporation ("DEC") and Sun Microsystems Corporation ("Sun"). In the Company's opinion, the major competitive advantage of the open systems vendors is their overall market presence and ability to provide integrated CPU, storage and software packages. The Company believes that its major independent storage competitors in the open systems market are Data General Corporation and Symbios Logic, Inc. EMC believes that it has advantages over its open systems competitors in performance, capacity, availability, connectivity and software features. BACKLOG The Company manufactures its products on the basis of its forecast of near- term demand and maintains inventory in advance of receipt of firm orders from customers. Orders are generally shipped by the Company shortly after receipt of the order. Customers may reschedule orders with little or no penalty. For these reasons, 8 the Company's backlog at any particular time is not meaningful, because it is not necessarily indicative of future sales levels. EMPLOYEES As of January 31, 1997, EMC had approximately 4,800 employees worldwide including temporary employees. None of the Company's domestic employees is represented by a labor union, and the Company has never suffered an interruption of business as a result of a labor dispute. The Company considers its relations with its employees to be good. ENVIRONMENT The Company's manufacturing facilities are subject to numerous laws and regulations designed to protect the environment, particularly from wastes generated as a result of assembling certain EMC products. The cost of compliance with such regulations has not to date involved a significant expense or had a material effect on the capital expenditures, earnings or competitive position of the Company. PATENTS EMC has been granted and/or owns by assignment nearly 100 United States patents. The Company also has over 150 patent applications pending in the U.S. relating to its products for the mainframe, midrange, open systems and network-attached storage markets. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The Company is active in primarily one business segment: designing, manufacturing and marketing high performance storage products. Information by geographic area is presented below with exports shown in their area of origin. Sales and marketing operations outside the U.S. are conducted through sales subsidiaries and branches located principally in Europe and the Asia Pacific region. In 1996, the U.S. market amounted to greater than 95% of the Company's sales, income and identifiable assets in the North/South America segment. Intercompany transfers between geographic areas are accounted for at prices which are designed to be representative of unaffiliated party transactions. (Amounts are in thousands.)
EUROPE, NORTH/SOUTH MIDDLE EAST, ASIA CONSOLIDATED AMERICA AFRICA PACIFIC ELIMINATIONS TOTAL ----------- ------------ -------- ------------ ------------ 1996 Sales................... $1,441,935 $687,350 $144,367 $ -- $2,273,652 Transfers between areas.................. 72,813 159,605 -- (232,418) -- ---------- -------- -------- --------- ---------- Total Sales........... 1,514,748 846,955 144,367 (232,418) 2,273,652 Income (loss) from operations............. 334,547 167,964 (3,851) (2,119) 496,541 Identifiable assets at year end............... 1,749,221 703,929 104,210 (263,814) 2,293,546 1995 Sales................... $1,230,223 $567,303 $123,749 $ -- $1,921,275 Transfers between areas.................. 134,073 141,003 10 (275,086) -- ---------- -------- -------- --------- ---------- Total sales........... 1,364,296 708,306 123,759 (275,086) 1,921,275 Income from operations.. 264,168 176,293 1,805 (6,487) 435,779 Identifiable assets at year end............... 1,669,928 144,081 77,923 (146,203) 1,745,729 1994 Sales................... $ 871,048 $449,467 $ 56,977 $ -- $1,377,492 Transfers between areas.................. 123,587 61,577 110 (185,274) -- ---------- -------- -------- --------- ---------- Total sales........... 994,635 511,044 57,087 (185,274) 1,377,492 Income (loss) from operations............. 155,544 196,658 (97) (1,573) 350,532 Identifiable assets at year end............... 1,230,883 171,233 36,437 (121,053) 1,317,500
9 ITEM 2. PROPERTIES The Company's operations are conducted at several locations in the United States and abroad. The following table provides certain information on the Company's principal offices and manufacturing facilities:
LOCATION USE APPROX. SQ. FT. PROPERTY INTEREST -------- --- --------------- ----------------- 171 South St. Marketing, Research and 285,000 owned Hopkinton, MA Development, Manufacturing 42 South St. Customer Demonstration 63,000 owned Hopkinton, MA Center, Administration 35 Parkwood Corporate & 160,000 leased Drive Administration Hopkinton, MA 5-9 Technology Customer Service, OEM 265,000 leased Dr. Sales, Quality, Research Milford, MA and Development, Manufacturing 45 South Street Manufacturing 36,000 leased Hopkinton, MA 65 South Street Research and Development 26,000 leased Hopkinton, MA 8-12 Avenue E Manufacturing 60,000 leased Hopkinton, MA 80 South St. Manufacturing 156,000 owned Hopkinton, MA Cork, Ireland Manufacturing 180,000 owned McDATA Research and 90,000 leased Corporation Development, Manufacturing
The Company is currently expanding its facility in Ireland by 20,000 square feet for administrative use. The Company also leases space for its sales and service offices and certain research and development facilities worldwide, and owns land in the Hopkinton, Massachusetts area for possible expansion purposes. ITEM 3. LEGAL PROCEEDINGS The Company is a party to litigation which it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material adverse effect on the Company's business or financial condition. On September 16, 1996, the Company was served with civil investigative demands by the Antitrust Division of the United States Department of Justice in connection with the Department's investigation into the agreement dated June 7, 1996 between IBM and Storage Technology Corporation (the "IBM/STK Agreement"). The Justice Department is gathering evidence to determine whether the IBM/STK Agreement has been, is, or may be in violation of the federal Sherman Antitrust Act. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's stockholders during the fourth quarter of the fiscal year covered by this report. 10 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Richard J. Egan............ 60 Chairman of the Board and Director Michael C. Ruettgers....... 54 President, Chief Executive Officer and Director L. Daniel Butler........... 58 Senior Vice President, Customer Service Raymond Fortune............ 57 Senior Vice President, International Sales Michael A. Klayko.......... 42 Senior Vice President, North American Sales/Services Richard P. Lehane.......... 49 Senior Vice President, Worldwide Manufacturing Colin G. Patteson.......... 47 Senior Vice President, Chief Administrative Officer and Treasurer James B. Rothnie........... 48 Senior Vice President, Corporate Marketing Paul T. Dacier............. 39 Vice President and General Counsel William J. Teuber, Jr...... 45 Vice President and Chief Financial Officer
Richard J. Egan is a founder of the Company and has served as a Director since the Company's inception in 1979. He was elected Chairman of the Board of the Company in January 1988. Prior to January 1988, he was also President of EMC. From 1979 to January 1992, he was Chief Executive Officer of the Company. He is also a director of Cognition Corporation, a CAD/CAM software supplier. Michael C. Ruettgers served as Executive Vice President, Operations of EMC from July 1988 to October 1989, when he became President. From October 1989 to January 1992, Mr. Ruettgers served as Chief Operating Officer of EMC. In January 1992, he became Chief Executive Officer and in May 1992, he was elected a Director of the Company. Before joining EMC, he was Chief Operating Officer at Technical Financial Services, Incorporated, a high technology consulting company, from February 1987 to July 1988. He is also a director of Cross Comm, Inc., a manufacturer of computer network products, and Commonwealth Energy System, a public utility company. L. Daniel Butler joined EMC in August 1990 as Vice President of Customer Service and became Senior Vice President of Customer Service in February 1993. Prior to joining EMC, Mr. Butler was the founder and President of DMX, Inc., an electronic board assembling company, from October 1989 to August 1990. From October 1987 to September 1989, he was Director of Logistics Planning at Data General Corporation, a computer manufacturer. Raymond Fortune joined EMC in July 1994 as Senior Vice President, International Sales. From November 1989 to March 1991, Mr. Fortune was Executive Vice President of Commercial Products, and from May 1993 to June 1994 he was Chief Operating Officer, at Kendall Square Research Corporation, a computer manufacturer. From May 1991 to April 1993, Mr. Fortune was Chief Executive Officer at Ultra Network Technologies, Incorporated, a high speed networking products manufacturer. Michael A. Klayko joined EMC in March 1996 as Senior Vice President, North American Sales and became Senior Vice President, North American Sales/Services in January 1997. From August 1992 to February 1996, Mr. Klayko was Worldwide Marketing Manager, Computer Systems Organization at Hewlett-Packard Company, a computer manufacturer. From 1979 to 1992, Mr. Klayko held various positions in marketing and sales at IBM Corporation, a computer manufacturer. Richard P. Lehane joined EMC in February 1988 as General Manager of EMC's manufacturing facility in Cork, Ireland and became Senior Vice President, Worldwide Manufacturing of EMC in November 1996. Prior 11 to joining EMC, Mr. Lehane held several senior level management positions in manufacturing at Wang Laboratories, Inc., a computer manufacturer. Colin G. Patteson served as European Controller of EMC from January 1989 to March 1991 and as Corporate Controller from March 1991 to April 1995. From April 1995 to February 1997, Mr. Patteson was Vice President, Chief Financial Officer and Treasurer of EMC, when he became Senior Vice President, Chief Administrative Officer and Treasurer. Mr. Patteson has been a Vice President of EMC since February 1993. James B. Rothnie joined EMC in October 1995 as Senior Vice President, Corporate Marketing. Previously, he was Vice President of Software Development at Data General Corporation, a computer manufacturer, from October 1994 to October 1995. From 1987 to 1994, Mr. Rothnie served in several executive capacities at Kendall Square Research Corporation, a computer manufacturer, most recently as Executive Vice President. Paul T. Dacier joined EMC in March 1990 as General Counsel and became Vice President and General Counsel in February 1993. Prior to joining EMC he was Senior Counsel, Corporate Operations at Apollo Computer Inc., a computer manufacturer, from January 1987 to January 1990. William J. Teuber, Jr. joined EMC in August 1995 as Vice President and Controller and became Vice President and Chief Financial Officer in February 1997. From 1988 to August 1995, Mr. Teuber was a partner at Coopers & Lybrand L.L.P., an accounting firm. ---------------- Richard J. Egan, Chairman of the Board and a Director, is the husband of Maureen E. Egan, a Director of the Company. He also is the brother-in-law of W. Paul Fitzgerald, a Director of the Company. W. Paul Fitzgerald is the brother of Maureen E. Egan. John R. Egan, a Director of the Company, is the son of Richard J. and Maureen E. Egan. ---------------- The President and Treasurer are elected annually to serve until the first meeting of the Board of Directors following the next annual meeting of stockholders and until their successors are elected and qualified. The other executive officers are appointed to serve in such positions and serve at the pleasure of the Board of Directors. ---------------- EMC/2/, EMC, Symmetrix, ICDA, MOSAIC: 2000, SRDF, SDMS, EDM and SMTP are trademarks of EMC Corporation. WorldMark is a trademark of NCR Corporation. IBM and ESCON are trademarks of IBM Corporation. Escala is a trademark of Bull. Symmetry and NUMA-Q are trademarks of Sequent. 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS EMC's common stock $0.01 par value (the "Common Stock") began trading on the over-the-counter market on April 4, 1986 under the NASDAQ symbol EMCS. On March 22, 1988, the Company's stock began trading on the New York Stock Exchange under the symbol EMC. The following stock splits were effected in the form of stock dividends in the following amounts and at the following dates: a three-for-two stock split effective November 24, 1992, for stockholders of record on November 9, 1992, a two-for-one stock split effective June 8, 1993, for stockholders of record on May 24, 1993, and a two-for-one stock split effective December 10, 1993, for stockholders of record on November 26, 1993. The following table sets forth the range of high and low prices on the New York Stock Exchange for the past two years during the fiscal periods shown.
FISCAL 1996 HIGH LOW ----------- ------ ------ First Quarter............................................. $22.00 $15.50 Second Quarter............................................ 23.13 18.00 Third Quarter............................................. 23.13 17.00 Fourth Quarter............................................ 34.63 22.00 FISCAL 1995 HIGH LOW ----------- ------ ------ First Quarter............................................. $23.25 $14.75 Second Quarter............................................ 25.88 16.63 Third Quarter............................................. 27.38 17.75 Fourth Quarter............................................ 19.13 13.13
As of January 31, 1997, there were approximately 4,480 holders of record of the Company's Common Stock. The Company has never paid cash dividends on its Common Stock. While subject to periodic review, the current policy of its Board of Directors is to retain all earnings primarily to provide funds for the continued growth of the Company. 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA EMC CORPORATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED ------------------------------------------------------------ DECEMBER 31, DECEMBER 30, DECEMBER 31, JANUARY 1, JANUARY 2, 1996 1995 1994 1994 1993 ------------ ------------ ------------ ---------- ---------- SUMMARY OF OPERATIONS: Revenues................ $2,273,652 $1,921,275 $1,377,492 $782,621 $385,706 Operating income........ 496,541 435,779 350,532 180,428 48,575 Net income.............. 386,229 326,845 250,668 127,122 29,508 Net income per weighted average common share (fully diluted)(1)..... $ 1.56 $ 1.34 $ 1.10 $ 0.60 $ 0.16 Weighted average common shares (fully diluted)(1)..... 251,431 248,296 234,255 217,225 190,548 BALANCE SHEET DATA: Working capital......... $1,336,634 $ 959,595 $ 600,341 $516,876 $149,335 Total assets............ 2,293,546 1,745,729 1,317,500 829,646 338,780 Long-term obligations(2)......... 191,234 245,845 286,106 274,029 76,093 Stockholders' equity.... $1,636,789 $1,140,301 $ 727,641 $419,094 $168,266
- -------- (1) In addition to common stock equivalents, fully diluted earnings per share for 1996, 1995, 1994 and 1993 reflect the dilutive effects of the Company's 4 1/4% Convertible Subordinated Notes due 2001 (the "4 1/4% Notes"). Fully diluted earnings per share for 1995 (through conversion date), 1994, 1993 and 1992 reflect the dilutive effects of the Company's 6 1/4% Convertible Subordinated Debentures due 2002 (the "Debentures"). (2) Excludes current portion of long-term debt. Approximately $143 million of the long-term obligations at December 31, 1996 were converted to equity on January 2, 1997. See Note J to Notes to the Consolidated Financial Statements in the Company's filing on Form 10-K for the year ended December 31, 1996. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with "Factors that May Affect Future Results" beginning on page 18. The following table presents certain consolidated statement of operations information stated as a percentage of total revenues.
FISCAL YEAR ENDED -------------------------------------- DECEMBER 31, DECEMBER 30, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ REVENUES Mainframe........................... 54.9% 74.3% 85.4% Open Systems........................ 33.3 10.6 1.8 McDATA(1)........................... 8.0 8.3 -- Other............................... 1.4 4.6 10.3 ----- ----- ----- Net sales........................... 97.6 97.8 97.5 Service and rental income........... 2.4 2.2 2.5 ----- ----- ----- TOTAL REVENUE....................... 100.0 100.0 100.0 COST AND EXPENSES Cost of sales and service........... 54.9 52.2 47.9 Research and development............ 7.1 8.5 8.6 Selling, general and administrative..................... 16.2 16.6 18.1 ----- ----- ----- OPERATING INCOME.................... 21.8 22.7 25.4 Investment income and interest expense, net....................... 1.0 0.6 0.5 Other income/(expense), net......... -- 0.2 (0.1) ----- ----- ----- Income before income taxes.......... 22.8 23.5 25.8 Provision for income taxes.......... 5.8 6.5 7.6 ----- ----- ----- NET INCOME.......................... 17.0% 17.0% 18.2% ===== ===== =====
- -------- (1) The Company acquired McDATA in December 1995. Financial statements for periods prior to 1995 were not restated due to immateriality. REVENUES Total revenues for 1996 were $2,273,652,000 compared to $1,921,275,000 for 1995, an increase of $352,377,000 or 18%. The increase in revenues was due primarily to the continued strong demand for the Company's series of ICDA based products, particularly the open systems products which include the Symmetrix 3000 series of products. Total revenues for 1995 compare to $1,377,492,000 for 1994, an increase of $543,783,000 or 39%. Software revenues are included in the product revenues for the respective mainframe and open systems markets. Revenues from products sold directly and through OEMs into the mainframe storage market were $1,248,138,000 in 1996, $1,428,379,000 in 1995 and $1,177,014,000 in 1994; a decrease of $180,241,000 or 13% from 1995 to 1996, and an increase of $251,365,000 or 21% from 1994 to 1995. The decrease in mainframe revenues in 1996 reflects price erosion for storage-related products in this market partially offset by increased unit sales. The Company expects further declines in the mainframe revenue levels and revenue as a percentage of total revenues in 1997. Revenues from products sold into the open systems storage market, which include the Symmetrix products operating in an open systems environment and other products, were $757,662,000 in 1996, $200,981,000 in 1995 15 and $24,323,000 in 1994. Revenues in this market in 1996 increased to approximately 3.8 times 1995 revenues. The open systems market represented 33% of the Company's total revenue in 1996, compared to 11% in 1995. The Company expects further growth in open systems revenue levels and revenue as a percentage of total revenues in this market throughout 1997. Revenues from products sold by McDATA, which include the ESCON Director series of products, were $180,540,000 in 1996 and $160,205,000 in 1995, an increase of $20,335,000 or 13%. Revenues from all other products, which include the midrange series of products, were $31,952,000 in 1996, $88,650,000 in 1995 and $141,728,000 in 1994; a decrease of $56,698,000 or 64% from 1995 to 1996, and a decrease of $53,078,000 or 37% from 1994 to 1995. These decreases are primarily attributable to the declines in midrange series revenues. Revenues from service and rental income were $55,360,000 in 1996, $43,060,000 in 1995 and $34,427,000 in 1994; an increase of $12,300,000 or 29% from 1995 to 1996, and an increase of $8,633,000 or 25% from 1994 to 1995. In October 1995, the Company entered into a reseller agreement with HP under which HP markets and resells the Symmetrix 3000 series of systems worldwide for connection to HP's 9000 series computers. This agreement was expanded to enable HP to also market and resell this family of systems for connection to HP's 3000 series of computers. The current agreement extends to June 30, 1997. Revenues for 1996 under this agreement were $287,352,000 or 12.6% of total revenues. Revenues for 1995 were not significant. Revenues on sales into the markets of North and South America were $1,346,222,000 in 1996 compared to $1,148,237,000 in 1995, an increase of $197,985,000 or 17%. This increase was primarily due to growth in sales of the Company's products in the open systems storage market. Total revenues for 1995 compare to $865,687,000 in 1994, an increase of $282,550,000 or 33%. The U.S. market amounted to greater than 95% of the Company's revenues in the North and South America segment. International revenues were $942,781,000 or 41% of total revenues in 1996 compared to $773,038,000 or 40% of total revenues in 1995. The Company expects further increases in international sales as a percentage of total revenues throughout 1997. Revenues on sales into the markets of Europe, Africa and the Middle East were $720,792,000 in 1996 compared to $631,378,000 in 1995, an increase of $89,414,000 or 14%. This increase was primarily due to growth in sales of the Symmetrix series of products in the open systems storage market. During 1996 the Company opened a sales office in Israel. During 1995, the Company opened sales offices in South Africa, Sweden, Denmark, Norway and Finland. Total revenues for 1995 compare to $439,524,000 in 1994, an increase of $191,854,000 or 44%. Revenues on sales into the markets in the Asia Pacific region were $206,638,000 in 1996 compared to $141,660,000 in 1995, an increase of $64,978,000 or 46%. This increase is primarily due to growth in sales of the Symmetrix series of products in the mainframe storage market. During 1995, the Company opened sales offices in Korea and Singapore. Total revenues for 1995 compare to $72,281,000 in 1994, an increase of $69,379,000 or 96%. GROSS MARGINS Gross margins decreased to 45.1% in 1996, compared to 47.8% in 1995 and 52.1% in 1994. These decreases are primarily attributable to the impact of price declines in the mainframe and open systems storage markets being greater than the impact of cost declines in raw material components. During the second half of 1996, the rate of price declines moderated which, together with total revenue growth, increased software revenues and revenues from new Symmetrix products, resulted in an increased gross margin percentage for that period as 16 compared to the first half of 1996. Software revenues were approximately $76,438,000 in 1996. Software revenues were not significant in 1995. In 1995, cost of goods sold included one-time charges of approximately $31,000,000, net of tax, relating to end-of-life products and other inventory. The Company currently believes that price declines will continue. RESEARCH AND DEVELOPMENT Research and development ("R&D") expenses were $161,088,000, $162,611,000 and $117,922,000 in 1996, 1995 and 1994, respectively. As a percentage of revenues, R&D expenses were 7.1%, 8.5% and 8.6% in 1996, 1995 and 1994, respectively. The decrease in R&D spending levels in 1996 over 1995 reflects the consolidation of domestic development efforts and the capitalization of software development costs primarily related to specific software products. The decrease was partially offset by the cost of additional technical staff, especially to support development for products in the open systems storage market, and depreciation expenses associated with capital equipment acquired to facilitate development. The Company expects to continue to spend substantial amounts for R&D in 1997. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative ("SG&A") expenses were $367,073,000, $320,009,000 and $249,004,000 in 1996, 1995 and 1994, respectively. As a percentage of revenues, SG&A expenses were 16.2%, 16.6% and 18.1% in 1996, 1995 and 1994, respectively. The dollar increase in 1996 over 1995 is due primarily to costs associated with additional sales and support personnel and their related overhead costs, both domestically and internationally, in connection with the Company's increased revenue levels and the Company's initiative to capture market share for its open systems storage products. The Company has expanded the international direct sales force, particularly in the Asia Pacific region, as well as OEM, alliance and partnership programs with applications, systems and database vendors. Expenses in 1995 include approximately $8,000,000 of costs related to the acquisition of McDATA. SG&A expenses are expected to increase in dollar terms during 1997. INVESTMENT INCOME AND INTEREST EXPENSE Investment income increased to $34,476,000 in 1996 from $23,620,000 in 1995 and $21,619,000 in 1994. Interest income was earned primarily from investments in cash equivalents and investments. Investment income increased in 1996 over 1995 primarily due to higher average cash and investment balances primarily generated from operations. Interest expense decreased to $11,967,000 in 1996, from $12,857,000 in 1995 and $15,311,000 in 1994. The decrease in 1996 from 1995 is primarily due to conversions of the Debentures in April 1995. Interest expense in 1996 was primarily due to the 4 1/4% Notes, all of which were converted to Common Stock by January 2, 1997. PROVISION FOR TAXES The provision for income taxes was $133,245,000 in 1996, $123,976,000 in 1995 and $104,716,000 in 1994, respectively, which resulted in effective tax rates of 25.7%, 27.5% and 29.5% in 1996, 1995 and 1994, respectively. The decrease in the effective tax rate is mainly attributable to the realization of benefits associated with the continued progress on the Company's various tax strategies and benefits related to offshore manufacturing. FINANCIAL CONDITION Cash and cash equivalents and short and long-term investments were $840,858,000 and $504,904,000 at December 31, 1996 and December 30, 1995, respectively, an increase of $335,954,000. In 1996, cash and cash equivalents increased by $116,749,000. Cash provided by operating activities was $483,375,000. This was primarily generated from net income and working capital management. Cash used by investing activities was $374,763,000 principally for additions to 17 property, plant and equipment and the purchase of investments. Cash provided by financing activities was $8,718,000, principally due to proceeds from stock option exercises offset by repurchases of Common Stock. In November 1996, the Board of Directors rescinded the program under which Common Stock had been repurchased during 1996. In November 1996, the Company announced that it would redeem on January 1, 1997 all outstanding 4 1/4% Notes. The aggregate principal amount of the 4 1/4% Notes outstanding at the time of announcement was $229,498,000. The 4 1/4% Notes, issued by EMC in December 1993 and January 1994 in an amount totaling $230 million, were generally convertible into shares of Common Stock of the Company at any time prior to the redemption date at a conversion price of $19.84 per share. At December 31, 1996, the holders of approximately $87 million principal amount had elected to convert the 4 1/4% Notes to Common Stock. On January 2, 1997, the Company paid approximately $65,000 to redeem 4 1/4% Notes outstanding and the remainder converted into Common Stock. The Company has available for use its credit line of $50,000,000 and may elect to borrow at any time. In February 1997, the Company announced its intention to issue and offer for sale up to approximately $517,500,000 Convertible Subordinated Notes due 2002 in an offering exempt from the registration requirements of the Federal Securities Laws. Based on its current operating and capital expenditure forecasts, the Company believes funds currently available, funds generated from operations and its available line of credit and the net proceeds to the Company from the sale of the Notes described above will be adequate to finance its operations as well as potential acquisitions. To date, inflation has not had a material impact on the Company's financial results. The Company will adopt Statement of Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" in 1997. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The Statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company believes that adoption will not have a material effect on its financial statements. FACTORS THAT MAY AFFECT FUTURE RESULTS This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of 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 those set forth below, other one-time events and other important factors disclosed previously and from time to time in EMC's other filings at the U.S. Securities and Exchange Commission. UNEVEN PATTERN OF QUARTERLY RESULTS There has been a historic and recurring "hockey stick" pattern of the Company's quarterly sales, by which a disproportionate percentage of a quarter's total sales occur in the last month and weeks and days of each quarter, making prediction of revenues, earnings and working capital for each financial period especially difficult and uncertain and increasing the risk of unanticipated variations in quarterly results and financial condition. This pattern of sales is itself believed to be the result of many factors including the significant size of EMC's average product price in relation to its customers' budgets, resulting in long lead times for customers' budgetary approval, which tends to be given late in a quarter; the tendency of customers to wait until late in a quarter to commit to purchase in the hope of obtaining more favorable pricing from one or more competitors seeking their business; and, at times, seasonal influences, as well as the fourth quarter influence of customers' spending their remaining capital budget authorization prior to new budget constraints in the next year's first quarter. The "hockey stick" pattern of the Company's sales also makes it extremely difficult to predict near-term demand and adjust manufacturing capacity accordingly. Substantial variance of orders from the predicted 18 demand may limit the Company's ability to assemble, test and ship orders received in the last weeks and days of each quarter, which could adversely affect quarterly revenues and earnings. In addition, revenues in any quarter are substantially dependent on orders booked and shipped in that quarter and the Company's backlog at any particular time is not necessarily indicative of future sales levels. This is because the Company manufactures its products on the basis of its forecast of near-term demand and maintains inventory in advance of receipt of firm orders from customers; orders are generally shipped by the Company shortly after receipt of the order; and customers may reschedule orders with little or no penalty. These are additional factors making the prediction of revenues extremely difficult. Further, any unexpected decline in revenues without a corresponding and timely slowdown in expenses could have a material adverse effect on the Company's business, results of operations or financial condition. COMPETITION There is strong competition in the computer data storage industry. EMC competes with many companies in the mainframe and open systems markets, certain of which have substantially greater financial and technological resources, larger distribution capabilities, earlier access to customers and greater overall customer loyalty than EMC. In the mainframe market, EMC competes primarily with IBM. In the open systems market, the Company's primary competition is provided by systems vendors, including IBM, DEC and Sun. In the Company's opinion, the major competitive advantage of the open systems vendors is their overall market presence and ability to provide integrated CPU, storage and software packages. EMC's business may be adversely affected by the announcement or introduction of new products by its competitors, price reductions of its competitors' equipment or services and the implementation of certain marketing strategies by its competitors. As a significant number of EMC's products are designed to be fully compatible with IBM computers and IBM operating systems, EMC's business could also be adversely affected by modifications in the design or configuration of IBM computer systems. PRICING Competitive pricing pressures exist in the computer storage market, and have had and may in the future have an adverse effect on the Company's revenues and earnings. There also has been and may continue to be a willingness on the part of certain large competitors to reduce prices in order to preserve or gain market share, which cannot be foreseen by the Company. The Company believes that pricing pressures are likely to continue as competitors develop more competitive product offerings. To date, the Company has been able to manage its component and product design costs. However, there can be no assurance that the Company will be able to continue to achieve reductions in component and product design costs. The relative and varying rates of product price and component cost declines could have an adverse effect on the Company's earnings. DEPENDENCE ON SUPPLIERS The Company purchases certain components and products from suppliers who EMC believes are currently the only suppliers of those components or products that meet EMC's requirements. Among the most important components that EMC uses are disk drives and high density memory components ("DRAMs"). Disk drives are a key component of the Company's products and the Company currently purchases substantially all of its disk drives from a single supplier. EMC purchases DRAMs from a small number of qualified suppliers. A failure by any supplier of disk drives, high density DRAMs or other components to meet EMC's delivery or quality requirements for an extended period of time could have a material adverse effect on EMC. The Company is currently transitioning its product line from use of 5.25^ 9 GB disk drives to new 3.5^ 9 GB and 5.25^ 23 GB disk drive technologies. This transition may intensify the above risks. From time to time, because of high industry demand and/or the inability of certain vendors to consistently meet on a timely basis the Company's component quality standards, the Company has experienced delays in deliveries of disk drives and high density 19 DRAMs needed to satisfy orders for its ICDA products. The Company is currently working with such vendors to proactively maintain and/or improve component quality standards and also continues to seek alternative sources of supply. If such shortages and/or performance problems were to intensify, the Company could lose some time-sensitive customer orders which could adversely affect quarterly revenues and earnings. The adverse effect of a supplier's failure to meet EMC's requirements may be intensified by the "hockey stick" pattern of the Company's sales and the necessity of meeting critical manufacturing schedules. NEW PRODUCTS Technology and user needs change rapidly in the computer data storage industry, which requires ongoing technological development and introduction of new products. Sales of the Symmetrix series of products constitute the principal source of revenues for EMC and such sales are expected to continue to be the principal source of its revenues in the near future. EMC expects competition in the sale of ICDA products to increase, and there can be no assurance that the Symmetrix series of products will continue to achieve market acceptance. Significant delays in the development of ICDA technology for future products or product enhancements would be to the advantage of EMC's competitors. Furthermore, the continued development of ICDA technology and its incorporation into EMC's future generations of products cannot be assured even with significant additional investments. Further risks inherent in new product introductions include the uncertainty of price-performance relative to products of competitors, including competitors' responses to the introductions, and the desire by customers to evaluate new, more expensive products for longer periods of time. CHANGE IN REGULATIONS The Company's business, results of operations and financial condition could be adversely affected if laws, regulations or standards relating to the Company or its products were newly implemented or changed. MANUFACTURING RISKS EMC's products operate near the limits of electronic and physical performance and are designed and manufactured with relatively small tolerances. If flaws in design, production, assembly or testing occur on the part of EMC or its suppliers, EMC may experience a rate of failure in its products that results in substantial repair or replacement costs and potential damage to EMC's reputation. Continued improvement in manufacturing capabilities and control of material and manufacturing quality and costs will be critical factors in the future growth of EMC. EMC frequently revises and updates manufacturing and test processes to address engineering and component changes to its products and evaluates the reallocation of manufacturing resources among its facilities. There can be no assurance that EMC's efforts to monitor, develop and implement appropriate test and manufacturing processes for its products, especially the Symmetrix series of products, will be sufficient to permit EMC to avoid a rate of failure in its products that results in substantial delays in shipment, significant repair or replacement costs and potential damage to EMC's reputation, any of which could have a substantial adverse effect on EMC's operations and ultimately on its financial results. INDIRECT CHANNELS OF DISTRIBUTION In 1996, the Company derived a significant percentage of its product revenues from reseller and OEM channels. A substantial portion of these reseller and OEM revenues stems from the Company's reseller agreement with HP, which currently expires in June of 1997. The Company's financial results could be adversely affected if such contracts were terminated, if the Company's relationship with such resellers or OEMs were to deteriorate or if the financial condition of its resellers and OEMs were to weaken. In addition, the Company is currently experiencing growth in the transition from the mainframe to the open systems market. In this regard, the Company may have an increased reliance on indirect channels of distribution. There can be no assurance that the Company will be successful in maintaining or expanding these indirect channels of distribution. If the Company is not successful, the Company may lose certain sales opportunities. Furthermore, the partial reliance on indirect channels of distribution may materially reduce the visibility to management of potential orders. 20 ALLIANCES Many of the Company's products are marketed in conjunction with the products of other vendors, and the Company plans to continue its strategy of developing key alliances. There can be no assurance that the Company will be successful in its ongoing strategic partnerships or that the Company will be able to find further suitable business relationships as it develops new products. Any failure to continue or expand such relationships could have a material adverse effect on the Company's business, financial condition and results of operation. There can be no assurance that the Company's distributors and strategic partners, many of which have significantly greater financial and marketing resources than the Company, will not develop and market products in competition with the Company in the future, discontinue their relationships with the Company, or form competing arrangements with the Company's competitors. INTERNATIONAL SALES A substantial portion of the Company's revenues is derived from sales outside the United States. In addition, a substantial portion of the Company's products are manufactured outside of the United States. Accordingly, the Company's future results could be adversely affected by a variety of factors, including changes in foreign currency exchange rates, changes in a specific country's or region's political or economic conditions, trade restrictions, import or export licensing requirements, the overlap of different tax structures or changes in international tax laws, changes in regulatory requirements, compliance with a variety of foreign laws and regulations and longer payment cycles in certain countries. MANAGEMENT OF GROWTH The Company has a history of rapid growth. The Company's future operating results will depend on management's ability to manage growth, continuously hire and retain significant numbers of qualified employees, forecast revenues and control expenses. An unexpected decline in the growth rate of revenues without a corresponding and timely reduction in expense growth could have a material adverse effect on the Company's business, results of operations or financial condition. DEPENDENCE UPON KEY PERSONNEL The Company's continued growth and success depends to a significant extent on the continued service of senior management and other key employees and the hiring of new qualified employees. Competition for highly-skilled personnel is intense in the high technology industry. There can be no assurance that the Company will be successful in continuously recruiting new personnel and in retaining existing personnel. The loss of one or more key employees or the Company's inability to attract additional qualified employees or retain other employees could have a material adverse effect on the Company's business, results of operations or financial condition. ENFORCEMENT OF THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS No assurance can be given that the Company's patent applications will issue as patents or that any patents that may issue will provide the Company with adequate protection for the covered products or technology. Additionally, there can be no assurance that the Company's confidentiality agreements will adequately protect its trade secrets, know-how or other proprietary information. Further, there can be no assurance that the Company's activities will not infringe on the patents or proprietary rights of others or that the Company will be able to obtain licenses to any technology that it may require to conduct its business or that, if obtainable, such technology can be licensed at a reasonable cost. Although the Company has significantly increased its patents and patent applications, the rapidly changing technology of the computer industry makes EMC's future success dependent upon the technical competence and creative skills of its personnel rather than on existing patent protection. 21 RISKS ASSOCIATED WITH FUTURE ACQUISITIONS As part of its business strategy, the Company may make acquisitions of, or significant investments in, businesses that offer complementary products, services and technologies. Any such future acquisitions or investments would be accompanied by the risks commonly encountered in an acquisition of a business. Such risks include, among other things, the difficulty of assimilating the operations and personnel of the acquired business, the inability of management to maximize the financial and strategic position of the Company through the successful incorporation of acquired personnel and customers, the maintenance of uniform standards, controls, procedures and policies and the impairment of relationships with employees and customers as a result of any integration of new management personnel. These factors could have a material adverse effect on the Company's business, results of operations or financial condition. The Company expects that the consideration paid for future acquisitions, if any, could be in the form of cash, stock, rights to purchase stock or a combination thereof. Dilution to existing stockholders and to earnings per share may result to the extent that shares of stock or other rights to purchase stock are issued in connection with any such future acquisitions. VOLATILITY OF STOCK PRICE The Company's stock price, like that of other technology companies, is subject to significant volatility. The announcement of new products, services or technological innovations by the Company or its competitors, quarterly variations in the Company's results of operations, changes in revenue or earnings estimates by the investment community and speculation in the press or investment community are among the factors affecting the Company's stock price. In addition, the stock price may be affected by general market conditions and domestic and international economic factors unrelated to the Company's performance. Because of these reasons, recent trends should not be considered reliable indicators of future stock prices or financial results. 22 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and the Board of Directors of EMC Corporation: We have audited the accompanying consolidated balance sheets of EMC Corporation as of December 31, 1996 and December 30, 1995, and the related consolidated statements of income, cash flows and stockholders' equity and the financial statement schedule for each of the three years in the period ended December 31, 1996. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of EMC Corporation as of December 31, 1996 and December 30, 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Boston, Massachusetts January 23, 1997 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EMC CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, DECEMBER 30, 1996 1995 ------------ ------------ ASSETS Current assets: Cash and cash equivalents........................... $ 496,377 $ 379,628 Short-term investments.............................. 230,981 -- Trade and notes receivable less allowance for doubtful accounts of $7,368 and $7,062, respectively....................................... 627,409 550,473 Inventories......................................... 336,581 330,160 Deferred income taxes............................... 43,421 44,061 Other assets........................................ 19,367 14,633 ---------- ---------- Total current assets................................. 1,754,136 1,318,955 Long-term investments................................ 113,500 125,276 Notes receivable, net................................ 20,013 26,497 Property, plant and equipment, net................... 276,387 218,901 Deferred income taxes................................ 16,664 9,200 Intangible assets, net............................... 52,382 20,078 Other assets......................................... 60,464 26,822 ---------- ---------- Total assets...................................... $2,293,546 $1,745,729 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations............ $ 7,058 $ 915 Accounts payable.................................... 172,871 111,721 Accrued expenses.................................... 122,562 130,596 Income taxes payable................................ 104,899 107,717 Deferred revenue.................................... 10,112 8,411 ---------- ---------- Total current liabilities............................ 417,502 359,360 Deferred revenue..................................... 2,019 223 Deferred income taxes................................ 46,002 -- Long-term obligations: 4 1/4% convertible subordinated notes due 2001...... 142,720 229,598 Notes payable and other noncurrent liabilities...... 48,514 16,247 ---------- ---------- Total liabilities.................................... 656,757 605,428 ---------- ---------- Commitments and contingencies Stockholders' equity: Series Preferred Stock, par value $.01; authorized 25,000,000 shares, none outstanding................ -- -- Common Stock, par value $.01; authorized 500,000,000 shares; issued 238,239,672 and 232,517,845, in 1996 and 1995, respectively............................. 2,382 2,325 Additional paid-in capital.......................... 463,687 350,989 Deferred compensation............................... (7,027) (2,140) Retained earnings................................... 1,172,828 786,599 Cumulative translation adjustment................... 4,919 3,766 Treasury stock, at cost, none and 2,646,453 shares in 1996 and 1995, respectively..................... -- (1,238) ---------- ---------- Total stockholders' equity........................ 1,636,789 1,140,301 ---------- ---------- Total liabilities and stockholders' equity...... $2,293,546 $1,745,729 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 24 EMC CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED -------------------------------------- DECEMBER 31, DECEMBER 30, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ Revenues: Net sales............................ $2,218,292 $1,878,215 $1,343,065 Service and rental................... 55,360 43,060 34,427 ---------- ---------- ---------- 2,273,652 1,921,275 1,377,492 Costs and expenses: Cost of sales and service............ 1,248,950 1,002,876 660,034 Research and development............. 161,088 162,611 117,922 Selling, general and administrative.. 367,073 320,009 249,004 ---------- ---------- ---------- Operating income....................... 496,541 435,779 350,532 Investment income...................... 34,476 23,620 21,619 Interest expense....................... (11,967) (12,857) (15,311) Other income/(expense), net............ 424 4,279 (1,456) ---------- ---------- ---------- Income before taxes.................... 519,474 450,821 355,384 Income tax provision................... 133,245 123,976 104,716 ---------- ---------- ---------- Net income............................. $ 386,229 $ 326,845 $ 250,668 ========== ========== ========== Net income per weighted average share, primary............................... $ 1.57 $ 1.36 $ 1.18 ========== ========== ========== Net income per weighted average share, fully diluted......................... $ 1.56 $ 1.34 $ 1.10 ========== ========== ========== Weighted average shares, primary....... 249,295 245,386 218,046 Weighted average shares, fully diluted............................... 251,431 248,296 234,255
The accompanying notes are an integral part of the consolidated financial statements. 25 EMC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEAR ENDED -------------------------------------- DECEMBER 31, DECEMBER 30, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ Cash flows from operating activities: Net income.............................. $ 386,229 $ 326,845 $ 250,668 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Depreciation and amortization.......... 86,949 53,617 32,728 Deferred income taxes, net............. 39,178 (6,587) (18,267) Net loss on disposal of property and equipment............................. 1,125 635 262 Tax benefit from stock options exercised............................. 17,746 11,165 26,698 Changes in assets and liabilities: Trade and notes receivable............ (69,103) (156,719) (221,708) Inventories........................... (6,480) (74,351) (133,159) Other assets.......................... (24,433) (30,984) (19,526) Accounts payable...................... 61,458 (16,061) 78,698 Accrued expenses...................... (9,955) 22,432 46,448 Income taxes payable.................. (2,836) 49,275 34,629 Deferred revenue...................... 3,497 (1,889) (65) --------- --------- --------- Net cash provided by operating activities.......................... 483,375 177,378 77,406 --------- --------- --------- Cash flows from investing activities: Additions to property, plant and equipment.............................. (125,973) (92,200) (108,968) Proceeds from sales of property and equipment.............................. 1,441 39 445 Capitalized software development costs.. (24,693) (5,000) -- Purchase of patents..................... (6,333) -- -- Maturity of short-term and long-term investments............................ 206,061 67,284 18,478 Purchase of short-term and long-term investments............................ (425,266) (16,929) (143,717) --------- --------- --------- Net cash used by investing activities.......................... (374,763) (46,806) (233,762) --------- --------- --------- Cash flows from financing activities: Issuance of common stock................ 33,181 19,438 9,596 Purchase of treasury stock.............. (27,457) (415) (320) Issuance of 4 1/4% convertible subordinated notes due 2001, net of issuance costs......................... -- -- 29,350 Payment of long-term and short-term obligations............................ (1,295) (10,735) (1,272) Issuance of long-term and short-term obligations............................ 4,289 545 11,715 --------- --------- --------- Net cash provided by financing activities.......................... 8,718 8,833 49,069 --------- --------- --------- Effect of exchange rate changes on cash.. (581) (283) 2,493 Net increase/(decrease) in cash and cash equivalents............................. 117,330 139,405 (107,287) Cash and cash equivalents at beginning of period.................................. 379,628 240,506 345,300 --------- --------- --------- Cash and cash equivalents at end of period.................................. $ 496,377 $ 379,628 $ 240,506 ========= ========= ========= Non-cash activity--conversions of debentures and notes.................... $ 85,636 $ 39,535 $ 19,726 --patents acquired by notes and other payables................... $ 37,416 -- --
The accompanying notes are an integral part of the consolidated financial statements. 26 EMC CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996 -------------------------------------------------------------------------------------------------- COMMON STOCK TREASURY STOCK ------------------ ADDITIONAL DEFERRED CUMULATIVE -------------------- TOTAL PAR PAID-IN COMPEN- RETAINED TRANSLATION STOCKHOLDERS' SHARES VALUE CAPITAL SATION EARNINGS ADJUSTMENT SHARES COST EQUITY ----------- ------ ---------- -------- ---------- ----------- ---------- -------- ------------- Balance January 1, 1994................. 189,936,120 $1,899 $226,668 $(3,552) $ 193,045 $1,537 2,607,996 $ (503) $ 419,094 Exercise of stock options............. 5,361,342 54 8,548 -- -- -- -- -- 8,602 Tax benefit from stock options exercised........... -- -- 26,698 -- -- -- -- -- 26,698 Grant of stock options............. -- -- 49 (49) -- -- -- -- -- Issuance of common stock pursuant to bond and note conversions......... 6,440,580 64 19,662 -- -- -- -- -- 19,726 Amortization of deferred compensation........ -- -- -- 994 -- -- -- -- 994 Purchase of treasury stock............... -- -- -- -- -- -- 19,471 (320) (320) Cumulative translation adjustment.......... -- -- -- -- -- 2,179 -- -- 2,179 Net income........... -- -- -- -- 250,668 -- -- -- 250,668 ----------- ------ -------- ------- ---------- ------ ---------- -------- ---------- Balance, December 31, 1994................. 201,738,042 2,017 281,625 (2,607) 443,713 3,716 2,627,467 (823) 727,641 ----------- ------ -------- ------- ---------- ------ ---------- -------- ---------- Pooling of interests with McDATA Corporation......... 13,567,112 136 1,794 -- 16,041 -- -- -- 17,971 ----------- ------ -------- ------- ---------- ------ ---------- -------- ---------- Balance as restated.. 215,305,154 2,153 283,419 (2,607) 459,754 3,716 2,627,467 (823) 745,612 ----------- ------ -------- ------- ---------- ------ ---------- -------- ---------- Exercise of stock options............. 4,303,305 43 16,454 -- -- -- -- -- 16,497 Tax benefit from stock options exercised........... -- -- 11,165 -- -- -- -- -- 11,165 Grant of stock options............. -- -- 545 (545) -- -- -- -- -- Issuance of common stock pursuant to bond conversions.... 12,909,386 129 39,406 -- -- -- -- -- 39,535 Amortization of deferred compensation........ -- -- -- 1,012 -- -- -- -- 1,012 Purchase of treasury stock............... -- -- -- -- -- -- 18,986 (415) (415) Cumulative translation adjustment.......... -- -- -- -- -- 50 -- -- 50 Net income........... -- -- -- -- 326,845 -- -- -- 326,845 ----------- ------ -------- ------- ---------- ------ ---------- -------- ---------- Balance, December 30, 1995................. 232,517,845 2,325 350,989 (2,140) 786,599 3,766 2,646,453 (1,238) 1,140,301 ----------- ------ -------- ------- ---------- ------ ---------- -------- ---------- Exercise of stock options............. 1,342,896 13 2,422 -- -- -- (3,946,453) 28,695 31,130 Tax benefit from stock options exercised........... -- -- 17,746 -- -- -- -- -- 17,746 Grant of stock options............. -- -- 6,938 (6,938) -- -- -- -- -- Issuance of common stock pursuant to bond conversions.... 4,378,931 44 85,592 -- -- -- -- -- 85,636 Amortization of deferred compensation........ -- -- -- 2,051 -- -- -- -- 2,051 Purchase of treasury stock............... -- -- -- -- -- -- 1,300,000 (27,457) (27,457) Cumulative translation adjustment.......... -- -- -- -- -- 1,153 -- -- 1,153 Net income........... -- -- -- -- 386,229 -- -- -- 386,229 ----------- ------ -------- ------- ---------- ------ ---------- -------- ---------- Balance, December 31, 1996................. 238,239,672 $2,382 $463,687 $(7,027) $1,172,828 $4,919 -- -- $1,636,789 =========== ====== ======== ======= ========== ====== ========== ======== ==========
The accompanying notes are an integral part of the consolidated financial statements. 27 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. COMPANY EMC Corporation and its subsidiaries ("EMC" or the "Company") design, manufacture, market and support a wide range of storage-related hardware and software products and related services for the mainframe, open systems and network attached computer storage markets worldwide. These products are sold as storage solutions for customers utilizing a variety of computer system platforms including, but not limited to, International Business Machines Corporation ("IBM") and IBM-compatible mainframe, Unisys Corporation ("Unisys"), Compagnie des Machines Bull S.A. ("Bull"), Hewlett-Packard Company ("HP"), NCR Corporation ("NCR"), Sequent Computer Systems, Inc. ("Sequent") and other open systems platforms. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated. Basis of Presentation On September 23, 1996, EMC elected to change its fiscal year end from a fiscal basis which would have ended on December 28, 1996 to a calendar year end basis ending on December 31, 1996. This change was reported on Form 8-K on October 4, 1996. The effect on the Company's results of operations was not material. Certain prior year amounts have been reclassified to conform with the 1996 presentation. Use of Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reporting period and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Acquisitions In December 1995, EMC exchanged 13,567,112 shares of EMC common stock, $.01 par value (the "Common Stock") for all of the outstanding stock and stock options exercisable as of the closing date of McDATA Corporation ("McDATA"), a leader in data network switching solutions. The business combination was accounted for as a pooling of interests. The accompanying financial statements for periods prior to 1995 do not include the amounts for this acquisition as they were deemed to be immaterial. Only 1995 financial information has been restated as if the transaction had occurred as of January 1, 1995. Separate company results for 1995 before the combinations were consummated were as follows:
PERIOD ENDED DECEMBER 6, 1995 ------------------------------- REVENUES NET INCOME --------------- --------------- EMC.......................................... $ 1,402,059,000 $ 197,303,000 McDATA....................................... 148,253,000 41,748,000 --------------- ------------- Total...................................... $ 1,550,312,000 $ 239,051,000 =============== =============
The Company acquired several other companies in the last three years, all accounted for using the purchase method, which were not significant to its financial position or results of operations. Under the purchase method, 28 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the results of operations of acquired companies are included prospectively from the date of acquisition, and the acquisition cost is allocated to the acquirees' assets and liabilities based upon their fair market values at the date of acquisition. At December 31, 1996 and December 30, 1995 the net book value of goodwill associated with acquisitions was $12,870,000 and $15,070,000, respectively. Goodwill is being amortized on a straight line basis over five years and is included in intangible assets, net. Accumulated amortization was $6,996,000 and $3,186,000 on December 31, 1996 and December 30, 1995, respectively. The Company implemented Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in 1996. This standard prescribes the method for asset impairment evaluation for long-lived assets and certain identifiable intangibles that are either held and used or to be disposed of based upon the excess of the carrying amount of such assets over their fair values. The Company was generally in conformance with this standard prior to adoption and therefore the implementation did not have a material effect on its financial statements. Revenue Recognition The Company generally recognizes revenue from product sales at the time the products are shipped provided no significant vendor obligations remain and the resulting receivable is deemed collectible by management. Upon shipment, the Company provides for estimated product returns and the estimated cost that may be incurred for product warranties. Revenue from rentals is recorded on a monthly basis over the life of the contracts. Revenue from sales-type leases is recognized at the net present value of expected future payments. Service revenue is recognized over the contractual period or as services are rendered. Foreign Currency Translation The local currency is the functional currency of sales operations in Canada, South America, Europe, South Africa and the Asia Pacific region (except Hong Kong). Assets and liabilities of these operations are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the period, except for inventories and property, plant and equipment which are translated at historical exchange rates. The Company's operations in Ireland, Israel and Hong Kong are generally dependent on the U.S. dollar. Consolidated transaction results included in other income/(expense), net were gains of $1,044,000 in 1996 and $1,667,000 in 1995, and losses of $1,072,000 in 1994. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments with a remaining maturity of ninety days or less at the time of purchase. These investments are stated at cost plus accrued interest, which approximates market. Investments The Company's investments are comprised primarily of debt securities which are held-to-maturity. Investments with remaining maturities of less than twelve months from the balance sheet date are classified as short-term investments. Investments with remaining maturities of more than twelve months from the balance sheet date are classified as long-term investments. 29 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Statement of Cash Flows Supplemental Information
1996 1995 1994 ----------- ----------- ----------- Cash paid for: Income taxes......................... $78,651,000 $70,389,000 $76,539,000 Interest............................. 11,428,000 12,965,000 10,854,000
Inventories Inventories are stated at the lower of cost (first in, first out) or market, not in excess of net realizable value. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, as follows: Furniture and fixtures.................................. 7 years Equipment............................................... 3-7 years Transportation equipment................................ 5-10 years Improvements............................................ 5 years Buildings............................................... 25-31 1/2 years
When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed from the accounts and the related gains or losses are included in operations. Capitalized Software Development Costs Research and development costs are expensed as incurred. Software development costs incurred subsequent to establishment of technological feasibility through the general release of the software products are capitalized. Technological feasibility is demonstrated by the completion of a detailed program design. Such costs are amortized on a straight-line basis over two years. Unamortized software development costs were approximately $22,508,000 and $5,000,000 at December 31, 1996 and December 30, 1995, respectively, and are included in other assets, noncurrent. In 1996 amortization expense was $7,185,000. No amortization expense was recorded in 1995. Income Taxes Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse (see Note H). Tax credits are generally recognized as reductions of income tax provisions in the year in which the credits arise. The Company does not provide for U.S. income tax liability on undistributed earnings of its foreign subsidiaries, except Puerto Rico. All income and tollgate tax obligations for the Company's Puerto Rican subsidiary ("EMC Caribe") were settled in 1996. The earnings of non-U.S. subsidiaries, which reflect full provision for non-U.S. income taxes, are indefinitely reinvested in non-U.S. operations or will be remitted substantially free of additional tax. Accordingly, no material provision has been made for taxes that might be payable upon remittance of such non-U.S. earnings. 30 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Net Income Per Share Net income per share was computed on the basis of weighted average common and dilutive common share equivalents outstanding. Weighted average shares outstanding and earnings used in the per share computations reflect the dilutive effects of stock options, the Company's 4 1/4% Convertible Subordinated Notes due 2001 (the "Notes") and 6 1/4% Convertible Subordinated Debentures due 2002 (the "Debentures"). Net income for computation of earnings per share includes an add back of $5,296,000, $6,224,000 and $7,620,000 for fully diluted and $5,296,000, $5,855,000 and $5,838,000 for primary, in 1996, 1995 and 1994, respectively, representing interest expense on the Notes and Debentures, net of its tax effect. C. INVESTMENTS The following tables summarize the composition of the Company's short and long-term investments and includes cash equivalents of $256,943,000 and $168,614,000 at December 31, 1996 and December 30, 1995, respectively.
DECEMBER 31, 1996 ------------------------- AMORTIZED AGGREGATE COST BASIS FAIR VALUE ------------ ------------ U.S. corporate debt securities....................... $412,318,000 $412,137,000 U.S. government and agencies......................... 100,231,000 100,418,000 Foreign debt securities.............................. 88,875,000 89,617,000 ------------ ------------ Total.............................................. $601,424,000 $602,172,000 ============ ============ DECEMBER 30, 1995 ------------------------- AMORTIZED AGGREGATE COST BASIS FAIR VALUE ------------ ------------ U.S. corporate debt securities....................... $259,288,000 $260,171,000 U.S. government and agencies......................... 24,602,000 24,653,000 Foreign debt securities.............................. 10,000,000 10,075,000 ------------ ------------ Total.............................................. $293,890,000 $294,899,000 ============ ============
The contractual maturities of investments and cash equivalents held at December 31, 1996 and December 30, 1995 are as follows:
DECEMBER 31, 1996 ------------------------- AMORTIZED AGGREGATE COST BASIS FAIR VALUE ------------ ------------ Due within one year.................................. $487,924,000 $488,220,000 Due after one year through five years................ 111,648,000 112,104,000 Due after five years through ten years............... -- -- Due after ten years.................................. 1,852,000 1,848,000 ------------ ------------ Total.............................................. $601,424,000 $602,172,000 ============ ============
31 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 30, 1995 ------------------------- AMORTIZED AGGREGATE COST BASIS FAIR VALUE ------------ ------------ Due within one year.................................. $168,614,000 $168,614,000 Due after one year through five years................ 109,424,000 110,412,000 Due after five years through ten years............... 14,102,000 14,027,000 Due after ten years.................................. 1,750,000 1,846,000 ------------ ------------ Total.............................................. $293,890,000 $294,899,000 ============ ============
The net unrealized gain of $748,000 at December 31, 1996 consisted of gross unrealized gains of $1,241,000 and gross unrealized losses of $493,000. The net unrealized gain of $1,009,000 at December 30, 1995 consisted of gross unrealized gains of $1,372,000 and gross unrealized losses of $363,000. Investment income consists principally of interest income, including interest on notes receivable from sales-type leases. D. INVENTORY Inventories consist of:
DECEMBER 31, DECEMBER 30, 1996 1995 ------------ ------------ Purchased parts.................................. $ 16,610,000 $ 22,870,000 Work-in-process.................................. 210,445,000 150,216,000 Finished goods................................... 109,526,000 157,074,000 ------------ ------------ $336,581,000 $330,160,000 ============ ============
The Company wrote off approximately $31,000,000, net of tax, of inventory in the fourth quarter of 1995, primarily relating to end-of-life products and other inventory, and other inventory-related adjustments. E. LEASING TRANSACTIONS Notes receivable are primarily from installment sales of the Company's products. The payment schedule for such notes at December 31, 1996 is as follows: 1997.......................................................... $19,845,000 1998.......................................................... 12,224,000 1999.......................................................... 10,501,000 2000.......................................................... 3,220,000 2001.......................................................... 967,000 ----------- Face value.................................................... 46,757,000 Less amounts representing interest............................ 5,863,000 ----------- Present value................................................. 40,894,000 Current portion............................................... 20,881,000 ----------- Long-term portion............................................. $20,013,000 ===========
Implicit interest rates range from approximately 8% to 9%. 32 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Actual cash collections may differ, however, due to customer early buyouts, upgrades and refinancings. The Company receives proceeds for its sales-type leases through third-party financing arrangements with various financial institutions on a nonrecourse basis, which may be either collateralized by a lien on the equipment, which is returned to the Company at the end of the lease, or title to the equipment may pass to the funding source at the time of financing. Residuals values recorded by the Company for equipment under leases at December 31, 1996 and December 30, 1995 were $24,602,000 and $10,871,000, respectively, and are included in other assets, noncurrent. F. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of:
DECEMBER 31, DECEMBER 30, 1996 1995 ------------ ------------ Furniture and fixtures......................... $ 11,498,000 $ 8,950,000 Equipment...................................... 313,283,000 260,882,000 Transportation equipment....................... 8,821,000 873,000 Buildings and improvements..................... 76,427,000 53,748,000 Land........................................... 2,964,000 1,870,000 Construction in progress....................... 43,988,000 20,273,000 ------------ ------------ 456,981,000 346,596,000 Accumulated depreciation....................... (180,594,000) (127,695,000) ------------ ------------ $276,387,000 $218,901,000 ============ ============
G. ACCRUED EXPENSES Accrued expenses consist of:
DECEMBER 31, DECEMBER 30, 1996 1995 ------------ ------------ Salaries and benefits........................... $ 62,617,000 $ 67,007,000 Warranty........................................ 20,870,000 17,798,000 Other........................................... 39,075,000 45,791,000 ------------ ------------ $122,562,000 $130,596,000 ============ ============
H. INCOME TAXES The Company's provision for income taxes consists of:
1996 1995 1994 ------------ ------------ ------------ Federal and state Current...................... $ 88,208,000 $123,927,000 $108,459,000 Deferred..................... 39,394,000 (5,867,000) (18,421,000) ------------ ------------ ------------ 127,602,000 118,060,000 90,038,000 ------------ ------------ ------------ Foreign Current...................... 5,859,000 6,636,000 14,524,000 Deferred..................... (216,000) (720,000) 154,000 ------------ ------------ ------------ 5,643,000 5,916,000 14,678,000 ------------ ------------ ------------ Total provision for income taxes......................... $133,245,000 $123,976,000 $104,716,000 ============ ============ ============
33 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Net undistributed earnings of foreign subsidiaries at December 31, 1996 and December 30, 1995 approximated $545,945,000 and $388,411,000, respectively. Based on the Company's policy of indefinite reinvestment in non-U.S. operations, it is not currently practicable to determine the tax liability associated with the repatriation of these earnings. Income before income taxes for foreign operations for 1996, 1995 and 1994 approximated $163,177,000, $172,933,000 and $152,363,000, respectively. A reconciliation of the Company's income tax provision to the statutory federal tax rate is as follows:
1996 1995 1994 ----- ---- ---- Statutory federal tax rate.............................. 35.0% 35.0% 35.0% State taxes, net of federal tax benefits................ 3.0 3.6 2.6 International tax benefits.............................. (10.8) (8.5) (7.2) Tax credits............................................. (.8) (1.4) (.7) Other................................................... (.7) (1.2) (.2) ----- ---- ---- 25.7% 27.5% 29.5% ===== ==== ====
The Company's manufacturing facility in Ireland incurs a 10% tax rate on income from manufacturing operations until the year 2010. The Company's Puerto Rico operation ("EMC Caribe") benefited from a ten year exemption which expired in 1995, on up to 90% of its income as a result of the Company's Grant of Industrial Tax Exemption issued by the Commonwealth of Puerto Rico. EMC Caribe ceased manufacturing operations in February 1994 and was liquidated in January 1997. The components of the current and noncurrent deferred tax assets and liabilities as of December 31, 1996 and December 30, 1995 were as follows:
1996 1995 ------------ ----------- Current deferred tax assets/(liabilities): Accounts receivable........................... $ 11,517,000 $10,499,000 Inventory..................................... 16,336,000 27,580,000 Other liabilities............................. 7,440,000 5,793,000 Other assets.................................. 8,128,000 8,273,000 Puerto Rico tollgate tax...................... -- (8,084,000) ------------ ----------- Total current deferred tax assets........... $ 43,421,000 $44,061,000 ============ =========== Noncurrent deferred tax assets: Fixed assets.................................. 4,852,000 2,756,000 Intangible assets............................. 4,069,000 -- Net operating loss carryforwards.............. 10,933,000 9,984,000 Research and development credit carryforward.. 1,342,000 1,144,000 Other......................................... 2,830,000 2,113,000 Valuation reserve............................. (7,362,000) (6,797,000) ------------ ----------- Subtotal...................................... 16,664,000 9,200,000 ------------ ----------- Deferral of lease revenue..................... (37,082,000) -- Software development costs.................... (8,920,000) -- ------------ ----------- Subtotal...................................... (46,002,000) -- ------------ ----------- Total noncurrent deferred tax assets/(liabilities)....................... $(29,338,000) $ 9,200,000 ============ ===========
34 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The valuation allowance on December 31, 1996 and December 30, 1995 provided reserves against non-U.S. operating loss carryforwards which may expire before the Company can utilize them. The realization of the remaining deferred tax assets is more likely than not. The Company has net operating loss carryforwards as of December 31, 1996 which are summarized as follows:
CARRYFORWARD PERIOD APPROXIMATE VALUE DURING WHICH LOSSES COUNTRY IN U.S. DOLLARS WILL EXPIRE ------- ----------------- ------------------- France............................... $15,867,000 5 years/1997-1999 Japan................................ 2,756,000 5 years/1999-2000 United States........................ 9,155,000 15 years/2002-2008
The U.S. losses relate to the pre-acquisition losses of companies acquired. The losses in France relate to a wholly-owned subsidiary of EMC in France and the losses of Japan relate to a 95% owned subsidiary of EMC in Japan. The Company is currently undergoing an examination of its 1992, 1993 and 1994 tax returns by the Internal Revenue Service. The Company believes its financial position appropriately reflects its income tax obligations. I. EMPLOYEE COMPENSATION PLANS The Company has established a deferred compensation program for certain employees which is qualified under Section 401(k) of the federal tax laws. The Company intends, at the end of each calendar quarter, to make a contribution that matches 100% of the employee's contribution up to a maximum of 2% of the employee's quarterly compensation. Additionally, provided that certain quarterly profit goals are attained, the Company in succeeding quarters, will provide an additional matching contribution of 1% of the employee's quarterly compensation up to a maximum quarterly matching contribution not to exceed 5% of compensation. However, the Company's matching contribution per participant has a quarterly limit of $500. The Company's contribution amounted to approximately $3,836,000 in 1996, $3,124,000 in 1995 and $2,277,000 in 1994, pursuant to this formula. Costs associated with certain postretirement or postemployment benefit plans other than plans that exist in certain foreign subsidiaries as required by law are not significant. J. COMMITMENTS AND LONG-TERM OBLIGATIONS Operating Lease Commitments The Company leases office and warehouse facilities under various operating leases. Facilities rent expense amounted to $12,196,000, $11,095,000, and $10,277,000 in 1996, 1995 and 1994, respectively. The Company's commitments under its operating leases are as follows:
OPERATING FISCAL YEAR LEASES ----------- ------------ 1997......................................................... $ 43,690,000 1998......................................................... 33,722,000 1999......................................................... 14,242,000 2000......................................................... 4,418,000 2001......................................................... 3,397,000 Thereafter................................................... 10,686,000 ------------ Total minimum lease payments................................. $110,155,000 ============
35 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Lines of Credit EMC has a line of credit providing a maximum of $50,000,000 at LIBOR plus 30 basis points. At December 31, 1996 and December 30, 1995, there were no borrowings outstanding. The Company must maintain certain minimum financial ratios including a minimum level of working capital and tangible net worth upon utilization of the line of credit. 4 1/4% Notes In November 1996, the Company announced that it would redeem on January 1, 1997 all outstanding 4 1/4% convertible subordinated notes due 2001 (the "Notes"). The aggregate principal amount of the Notes at the time of announcement was $229,498,000. The Notes, issued by EMC in December 1993 and January 1994 in an amount totaling $230 million, were generally convertible into shares of Common Stock of the Company at any time prior to the redemption date at a conversion price of $19.84 per share. At December 31, 1996, the holders of approximately $87 million principal amount had elected to convert the Notes to common stock. On January 2, 1997, the Company paid approximately $65,000 to redeem Notes outstanding and the remainder converted into Common Stock. Long-Term Obligations The Company has a $14,000,000 mortgage collateralized by the Company's primary U.S. manufacturing facility. The mortgage is payable in monthly installments, calculated on a 30 year amortization schedule at 10.5%, with a lump sum payment of approximately $12,835,000 due on April 1, 1999. IDA Grant The Industrial Development Authority ("IDA") of Ireland has granted the Company a total of $5,189,000 towards the purchase price and improvements to the Company's facility in Ireland. The grants are included in long-term obligations and are amortized over the related estimated useful lives of the assets purchased of twenty-five years for building improvements and seven years for purchase equipment. Remaining unamortized grants at December 31, 1996 are $4,555,000, of which $324,000 is current and $4,231,000 is long-term. Purchase of Patent Portfolio In February 1996, the Company acquired a patent portfolio valued at $40 million. Payments of $5 million have been made to date with the remainder due in annual installments over five years. The asset is being amortized over the estimated useful life of five years and is included in intangible assets, net. Accumulated amortization at December 31, 1996 was approximately $7,333,000. 36 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Payments remaining on the above commitments and other noncurrent liabilities (excluding the IDA grant) are as follows:
FISCAL YEAR ----------- 1997.......................................................... $ 8,169,000 1998.......................................................... 11,746,000 1999.......................................................... 20,140,000 2000.......................................................... 7,010,000 2001.......................................................... 7,000,000 ----------- Total minimum payments........................................ 54,065,000 Less amounts representing interest............................ 3,048,000 ----------- Present value of net payments................................. 51,017,000 Current portion............................................... 6,734,000 ----------- Long-term portion............................................. $44,283,000 ===========
K. STOCKHOLDERS' EQUITY Preferred Stock The Company's Series Preferred Stock may be issued from time to time in one or more series, with such terms as the Board of Directors may determine, without further action by the stockholders of the Company. Common Stock Repurchase Program In January 1996, the Company's Board of Directors authorized the repurchase of up to 15 million shares of the Company's Common Stock over a five year period. As of December 31, 1996, the Company had repurchased 1,300,000 shares of Common Stock for approximately $27,000,000, all of which has been reissued in connection with stock option exercises. In November 1996, the Company announced that its Board of Directors had rescinded the program to avoid any potential issues regarding pooling of interests treatment. Stock Option Plans The Board of Directors and stockholders adopted the EMC Corporation 1993 and 1985 Stock Option Plans (the "1993 Plan" and the "1985 Plan," respectively) to provide qualified incentive stock options and nonqualified stock options to key employees. A total of 8,000,000 and 36,000,000 shares of Common Stock have been reserved for issuance under the 1993 Plan and the 1985 Plan, respectively. Under the terms of the 1993 Plan and the 1985 Plan, the exercise price of incentive stock options issued must be equal to at least the fair market value of the Common Stock at the date of grant. In the event that nonqualified stock options are granted under the 1993 Plan, the exercise price may be less than the fair market value at the time of grant but not less than par value which is $.01 per share. In the event that nonqualified stock options are granted under the 1985 Plan, the exercise price may be less than the fair market value at the time of grant, but in the case of employees not subject to Section 16 of the Securities Exchange Act of 1934 ("Section 16") not less than par value which is $.01 per share, and in the case of employees subject to Section 16, not less than 50% of the fair market value at the time of grant. Since May 1995, no new incentive stock options have been available for grant under the 1985 Plan. 37 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In 1996, an officer was granted options to purchase 250,000 shares of Common Stock at $9.25, representing 50% of the per share fair market value at the date of grant and vesting over five years. In 1994, an employee was granted options to purchase 5,000 shares of Common Stock at $9.94, representing 50% of the per share fair market value at the date of grant and vesting over five years. Discounts from fair market value have been recorded as deferred compensation and are being amortized over the respective vesting periods of the options. The 1992 EMC Corporation Stock Option Plan for Directors (the "Directors Plan") was adopted by the stockholders in May 1992. A total of 1,800,000 shares of Common Stock have been reserved for issuance under the Directors Plan. The exercise price for each option granted under the Directors Plan will be at a price per share determined at the time the option is granted, but not less than 50% of the per share fair market value of Common Stock at the date of grant. In 1996, a director was granted options to purchase 500,000 shares of Common Stock at $9.25, representing 50% of the per share fair market value at the date of grant. In 1995, two directors were granted options to purchase 80,000 shares of Common Stock at $6.81, representing 50% of the per share fair market value at the date of grant. The discounts from fair market value have been recorded as deferred compensation and are being amortized over the three year vesting period of the options. Generally, when shares acquired pursuant to the exercise of incentive stock options are sold within one year of exercise or within two years from the date of grant, the Company derives a tax deduction measured by the amount that the fair market value exceeds the option price at the date the options are exercised. When nonqualified stock options are exercised, the Company derives a tax deduction measured by the amount that the fair market value exceeds the option price at the date the options are exercised. As of December 31, 1996, options exercisable under the 1993 Plan, the 1985 Plan and the Directors Plan (the "Plans") approximated 2,279,997 and shares available for future option grants approximated 1,864,420. In general, options become exercisable in equal annual installments over the first five years after the date of grant and expire after ten years. The vesting schedule has been amended for newly granted formula options under the Directors Plan to a period of three years instead of five years so as to conform to a director's period of election to the Board of Directors. Formula options granted subsequent to the amendment will be exercisable in increments of 33 1/3% for the shares covered thereby on each of the first through third anniversaries of the grant. 38 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Supplemental Disclosures for Stock-Based Compensation The Company applies APB Opinion No. 25 and related Interpretations in accounting for the Plans. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123"), issued in 1995, defined a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. The Company elected to continue to apply the accounting provisions of APB Opinion No. 25 for stock options. The required disclosures under SFAS 123 as if the Company had applied the new method of accounting are made below. Activity under the Plans for the year ended December 31, 1996 is as follows:
WTD. AVG. NUMBER OF EXERCISE SHARES PRICE ---------- --------- Outstanding, January 1, 1994......................... 19,003,271 $ 4.05 Granted.............................................. 2,647,260 16.31 Canceled............................................. (891,200) 13.16 Exercised............................................ (4,974,124) 2.06 ---------- ------ Outstanding, December 31, 1994....................... 15,785,207 6.24 Options Relating to McDATA Merger.................... 493,387 0.86 Granted.............................................. 2,814,503 21.33 Canceled............................................. (1,415,043) 12.55 Exercised............................................ (4,163,707) 2.58 ---------- ------ Outstanding, December 30, 1995....................... 13,514,347 9.66 Granted.............................................. 4,213,969 17.28 Canceled............................................. (685,561) 17.37 Exercised............................................ (4,610,172) 4.71 ---------- ------ Outstanding, December 31, 1996....................... 12,432,583 $13.61 ========== ======
Summarized information about stock options outstanding at December 31, 1996 is as follows:
EXERCISABLE ------------------ WEIGHTED AVG. WEIGHTED WEIGHTED NUMBER OF REMAINING AVG. AVG. RANGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE --------------- ----------- ----------- -------- --------- -------- $ 0.29- 3.71 2,615,064 5.6 $ 2.03 914,225 $ 1.93 6.47-11.42 1,744,863 7.7 8.05 231,913 7.34 12.44-18.50 5,090,346 8.5 16.75 725,035 14.61 18.75-26.50 2,982,310 8.6 21.57 408,824 21.59
Options exercisable at December 30, 1995 and December 31, 1994 were 2,509,050 and 1,957,632, respectively. 39 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The fair value of each option granted during 1996 and 1995 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
1996 1995 ----- ---- Dividend yield................................................ none none Expected volatility........................................... 45.0% 50.0% Risk-free interest rate....................................... 6.5% 6.3% Expected life................................................. 5.0 5.0
Weighted average fair value of options granted at fair value dur- ing: 1996............................................................ $ 9.17 ====== 1995............................................................ $11.04 ====== Weighted average fair value of options granted below fair value at date of grant during: 1996............................................................ $12.63 ====== 1995............................................................ $ 9.39 ======
Had compensation cost for the Company's 1996 and 1995 stock option grants been determined consistent with SFAS 123, the Company's net income and net income per share would approximate the pro forma amounts below:
NET INCOME PER NET INCOME FULLY DILUTED SHARE ------------ ------------------- As reported: 1996.................................... $386,229,000 $1.56 1995.................................... 326,845,000 1.34 Pro forma: 1996.................................... $378,336,000 $1.53 1995.................................... 323,200,000 1.33
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards made prior to 1995. Additional awards in future years are anticipated. Employee Stock Purchase Plan In January 1989, the Board of Directors adopted the 1989 Employee Stock Purchase Plan (the "1989 Plan"). Under the 1989 Plan, eligible employees of the Company may purchase shares of Common Stock, through payroll deductions, at the lower of 85% of fair market value of the stock at the time of grant or 85% of fair market value at the time of exercise. A total of 4,900,000 shares have been reserved for issuance under the 1989 Plan. Shares are granted twice yearly, on January 1 and July 1, and are exercisable on the succeeding June 30 or December 31. The Company issued 679,177 and 139,598 shares in 1996 and 1995, respectively. The weighted average fair values of options granted at fair value under the 1989 Plan during 1996 and 1995 were $4.64 and $6.54, respectively. L. LITIGATION The Company is a party to litigation which it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material adverse effect on the Company's business or financial condition. 40 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) M. FINANCIAL INSTRUMENTS Off-Balance-Sheet Risk The Company enters into forward exchange and foreign currency option contracts to hedge foreign currency cash flows on a continuing basis for periods consistent with its committed exposures. The Company does not engage in currency speculation. The Company's foreign exchange contracts do not subject the Company to risk due to exchange rate movements because gains and losses on these contracts offset losses and gains on the underlying transactions being hedged. The maximum amount of foreign currency contracts outstanding during 1996 and 1995 was $257,401,000 and $228,750,000, respectively. At December 31, 1996 and December 30, 1995, the Company had $257,401,000, and $202,031,000 of forward exchange contracts outstanding, respectively. At December 30, 1995, the Company had $10,000,000 of foreign currency options outstanding. Fair Value The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, investments, accounts receivable, current portion of long term debt, and accounts payable approximate fair value due to the short maturities of these instruments. N. RISKS AND UNCERTAINTIES The Company's future results of operations involve a number of risks and uncertainties. Factors that could affect the Company's future operating results and cause actual results to vary materially from expectations include, but are not limited to, the uneven pattern of quarterly results, competition, competitive pricing pressures, dependence on suppliers, new products, changes in regulations, manufacturing risks, reliance on indirect channels of distribution, strategic relationships, international sales, management of growth, dependence upon key personnel, enforcement of the Company's intellectual property rights and future acquisitions. Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments, long-term investments and trade and notes receivable. The Company places its temporary cash investments and long-term investments in investment grade instruments and limits the amount of investment with any one financial institution. The credit risk associated with trade receivables is minimal due to the large number of customers and their broad dispersion over many different industries and geographic areas. In 1996, Hewlett-Packard Company represented 12.6% of the Company's total revenues. During 1995 and 1994, no single customer accounted for greater than 10% of the Company's revenues. O. SEGMENT INFORMATION The Company is active in primarily one business segment: designing, manufacturing and marketing a wide range of storage-related hardware and software products and related services. Information by geographic area is presented below with exports shown in their area of origin. Sales and marketing operations outside the U.S. are conducted through sales subsidiaries and branches located principally in Europe and the Asia Pacific region. The U.S. market amounted to greater than 95% of the Company's sales, income and identifiable assets in the North/South America segment. 41 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Intercompany transfers between geographic areas are accounted for at prices which are designed to be representative of unaffiliated party transactions. (in thousands)
EUROPE NORTH/SOUTH MIDDLE EAST, ASIA CONSOLIDATED AMERICA AFRICA PACIFIC ELIMINATIONS TOTAL ----------- ------------ -------- ------------ ------------ 1996 Sales................... $1,441,935 $687,350 $144,367 $ -- $2,273,652 Transfers between areas.................. 72,813 159,605 -- (232,418) -- ---------- -------- -------- --------- ---------- Total sales............. 1,514,748 846,955 144,367 (232,418) 2,273,652 Income (loss) from operations............. 334,547 167,964 (3,851) (2,119) 496,541 Identifiable assets at year end............... 1,749,221 703,929 104,210 (263,814) 2,293,546 1995 Sales................... $1,230,223 $567,303 $123,749 $ -- $1,921,275 Transfers between areas.................. 134,073 141,003 10 (275,086) -- ---------- -------- -------- --------- ---------- Total sales............. 1,364,296 708,306 123,759 (275,086) 1,921,275 Income from operations.. 264,168 176,293 1,805 (6,487) 435,779 Identifiable assets at year end............... 1,669,928 144,081 77,923 (146,203) 1,745,729 1994 Sales................... $ 871,048 $449,467 $ 56,977 $ -- $1,377,492 Transfers between areas.................. 123,587 61,577 110 (185,274) -- ---------- -------- -------- --------- ---------- Total sales............. 994,635 511,044 57,087 (185,274) 1,377,492 Income (loss) from operations............. 155,544 196,658 (97) (1,573) 350,532 Identifiable assets at year end............... 1,230,883 171,233 36,437 (121,053) 1,317,500
P. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share amounts)
Q1 1996 Q2 1996 Q3 1996 Q4 1996 -------- -------- -------- -------- 1996 Net sales, service and rental.............. $521,487 $545,017 $550,754 $656,394 Gross profit............................... 228,323 240,076 244,316 311,987 Net income................................. 84,545 87,054 90,347 124,283 Net income per share, (fully diluted)...... $ 0.35 $ 0.36 $ 0.37 $ 0.50 Q1 1995 Q2 1995 Q3 1995 Q4 1995 -------- -------- -------- -------- 1995 Net sales, service and rental.............. $448,116 $478,553 $475,460 $519,146 Gross profit............................... 230,008 246,791 235,183 206,417 Net income................................. 85,449 94,111 85,158 62,127 Net income per share, (fully diluted)...... $ 0.35 $ 0.38 $ 0.35 $ 0.26
The first three quarters of 1995 have been restated to reflect the acquisition of McDATA, accounted for as a pooling of interests. On September 23, 1996, EMC elected to change its fiscal year end from a fiscal basis which would have ended on December 28, 1996 to a calendar basis ending on December 31, 1996. The effect on the Company's results of operations was not material. 42 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company will furnish to the Securities and Exchange Commission a definitive Proxy Statement (the "Proxy Statement") not later than 120 days after the close of the fiscal year ended December 31, 1996. The information required by this item is incorporated herein by reference to the Proxy Statement. Also see "Executive Officers of the Registrant" in Part I of this form. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the Proxy Statement. 43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The financial statements listed in the accompanying Index to Consolidated Financial Statements and Schedule on page 47 are filed as part of this report. 2. Schedule The schedule listed in the accompanying Index to Consolidated Financial Statements and Schedule on page 47 is filed as part of this report. 3. Exhibits See Index to Exhibits page 48 of this report. The exhibits are filed with or incorporated by reference in this report. (b) Reports on Form 8-K. On October 4, 1996, the registrant filed a report (Date of Report: October 4, 1996) on Form 8-K reporting, under Item 8, a change in its fiscal year end from December 28, 1996 to December 31, 1996. On October 10, 1996, the registrant filed a report (Date of Report: October 10, 1996) on Form 8-K reporting, under Item 5, that it was served with civil investigative demands by the Antitrust Division of the United States Department of Justice in connection with the Department's investigation into the agreement dated June 7, 1996 between International Business Machines Corporation and Storage Technology Corporation. The Justice Department is gathering evidence to determine whether the IBM/STK Agreement has been, is, or may be in violation of the federal Sherman Antitrust Act. On December 12, 1996, the registrant filed a report (Date of Report: November 25, 1996) on Form 8-K reporting, under Item 5, that on January 1, 1997 it would redeem all of its outstanding 4 1/4% convertible subordinated notes due 2001. The registrant also reported that its Board of Directors had rescinded the Company's Common Stock repurchase program due to the Securities and Exchange Commission's issuance of Staff Accounting Bulletin 96. 44 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, EMC CORPORATION HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON FEBRUARY 27, 1997. EMC CORPORATION /s/ Richard J. Egan By: _________________________________ RICHARD J. EGAN CHAIRMAN OF THE BOARD 45 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES ON THE DATE INDICATED AS OF FEBRUARY 27, 1997. SIGNATURE TITLE /s/ Richard J. Egan Chairman of the Board (Principal - ------------------------------------- Executive Officer) and Director RICHARD J. EGAN /s/ Michael C. Ruettgers President and Chief Executive Officer - ------------------------------------- and Director MICHAEL C. RUETTGERS /s/ Colin G. Patteson Senior Vice President, Chief - ------------------------------------- Administrative Officer and Treasurer COLIN G. PATTESON (Principal Financial Officer) /s/ William J. Teuber, Jr. Vice President and Chief Financial - ------------------------------------- Officer (Principal Accounting Officer) WILLIAM J. TEUBER, JR. /s/ Michael J. Cronin Director - ------------------------------------- MICHAEL J. CRONIN /s/ John F. Cunningham Director - ------------------------------------- JOHN F. CUNNINGHAM /s/ John R. Egan Director - ------------------------------------- JOHN R. EGAN /s/ Maureen E. Egan Director - ------------------------------------- MAUREEN E. EGAN /s/ W. Paul Fitzgerald Director - ------------------------------------- W. PAUL FITZGERALD /s/ Joseph F. Oliveri Director - ------------------------------------- JOSEPH F. OLIVERI 46 EMC CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS
FORM 10-K --------- Report of Independent Accountants.................................... p. 23 Consolidated Balance Sheets at December 31, 1996 and December 30, 1995................................................................ p. 24 Consolidated Statements of Income for the years ended December 31, 1996, December 30, 1995, and December 31, 1994...................... p. 25 Consolidated Statements of Cash Flows for the years ended December 31, 1996, December 30, 1995, and December 31, 1994.................. p. 26 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, December 30, 1995, and December 31, 1994......... p. 27 Notes to Consolidated Financial Statements........................... pp. 28-42 Schedule: Schedule II--Valuation and Qualifying Accounts..................... p. 49
Note: All other financial statement schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto. 47 The exhibits listed below are filed with or incorporated by reference in this report. 3.1 Articles of Organization of EMC Corporation./1/ 3.2 Articles of Amendment filed February 26, 1986./1/ 3.3 Articles of Amendment filed April 2, 1986./1/ 3.4 Articles of Amendment filed May 13, 1987./2/ 3.5 Articles of Amendment filed June 19, 1992./3/ 3.6 Articles of Amendment filed May 12, 1993./4/ 3.7 Articles of Amendment filed November 12, 1993./5/ 3.8 Articles of Amendment filed May 10, 1995./6/ 3.9 By-laws of EMC Corporation, as amended on July 21, 1995./7/ 4.1 Form of Stock Certificate./8/ 10.1 EMC Corporation 1985 Stock Option Plan, as amended (filed herewith). 10.2 EMC Corporation 1989 Employee Stock Purchase Plan, as amended./9/ 10.3 EMC Corporation 1992 Stock Option Plan for Directors, as amended (filed herewith). 10.4 EMC Corporation 1993 Stock Option Plan, as amended (filed herewith). 10.5 McDATA 1990 Class A Stock Option Plan./10/ 10.6 McDATA 1990 Class B Stock Option Plan./10/ 10.7 EMC Corporation Profit-Sharing Plan./1/ 10.7 Mortgage Agreement with and Note Payable to John Hancock Mutual Life Insurance Company./1/ 11.1 Computation of net income (loss) per share (filed herewith). 22.1 Subsidiaries of Registrant (filed herewith). 23.1 Consent of Independent Accountants dated February 27, 1997 (filed herewith).
- -------- /1/ Incorporated herein by reference to the Company's Registration Statement on Form S-1 (No. 33-3656). /2/ Incorporated herein by reference to the Company's Registration Statement on Form S-1 (No. 33-17218). /3/ Incorporated herein from Annual Report on Form 10-K of EMC Corporation filed February 12, 1993. /4/ Incorporated herein by reference to the Company's Registration Statement on Form S-1 (No. 33-67224). /5/ Incorporated herein from Current Report on Form 8-K of EMC Corporation filed November 19, 1993. /6/ Incorporated herein from Current Report on Form 8-K of EMC Corporation filed May 26, 1995. /7/ Incorporated herein from Quarterly Report on Form 10-K of EMC Corporation filed August 11, 1995. /8/ Incorporated herein from Annual Report on Form 10-K of EMC Corporation filed March 31, 1988. /9/ Incorporated herein from Annual Report on Form 10-K of EMC Corporation filed March 29, 1995. /10/ Incorporated herein from Annual Report on Form 10-K of EMC Corporation filed March 26, 1996. 48 EMC CORPORATION AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ------------------ ---------- ---------- ---------- ----------- ---------- Year ended December 31, 1996 Allowance for doubtful accounts.............. $7,062,000 $1,927,000 -- $(1,621,000) $7,368,000 Year ended December 30, 1995 Allowance for doubtful accounts.............. $6,272,000 $2,435,000 -- $(1,645,000) $7,062,000 Year ended December 31, 1994 Allowance for doubtful accounts.............. $5,262,000 $2,223,000 -- $(1,213,000) $6,272,000
49 EX-10.1 2 1985 STOCK OPTION PLAN EXHIBIT 10.1 EMC CORPORATION 1985 STOCK OPTION PLAN, as amended January 22, 1997 1. PURPOSE. ------- The purpose of the EMC Corporation 1985 Stock Option Plan is to enable EMC Corporation to provide a special incentive to a limited number of key employees of the Company and its Subsidiaries, if any, who are in a position to have a significant effect upon the Company's business and earnings. In order to accomplish this purpose, the Plan authorizes the grant to such key employees of options to purchase Common Stock of the Company. Increased ownership of Common Stock will provide such key employees with an additional incentive to take into account the long-term interests of the Company. 2. DEFINITIONS. ----------- As used herein, the following words or terms have the meanings set forth below. The masculine gender is used throughout the Plan but is intended to apply to members of both sexes. 2.1 "Board of Directors" means the Board of Directors of the Company. 2.2 "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. 2.3 "Committee" means the Committee appointed by the Board of Directors to administer the Plan or the Board of Directors as a whole if no appointment is made. 2.4 "Common Stock" means the Common Stock of the Company. 2.5 "Company" means EMC Corporation, a corporation established under the laws of The Commonwealth of Massachusetts. 2.6 "Fair Market Value" in the case of a share of Common Stock on a particular day, means the fair market value as determined from time to time by the Board of Directors or, where appropriate, by the Committee, taking into account all information which the Board of Directors, or the Committee, considers relevant. 2.7 "Incentive Stock Option" means a stock option that satisfies the requirements of Section 422 of the Code. 2.8 "Participant" means an individual holding a stock option or stock options granted to him under the Plan. 2.9 "Plan" means the EMC Corporation 1985 Stock Option Plan set forth herein. 2.10 "Subsidiary" or "Subsidiaries" means a corporation or corporations in which the Company owns, directly or indirectly, stock possessing 50 percent or more of the total combined voting power of all classes of stock. 2.11 "Ten Percent Stockholder" means any person who, at the time an option is granted, owns or is deemed to own stock (as determined in accordance with Sections 422 and 424 of the Code) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parent or a subsidiary. 3. ADMINISTRATION. -------------- 3.1 The Plan shall be administered by the Committee and, to the extent provided herein, the Board of Directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. 3.2 Subject to the provisions set forth herein, each of the Committee and the Board of Directors shall have full authority to determine the provisions of options to be granted under the Plan. Subject to the provisions set forth herein, the Committee shall have full authority to interpret the terms of the Plan and of options granted under the Plan, to adopt, amend and rescind rules and guidelines for the administration of the Plan and for its own acts and proceedings and to decide all questions and settle all controversies and disputes which may arise in connection with the Plan; provided, however, that -------- ------- any change to the terms of an option granted hereunder shall be approved by the Board of Directors to the extent such change would be deemed to be a new option grant or such terms relate to a subsequent transaction that would not be exempt from Section 16(b) of the Securities Exchange Act of 1934 in the absence of such approval. 3.3 The decision of the Committee or the Board of Directors, as applicable, on any matter as to which the Committee or the Board of Directors, as applicable, is given authority under subsection 3.2 shall be final and binding on all persons concerned. 3.4 Nothing in the Plan shall be deemed to give any officer or employee, or his legal representatives or assigns, any right to participate in the Plan, except to such extent, if any, as the Committee or the Board, as applicable, may have determined or approved pursuant to the provisions of the Plan. 2 4. SHARES SUBJECT TO THE PLAN. -------------------------- 4.1 The maximum number of shares of Common Stock that may be delivered upon the exercise of options granted under the Plan shall be 36,000,000, subject to adjustment in accordance with the provisions of Section 8. 4.2 If any option granted under the Plan terminates without having been exercised in full (including an option which terminates by agreement between the Company and the Participant), the number of shares of Common Stock as to which such option has not been exercised prior to termination shall be available for future grants within the limits set forth in subsection 4.1. 4.3 Shares of Common Stock delivered upon the exercise of options shall consist of shares of authorized and unissued Common Stock, except that the Board of Directors may from time to time in its discretion determine in any case the shares to be so delivered shall consist of shares of authorized and issued Common Stock reacquired by the Company and held in its Treasury. No fractional shares of Common Stock shall be delivered upon the exercise of an option. 5. ELIGIBILITY FOR OPTIONS. ----------------------- Employees eligible to receive options under the Plan shall be those key employees of the Company and its Subsidiaries, if any, who, in the opinion of the Committee, are in a position to have a significant effect upon the Company's business and earnings. Members of the Board of Directors of the Company or a Subsidiary who are not employed as regular salaried officers or employees of the Company or a Subsidiary may not participate in the Plan. 6. GRANT OF OPTIONS. ---------------- 6.1 From time to time while the Plan is in effect, each of the Committee and the Board of Directors may, in its absolute discretion, select from among the persons eligible to receive options (including persons to whom options were previously granted) those persons to whom options are to be granted. 6.2 Each of the Committee and the Board of Directors shall, in its absolute discretion, determine the number of shares of Common Stock to be subject to each option granted by it under the Plan. 6.3 No Incentive Stock Option may be granted under the Plan after May 16, 1995, but options theretofore granted may extend beyond that date. 3 7. PROVISIONS OF OPTIONS. --------------------- 7.1 Incentive Stock Options or Other Options. Options granted under ---------------------------------------- the Plan may be either Incentive Stock Options or options which do not qualify as Incentive Stock Options, as the Committee or the Board of Directors shall determine at the time of each grant of options hereunder. 7.2 Stock Option Certificates or Agreements. Options granted under --------------------------------------- the Plan shall be evidenced by certificates or agreements in such form as the Committee shall from time to time approve. Such certificates or agreements shall comply with the terms and conditions of the Plan and may contain such other provisions not inconsistent with the terms and conditions of the Plan as the Committee shall deem advisable. In the case of options intended to qualify as Incentive Stock Options, the certificates or agreements shall contain such provisions relating to exercise and other matters as are required of incentive stock options under the Code. 7.3 Terms and Conditions. All options granted under the Plan shall -------------------- be subject to the following terms and conditions to the extent applicable and to such other terms and conditions not inconsistent therewith as the Committee or the Board of Directors shall determine: 7.3.1 Exercise Price. The exercise price per share of Common Stock -------------- with respect to each option shall be as determined by the Committee but in the case of an Incentive Stock Option not less than 100% (110% in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) of the Fair Market Value per share at the time the option is granted. In the case of an option which does not qualify as an Incentive Stock Option, the exercise price per share of Common Stock shall be not less than par value. 7.3.2 Value of Shares of Common Stock Subject to Incentive Stock ---------------------------------------------------------- Options. Each eligible employee may be granted Incentive Stock Options ------- only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any related corporation, such Incentive Stock Options do not become exercisable for the first time by such employee during any calendar year in a manner which would entitle the employee to purchase more than $100,000 in fair market value (determined at the time the Incentive Stock Options were granted) of Common Stock in that year. Any options granted to any employee in excess of such amount will be granted as Non-Qualified Options. 7.3.3 Period of Options. An option shall be exercisable during such ----------------- period of time as the Committee or the Board of Directors may specify (subject to subsection 7.4 below), but in the case of an Incentive Stock Option not after the expiration of ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from the date the option is granted. 4 7.3.4 Exercise of Options. ------------------- 7.3.4.1 Each option shall be made exercisable at such time or times as the Committee or the Board of Directors shall determine. In the case of an option made exercisable in installments, the Committee or the Board of Directors may later determine to accelerate the time at which one or more of such installments may be exercised. 7.3.4.2 Any exercise of an option shall be in writing signed by the proper person and delivered or mailed to the General Counsel of the Company, accompanied by an option exercise notice and payment in full for the number of shares in respect to which the option is exercised. 7.3.4.3 In the event an option is exercised by the executor or administrator of a deceased Participant, or by the person or persons to whom the option has been transferred by the Participant's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver stock thereunder until the Company is satisfied that the person or persons exercising the option is or are the duly appointed executor or administrator of the deceased Participant or the person or persons to whom the option has been transferred by the Participant's will or by the applicable laws of descent and distribution. 7.3.4.4 The Committee or the Board of Directors may at the time of grant condition the exercise of an option upon agreement by the Participant to subject the Common Stock to any restrictions on transfer or repurchase rights in effect on the date of exercise, upon representations of continued employment and upon other terms not inconsistent with this Plan. Any such conditions shall be set forth in the option certificate or other document evidencing the option. 7.3.4.5 In the case of an option that is not an Incentive Stock Option, the Committee shall have the right to require that the individual exercising the option to remit to the Company an amount sufficient to satisfy any federal, state, or local withholding tax requirements (or makes other arrangements satisfactory to the Company with regard to such taxes) prior to the delivery of any Common Stock pursuant to the exercise of the option. In the case of an Incentive Stock Option, if at the time the Incentive Stock Option is exercised the Committee determines that under applicable law and regulations the Company could be liable for the withholding of any federal or state tax with respect to a disposition of the Common Stock received upon exercise, the Committee may require as a condition of exercise that the individual exercising the Incentive Stock 5 Option agree (i) to inform the Company promptly of any disposition (within the meaning of Section 422 (a) (1) of the Code and the regulations thereunder) of Common Stock received upon exercise, and (ii) to give such security as the Committee deems adequate to meet the potential liability of the Company for the withholding of tax, and to augment such security from time to time in any amount reasonably deemed necessary by the Committee to preserve the adequacy of such security. 7.3.4.6 In the case of an option that is exercised by an individual that is subject to taxation in a foreign jurisdiction, the Committee shall have the right to require the individual exercising the option to remit to the Company an amount sufficient to satisfy any federal or withholding requirement of that foreign jurisdiction (or make other arrangements satisfactory to the Company with regard to such taxes prior to the delivery of any Common Stock pursuant to the exercise of the option). 7.3.5 Payment for and Delivery of Stock. The shares of stock --------------------------------- purchased on any exercise of an option granted hereunder shall be paid for in full in cash or, if permitted by the terms of the option, in shares of unrestricted Common Stock at the time of such exercise or, if so permitted, a combination of such cash and Common Stock. A Participant shall not have the rights of a stockholder with respect to awards under the Plan except as to stock actually issued to him. 7.3.6 Listing of Stock, Withholding and Other Legal Requirements. ---------------------------------------------------------- The Company shall not be obligated to deliver any stock until all federal and state laws and regulations which the Company may deem applicable have been complied with, nor, in the event the outstanding Common Stock is at the time listed upon any stock exchange, until the stock to be delivered has been listed or authorized to be added to the list upon official notice of issuance to such exchange. In addition, if the shares of stock subject to any option have not been registered in accordance with the Securities Act of 1933, as amended, the Company may require the person or persons who wishes or wish to exercise such option to make such representation or agreement with respect to the sale of stock acquired on exercise of the option as will be sufficient, in the opinion of the Company's counsel, to avoid violation of said Act, and may also require that the certificates evidencing said stock bear an appropriate restrictive legend. 7.3.7 Non-transferability of Options. No option may be transferred by ------------------------------ the Participant otherwise than by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order, and during the Participant's lifetime the option may be exercised only by him or her; provided, however, that the Board of Directors or the Committee, as -------- ------- applicable, in its discretion, may allow for transferability of non- qualified stock options by the Participant to "Immediate Family Members". Immediate Family Members means children, grandchildren, spouse or common law spouse, siblings or parents of the Participant or to bona 6 fide trusts, partnerships or other entities controlled by and of which the beneficiaries are Immediate Family Members of the Participant. Any option grants that are transferable are further conditioned on the Participant and Immediate Family Members agreeing to abide by the Company's then current stock option transfer guidelines. 7.3.8 Death. If a Participant dies at a time when he is entitled ----- to exercise an Incentive Stock Option, then at any time or times within three years after his death such Incentive Stock Option may be exercised, as to all or any of the shares which the Participant was entitled to purchase thereunder immediately prior to his death, by his executor or administrator or the person or persons to whom the Incentive Stock Option is transferred by will or the applicable laws of descent and distribution, and except as so exercised such Incentive Stock Option shall expire at the end of such three- year period. In no event, however, may any Incentive Stock Option granted under the Plan be exercised after the expiration of ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from the date the Incentive Stock Option was granted. 7.3.9 Termination of Employment. If the employment of a Participant ------------------------- terminates for any reason other than his death, all options held by the Participant shall thereupon expire on the date of termination unless the option by its terms, or the Committee or the Board of Directors by resolution, shall allow the Participant to exercise any or all of the options held by him after termination. In the case of an Incentive Stock Option, the Incentive Stock Option shall in any event expire at the end of three months after such termination of employment, or after the expiration of ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from the date the Incentive Stock Option was granted, whichever occurs first. If the Committee or the Board of Directors so decides, an option may provide that a leave of absence granted by the Company or Subsidiary is not a termination of employment for the purpose of this subsection 7.3.9, and in the absence of such a provision the Committee may in any particular case determine that such a leave of absence is not a termination of employment for such purpose. The Committee shall also determine all other matters relating to continuous employment. 7.4 Authority of the Committee. The Committee shall have the authority, -------------------------- either generally or in particular instances, to waive compliance by a Participant with any obligation to be performed by him under an option and to waive any condition or provision of an option, except that the Committee may not (i) increase the total number of shares covered by any Incentive Stock Option (except in accordance with Section 8), (ii) reduce the option price per share of any Incentive Stock Option (except in accordance with Section 8) or (iii) extend the term of any Incentive Stock Option to more than ten years, subject, however, to the provisions of Section 10. 7 8. CHANGES IN STOCK. ---------------- In the event of a stock dividend, stock split or other change in corporate structure or capitalization affecting the Common Stock that becomes effective after the adoption of the Plan by the Board of Directors, the Committee shall make appropriate adjustments in (i) the number and kind of shares of stock on which options may thereafter be granted hereunder, (ii) the number and kind of shares of stock remaining subject to each option outstanding at the time of such change and (iii) the option price. The Committee's determination shall be binding on all persons concerned. Subject to any required action by the stockholders, if the Company shall be the surviving corporation in any merger or consolidation (other than a merger or consolidation in which the Company survives but in which a majority of its outstanding shares are converted into securities of another corporation or are exchanged for other consideration), any option granted hereunder shall pertain and apply to the securities which a holder of the number of shares of stock of the Company then subject to the option would have been entitled to receive, but a dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving corporation or in which a majority of its outstanding shares are so converted or exchanged shall cause every option hereunder to terminate; provided that if any such dissolution, liquidation, merger or consolidation is contemplated, the Company shall either arrange for any corporation succeeding to the business and assets of the Company to issue to the Participants replacement options (which, in the case of Incentive Stock Options, satisfy, in the determination of the Committee, the requirements of Section 424 of the Code) on such corporation's stock which will to the extent possible preserve the value of the outstanding options or shall make the outstanding options fully exercisable at least 20 days before the effective date of any such dissolution, liquidation, merger or consolidation. The existence of the Plan shall not prevent any such change or other transaction and no Participant thereunder shall have any right except as herein expressly set forth. 9. EMPLOYMENT RIGHTS. ----------------- Neither the adoption of the Plan nor any grant of options confers upon any employee of the Company or a Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor does it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. 10. DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION. ------------------------------------------------------- The Committee or the Board of Directors may at any time discontinue granting options under the Plan and, with the consent of the Participant, may at any time cancel an existing option in whole or in part and grant another option to the Participant for such number of shares as the Committee or the Board of Directors specifies. The Board of Directors may at any time or times amend the Plan for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose 8 which may at the time be permitted by law or may at any time terminate the Plan as to any further grants of options, provided that no such amendment shall without the approval of the stockholders of the Company (a) increase the maximum number of shares available under the Plan, (b) change the group of employees eligible to receive options under the Plan, (c) reduce the exercise price of outstanding incentive options or reduce the price at which incentive options may be granted, (d) extend the time within which options may be granted, (e) alter the Plan in such a way that incentive options granted or to be granted hereunder would not be considered incentive stock options under Section 422 of the Code, or (f) amend the provisions of this Section 10, and no such amendment shall adversely affect the rights of any employee (without his consent) under any option previously granted. 11. EFFECTIVE DATE. -------------- The Plan shall become effective upon its adoption by the Board of Directors, and options may be granted under the Plan from and after the date of such adoption; provided, however, that if prior to May 16, 1986 the stockholders of the Company have not approved the Plan, the Plan shall terminate to the extent that it relates to the issuance of Incentive Stock Options and all Incentive Stock Options theretofore granted shall terminate and cease to be of any force or effect. No Incentive Stock Option granted hereunder shall be exercisable unless and until the Plan has been so approved. 9 EX-10.3 3 1992 STOCK OPTION PLAN EXHIBIT 10.3 EMC CORPORATION 1992 EMC CORPORATION STOCK OPTION PLAN FOR DIRECTORS, as amended January 22, 1997 1. PURPOSE The purpose of this 1992 Stock Option Plan for Directors (the "Plan") is to advance the interests of EMC Corporation (the "Company") by enhancing the ability of the Company to attract and retain directors who are in a position to make significant contributions to the success of the Company and to reward directors for such contributions through ownership of shares of the Company's Common Stock (the "Stock"). 2. ADMINISTRATION The Plan shall be administered by the Board of Directors (the "Board") of the Company and the Executive Compensation and Stock Option Committee (the "Committee") of the Board, as set forth herein. The Board and the Committee shall each have authority, not inconsistent with the express provisions of the Plan to grant options in accordance with the Plan to such directors as are eligible to receive options. The Committee shall in addition have authority, not inconsistent with the express provisions of the Plan, (a) to prescribe the form or forms of instruments evidencing options and any other instruments required under the Plan and to change such forms from time to time; (b) to adopt, amend and rescind rules and regulations for the administration of the Plan; and (c) to interpret the Plan and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations of the Committee or the Board, as the case may be, shall be conclusive and shall bind all parties. Subject to Section 7, the Committee shall also have the authority, both generally and in particular instances, to waive compliance by a director with any obligation to be performed by him or her under an option and to waive any condition or provision of an option. Nothwithstanding the preceding two sentences, any change to the terms of an option granted hereunder shall be approved by the Board to the extent such change would be deemed to be a new option grant or such terms relate to a subsequent transaction that would not be exempt from Section 16(b) of the Securities Exchange Act of 1934 in the absence of such approval. 3. EFFECTIVE DATE AND TERM OF PLAN The Plan shall become effective on the date on which the Plan is approved by the stockholders of the Company. No option shall be granted under the Plan after the 1 completion of ten years from the date on which the Plan was adopted by the Board, but options granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN (a) Number of Shares. Subject to adjustment as provided in Section 4(c), the aggregate number of shares of Stock that may be delivered upon the exercise of options granted under the Plan shall be 1,800,000. If any option granted under the Plan terminates without having been exercised in full, the number of shares of Stock as to which such option was not exercised shall be available for future grants within the limits set forth in this Section 4(a). (b) Shares to be Delivered. Shares delivered under the Plan shall be authorized but unissued Stock or, if the Board so decides in its sole discretion, previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock shall be delivered under the Plan. (c) Changes in Stock. In the event of a stock dividend, stock split or other change in corporate structure or capitalization affecting the Stock, the number and kind of shares of stock or securities of the Company to be subject to options then outstanding or to be granted under the Plan, and the option price, and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. 5. ELIGIBILITY FOR OPTIONS Directors eligible to receive options under the Plan ("Eligible Directors") shall be those directors who (i) are not employees of the Company; and (ii) are not holders of more than 5% of the outstanding shares of the Stock or persons in control of such holders. 6. TERMS AND CONDITIONS OF OPTIONS (a) Formula Options. Eligible Directors who are directors on the date of stockholder approval of the Plan shall be awarded options to purchase up to 40,000 shares of Stock. Following stockholder approval of the plan, each newly elected Eligible Director shall be awarded options to purchase up to 40,000 shares of Stock on the date of his or her first election. (b) Discretionary Options. In addition to the formula options provided for above, the Committee or the Board may award options to purchase shares of Stock to Eligible Directors on such terms as it may determine not inconsistent with this Plan. 2 (c) Exercise Price. The exercise price of each option shall be not less than 50% of the fair market value per share of the Stock at the time of the grant. For this purpose "fair market value" shall mean the last sales price of the Stock as reported on the New York Stock Exchange on the date of the grant (based on The Wall Street Journal report of composite transactions) or, if the Stock is no longer listed on such Exchange, it shall have the same meaning as it does in the provisions of the Internal Revenue Code of 1986 (the "Code") and the regulations thereunder applicable to incentive options. (d) Duration of Options. The latest date on which an option may be exercised (the "Final Exercise Date") shall be the date which is ten years from the date the option was granted. (e) Exercise of Options. (1) Each formula option shall become exercisable in increments of 33 1/3% of the shares covered thereby on each of the first through third anniversaries of the grant. Each discretionary option shall become exercisable at such time or times as the Committee or the Board shall determine. (2) Any exercise of an option shall be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (a) an option exercise notice and any other documents required by the Committee; and (b) payment in full for the number of shares for which the option is exercised. (3) If any option is exercised by the executor or administrator of a deceased director, or by the person or persons to whom the option has been transferred by the director's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of the person or persons exercising the option. (4) The Company shall have the right to settle any option, and to terminate the rights of the holder thereof, by paying to the option holder the difference between the fair market value of the Stock at the time of settlement and the purchase price. (f) Payment for and Delivery of Stock. Stock purchased under the Plan shall be paid for as follows: (i) in cash or by certified check, bank draft or money order payable to the order of the Company; (ii) through the delivery of shares of Stock having a fair market value on the last business day preceding the date of exercise equal to the purchase price; or (iii) by a combination of cash and Stock as provided in clauses (i) and (ii) above. An option holder shall not have the rights of a stockholder with regard to awards under the Plan except as to Stock actually received by him or her under the Plan. The Company shall not be obligated to deliver any shares of Stock (a) until, in the opinion of the Company's counsel, all applicable Federal and state laws and regulations 3 have been complied with; and (b) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance; and (c) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the option, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. (g) Nontransferability of Options/Exceptions. No option may be transferred by a director otherwise than by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order, and during the director's lifetime the option may be exercised only by him or her; provided, however, that -------- ------- the Board of Directors or the Committee, as applicable, in its discretion, may allow for transferability of options by the Participant to "Immediate Family Members." Immediate Family Members means children, grandchildren, spouse or common law spouse, siblings or parents of the Participant or to bona fide trusts, partnerships or other entities controlled by and of which the beneficiaries are Immediate Family Members of the Participant. Any option grants that are transferable are further conditioned on the Participant and Immediate Family Members agreeing to abide by the Company's then current stock option transfer guidelines. (h) Death. If a director dies at the time he or she is entitled to exercise an option, then the portion formerly exercisable by the director may be exercised by the director's executor or administrator, or by the person to whom the option is transferred under the applicable laws of descent and distribution, within three years of the death of the director, subject to earlier termination of an option pursuant to Section 6(c). (i) Other Termination of Status of Director. All previously unexercised options terminate and are forfeited automatically upon the termination of the director's service with the Company, unless the Committee or the Board of Directors specifies otherwise. (j) Mergers, etc. In the event of a dissolution, liquidation, consolidation or merger in which the Company is not the surviving corporation, or which results in the acquisition of substantially all of the Company's stock by a single person or entity or by a group of persons and entities acting in concert all outstanding options will thereupon terminate, provided at least twenty days prior to the effective date of any such dissolution, liquidation, consolidation or merger, the Committee or the Board may either (i) make all outstanding options immediately exercisable or (ii) arrange to have the surviving corporation grant replacement options for the option holders. 4 7. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION Neither adoption of the Plan nor the grant of options to a director shall affect the Company's right to grant to such director or any director options that are not subject to the Plan, to issue to such directors Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued to directors. The Committee or the Board may at any time discontinue granting options under the Plan. The Board may at any time, or times, amend the Plan for the purpose of satisfying any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of options, provided that (except to the extent expressly required or permitted herein above) no such amendment shall, without the approval of the stockholders of the Company, (a) increase the maximum number of shares available under the Plan; (b) increase the number of options to be granted to Eligible Directors; (c) amend the definition of Eligible Directors so as to enlarge the group of directors eligible to receive options under the Plan; (d) reduce the price at which options may be granted other than as permitted in the Plan; or (e) amend the provisions of this Section 7. 5 EX-10.4 4 1993 STOCK OPTION PLAN EXHIBIT 10.4 EMC CORPORATION 1993 STOCK OPTION PLAN, as amended January 22, 1997 1. PURPOSE. ------- The purpose of the EMC Corporation 1993 Stock Option Plan is to enable EMC Corporation to provide a special incentive to a limited number of key employees of the Company and its Subsidiaries, if any, who are in a position to have a significant effect upon the Company's business and earnings. In order to accomplish this purpose, the Plan authorizes the grant to such key employees of options to purchase Common Stock of the Company. Increased ownership of Common Stock will provide such key employees with an additional incentive to take into account the long-term interests of the Company. 2. DEFINITIONS. ----------- As used herein, the following words or terms have the meanings set forth below. The masculine gender is used throughout the Plan but is intended to apply to members of both sexes. 2.1 "Board of Directors" means the Board of Directors of the Company. 2.2 "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. 2.3 "Committee" means the Committee appointed by the Board of Directors to administer the Plan or the Board of Directors as a whole if no appointment is made. 2.4 "Common Stock" means the Common Stock of the Company. 2.5 "Company" means EMC Corporation, a corporation established under the laws of The Commonwealth of Massachusetts. 2.6 "Fair Market Value" in the case of a share of Common Stock on a particular day, means the fair market value as determined from time to time by the Board of Directors or, where appropriate, by the Committee, taking into account all information which the Board of Directors, or the Committee, considers relevant. 2.7 "Incentive Stock Option" means a stock option that satisfies the requirements of Section 422 of the Code. 2.8 "Participant" means an individual holding a stock option or stock options granted to him under the Plan. 1 2.9 "Plan" means the EMC Corporation 1993 Stock Option Plan set forth herein. 2.10 "Subsidiary" or "Subsidiaries" means a corporation or corporations in which the Company owns, directly or indirectly, stock possessing 50 percent or more of the total combined voting power of all classes of stock. 2.11 "Ten Percent Stockholder" means any person who, at the time an option is granted, owns or is deemed to own stock (as determined in accordance with Sections 422 and 424 of the Code) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parent or a subsidiary. 3. ADMINISTRATION. -------------- 3.1 The Plan shall be administered by the Committee and, to the extent provided herein, the Board of Directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. 3.2 Subject to the provisions set forth herein, each of the Committee and the Board of Directors shall have full authority to determine the provisions of options to be granted under the Plan. Subject to the provisions set forth herein, the Committee shall have full authority to interpret the terms of the Plan and of options granted under the Plan, to adopt, amend and rescind rules and guidelines for the administration of the Plan and for its own acts and proceedings and to decide all questions and settle all controversies and disputes which may arise in connection with the Plan; provided, however, that -------- ------- any change to the terms of an option granted hereunder shall be approved by the Board of Directors to the extent such change would be deemed to be a new option grant or such terms relate to a subsequent transaction that would not be exempt from Section 16(b) of the Securities Exchange Act of 1934 in the absence of such approval. 3.3 The decision of the Committee or the Board of Directors, as applicable, on any matter as to which the Committee or the Board of Directors, as applicable, is given authority under subsection 3.2 shall be final and binding on all persons concerned. 3.4 Nothing in the Plan shall be deemed to give any officer or employee, or his legal representatives or assigns, any right to participate in the Plan, except to such extent, if any, as the Committee or the Board, as applicable, may have determined or approved pursuant to the provisions of the Plan. 2 4. SHARES SUBJECT TO THE PLAN. -------------------------- 4.1 The maximum number of shares of Common Stock that may be delivered upon the exercise of options granted under the Plan shall be 14,000,000/*/, subject to adjustment in accordance with the provisions of Section 8. 4.2 If any option granted under the Plan terminates without having been exercised in full (including an option which terminates by agreement between the Company and the Participant), the number of shares of Common Stock as to which such option has not been exercised prior to termination shall be available for future grants within the limits set forth in subsection 4.1. 4.3 Shares of Common Stock delivered upon the exercise of options shall consist of shares of authorized and unissued Common Stock, except that the Board of Directors may from time to time in its discretion determine in any case the shares to be so delivered shall consist of shares of authorized and issued Common Stock reacquired by the Company and held in its Treasury. No fractional shares of Common Stock shall be delivered upon the exercise of an option. 5. ELIGIBILITY FOR OPTIONS. ----------------------- Employees eligible to receive options under the Plan shall be those key employees of the Company and its Subsidiaries, if any, who, in the opinion of the Committee, are in a position to have a significant effect upon the Company's business and earnings. Members of the Board of Directors of the Company or a Subsidiary who are not employed as regular salaried officers or employees of the Company or a Subsidiary may not participate in the Plan. 6. GRANT OF OPTIONS. ---------------- 6.1 From time to time while the Plan is in effect, each of the Committee and the Board of Directors may, in its absolute discretion, select from among the persons eligible to receive options (including persons to whom options were previously granted) those persons to whom options are to be granted. 6.2 Each of the Committee and the Board of Directors shall, in its absolute discretion, determine the number of shares of Common Stock to be subject to each option granted by it under the Plan. 6.3 No Incentive Stock Option may be granted under the Plan after May 12, 2003, but options theretofore granted may extend beyond that date. - --------------------------------------------- /*/ Subject to stockholder approval. 3 7. PROVISIONS OF OPTIONS. --------------------- 7.1 Incentive Stock Options or Other Options. Options granted under the ---------------------------------------- Plan may be either Incentive Stock Options or options which do not qualify as Incentive Stock Options, as the Committee or the Board of Directors shall determine at the time of each grant of options hereunder. 7.2 Stock Option Certificates or Agreements. Options granted under the Plan --------------------------------------- shall be evidenced by certificates or agreements in such form as the Committee shall from time to time approve. Such certificates or agreements shall comply with the terms and conditions of the Plan and may contain such other provisions not inconsistent with the terms and conditions of the Plan as the Committee shall deem advisable. In the case of options intended to qualify as Incentive Stock Options, the certificates or agreements shall contain such provisions relating to exercise and other matters as are required of incentive stock options under the Code. 7.3 Terms and Conditions. All options granted under the Plan shall be -------------------- subject to the following terms and conditions to the extent applicable and to such other terms and conditions not inconsistent therewith as the Committee or the Board of Directors shall determine: 7.3.1 Exercise Price. The exercise price per share of Common Stock -------------- with respect to each option shall be as determined by the Committee but in the case of an Incentive Stock Option not less than 100% (110% in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) of the Fair Market Value per share at the time the option is granted. In the case of an option which does not qualify as an Incentive Stock Option, the exercise price per share of Common Stock shall be not less than par value. 7.3.2 Value of Shares of Common Stock Subject to Incentive Stock ---------------------------------------------------------- Options. Each eligible employee may be granted Incentive Stock Options ------- only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any related corporation, such Incentive Stock Options do not become exercisable for the first time by such employee during any calendar year in a manner which would entitle the employee to purchase more than $100,000 in fair market value (determined at the time the Incentive Stock Options were granted) of Common Stock in that year. Any options granted to an employee in excess of such amount will be granted as Non-Qualified Options. 7.3.3 Period of Options. An option shall be exercisable during such ----------------- period of time as the Committee or Board of Directors may specify (subject to subsection 7.4 below), but in the case of an Incentive Stock Option not after the expiration of ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from the date the option is granted. 4 7.3.4 Exercise of Options. ------------------- 7.3.4.1 Each option shall be made exercisable at such time or times as the Committee or the Board of Directors shall determine. In the case of an option made exercisable in installments, the Committee or the Board of Directors may later determine to accelerate the time at which one or more of such installments may be exercised. 7.3.4.2 Any exercise of an option shall be in writing signed by the proper person and delivered or mailed to the General Counsel of the Company, accompanied by an option exercise notice and payment in full for the number of shares in respect to which the option is exercised. 7.3.4.3 In the event an option is exercised by the executor or administrator of a deceased Participant, or by the person or persons to whom the option has been transferred by the Participant's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver stock thereunder until the Company is satisfied that the person or persons exercising the option is or are the duly appointed executor or administrator of the deceased Participant or the person or persons to whom the option has been transferred by the Participant's will or by the applicable laws of descent and distribution. 7.3.4.4 The Committee or the Board of Directors may at the time of grant condition the exercise of an option upon agreement by the Participant to subject the Common Stock to any restrictions on transfer or repurchase rights in effect on the date of exercise, upon representations of continued employment and upon other terms not inconsistent with this Plan. Any such conditions shall be set forth in the option certificate or other document evidencing the option. 7.3.4.5 In the case of an option that is not an Incentive Stock Option, the Committee shall have the right to require that the individual exercising the option to remit to the Company an amount sufficient to satisfy any federal, state, or local withholding tax requirements (or makes other arrangements satisfactory to the Company with regard to such taxes) prior to the delivery of any Common Stock pursuant to the exercise of the option. In the case of an Incentive Stock Option, if at the time the Incentive Stock Option is exercised the Committee determines that under applicable law and regulations the Company could be liable for the withholding of any federal or state tax with respect to a disposition of the Common Stock received upon exercise, the Committee may require as a condition of exercise that the individual exercising the Incentive Stock Option agree (i) to inform the Company promptly of any disposition 5 (within the meaning of Section 422 (a) (1) of the Code and the regulations thereunder) of Common Stock received upon exercise, and (ii) to give such security as the Committee deems adequate to meet the potential liability of the Company for the withholding of tax, and to augment such security from time to time in any amount reasonably deemed necessary by the Committee to preserve the adequacy of such security. 7.3.4.6 In the case of an option that is exercised by an individual that is subject to taxation in a foreign jurisdiction, the Committee shall have the right to require the individual exercising the option to remit to the Company an amount sufficient to satisfy any federal or withholding requirement of that foreign jurisdiction (or make other arrangements satisfactory to the Company with regard to such taxes prior to the delivery of any Common Stock pursuant to the exercise of the option). 7.3.5 Payment for and Delivery of Stock. The shares of stock --------------------------------- purchased on any exercise of an option granted hereunder shall be paid for in full in cash or, if permitted by the terms of the option, in shares of unrestricted Common Stock at the time of such exercise or, if so permitted, a combination of such cash and Common Stock. A Participant shall not have the rights of a stockholder with respect to awards under the Plan except as to stock actually issued to him. 7.3.6 Listing of Stock, Withholding and Other Legal Requirements. ---------------------------------------------------------- The Company shall not be obligated to deliver any stock until all federal and state laws and regulations which the Company may deem applicable have been complied with, nor, in the event the outstanding Common Stock is at the time listed upon any stock exchange, until the stock to be delivered has been listed or authorized to be added to the list upon official notice of issuance to such exchange. In addition, if the shares of stock subject to any option have not been registered in accordance with the Securities Act of 1933, as amended, the Company may require the person or persons who wishes or wish to exercise such option to make such representation or agreement with respect to the sale of stock acquired on exercise of the option as will be sufficient, in the opinion of the Company's counsel, to avoid violation of said Act, and may also require that the certificates evidencing said stock bear an appropriate restrictive legend. 7.3.7 Non-transferability of Options. No option may be transferred ------------------------------ by the Participant otherwise than by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order, and during the Participant's lifetime the option may be exercised only by him or her; provided, however, that the Board of Directors or the Committee, as -------- ------- applicable, in its discretion, may allow for transferability of non- qualified stock options by the Participant to "Immediate Family Members." Immediate Family Members means children, grandchildren, spouse or common law spouse, siblings or parents of the Participant or to bona fide trusts, partnerships or other entities controlled by and of which the 6 beneficiaries are Immediate Family Members of the Participant. Any option grants that are transferable are further conditioned on the Participant and Immediate Family Members agreeing to abide by the Company's then current stock option transfer guidelines. 7.3.8 Death. If a Participant dies at a time when he is entitled ----- to exercise an Incentive Stock Option, then at any time or times within three years after his death such Incentive Stock Option may be exercised, as to all or any of the shares which the Participant was entitled to purchase thereunder immediately prior to his death, by his executor or administrator or the person or persons to whom the Incentive Stock Option is transferred by will or the applicable laws of descent and distribution, and except as so exercised such Incentive Stock Option shall expire at the end of such three-year period. In no event, however, may any Incentive Stock Option granted under the Plan be exercised after the expiration of ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from the date the Incentive Stock Option was granted. 7.3.9 Termination of Employment. If the employment of a Participant ------------------------- terminates for any reason other than his death, all options held by the Participant shall thereupon expire on the date of termination unless the option by its terms, or the Committee or the Board of Directors by resolution, shall allow the Participant to exercise any or all of the options held by him after termination. In the case of an Incentive Stock Option, the Incentive Stock Option shall in any event expire at the end of three months after such termination of employment, or after the expiration of ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from the date the Incentive Stock Option was granted, whichever occurs first. If the Committee or the Board of Directors so decides, an option may provide that a leave of absence granted by the Company or Subsidiary is not a termination of employment for the purpose of this subsection 7.3.9, and in the absence of such a provision the Committee may in any particular case determine that such a leave of absence is not a termination of employment for such purpose. The Committee shall also determine all other matters relating to continuous employment. 7.4 Authority of the Committee. The Committee shall have the authority, -------------------------- either generally or in particular instances, to waive compliance by a Participant with any obligation to be performed by him under an option and to waive any condition or provision of an option, except that the Committee may not (i) increase the total number of shares covered by any Incentive Stock Option (except in accordance with Section 8), (ii) reduce the option price per share of any Incentive Stock Option (except in accordance with Section 8) or (iii) extend the term of any Incentive Stock Option to more than ten years, subject, however, to the provisions of Section 10. 7 8. CHANGES IN STOCK. ---------------- In the event of a stock dividend, stock split or other change in corporate structure or capitalization affecting the Common Stock that becomes effective after the adoption of the Plan by the Board of Directors, the Committee shall make appropriate adjustments in (i) the number and kind of shares of stock on which options may thereafter be granted hereunder, (ii) the number and kind of shares of stock remaining subject to each option outstanding at the time of such change and (iii) the option price. The Committee's determination shall be binding on all persons concerned. Subject to any required action by the stockholders, if the Company shall be the surviving corporation in any merger or consolidation (other than a merger or consolidation in which the Company survives but in which a majority of its outstanding shares are converted into securities of another corporation or are exchanged for other consideration), any option granted hereunder shall pertain and apply to the securities which a holder of the number of shares of stock of the Company then subject to the option would have been entitled to receive, but a dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving corporation or in which a majority of its outstanding shares are so converted or exchanged shall cause every option hereunder to terminate; provided that if any such dissolution, liquidation, merger or consolidation is contemplated, the Company shall either arrange for any corporation succeeding to the business and assets of the Company to issue to the Participants replacement options (which, in the case of Incentive Stock Options, satisfy, in the determination of the Committee, the requirements of Section 424 of the Code) on such corporation's stock which will to the extent possible preserve the value of the outstanding options or shall make the outstanding options fully exercisable at least 20 days before the effective date of any such dissolution, liquidation, merger or consolidation. The existence of the Plan shall not prevent any such change or other transaction and no Participant thereunder shall have any right except as herein expressly set forth. 9. EMPLOYMENT RIGHTS. ----------------- Neither the adoption of the Plan nor any grant of options confers upon any employee of the Company or a Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor does it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. 10. DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION. ------------------------------------------------------- The Committee or the Board of Directors may at any time discontinue granting options under the Plan and, with the consent of the Participant, may at any time cancel an existing option in whole or in part and grant another option to the Participant for such number of shares as the Committee or the Board of Directors specifies. The Board of Directors may at any time or times amend the Plan for the purpose of satisfying the 8 requirements of any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law or may at any time terminate the Plan as to any further grants of options, provided that no such amendment shall without the approval of the stockholders of the Company (a) increase the maximum number of shares available under the Plan, (b) change the group of employees eligible to receive options under the Plan, (c) reduce the exercise price of outstanding incentive options or reduce the price at which incentive options may be granted, (d) extend the time within which options may be granted, (e) alter the Plan in such a way that incentive options granted or to be granted hereunder would not be considered incentive stock options under Section 422 of the Code, or (f) amend the provisions of this Section 10, and no such amendment shall adversely affect the rights of any employee (without his consent) under any option previously granted. 11. EFFECTIVE DATE. -------------- The Plan became effective immediately upon its approval by the stockholders of the Company at the Annual Meeting on May 12, 1993. 9 EX-11.1 5 COMPUTATION OF NET INCOME (LOSS) PER SHARE EMC CORPORATION EXHIBIT 11.1 COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER SHARE
1996 1995 1994 ----------- ----------- ----------- PRIMARY Net income (in thousands)............... $386,229 $326,845 $250,668 Add back interest expense on convertible notes.................................. 8,827 9,758 9,730 Less tax effect on interest expense on convertible notes...................... (3,531) (3,903) (3,892) ----------- ----------- ----------- Net income for purpose of calculating primary net income per share........... $391,525 $332,700 $256,506 ----------- ----------- ----------- Weighted average shares outstanding during the period...................... 236,153,731 225,314,314 193,969,252 ----------- ----------- ----------- Common equivalent shares................ 13,141,480 20,071,895 24,076,414 ----------- ----------- ----------- Common and common equivalent shares outstanding for purpose of calculating primary net income per share........... 249,295,211 245,386,209 218,045,666 =========== =========== =========== Primary net income per share (Note B)... $1.57 $1.36 $1.18 FULLY DILUTED Net income (in thousands)............... $386,229 $326,845 $250,668 Add back interest expense on convertible debentures and notes................... 8,827 10,374 12,700 Less tax effect on interest expense on convertible debentures and notes....... (3,531) (4,150) (5,080) ----------- ----------- ----------- Net income for purpose of calculating fully diluted net income per share..... $391,525 $333,069 $258,288 ----------- ----------- ----------- Common and common equivalent shares outstanding for purpose of calculating primary net income per share........... 249,295,211 245,386,209 218,045,666 Incremental shares to reflect full dilution............................... 2,136,132 2,909,934 16,208,974 ----------- ----------- ----------- Total shares for purpose of calculating fully diluted net income per share..... 251,431,343 248,296,143 234,254,640 =========== =========== =========== Fully diluted net income per share (Note B)..................................... $1.56 $1.34 $1.10
EX-22.1 6 SUBSIDARIES OF REGISTRANT EXHIBIT 22.1--SUBSIDIARIES OF REGISTRANT The following is a list of the Corporation's consolidated subsidiaries as of January 31, 1997. The Corporation owns, directly or indirectly, 100% of the voting securities of each subsidiary, unless noted otherwise and except for director's qualifying shares.
STATE OR JURISDICTION OF NAME ORGANIZATION - ---- ------------------- EMC Asset Acquisition Corporation.......................... Delaware EMC (Benelux) B.V. ........................................ The Netherlands EMC Computer Storage Systems (Israel) Ltd. ................ Israel EMC Computer Storage Systems (Sales and Services) Ltd. .... Israel EMC Computer Systems AG.................................... Switzerland EMC Computer Systems (Benelux) B.V. ....................... The Netherlands EMC Computer Systems California, Inc. ..................... Delaware EMC Computer Systems (F.E.) Limited........................ Hong Kong EMC Computer Systems France S.A. .......................... France EMC Computer Systems Italy SPA............................. Italy EMC Computer Systems (S.A.) Pty. Ltd. ..................... South Africa EMC Computer Systems (South Asia) Pte. Ltd. ............... Singapore EMC Computer Systems (U.K.) Limited........................ United Kingdom EMC Computer-Systems AS.................................... Norway EMC Computer-Systems A/S................................... Denmark EMC Computer-Systems Brazil Ltda. ......................... Brazil EMC Computer-Systems Deutschland GMBH...................... Germany EMC Computer-Systems Ireland Limited....................... Ireland EMC Computer-Systems OY.................................... Finland EMC Computer-Systems Svenska AB............................ Sweden EMC Foreign Sales Corporation (F.S.C.)..................... Barbados EMC International Holdings, Inc. .......................... Delaware EMC Japan K.K.*............................................ Japan EMC Securities Corporation................................. Massachusetts EMC System Peripherals Canada, Inc. ....................... Canada Epoch, Inc. ............................................... Delaware Hankook EMC Computer Systems Chusik Hoesa.................. South Korea McDATA Asia Pacific Pte. Ltd. ............................. Singapore McDATA Corporation......................................... Delaware McDATA Europa GmbH......................................... Germany McDATA International, Inc. ................................ U.S. Virgin Islands McDATA UK Limited.......................................... United Kingdom
- -------- * 95% owned by EMC Corporation, the remainder owned by CLC Corporation. EX-23.1 7 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1-- CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of EMC Corporation on Form S-8 (File Nos. 33-71262, 33-71598, 33-63665, 333- 1375 and 333-5133) of our report dated January 23, 1997, on our audits of the consolidated financial statements and financial statement schedule of EMC Corporation as of December 31, 1996 and December 30, 1995 and for the years ended December 31, 1996, December 30, 1995, and December 31, 1994, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Boston, Massachusetts February 27, 1997 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 DEC-31-1995 DEC-31-1996 496,377 344,481 627,409 7,368 336,581 1,754,136 276,387 52,899 2,293,546 417,502 142,720 0 0 2,382 1,634,407 2,293,546 2,218,292 2,273,652 1,248,950 1,248,950 528,161 0 11,967 519,474 133,245 386,229 0 0 0 386,229 1.57 1.56
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