-----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, BvHsV2FwfZ6pt4w7qUkc/ycDR+sKWcbehRz3J/r7QyLK4CBV65QaAix8t25Rqy/8 tl8Rq73oNvrZIYxTt9AtAw== 0000927016-97-003049.txt : 19971114 0000927016-97-003049.hdr.sgml : 19971114 ACCESSION NUMBER: 0000927016-97-003049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMC CORP CENTRAL INDEX KEY: 0000790070 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 042680009 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09853 FILM NUMBER: 97713865 BUSINESS ADDRESS: STREET 1: 171 SOUTH STREET CITY: HOPKINTON STATE: MA ZIP: 01748-9103 BUSINESS PHONE: 5084351000 MAIL ADDRESS: STREET 1: 171 SOUTH STREET CITY: HOPKINTON STATE: MA ZIP: 01748-9103 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarter Ended: September 30, 1997 Commission File Number 1- 9853 ------------------- ------- EMC CORPORATION -------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-2680009 - ----------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) organization or incorporation) 171 South Street Hopkinton, Massachusetts 01748-9103 - -------------------------------------------------------------------------------- (Address of principal executive offices, including zip code) (508) 435-1000 -------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, par value $.01 per share 247,971,175 - --------------------------------------- ----------------------------------- Class Outstanding as of September 30, 1997 -2- EMC CORPORATION
Page No. Part I - Financial Information Consolidated Balance Sheets September 30, 1997 and December 31, 1996............................. 3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1997 and September 30, 1996............................ 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and September 30, 1996............................................... 5 Notes to Interim Consolidated Financial Statements............................................................ 6-9 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 10-18 Part II - Other Information................................................... 19 Signatures.................................................................... 20 Exhibit Index................................................................. 21
-3- EMC CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
September 30, December 31, ASSETS 1997 1996 -------------- ------------- Current assets: Cash and cash equivalents $ 971,241 $ 496,377 Short-term investments 361,607 230,981 Trade and notes receivable less allowance for doubtful accounts of $7,519 and $7,368 in 1997 and 1996, respectively 663,114 627,409 Inventories 449,024 336,581 Deferred income taxes 34,031 43,421 Other assets 30,399 19,367 ---------- ---------- Total current assets 2,509,416 1,754,136 Long-term investments 140,067 113,500 Notes receivable, net 29,459 20,013 Property, plant and equipment, net 338,583 276,387 Deferred income taxes 15,458 16,664 Intangible and other assets, net 142,513 112,846 ---------- ---------- Total assets $3,175,496 $2,293,546 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term obligations $ 8,293 $ 7,058 Accounts payable 120,158 172,871 Accrued expenses 116,674 122,562 Income taxes payable 130,983 104,899 Deferred revenue 7,348 10,112 ---------- ---------- Total current liabilities 383,456 417,502 Deferred revenue 805 2,019 Deferred income taxes 41,985 46,002 Long-term obligations: 3 1/4% convertible subordinated notes due 2002 517,500 --- 4 1/4% convertible subordinated notes due 2001 --- 142,720 Notes payable and other noncurrent liabilities 39,229 48,514 ---------- ---------- Total liabilities 982,975 656,757 ---------- ---------- Commitments and contingencies Stockholders' equity: Series Preferred Stock, par value $.01; authorized 25,000,000 --- --- shares, none outstanding Common Stock, par value $.01; authorized 750,000,000 shares; issued 247,971,175 and 238,239,672 shares, in 1997 and 1996, respectively 2,479 2,382 Additional paid-in capital 655,192 463,687 Deferred compensation (12,572) (7,027) Retained earnings 1,545,117 1,172,828 Cumulative translation adjustment 2,305 4,919 ---------- ---------- Total stockholders' equity 2,192,521 1,636,789 ---------- ---------- Total liabilities and stockholders' equity $3,175,496 $2,293,546 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. -4- EMC CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited)
For the Three Months Ended For the Nine Months Ended -------------------------- ------------------------ Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1997 1996 1997 1996 ---------- ---------- ----------- ----------- Revenues: Net sales $713,949 $536,279 $2,009,360 $1,578,698 Service and rental 18,621 14,475 55,108 38,560 -------- -------- ---------- ---------- 732,570 550,754 2,064,468 1,617,258 Costs and expenses: Cost of sales and service 391,278 306,438 1,111,808 904,543 Research and development 56,531 41,151 158,068 116,101 Selling, general and administrative 122,093 90,268 334,357 259,190 -------- -------- ---------- ---------- Operating income 162,668 112,897 460,235 337,424 Investment income 20,708 9,537 49,804 23,903 Interest expense (4,706) (3,045) (10,748) (9,101) Other income / (expense), net (294) 92 1,434 89 -------- -------- ---------- ---------- Income before taxes 178,376 119,481 500,725 352,315 Income tax provision 45,754 29,134 128,436 90,369 -------- -------- ---------- ---------- Net income $132,622 $ 90,347 $ 372,289 $ 261,946 ======== ======== ========== ========== Net income per weighted average share, primary $0.51 $0.37 $1.44 $1.07 ======== ======== ========== ========== Net income per weighted average share, fully diluted $0.51 $0.37 $1.44 $1.07 ======== ======== ========== ========== Weighted average number of common shares outstanding, primary 265,676 248,998 261,636 248,714 Weighted average number of common shares outstanding, fully diluted 266,267 249,795 262,798 249,287
The accompanying notes are an integral part of the consolidated financial statements. -5- EMC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
For the Nine Months Ended ------------------------------ September 30, September 30, 1997 1996 -------------- -------------- Cash flows from operating activities: Net income $ 372,289 $ 261,946 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 95,499 63,204 Deferred income taxes, net 6,579 25,575 Net loss on disposal of property and equipment 491 954 Tax benefit from stock options exercised 16,500 --- Changes in assets and liabilities: Trade and notes receivable (45,001) (11,166) Inventories (112,448) 26,861 Other assets (42,678) (25,391) Accounts payable (52,731) 39,474 Accrued expenses (6,250) (18,532) Income taxes payable 26,020 (3,630) Deferred revenue (3,984) 6,655 --------- --------- Net cash provided by operating activities 254,286 365,950 --------- --------- Cash flows from investing activities Additions to property, plant and equipment (125,837) (88,238) Purchase of patents --- (6,333) Proceeds from disposal of property and equipment 313 850 Capitalized software development costs (19,385) (18,693) Maturities/(purchases) of short-term and long-term investments, net (157,193) (40,232) --------- --------- Net cash used by investing activities (302,102) (152,646) --------- --------- Cash flows from financing activities: Issuance of common stock 26,342 19,135 Repurchase of shares for treasury --- (22,207) Redemption of 4 1/4% notes due 2001 (65) --- Issuance of 3 1/4% notes due 2002, net of issuance costs 506,671 --- Payment of long-term and short-term obligations (9,763) (822) Issuance of long-term and short-term obligations 1,713 4,296 --------- --------- Net cash provided by financing activities 524,898 402 --------- --------- Effect of exchange rate changes on cash (2,218) 73 Net increase in cash and cash equivalents 477,082 213,706 Cash and cash equivalents at beginning of period 496,377 379,628 --------- --------- Cash and cash equivalents at end of period $ 971,241 $ 593,407 ========= ========= Non-cash activity: Conversion of 4 1/4% notes to common stock, net of issuance costs $140,682 $100 Patents acquired by notes and other payables --- $37,416
The accompanying notes are an integral part of the consolidated financial statements. -6- EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation --------------------- Company ------- EMC Corporation and its subsidiaries ("EMC" or the "Company") design, manufacture, market and support a wide range of storage-related hardware and software products and related services for the Enterprise Storage market. Enterprise Storage provides shared storage of information from all types of computers, including both mainframe and open systems computers. EMC's products are sold as storage solutions for customers utilizing a variety of computer system platforms, including, but not limited to, International Business Machines Corporation ("IBM") and IBM-compatible mainframe, Unisys Corporation, Compagnie des Machines Bull S.A., Hewlett-Packard Company ("HP"), NCR Corporation, Sequent Computer Systems, Inc., and Siemens Nixdorf Informationssysteme AG. Accounting ---------- The accompanying consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles. These statements include the accounts of EMC and its subsidiaries. Certain information and footnote disclosures normally included in the Company's annual consolidated financial statements have been condensed or omitted. The interim consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the results for the interim periods ended September 30, 1997 and September 30, 1996. Certain prior year amounts have been reclassified to conform with the 1997 presentation. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the entire fiscal year. It is suggested that these interim consolidated financial statements be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1996, which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 1997. -7- EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 2. Inventory
September 30, 1997 December 31, 1996 ------------------ ----------------- Inventories consist of: (in thousands) Purchased parts $ 23,823 $ 16,610 Work-in-process 254,174 210,445 Finished goods 171,027 109,526 -------- -------- $449,024 $336,581 ======== ========
3. Long-Term Obligations --------------------- In March 1997, the Company sold in a private placement under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), $517.5 million of 3 1/4% convertible subordinated notes due 2002 (the "3 1/4% Notes"). The 3 1/4% Notes are generally convertible into shares of common stock of the Company at a conversion price of $45.31 per share, subject to adjustment in certain events. Interest is payable semiannually and the 3 1/4% Notes are redeemable at the option of the Company at set redemption prices (which range from 100.65% to 101.30% of principal), plus accrued interest, commencing March 15, 2000. The Company has filed a Registration Statement on Form S-3 with the Securities and Exchange Commission under the Securities Act, which became effective on June 26, 1997, permitting the resale, on a registered basis, of the Notes and of the shares of common stock issuable upon conversion of the Notes from time to time by the securityholders named or to be named therein. 4. Net Income Per Share -------------------- Net income per share was computed on the basis of weighted average common and dilutive common equivalent shares outstanding. Primary and fully diluted weighted average shares outstanding used in the per share computations reflect the dilutive effects of the 3 1/4% Notes for the three and nine months ended September 30, 1997, and of the 4 1/4% convertible subordinated notes due 2001 (the "4 1/4% Notes") for the three and nine months ended September 30, 1996. The dilutive effects of outstanding stock options are reflected in all periods presented. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" which is effective for fiscal years ending after December 15, 1997. This Statement replaces the presentation of primary earnings per share ("EPS") with a presentation of diluted EPS and adds the presentation of basic EPS, which excludes dilutive securities. It also requires a reconciliation of the basic EPS to diluted EPS and dual presentation on the face of the income statement. -8- EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS Pro forma net income per share for the three and nine months ended September 30, 1997 and September 30, 1996, respectively, as computed under the new standard is as follows:
For the three months ended -------------------------------------- September 30, 1997 September 30, 1996 ------------------ ------------------ Net income per weighted average share, basic $0.54 $0.39 Net income per weighted average share, diluted $0.51 $0.37 For the nine months ended ------------------------- September 30, 1997 September 30, 1996 ------------------ ------------------ Net income per weighted average share, basic $1.51 $1.13 Net income per weighted average share, diluted $1.44 $1.07
5. Common Stock ------------ On October 21, 1997, the Company announced a 2-for-1 stock split in the form of a 100% stock dividend with a record date of October 31, 1997 and a distribution date of November 17, 1997. Share and per share amounts have not been restated to reflect the stock split. Pro forma fully diluted per share amounts as restated to reflect the stock split are $.25 and $.18 for the three months ended September 30, 1997 and 1996, respectively, and $.72 and $.53 for the nine months ended September 30, 1997 and 1996. 6. Litigation ------------ On August 20, 1997, TM Patents, L.P. ("TM") filed suit against the Company in the United States District Court for the Southern District of New York (Civil Action No. 97-6211) alleging that the Company is infringing two patents and seeking unspecified damages. The Company believes TM's claims are without merit. The Company is a party to other litigation which it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material adverse effect on the Company's business or financial condition. -9- EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 7. Derivatives ------------ Financial Reporting Release No. 48, issued by the Securities and Exchange Commission, requires enhanced disclosures regarding accounting policies for and market risks inherent in derivatives and other financial instruments. Note M of the notes to the financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 describes the Company's use of derivatives and its related accounting policy. There have been no significant changes to the policy set forth in Note M through September 30, 1997. 8. Subsequent Event ---------------- On October 1, 1997, a new McDATA Corporation was formed to design, develop and market fibre channel solutions for switched enterprise environments. EMC is currently the majority shareholder in the new company. McDATA Holdings Corporation, a wholly-owned subsidiary of EMC, continues to focus on McDATA's existing ESCON business and holds EMC's equity investment in the new McDATA Corporation. -10- EMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - Third Quarter of 1997 compared to Third Quarter of 1996 (in thousands) - -------------------------------------------------------------------------------- Revenues - -------- The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the risk factors set forth on page 18 and in EMC's other filings at the U.S. Securities and Exchange Commission. Total revenues for the third quarter ended September 30, 1997 were $732,570 compared to $550,754 for the third quarter of 1996, an increase of $181,816 or 33%. The increase in revenues was due primarily to the continued strong demand for the Company's Symmetrix series of products. These products address the growing demand for enterprise-wide storage solutions regardless of operating systems. Enterprise Storage allows users to move and store mission critical information from mainframe, UNIX and Windows NT environments. Revenues from products sold directly and through original equipment manufacturers ("OEM's") and resellers into the open systems storage market, which include the Symmetrix products operating in an open systems environment and other products, were $404,054 in the third quarter of 1997, compared to $182,613 in the third quarter of 1996, an increase of $221,441 or 121%. This was the second consecutive quarter in which open systems revenue levels exceeded mainframe revenue levels. The Company expects further growth in the open systems revenue levels and revenue as a percentage of total revenue in this market for the remainder of 1997. (See, however, "Factors that May Affect Future Results.") Revenues from products sold directly and through OEM's and resellers into the mainframe storage market, which include Symmetrix products operating primarily in the Multiple Virtual Storage ("MVS") environment, were $266,226 in the third quarter of 1997, compared to $305,605 in the third quarter of 1996. The decrease of $39,379 or 13% resulted from the continuing market transition from proprietary mainframe storage to products operating in an open systems environment and some seasonality in the European market which tends to be more mainframe-oriented. Revenues from products sold by McDATA Corporation, a wholly-owned subsidiary of EMC (See Note 8) ("McDATA"), which include the ESCON Director series of products, were $43,126 in the third quarter of 1997, compared to $43,776 in the third quarter of 1996, a decrease of $650 or 1%. -11- EMC CORPORATION Revenues from all other products, which include the midrange series of products, were less than $1 million in the third quarter of 1997, compared to $4,285 in the third quarter of 1996. Midrange revenue levels are not expected to be material in the remainder of 1997 and thereafter. Software revenues were $49,782 and $26,401 in the third quarters of 1997 and 1996, respectively. Software revenues are included in the product revenues for the respective mainframe and open systems markets. Revenues from service and rental income were $18,621 in the third quarter of 1997, compared to $14,475 in the third quarter of 1996, an increase of $4,146 or 29%, due principally to a broadening base of customers under service agreements. In October 1995, the Company entered into a reseller agreement with HP under which HP markets and resells the Symmetrix 3000 series of systems worldwide for connection to HP's 9000 series computers. This agreement was expanded to enable HP to also market and resell this family of systems for connection to HP's 3000 series computers. The current agreement extends through August 1998. Revenues for the third quarter of 1997 and 1996 under this agreement were $134,608 and $62,161, or 18% and 11% of total revenues, respectively. Revenues on sales into the North American markets were $426,733 in the third quarter of 1997 compared to $330,520 in the third quarter of 1996, an increase of $96,213, or 29%. This increase was due primarily to increased revenue levels from sales of the Symmetrix series of products in the open systems storage market. Revenues on sales into all markets outside North America were $305,837 or 42% of total revenues in the third quarter of 1997 compared to $220,234 or 40% of total revenues for the third quarter of 1996, an increase of $85,603 or 39%. The increase in revenue levels is primarily due to sales of the Symmetrix series of products in the open systems storage market. Revenues on sales into the markets of Europe, Africa and the Middle East were $221,606 in the third quarter of 1997 compared to $173,724 in the third quarter of 1996, an increase of $47,882, or 28%. Revenues on sales into the markets of the Asia Pacific region, primarily Japan, were $77,366 in the third quarter of 1997 compared to $45,656 in the third quarter of 1996, an increase of $31,710, or 69%. Revenues on sales into the markets of South America were $6,865 in the third quarter of 1997 compared to $854 in the third quarter of 1996, an increase of $6,011 or 704%. -12- EMC CORPORATION Gross Margins - ------------- Gross margins increased to 46.6% of revenues in the third quarter of 1997, compared to 44.4% of revenues in the third quarter of 1996. This increase is primarily attributable to increasing sales of software which have a higher gross margin than hardware sales. Other factors impacting gross margins to a lesser extent in the third quarter of 1997 include the rates of price declines in the marketplace and component cost declines which were about equal. The Company currently believes that price declines will continue. Research and Development - ------------------------ Research and development ("R&D") expenses were $56,531 and $41,151 in the third quarters of 1997 and 1996, respectively, an increase of $15,380, or 37%. R&D expenses were 7.7% and 7.5% of revenues in the third quarters of 1997 and 1996, respectively. The increase was partially due to the cost of additional technical staff to support a variety of initiatives including both fibre channel connectivity and Enterprise Storage software. The increase is also attributable to expenses associated with computer equipment acquired to facilitate this development. The Company expects to continue to spend substantial amounts for R&D for the balance of 1997 and thereafter. Selling, General and Administrative - ----------------------------------- Selling, general and administrative ("SG&A") expenses were $122,093 and $90,268 in the third quarters of 1997 and 1996, respectively, an increase of $31,825 or 35%. SG&A expenses were 16.7% and 16.4% of revenues in the third quarters of 1997 and 1996, respectively. The dollar increase is due primarily to costs associated with additional worldwide sales and support personnel and their related overhead costs. These costs are attributable to the Company's increased revenue levels and the Company's initiatives to expand sales of its Enterprise Storage products. The Company has expanded its international direct sales force, as well as its OEM, reseller, alliance and partnership programs with applications, systems and database vendors. SG&A expenses are expected to increase in dollar terms for the balance of 1997 and thereafter. Investment Income and Interest Expense - -------------------------------------- Investment income was $20,708 in the third quarter of 1997 compared with $9,537 in the same period a year ago. Interest income was earned from investments in cash equivalents, and short and long-term investments and other receivables. Investment income increased in 1997 primarily due to higher cash and investment balances which were derived from operations and the 3 1/4% Notes that were issued in March of 1997. Interest expense increased by $1,661 to $4,706 in the third quarter of 1997 from $3,045 in the third quarter of 1996. The increase is attributable to the issuance of the 3 1/4% Notes in March of 1997. -13- EMC CORPORATION Provision for Income Taxes - -------------------------- The provisions for income taxes were $45,754 and $29,134 in the third quarters of 1997 and 1996, respectively, which resulted in an effective tax rate of 25.6% in the third quarter of 1997 and 24.4% in the third quarter of 1996. In the third quarter of 1996 the Company reduced its expected year-to-date effective tax rate to 25.6% which resulted in the lower rate for the three month period ended September 30, 1996. The lower tax rate was due to the realization of benefits associated with the continued progress on the Company's various tax strategies. The Company provides for income taxes based upon its estimate of full year earnings on a country-by-country basis. -14- EMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - First Nine Months of 1997 compared to First Nine Months of 1996 (in thousands) - -------------------------------------------------------------------------------- Revenues - -------- The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the risk factors set forth on page 18 and in EMC's other filings at the U.S. Securities and Exchange Commission. Total revenues for the nine months ended September 30, 1997 were $2,064,468 compared to $1,617,258 for the first nine months of 1996, an increase of $447,210 or 28%. The increase in revenues was due primarily to the continued strong demand for the Company's Symmetrix series of products. These products address the growing need for enterprise-wide storage solutions regardless of operating systems. Enterprise Storage allows users to move and store data mission critical information from mainframe, UNIX and Windows NT environments. Revenues from products sold directly and through OEM's and resellers into the open systems storage market, which include the Symmetrix products operating in an open systems environment and other products, were $1,011,756 in the first nine months of 1997, compared to $498,902 in the first nine months of 1996, an increase of $512,854 or 103%. The Company expects further growth in the open systems revenue levels and revenue as a percentage of total revenue in this market for the remainder of 1997. (See, however, "Factors that May Affect Future Results.") Revenues from products sold directly and through OEM's and resellers into the mainframe storage market, which include Symmetrix products operating primarily in the MVS environment, were $857,155 in the first nine months of 1997, compared to $924,254 in the first nine months of 1996, a decrease of $67,099 or 7%. The trend in the mainframe revenue levels reflects a continuing market transition from proprietary mainframe storage to products operating in an open systems environment. Revenues from products sold by McDATA, which include the ESCON Director series of products, were $136,209 in the first nine months of 1997, compared to $129,052 in the first nine months of 1996, an increase of $7,157 or 6%. Revenues from all other products, which include the midrange series of products, were $4,240 in the first nine months of 1997, compared to $26,490 in the first nine months of 1996, a decrease of $22,250 or 84% attributable to customer demand shifting to Symmetrix Enterprise Storage. Midrange revenue levels are not expected to be material in the remainder of 1997 and thereafter. -15- EMC CORPORATION Software revenues were $117,152 and $53,034 in the first nine months of 1997 and 1996, respectively. Software revenues are included in the product revenues for the respective mainframe and open systems markets. Revenues from service and rental income were $55,108 in the first nine months of 1997, compared to $38,560 in the first nine months of 1996, an increase of $16,548 or 43%, due to a broadening base of customers under service agreements. In October 1995, the Company entered into a reseller agreement with HP under which HP markets and resells the Symmetrix 3000 series of systems worldwide for connection to HP's 9000 series computers. This agreement was expanded to enable HP to also market and resell this family of systems for connection to HP's 3000 series computers. The current agreement extends through August 1998. Revenues for the first nine months of 1997 and 1996 under this agreement were $360,722 and $175,477, or 17% and 11% of total revenues, respectively. Revenues on sales into the North American markets were $1,188,891 in the first nine months of 1997 compared to $965,322 in the first nine months of 1996, an increase of $223,569, or 23%. This increase was due primarily to increased revenue levels from sales of the Symmetrix series of products in the open systems storage market. Revenues on sales into all markets outside North America were $875,577 or 42% of total revenues in the first nine months of 1997 compared to $651,936 or 40% of total revenues for the first nine months of 1996. The increase in revenue levels is primarily due to sales of the Symmetrix series of products in the open systems storage market. Revenues on sales into the markets of Europe, Africa and the Middle East were $656,662 in the first nine months of 1997 compared to $502,983 in the first nine months of 1996, an increase of $153,679, or 31%. Revenues on sales into the markets of the Asia Pacific region, primarily Japan, were $204,467 in the first nine months of 1997 compared to $141,883 in the first nine months of 1996, an increase of $62,584, or 44%. Revenues on sales into the markets of South America were $14,448 in the first nine months of 1997 compared to $7,070 in the first nine months of 1996, an increase of $7,378 or 104%. -16- EMC CORPORATION Gross Margins - ------------- Gross margins increased to 46.1% of revenues in the first nine months of 1997, compared to 44.1% of revenues in the first nine months of 1996. This increase is primarily attributable to increasing sales of software which have a higher gross margin than hardware sales. Other factors impacting gross margins to a lesser extent in the first nine months of the year include the rates of price declines in the marketplace and component cost declines which were about equal. The Company currently believes that price declines will continue. Research and Development - ------------------------ R&D expenses were $158,068 and $116,101 in the first nine months of 1997 and 1996, respectively, an increase of $41,967, or 36%. R&D expenses were 7.7% and 7.2% of revenues in the first nine months of 1997 and 1996, respectively. The increase was partially due to the cost of additional technical staff to support a variety of initiatives including both fibre channel connectivity and Enterprise Storage software. The increase is also attributable to expenses associated with computer equipment acquired to facilitate this development. The Company expects to continue to spend substantial amounts for R&D for the balance of 1997 and thereafter. Selling, General and Administrative - ----------------------------------- SG&A expenses were $334,357 and $259,190 in the first nine months of 1997 and 1996, respectively, an increase of $75,167 or 29%. SG&A expenses were 16.2% and 16.0% of revenues in the first nine months of 1997 and 1996, respectively. The dollar increase is due primarily to costs associated with additional worldwide sales and support personnel and their related overhead costs. These costs are attributable to the Company's increased revenue levels and the Company's initiatives to expand sales of its Enterprise Storage products. The Company has expanded its international direct sales force, as well as its OEM, reseller, alliance and partnership programs with applications, systems and database vendors. SG&A expenses are expected to increase in dollar terms for the balance of 1997 and thereafter. Investment Income and Interest Expense - -------------------------------------- Investment income was $49,804 in the first nine months of 1997 compared with $23,903 in the same period a year ago. Interest income was earned from investments in cash equivalents, and short and long-term investments and other receivables. Investment income increased in 1997 primarily due to higher cash and investment balances which were derived from operations and the 3 1/4% Notes that were issued in March of 1997. -17- EMC CORPORATION Interest expense increased by $1,647 to $10,748 for the nine months ended September 30, 1997 from $9,101 for the nine months ended September 30, 1996 and relates primarily to the 3 1/4% Notes and 4 1/4% Notes, respectively. Provision for Income Taxes - -------------------------- The provisions for income taxes were $128,436 and $90,369 in the first nine months of 1997 and 1996, respectively, which resulted in an effective tax rate of 25.6% in the first nine months of 1997 and 1996. This effective tax rate is mainly attributable to the realization of benefits associated with the Company's various tax strategies. The Company provides for income taxes based upon its estimate of full year earnings on a country-by-country basis. FINANCIAL CONDITION - ------------------- Cash and cash equivalents and short and long-term investments were $1,472,915 and $840,858 at September 30, 1997 and December 31, 1996, respectively, an increase of $632,057. Cash provided by operating activities for the first nine months of 1997 was $254,286, generated primarily from net income and offset by an increase in working capital, primarily driven by an increase in inventory related to the transition to the new Symmetrix products. Cash used by investing activities was $302,102, principally for the purchase of short and long-term investments and additions to property, plant and equipment. Cash provided by financing activities was $524,898, principally from the issuance of the 3 1/4% Notes in March of 1997 and proceeds from the exercise of stock options. At September 30, 1997, the Company had available for use its credit line of $50 million. The Company may elect to borrow at any time. Based on its current operating and capital expenditure forecasts, the Company believes funds currently available, funds generated from operations and its available line of credit will be adequate to finance its operations, as well as potential acquisitions. Financial Reporting Release No. 48, issued by the Securities and Exchange Commission, requires enhanced disclosures regarding accounting policies for and market risks inherent in derivatives and other financial instruments. Note M of the notes to the financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 describes the Company's use of derivatives and its related accounting policy. There have been no significant changes to the policy set forth in Note M through September 30, 1997. -18- EMC CORPORATION FACTORS THAT MAY AFFECT FUTURE RESULTS - -------------------------------------- This Quarterly Report on Form 10-Q contains forward-looking statements as defined under the Federal Securities Laws. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including but not limited to: (i) a failure by any supplier of high density DRAMs, disk drives or other components to meet EMC's requirements for an extended period of time; (ii) changes in EMC's sales strategy and product development plans; (iii) the transition to new products; (iv) the historic and recurring "hockey stick" pattern of the Company's sales by which a disproportionate percentage of a quarter's total sales occur in the last month and weeks and days of each quarter; (v) the "hockey stick" pattern of the Company's sales, making it extremely difficult to predict near-term demand and adjust production capacity accordingly; (vi) competitive factors, including but not limited to pricing pressures, in the computer storage market; (vii) fluctuating currency exchange rates; (viii) the relative and varying rates of product price and component cost declines; (ix) termination of the agreements with certain of the Company's OEM's or resellers; (x) 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. -19- EMC CORPORATION PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- On August 20, 1997, TM Patents, L.P. ("TM") filed suit against the registrant in the United States District Court for the Southern District of New York (Civil Action No. 97-6211) alleging that the registrant is infringing two patents and seeking unspecified damages. The registrant believes TM's claims are without merit. The registrant is a party to other litigation which it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material adverse effect on the registrant's business or financial condition. Item 5. Other Information ----------------- (a) In August 1997, the registrant announced plans to more than double its worldwide manufacturing capacity. The registrant is constructing a manufacturing facility in Franklin, Massachusetts of approximately 650,000 square feet and increasing the size of its manufacturing plant in Cork, Ireland, to a total of approximately 400,000 square feet. (b) On October 1, 1997, a new McDATA Corporation was formed to design, develop and market fibre channel solutions for switched enterprise environments. The registrant is currently the majority shareholder in the new company. McDATA Holdings Corporation, a wholly-owned subsidiary of the registrant, continues to focus on McDATA's existing ESCON business and holds the registrant's equity investment in the new McDATA Corporation. (c) Subsequent Events. See Notes 5 and 8 to Notes to Interim Consolidated Financial Statements in Part I of this report. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 11.1 Computation of Primary and Fully Diluted Net Income Per Share (filed herewith). 27 Financial Data Schedule (filed herewith). -20- EMC CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EMC CORPORATION Date: November 12, 1997 By: /s/ Colin G. Patteson ---------------------- Colin G. Patteson Senior Vice President, Chief Administrative Officer and Treasurer (Principal Financial Officer) By: /s/ William J. Teuber, Jr. -------------------------- William J. Teuber, Jr. Vice President and Chief Financial Officer (Principal Accounting Officer) -21- EMC CORPORATION EXHIBIT INDEX Exhibit 11.1 Computation of Primary and Fully Diluted Net Income Per Share Exhibit 27 Financial Data Schedule EX-11.1 2 COMPUTATION OF NET INCOME PER SHARE -22- EMC CORPORATION Exhibit 11.1 Computation of Primary and Fully Diluted Net Income Per Share (unaudited) (Amounts in thousands except share and per share data)
Three Months Ended Nine Months Ended ------------------ ----------------- September 30, September 30, September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Primary - ------- Net income $ 132,622 $ 90,347 $ 372,289 $ 261,946 Add back interest expense on convertible notes 4,205 2,438 9,297 7,316 Less tax effect on interest expense on convertible notes (1,682) (975) (3,719) (2,926) ------------ ------------ ------------ ------------ Net income for purposes of calculating primary net income per share $ 135,145 $ 91,810 $ 377,867 $ 266,336 ============ ============ ============ ============ Weighted average shares outstanding during the period 247,333,328 232,295,208 246,468,084 231,271,815 Common equivalent shares 18,342,474 16,702,332 15,167,452 17,442,159 ------------ ------------ ------------ ------------ Common and common equivalent shares outstanding for purpose of calculating primary net income per share 265,675,802 248,997,540 261,635,536 248,713,974 ============ ============ ============ ============ Primary net income per share (Note 4) $0.51 $0.37 $1.44 $1.07 Fully Diluted - ------------- Net income $ 132,622 $ 90,347 $ 372,289 $ 261,946 Add back interest expense on convertible notes 4,205 2,438 9,297 7,316 Less tax effect on interest expense on convertible notes (1,682) (975) (3,719) (2,926) ------------- ------------ ------------ ------------ Net income for purpose of calculating fully diluted net income per share $ 135,145 $ 91,810 $ 377,867 $ 266,336 ============= ============ ============ ============ Common and common equivalent shares outstanding for purpose of calculating primary net income per share 265,675,802 248,997,540 261,635,536 248,713,974 Incremental shares to reflect full dilution 590,978 797,225 1,162,663 572,536 ------------ ------------ ------------ ------------ Total shares for purpose of calculating fully diluted net income per share 266,266,780 249,794,765 262,798,199 249,286,510 ============= ============ ============ ============ Fully diluted net income per share (Note 4) $0.51 $0.37 $1.44 $1.07
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EMC CORPORATION FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1997 971,241 361,607 663,114 7,519 449,024 2,509,146 338,583 95,499 3,175,496 383,456 517,500 0 0 2,479 2,190,042 3,175,496 2,009,360 2,064,468 1,111,808 1,604,233 0 0 10,748 500,725 128,436 372,289 0 0 0 372,289 1.44 1.44
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