-----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, QGF7W7gCXkwUzwcsVnLScaScBpzWEoGGQjvrmnxwCMduu455fsbwT7JNi7q3E90Y sDINq8FqHIns75vsVlQIgQ== 0000927016-98-000874.txt : 19980309 0000927016-98-000874.hdr.sgml : 19980309 ACCESSION NUMBER: 0000927016-98-000874 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980306 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-K405 SEC ACT: SEC FILE NUMBER: 001-09853 FILM NUMBER: 98559355 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-K405 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, 1997 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) 35 PARKWOOD DRIVE 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 3 1/4% Convertible Subordinated New York Stock Exchange Notes due 2002 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. Yes X 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. [X] The aggregate market value of voting stock held by nonaffiliates of the registrant was $15,839,114,391 as of January 31, 1998. The number of shares of Common Stock, $.01 par value, outstanding as of January 31, 1998 was 497,058,098. 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 6, 1998. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's prospects are subject to certain uncertainties and risks. This Annual Report on Form 10-K also contains certain forward-looking statements within the meaning of the Federal Securities Laws. The Company's future results may differ materially from its current results and actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. 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. - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL 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 open systems, mainframe and network attached information storage and retrieval system market. EMC introduced its first Symmetrix Integrated Cached Disk Array ("ICDA") in 1991. Since then, EMC has become the leading supplier of intelligent information storage and retrieval technology for enterprise computing environments. These products are sold as integrated storage solutions for customers utilizing a variety of the world's most popular computer system platforms, including but not limited to those shown below. These platforms include those of the Company's resellers and a variety of other open systems and mainframe platforms. [GRAPH APPEARS HERE] [THE GRAPH DEPICTS A PICTURE OF A SYMMETRIX UNIT SURROUNDED BY THE FOLLOWING PLATFORMS: HP, NCR, SIEMENS, UNISYS, SIEMENS NIXDORF, SUN MICROSYSTEMS, INTEL, DATA GENERAL, DIGITAL, COMPAQ, IBM, SILICON GRAPHICS, SEQUENT, BULL AND NETWORKS.] Large-scale open systems computing environments emerged in the 1990's, and joined the traditional mainframe computing environments that existed in data centers. As these disparate systems have grown in number and scope, EMC believes that companies have been re-evaluating the way they manage, protect and share their mission-critical information. Rather than placing the computing platform at the center of their Information Systems ("IS") environment, customers are focusing on the information and the ability to access that information, regardless of computing platform. The consolidated information-centric computing model shown above 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 and acts as a central information repository. The Company's objective is to continue to be the 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 highly functional software features that provide competitive advantage for EMC customers through high performance, high availability, heterogeneous connectivity and centralized management. 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 leading telecommunications and financial institutions worldwide. EMC, a Massachusetts corporation, was incorporated in 1979 and has its corporate headquarters at 35 Parkwood Drive, Hopkinton, Massachusetts. COMPANY STRATEGIES During 1997, the Company realigned its business to focus on four major strategies: 1) Products and Offerings; 2) Markets and Channels; 3) New Business Development; and 4) Operational Effectiveness and Efficiency. The Company also implemented a new product branding strategy in 1997 to complement its industry leadership objectives. This has resulted in the renaming of several products (noted below) for the purpose of aligning the product name with its respective value to the customer. STRATEGY ONE: PRODUCTS AND OFFERINGS The objective of Strategy One is to identify and deliver superior hardware and software products and offerings. Its intent is to deliver new and unique enterprise storage solutions that the Company believes will widen its lead over its competitors. The Company believes that competitive advantages in its products directly result from an innovative hardware architecture and highly functional software technology. ENTERPRISE STORAGE HARDWARE - --------------------------- The Company's common hardware architecture on which its principal products are based, called MOSAIC:2000, is based upon a modular design and interfaces that allow new technologies to be incorporated more rapidly than with traditional architectures. This hardware architecture enables the Company to deliver advanced technologies to market quickly while maintaining a consistent platform upon which its customers can expand capacity, performance, connectivity and intelligent functionality. This architectural hardware design has enabled the Company to expand its offerings in existing markets and to enter new, strategic markets quickly with proven storage products and services. EMC delivered the first Symmetrix series for the IBM and IBM-compatible mainframe storage market in 1991. 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 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 introduction of the first Symmetrix model, 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. The Symmetrix 5000 family of products shares a common architecture and components, with the main differentiator being capacity and host connectivity capabilities. The Company believes that the Symmetrix 5000 family offers the highest performance and availability storage in the mainframe market. 2 The Company's current open systems product offering is the Symmetrix 3000 family, first introduced in 1995. This family of products brings products similar to the Company's mainframe offerings to the open systems market. The Symmetrix 3000 family delivers 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. The Company introduced the latest generation of the Symmetrix 3000 and 5000 families in January 1997. The new generation Symmetrix established new competitive levels of scalability in the areas of performance, connectivity and capacity. The Company continues to engage in research and development of new hardware technology for the enterprise storage market. ENTERPRISE STORAGE SOFTWARE - --------------------------- A major strategic asset of the Company is the highly functional 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. Controller-based software resides within the EMC system, while host-based software resides within the customer's CPU. 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 protection, management and sharing. The Symmetrix 3000 and 5000 families support all of the Company's enterprise storage software solutions. Examples of controller-based software are: Symmetrix Remote Data Facility, EMC TimeFinder, Symmetrix Data Migration Services and Symmetrix Enterprise Storage Platform. The Company's host-based software products include: Symmetrix Manager for Open Systems and EMC Data Manager. During 1997, the Company introduced several new software products and enhancements to existing products. EMC continues to engage in research and development of software technology for the enterprise storage market in the areas of information protection, management and sharing. 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. NETWORK ATTACHED STORAGE - ------------------------ Network attached storage systems connect directly to local and wide area networks without the use of a host computer. This enables users on disparate systems to access and share central information. In 1996, EMC made available high performance network-attached storage solutions, the EMC Celerra File Server (formerly Symmetrix Network File Storage) and the EMC Celerra Media Server (formerly Symmetrix Network Media Storage). These systems combine EMC- developed proprietary software and network director hardware components with Symmetrix. EMC is currently engaging in research and development of additional products and features for the network attached storage market. ENTERPRISE CONNECTIVITY - ----------------------- In December 1995, the Company completed the acquisition of McDATA Corporation ("McDATA"). McDATA's primary product, the ESCON Director, is a high-speed fiber-optic-based network switch designed to connect computers and peripherals within data center environments and is marketed by IBM under an exclusive original equipment manufacturer ("OEM") agreement with McDATA. In October 1997, the Company reorganized McDATA into a new McDATA Corporation ("New McDATA") and McDATA Holdings Corporation ("McDATA Holdings"). New McDATA designs, develops and markets fibre channel solutions for switched enterprise environments. New McDATA is also currently performing services under the ESCON OEM Agreement with IBM on behalf of McDATA Holdings. 3 STRATEGY TWO: MARKETS AND CHANNELS Strategy Two is focused on developing and implementing a highly differentiated corporate identity and implementing marketing and sales channels to grow the Company's worldwide market leadership. Specific targeted storage markets include: the open systems market, including UNIX and Windows NT market segments, the IBM and IBM-compatible mainframe storage 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. ENTERPRISE STORAGE MARKET - ------------------------- In 1997, the Company continued to focus on the three core sectors of the enterprise storage market described below: open systems, mainframe and network attached storage. As enterprise information continues to consolidate and the three core sectors converge, in 1998 and thereafter, the Company will focus on and will modify its business and financial measurement to reflect a newly emerged enterprise storage market. OPEN SYSTEMS MARKET The 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. Revenues from the open systems market represented approximately 50%, 33% and 11% of EMC's revenues in 1997, 1996 and 1995, respectively. MAINFRAME MARKET The Company's ICDA-based products have achieved a significant presence in the mainframe storage market. The Company believes that mainframes will continue to 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. Revenues from the mainframe market represented approximately 41%, 55% and 74% of EMC's revenues in 1997, 1996 and 1995, respectively. NETWORK ATTACHED STORAGE MARKET The Company believes that the network attached storage market has high potential for storage requirements. The proliferation of local and wide-area networks has resulted in customers' reliance on networks for sharing large computer files (including image and video). The Company believes this is an emerging market and the demand for its products will grow as customers realize the importance of the efficient sharing and delivery of these files. ENTERPRISE STORAGE SERVICES - --------------------------- PROFESSIONAL SERVICES EMC formed its Enterprise Storage Professional Services business in 1997 to design and deliver world class professional services to its global customer base. The Company's Professional Services business assists customers in assessing, designing and implementing enterprise storage solutions customized to maximize their return on information assets. EMC's methodology provides a framework for the information storage industry's best practices and facilitates delivery of three new Professional Services practices including Enterprise Storage 4 Architecture and Design, Enterprise Storage Backup and Restore, and Enterprise Storage Disaster Recovery and Information Protection. The Company has hired approximately 100 Professional Services employees to date. INTERNET SERVICES During 1997, EMC formed an Internet Services Group which provides a comprehensive Web Site Management Service utilizing the high availability, capacity and performance of Symmetrix. Through this service, the Company develops, implements, maintains and monitors all the technical aspects of a customer's internet presence, including management of internet-based electronic commerce and database applications as well as Web and online advertising. These services are delivered through a new data center at EMC's main research and development facility in Hopkinton, Massachusetts. The monthly fee-based services provide companies with internet access, staffing, information protection, contingency planning and an information repository based on Symmetrix. MARKETING AND CUSTOMERS - ----------------------- EMC markets its products through multiple distribution channels, including its direct sales force, selected distributors, resellers 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 1997, the Company established a direct sales presence in Latin America and continued broadening its direct sales presence worldwide. The Company has dedicated personnel to support the needs of its customers in the open systems and mainframe markets and also the needs of its distributor, reseller and OEM customers, both domestically and internationally. During 1997, the Company derived 57% of its revenue from North America, 33% from Europe, the Middle East and Africa, 9% from the Asia Pacific region and 1% from South America. RESELLER AND OEM CHANNELS The Company believes its products are well suited for sale by resellers and OEMs in partnership with the Company and that its revenues from the reseller and OEM market will continue to increase. In response to anticipated growth, the Company increased its sales channel capabilities by signing agreements with a number of Value Added Resellers, Systems Integrators and distributors during 1997. The Company's principal reseller and OEM agreements are with Hewlett-Packard Company ("HP"), Siemens Nixdorf Informationssysteme AG ("SNI"), Unisys Corporation ("Unisys"), Sequent Computer Systems, Inc. ("Sequent"), NCR Corporation and Compagnie des Machines Bull S.A. These agreements enable the reseller or OEM to market and resell certain of the Company's Symmetrix systems worldwide, subject to certain terms and conditions, for connection to certain of the reseller or OEM's respective computer platforms. In January 1997, the Company entered into its reseller agreement with Sequent under which Sequent markets and resells the Symmetrix 3000 family of systems worldwide for connection to certain of Sequent's computers. In February 1997, the Company expanded its agreement with Unisys to enable Unisys to market and sell EMC's Symmetrix for connection to Unisys' open systems and mainframe computer platforms. In March 1997, the Company entered into its worldwide reseller relationship with SNI under which SNI markets and resells Symmetrix systems for connection to the complete family of SNI servers. In 1997 and 1996, the Company derived 27% and 19%, respectively, of its product revenues from reseller and OEM channels. ALLIANCES The Company has entered into and intends to continue to enter into alliances with leading software, relational database and enterprise application companies, including BMC Software, Inc., Microsoft Corporation, 5 SAP AG, Oracle Corporation and other major independent software applications vendors. EMC's strategy is to work closely with leading software companies to provide added value to its customers by integrating enterprise storage with software applications that customers rely on to manage their day to day business operations. STRATEGY THREE: NEW BUSINESS DEVELOPMENT Strategy Three's focus is to develop new business aligned to the enterprise storage market. This will be accomplished by maintaining a long term view on the storage industry's potential and continually assessing the market. Key objectives are to articulate the Company's new business strategic direction, to identify and close significant business development opportunities (mergers and acquisitions) and to manage and integrate such new business activities into EMC. STRATEGY FOUR: OPERATIONAL EFFECTIVENESS AND EFFICIENCY Strategy Four provides EMC's business with focused attention on service- related functions within the Company including Finance, Legal, Human Resources, Information Systems, Facilities and Business Process Development. Collectively, these functions provide a flexible infrastructure that supports EMC's highly evolutionary business model that the Company believes has enabled its continued financial and operational excellence. ---------------- MANUFACTURING 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 is currently constructing a new, state-of-the-art, 680,000 square foot manufacturing facility in Franklin, Massachusetts and is doubling the size of its manufacturing facility in Cork, Ireland, to a total of 450,000 square feet. 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 manufacturing 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 manufacturing operation in Cork holds ISO 9002 registration. COMPETITION In the open systems market, the Company's primary competition is provided by systems vendors, including IBM, Sun Microsystems, Inc. ("Sun"), and Digital Equipment Corporation ("DEC") (recently announced to be acquired by Compaq Computer Corporation). In the mainframe storage market, EMC competes primarily with systems vendors IBM and Hitachi, Limited ("Hitachi"). In the Company's opinion, the major competitive advantage of the systems vendors is their overall market presence and ability to provide integrated CPU, storage and software packages. The Company believes that it has a number of competitive advantages over these companies, especially in the areas of product performance, capacity, availability, connectivity, manageability, value-added software capabilities, time to market enhancements and total cost of ownership. 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 6 shortly after receipt of the order. Customers may reschedule orders with little or no penalty. For these reasons, 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, 1998, EMC had approximately 6,400 employees worldwide. 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 over 100 U.S. patents. The Company also has over 250 patent applications pending in the U.S. relating to its products for the open systems, mainframe 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. 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 and South America segment in 1997, 1996 and 1995. (See Note O to the Company's Consolidated Financial Statements.) 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 -------- --- --------------- ----------------- 35 Parkwood Dr. Corporate, Administration 160,000 leased Hopkinton, MA 42 South St. Customer Demonstration 63,000 owned Hopkinton, MA Center, Administration 80 South St. Manufacturing 156,000 owned Hopkinton, MA 171 South St. Marketing, Research and 285,000 owned Hopkinton, MA Development, Manufacturing 5-9 Technology Dr. Customer Service, Quality, 265,000 leased Milford, MA Research and Development, Manufacturing, Administration Cork, Ireland Manufacturing 200,000 owned McDATA Corporation Research and Development, 90,000 leased Manufacturing
7 The Company is currently expanding its facility in Ireland by 250,000 square feet and constructing a 680,000 square foot building in Franklin, Massachusetts, both for manufacturing use. The Company recently purchased a 15,000 square foot building at 228 South Street, Hopkinton, Massachusetts which will be used for administrative purposes. The Company also leases space for its sales and services offices and certain research and development facilities worldwide, and owns land in Hopkinton, Massachusetts for possible expansion purposes. ITEM 3. LEGAL PROCEEDINGS 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 alleging that the Company is infringing two patents and seeking unspecified damages. The Company filed a motion to transfer the case to the United States District Court for the District of Massachusetts and a motion to dismiss the suit. The Company's motion to transfer was granted with leave for the plaintiff to replead its suit. In the suit refiled in Massachusetts, TM alleged infringement only as to one of the two patents originally at issue. The Company believes TM's claims are without merit. On December 12, 1997, NewFrame Corporation Ltd. ("NewFrame") filed suit against the Company in the United States District Court for the District of Massachusetts. The suit contains a variety of allegations relating to the Company's use of NewFrame's software developments, including various contract claims and breach of fiduciary duty, and seeks monetary damages relating primarily to lost future profits. The Company has filed a motion to dismiss. The Company believes NewFrame's claims are without merit. In January 1998, Storage Technology Corporation ("STK") filed suit against the Company in the United States District Court for the Northern District of California alleging that the Company is infringing one patent and seeking unspecified damages. The Company has answered and counterclaimed. The Company believes STK'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, results of operation or financial condition. 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. 8 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
NAME AGE POSITION ---- --- -------- Richard J. Egan......... 62 Chairman of the Board and Director Michael C. Ruettgers.... 55 President, Chief Executive Officer and Director John R. Egan............ 40 Executive Vice President, Products and Offerings and Director Robert M. Dutkowsky..... 43 Executive Vice President, Markets and Channels Paul E. Noble, Jr. ..... 42 Senior Vice President, New Business Development Colin G. Patteson....... 48 Senior Vice President, Chief Administrative Officer and Treasurer Paul T. Dacier.......... 40 Vice President and General Counsel William J. Teuber, Jr... 46 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, Boston Edison Company, a public utility, and Shiva Corporation, a provider of remote access hardware, software and services. 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 Commonwealth Energy System, a public utility, and EG&G Inc., a diversified technology company. John R. Egan served in a number of executive positions with the Company including Executive Vice President, Marketing and Executive Vice President, International Sales, from October 1986 to January 1992. He was Executive Vice President, Sales and Marketing of the Company from January 1992 to July 1996. In May 1997, he rejoined the Company after a leave of absence, as Executive Vice President, Products and Offerings. He was elected a Director of the Company in May 1992. Robert M. Dutkowsky joined EMC in October 1997 as Executive Vice President, Markets and Channels. Prior to joining EMC, he held several senior level management positions at IBM, a computer manufacturer, from 1977 to 1997, most recently as Vice President of Worldwide Sales and Marketing for IBM's RS/6000 business. Paul E. Noble, Jr. served as Vice President of Customer Service of EMC from March 1987 through May 1989, and as Vice President of Sales Operations from June 1989 through May 1992. From June 1992 to January 1998, Mr. Noble was Vice President and General Manager of OEM Operations, when he became Senior Vice President, New Business Development of EMC. Colin G. Patteson served as European Controller of EMC from January 1989 to March 1991, as Corporate Controller from March 1991 to February 1993 and as Vice President and Corporate Controller from February 1993 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. 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. 9 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. W. Paul Fitzgerald, a Director of the Company, is the brother of Maureen E. Egan. John R. Egan, Executive Vice President, Products and Offerings, and a Director of the Company, is the son of Richard J. and Maureen E. Egan. Paul E. Noble, Jr., Senior Vice President, New Business Development of the Company, is the nephew of Richard J. and Maureen E. Egan and of W. Paul Fitzgerald. ---------------- 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, TimeFinder and Celerra are trademarks of EMC Corporation. IBM and ESCON are trademarks of IBM Corporation. The logos shown on page one are either registered trademarks or trademarks of their respective owners. 10 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, a two-for-one stock split effective December 10, 1993, for stockholders of record on November 26, 1993, and a two-for-one stock split effective November 17, 1997, for stockholders of record on October 31, 1997. 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, adjusted to reflect the effect of the November 17, 1997 stock split.
FISCAL 1997 HIGH LOW ----------- ------ ------ First Quarter............................................. $19.81 $16.06 Second Quarter............................................ 20.31 16.25 Third Quarter............................................. 30.88 19.59 Fourth Quarter............................................ 32.50 23.63 FISCAL 1996 HIGH LOW ----------- ------ ------ First Quarter............................................. $11.00 $ 7.75 Second Quarter............................................ 11.57 9.00 Third Quarter............................................. 11.57 8.50 Fourth Quarter............................................ 17.32 11.00
As of January 31, 1998, there were approximately 4,530 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. 11 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 31, DECEMBER 30, DECEMBER 31, JANUARY 1, 1997 1996 1995 1994 1994 ------------ ------------ ------------ ------------ ---------- SUMMARY OF OPERATIONS: Revenues................ $2,937,860 $2,273,652 $1,921,275 $1,377,492 $782,621 Operating income........ 661,912 496,541 435,779 350,532 180,428 Net income.............. 538,528 386,229 326,845 250,668 127,122 Net income per weighted average share, basic... $ 1.09 $ 0.83 $ 0.73 $ 0.65 $ 0.35 Net income per weighted average share, diluted(1)............. $ 1.04 $ 0.79 $ 0.67 $ 0.55 $ 0.30 Weighted average shares, basic.................. 493,698 463,548 450,629 387,939 360,408 Weighted average shares, diluted(1)............. 525,500 498,590 496,537 467,177 431,937 BALANCE SHEET DATA: Working capital......... $2,121,156 $1,336,634 $ 959,595 $ 600,341 $516,876 Total assets............ 3,490,109 2,293,546 1,745,729 1,317,500 829,646 Long-term obligations(2)......... 558,454 191,234 245,845 286,106 274,029 Stockholders' equity.... $2,376,301 $1,636,789 $1,140,301 $ 727,641 $419,094
- -------- (1) In addition to common stock equivalents, diluted earnings per share reflects the dilutive effects of the Company's debt securities as outstanding for the respective periods reported above. All share and per share amounts have been restated to reflect the stock split effective November 17, 1997 for all periods presented. (2) Excludes current portion of long-term debt. 12 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 ("MD&A") should be read in conjunction with "Factors that May Affect Future Results" beginning on page 17. All dollar amounts in the MD&A and in Item 7A are in thousands. The following table presents certain consolidated statement of operations information stated as a percentage of total revenues.
FISCAL YEAR ENDED -------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 30, 1997 1996 1995 ------------ ------------ ------------ REVENUES Mainframe........................... 40.9% 54.9% 74.3% Open Systems........................ 49.9 33.3 10.6 McDATA.............................. 6.4 8.0 8.3 Other............................... .2 1.4 4.6 ----- ----- ----- Net sales........................... 97.4 97.6 97.8 Service and rental income........... 2.6 2.4 2.2 ----- ----- ----- TOTAL REVENUE....................... 100.0 100.0 100.0 COST AND EXPENSES Cost of sales and service........... 53.5 54.9 52.2 Research and development............ 7.5 7.1 8.5 Selling, general and administrative..................... 16.5 16.2 16.6 ----- ----- ----- OPERATING INCOME.................... 22.5 21.8 22.7 Investment income and interest expense, net....................... 1.9 1.0 0.6 Other income/(expense), net......... -- -- 0.2 ----- ----- ----- Income before income taxes.......... 24.4 22.8 23.5 Provision for income taxes.......... 6.1 5.8 6.5 ----- ----- ----- NET INCOME.......................... 18.3% 17.0% 17.0% ===== ===== =====
REVENUES Total revenues for 1997 were $2,937,860 compared to $2,273,652 for 1996, an increase of $664,208 or 29%. Total revenues for 1996 compared to $1,921,275 for 1995; an increase of $352,377 or 18%. 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, allowing users to move, store and protect mission critical information in mainframe, UNIX and Windows NT environments. Revenues from products sold directly and through OEMs and resellers into the open systems storage market, which include the Symmetrix products operating in an open systems environment and other products, were $1,466,706 in 1997, $757,662 in 1996 and $200,981 in 1995; an increase of $709,044 or 94% from 1996 to 1997, and an increase of $556,681 or 277% from 1995 to 1996. The open systems market represented 50% of the Company's total revenues in 1997, compared to 33% in 1996 and 11% in 1995. Revenues from products sold directly and through OEMs and resellers into the mainframe storage market, which include Symmetrix products operating primarily in the Multiple Virtual Storage ("MVS") environment were $1,202,443 in 1997, $1,248,138 in 1996 and $1,428,379 in 1995; a decrease of $45,695 or 4% from 1996 to 1997, and a decrease of $180,241 or 13% from 1995 to 1996. Mainframe revenues in 1997 reflect continued market strength in the MVS environment offset by moderate price declines. The decrease in mainframe revenues in 1996 reflects price erosion for storage-related products in this market partially offset by increased unit sales. 13 The Company believes that the distinction between systems operating in an open systems versus a mainframe environment has become less meaningful as many systems operate in either environment. Accordingly, the Company will focus on and will modify its business and financial measurement to reflect the enterprise storage market. In 1998 and thereafter, the Company will report hardware and software revenue and discontinue the practice of reporting revenue for the open systems and mainframe markets. Revenues from products sold by McDATA, which include the ESCON Director series of products, were $189,090 in 1997, $180,540 in 1996 and $160,205 in 1995; an increase of $8,550 or 5% from 1996 to 1997, and an increase of $20,335 or 13% from 1995 to 1996. Revenues from all other products, which include the midrange series of products, were $4,407 in 1997, $31,952 in 1996 and $88,650 in 1995; a decrease of $27,545 or 86% from 1996 to 1997, and a decrease of $56,698 or 64% from 1995 to 1996. These decreases are primarily attributable to the declines in midrange series revenues. The demand for products in the midrange market is currently being satisfied by the Company's Symmetrix 3000 series of products. Software revenues were $176,859 and $76,437 in 1997 and 1996, respectively. Software revenues are included in the product revenues for the respective open systems and mainframe markets. Software revenues were not significant in 1995. The Company expects significant growth in software revenues in 1998. Revenues from service and rental income were $75,214 in 1997, $55,360 in 1996 and $43,060 in 1995; an increase of $19,854 or 36% from 1996 to 1997, and an increase of $12,300 or 29% from 1995 to 1996. Revenues for 1997 under the Company's reseller agreement with HP were $504,087 or 17% of total revenues. Revenues for 1996 were $287,352 or 13% of total revenues. Revenues for 1995 were not significant. Revenues from sales into the markets of North and South America were $1,706,551 in 1997 compared to $1,346,222 in 1996, an increase of $360,329 or 27%. This increase was primarily due to growth in sales of the Company's products in the open systems storage market. During 1997, the Company established a direct sales presence in Latin America. Total revenues for 1996 compare to $1,148,237 in 1995, an increase of $197,985 or 17%. Revenues in this segment include $24,424 and $15,351 of revenue from South America in 1997 and 1996, respectively. Revenues for 1995 were not significant. International revenues were $1,255,733 or 43% of total revenues in 1997 compared to $942,781 or 41% of total revenues in 1996 and $773,038 or 40% of total revenues in 1995. The Company expects further increases in international sales as a percentage of total revenues during 1998. Revenues from sales into the markets of Europe, Africa and the Middle East were $951,831 in 1997 compared to $720,792 in 1996, an increase of $231,039 or 32%. This increase was primarily due to growth in sales of the Symmetrix series of products in the open systems storage market. Total revenues for 1996 compare to $631,378 in 1995, an increase of $89,414 or 14%. During 1997, the Company opened a sales office in Austria. During 1996, the Company opened a sales office in Israel. During 1995, the Company opened sales offices in South Africa and the Nordic countries. Revenues from sales into the markets in the Asia Pacific region were $279,478 in 1997 compared to $206,638 in 1996, an increase of $72,840 or 35%. This increase is primarily due to growth in sales of the Symmetrix series of products in the open systems storage market. Total revenues for 1996 compare to $141,660 in 1995, an increase of $64,978 or 46%. During 1997, the Company opened a sales office in New Zealand. During 1995, the Company opened sales offices in Korea and Singapore. GROSS MARGINS Gross margins increased to 46.5% in 1997, compared to 45.1% in 1996 and 47.8% in 1995. The increase from 1996 to 1997 was principally due to the increase in software revenue which has a relatively higher gross 14 margin. The decrease from 1996 to 1995 was 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 compared to the first half of 1996. In 1995, cost of goods sold included one-time charges of approximately $31,000, 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 $220,884, $161,088 and $162,611 in 1997, 1996 and 1995, respectively. As a percentage of revenues, R&D expenses were 7.5%, 7.1% and 8.5% in 1997, 1996 and 1995, respectively. The increase in R&D spending levels in 1997 over 1996 was partially due to the cost of additional technical staff to support a variety of projects including both fibre channel connectivity and enterprise storage software. The increase is also attributable to the expenses associated with computer equipment acquired to facilitate this development. 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 computer equipment acquired to facilitate development. The Company expects to continue to spend substantial amounts for R&D in 1998. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative ("SG&A") expenses were $484,052, $367,073 and $320,009 in 1997, 1996 and 1995, respectively. As a percentage of revenues, SG&A expenses were 16.5%, 16.2% and 16.6% in 1997, 1996 and 1995, respectively. The dollar increase in 1997 over 1996 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 increase market share for its enterprise storage products and services. 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 of costs related to the acquisition of McDATA. SG&A expenses are expected to increase in dollar terms during 1998. INVESTMENT INCOME AND INTEREST EXPENSE Investment income increased to $70,506 in 1997 from $34,476 in 1996 and $23,620 in 1995. Interest income was earned primarily from investments in cash equivalents and investments. Investment income increased in 1997 over 1996 primarily due to higher average cash and investment balances generated from operations and the Company's 3 1/4% Convertible Subordinated Notes due 2002 issued in March of 1997 (the "3 1/4% Notes"). Interest expense increased to $15,463 in 1997, from $11,967 in 1996 and $12,857 in 1995. The increase in 1997 from 1996 is primarily due to the 3 1/4% Notes. The decrease in 1996 from 1995 is primarily due to conversions of the 6 1/4% Convertible Subordinated Debentures due 2002 in April 1995. Interest expense in 1996 was primarily due to the Company's 4 1/4% Convertible Subordinated Notes due 2001 (the "4 1/4% Notes"), all of which were redeemed or converted to Common Stock by January 1997. PROVISION FOR TAXES The provision for income taxes was $179,509 in 1997, $133,245 in 1996 and $123,976 in 1995, which resulted in effective tax rates of 25.0%, 25.7% and 27.5% in 1997, 1996 and 1995, 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. 15 FINANCIAL CONDITION Cash and cash equivalents and short and long-term investments were $1,650,633 and $840,858 at December 31, 1997 and 1996, respectively, an increase of $809,775. In 1997, cash and cash equivalents increased by $458,218. Cash provided by operating activities was $507,022. This was primarily generated from net income offset by an increase in working capital, primarily attributed to an increase in inventory and an increase in accounts receivable, consistent with the growth of the business. Cash used by investing activities was $589,235 principally for additions to property, plant and equipment and the purchase of short and long-term investments. The Company is currently expanding its facility in Ireland and constructing a facility in Franklin, Massachusetts, both for manufacturing use. Cash provided by financing activities was $543,702, principally due to issuance of the 3 1/4% Notes and proceeds from the exercise of stock options. 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 $9.92 per share. On January 2, 1997, the Company paid approximately sixty-five thousand dollars to redeem the 4 1/4% Notes outstanding and converted the remainder into Common Stock. The Company has available for use a credit line of $50,000 and may elect to borrow at any time. In March 1997, the Company sold $517,500 3 1/4% Notes. Based on its current operating and capital expenditure forecasts, the Company believes that the combination of funds currently available, funds generated from operations and its available line of credit will be adequate to finance its ongoing operations. To date, inflation has not had a material impact on the Company's financial results. TECHNICAL UPDATE The Company will adopt Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" in 1998. This Statement establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This Statement requires the classification of items of comprehensive income by their nature in a financial statement and the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company believes that adoption of this Statement will not have a material effect on its financial statements. The Company will also adopt Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information" in 1998. This Statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. This Statement establishes standards for reporting information about operating segments in annual financial statements. Operating segments are defined as components of an enterprise evaluated regularly by the Company's senior management in deciding how to allocate resources and in assessing performance. The Company believes that adoption of this Statement will not significantly change its segment reporting disclosure. Lastly, the Company will adopt Statement of Position 97-2 "Software Revenue Recognition" in 1998. This Statement supersedes Statement of Position 91-1 on software revenue recognition. This Statement establishes revenue recognition criteria for arrangements to deliver software that do not require significant production, modification or customization of the software. This Statement also establishes requirements for recognizing revenue when multiple elements exist in a software arrangement. The Company believes that adoption of this Statement will not have a material effect on its financial statements. 16 FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's prospects are subject to certain uncertainties and risks. This Annual Report on Form 10-K also contains certain forward-looking statements within the meaning of the Federal Securities Laws. The Company's future results may differ materially from its current results and 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 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 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 storage industry. EMC competes with many companies, 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 open systems market, the Company's primary competition is provided by systems vendors, including IBM, Sun and DEC. In the mainframe market, EMC competes primarily with systems vendors IBM and Hitachi. In the Company's opinion, the major competitive advantage of the 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, Symbios Logic, Inc. and MTI Technology Corporation. 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. 17 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 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. 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"). The Company currently purchases disk drives and 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 periodically transitions its product line to new disk drive technologies. These transitions 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 DRAMs needed to satisfy orders for its 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 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 storage products to increase, and there can be no assurance that the Symmetrix series of products will continue to achieve market acceptance. Significant delays in EMC's development of new hardware or software technologies would be to the advantage of EMC's competitors. Furthermore, the continued development of new hardware and software technologies for 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, competitors' responses to the introductions, accurate forecasting of customer demand, and the desire by customers to evaluate new, more expensive products for longer periods of time. There can be no assurance that the Company will be able to effectively manage the transitions to new products or new technologies. 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. 18 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 material adverse effect on EMC's operations and ultimately on its financial results. INDIRECT CHANNELS OF DISTRIBUTION In 1996 and 1997, 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, of which there is no guaranty of renewal. 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, as the Company's business grows, 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. 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. 19 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, including but not limited to hiring and retaining significant numbers of qualified employees, forecasting revenues, controlling expenses and managing its assets. An unexpected decline in the growth rate of revenues without a corresponding and timely reduction in expense growth or a failure to manage other aspects of 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 or 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 The Company generally relies upon patent, copyright, trademark and trade secret laws and contract rights in the United States and in other countries to establish and maintain its proprietary rights in its technology and products. However, there can be no assurance that any of such proprietary rights of the Company will not be challenged, invalidated or circumvented. In addition, the laws of certain countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Therefore, there can be no assurance that the Company will be able to adequately protect its proprietary technology against unauthorized third party copying or use, which could adversely affect the Company's competitive position. Further, there can be no assurance 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. From time to time, the Company receives notices from third parties claiming infringement by the Company's products of third party patent or other intellectual property rights. Responding to any such claim, regardless of its merit, could be time-consuming, result in costly litigation, divert management's attention and resources and cause the Company to incur significant expenses. In the event there is a successful claim of infringement against the Company and the Company fails to develop or license a substitute technology, the Company's business, results of operations or financial condition could be materially adversely affected. 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. 20 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. YEAR 2000 ISSUES The Company uses a significant number of computer software programs and operating systems in its product development, financial business systems and administrative functions. To the extent these software applications are unable to appropriately interpret the upcoming calendar year "2000," conversion of such applications will be necessary. The Company has implemented a program to determine whether the Company's systems are "Year 2000" compliant, assess the impact of any non-compliance and make any necessary adjustments. As part of this program, the Company is in the process of making the necessary conversions to its internal software. The Company anticipates that its conversion program will be completed in a timely manner. The Company does not anticipate that the total cost of such program will have a material adverse effect on the Company's business, results of operations or financial condition. In addition, the Company has contacted its key suppliers and other key third parties to determine the potential effect of the "Year 2000" issue on such parties. To the extent such third parties are materially adversely affected by the "Year 2000" issue, this could disrupt the Company's operations. There can be no assurance that the conversion of the Company's systems will be successful or that the Company's key contractors will have successful conversion programs, and that any such "Year 2000" compliance failures will not have a material adverse effect on the Company's business, results of operations or financial condition. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN EXCHANGE RISK MANAGEMENT As a multinational corporation, the Company is exposed to changes in foreign exchange rates. As the Company's international sales grow as a percentage of total sales, exposure to volatility in exchange rates could have a material adverse impact on the Company's financial results. The Company's risk from exchange rate changes is primarily related to non-dollar denominated sales in Europe and Japan. The Company uses foreign currency forward and option contracts to manage the risk of exchange rate fluctuations. The Company uses these derivative instruments to reduce its foreign exchange risk by essentially creating offsetting market exposures. The instruments held by the Company are not leveraged, and are held for purposes other than trading. The Company uses forward exchange contracts to hedge its net asset (balance sheet) position, and uses option contracts to hedge a portion of anticipated but not committed cash flows. The value-at-risk, using the variance/covariance model, of the combined foreign exchange position represents a potential one- day loss in earnings estimated to be nine hundred and thirty thousand dollars, at a 95% confidence level, as of December 31, 1997. The success of the hedging program depends on forecasts of transaction activity in the various currencies. To the extent that these forecasts are over or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. 21 INTEREST RATE RISK The Company maintains an investment portfolio consisting of debt securities of various issuers, types and maturities. These securities are generally classified as held to maturity, and consequently are recorded on the balance sheet at amortized cost. A portion of the investments are classified as available for sale. These securities are recorded on the balance sheet at market value, with the unrealized gain or loss recorded through the equity section. These instruments are not leveraged, and are not held for purposes of trading. Due to the relatively short term average maturity of the investment portfolio (See Note C to the Company's Consolidated Financial Statements), a sudden sharp change in interest rates would not have a material adverse effect on the value of the portfolio. 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, 1997 and December 31, 1996, 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, 1997. 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, 1997 and December 31, 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 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 21, 1998 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EMC CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents........................... $ 954,595 $ 496,377 Short-term investments.............................. 419,262 230,981 Trade and notes receivable less allowance for doubtful accounts of $6,773 and $7,368, in 1997 and 1996, respectively................................. 788,869 627,409 Inventories......................................... 404,660 336,581 Deferred income taxes............................... 37,095 43,421 Other assets........................................ 22,545 19,367 ---------- ---------- Total current assets................................. 2,627,026 1,754,136 Long-term investments................................ 276,776 113,500 Notes receivable, net................................ 20,013 20,013 Property, plant and equipment, net................... 396,511 276,387 Deferred income taxes................................ 14,174 16,664 Intangible and other assets, net..................... 155,609 112,846 ---------- ---------- Total assets..................................... $3,490,109 $2,293,546 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations............ $ 7,665 $ 7,058 Accounts payable.................................... 187,117 172,871 Accrued expenses.................................... 151,216 122,562 Income taxes payable................................ 151,088 104,899 Deferred revenue.................................... 8,784 10,112 ---------- ---------- Total current liabilities............................ 505,870 417,502 Deferred income taxes................................ 45,353 46,002 Long-term obligations: 4 1/4% convertible subordinated notes due 2001...... -- 142,720 3 1/4% convertible subordinated notes due 2002...... 517,500 -- Notes payable....................................... 40,954 48,514 Other liabilities.................................... 4,131 2,019 ---------- ---------- Total liabilities................................ 1,113,808 656,757 ---------- ---------- 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 496,792,608 and 476,479,344, in 1997 and 1996, respectively............................. 4,968 4,765 Additional paid-in capital.......................... 670,297 461,304 Deferred compensation............................... (12,738) (7,027) Unrealized gain/(loss) on investments............... (9) -- Retained earnings................................... 1,711,356 1,172,828 Cumulative translation adjustment................... 2,427 4,919 ---------- ---------- Total stockholders' equity....................... 2,376,301 1,636,789 ---------- ---------- Total liabilities and stockholders' equity...... $3,490,109 $2,293,546 ========== ==========
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 31, DECEMBER 30, 1997 1996 1995 ------------ ------------ ------------ Revenues: Net sales............................ $2,862,646 $2,218,292 $1,878,215 Service and rental................... 75,214 55,360 43,060 ---------- ---------- ---------- 2,937,860 2,273,652 1,921,275 Costs and expenses: Cost of sales and service............ 1,571,012 1,248,950 1,002,876 Research and development............. 220,884 161,088 162,611 Selling, general and administrative.. 484,052 367,073 320,009 ---------- ---------- ---------- Operating income....................... 661,912 496,541 435,779 Investment income...................... 70,506 34,476 23,620 Interest expense....................... (15,463) (11,967) (12,857) Other income/(expense), net............ 1,082 424 4,279 ---------- ---------- ---------- Income before taxes.................... 718,037 519,474 450,821 Income tax provision................... 179,509 133,245 123,976 ---------- ---------- ---------- Net income............................. $ 538,528 $ 386,229 $ 326,845 ========== ========== ========== Net income per weighted average share, basic................................. $ 1.09 $ .83 $ .73 ========== ========== ========== Net income per weighted average share, diluted............................... $ 1.04 $ .79 $ .67 ========== ========== ========== Weighted average shares, basic......... 493,698 463,548 450,629 Weighted average shares, diluted....... 525,500 498,590 496,537
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 31, DECEMBER 30, 1997 1996 1995 ------------ ------------ ------------ Cash flows from operating activities: Net income.............................. $ 538,528 $ 386,229 $ 326,845 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Depreciation and amortization.......... 136,257 86,949 53,617 Deferred income taxes.................. 8,167 39,178 (6,587) Net loss on disposal of property and equipment............................. 728 1,125 635 Tax benefit from stock options exercised............................. 18,540 17,746 11,165 Minority interest...................... (337) -- -- Changes in assets and liabilities: Trade and notes receivable............ (161,066) (69,103) (156,719) Inventories........................... (68,239) (6,480) (74,351) Other assets.......................... (52,997) (24,433) (30,984) Accounts payable...................... 14,382 61,458 (16,061) Accrued expenses...................... 28,757 (9,955) 22,432 Income taxes payable.................. 46,434 (2,836) 49,275 Deferred revenue...................... (2,132) 3,497 (1,889) --------- --------- --------- Net cash provided by operating activities.......................... 507,022 483,375 177,378 --------- --------- --------- Cash flows from investing activities: Additions to property, plant and equipment.............................. (210,797) (125,973) (92,200) Proceeds from sales of property and equipment.............................. 313 1,441 39 Capitalized software development costs.. (27,185) (24,693) (5,000) Purchase of patents..................... -- (6,333) -- Maturity of short-term and long-term investments............................ 534,711 206,061 67,284 Purchase of short-term and long-term investments............................ (886,277) (425,266) (16,929) --------- --------- --------- Net cash used by investing activities.......................... (589,235) (374,763) (46,806) --------- --------- --------- Cash flows from financing activities: Issuance of common stock................ 34,049 33,181 19,438 Purchase of treasury stock.............. -- (27,457) (415) Redemption of 4 1/4% convertible subordinated notes due 2001............ (65) -- -- Proceeds from investment in new McDATA.. 10,000 -- -- Issuance of 3 1/4% convertible subordinated notes due 2002, net of issuance costs......................... 506,671 -- -- Payment of long-term and short-term obligations............................ (11,683) (1,295) (10,735) Issuance of long-term and short-term obligations............................ 4,730 4,289 545 --------- --------- --------- Net cash provided by financing activities.......................... 543,702 8,718 8,833 --------- --------- --------- Effect of exchange rate changes on cash.. (3,271) (581) (283) Net increase in cash and cash equivalents............................. 461,489 117,330 139,405 Cash and cash equivalents at beginning of period.................................. 496,377 379,628 240,506 --------- --------- --------- Cash and cash equivalents at end of period.................................. $ 954,595 $ 496,377 $ 379,628 ========= ========= ========= Non-cash activity--conversions of debentures and notes.................... $ 140,682 $ 85,636 $ 39,535 --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, 1997 ------------------------------------------------------------------------------------------------------------- COMMON STOCK UNREALIZED TREASURY STOCK ------------------ ADDITIONAL DEFERRED GAIN/(LOSS) CUMULATIVE ------------------- TOTAL PAR PAID-IN COMPEN- ON RETAINED TRANSLATION STOCKHOLDERS' SHARES VALUE CAPITAL SATION INVESTMENTS EARNINGS ADJUSTMENT SHARES COST EQUITY ----------- ------ ---------- -------- ----------- ---------- ----------- ---------- ------- ------------- Balance, January 1, 1995........ 403,476,084 $4,035 $279,607 $ (2,607) -- $ 443,713 $ 3,716 5,254,934 $ (823) $ 727,641 Pooling of interests with McDATA Corporation.... 27,134,224 271 1,659 -- -- 16,041 -- -- -- 17,971 ----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ---------- Balance as restated....... 430,610,308 4,306 281,266 (2,607) -- 459,754 3,716 5,254,934 (823) 745,612 ----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ---------- Exercise of stock options.. 8,606,610 86 16,411 -- -- -- -- -- -- 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.... 25,818,772 258 39,277 -- -- -- -- -- -- 39,535 Amortization of deferred compensation... -- -- -- 1,012 -- -- -- -- -- 1,012 Purchase of treasury stock.......... -- -- -- -- -- -- -- 37,972 (415) (415) Cumulative translation adjustment..... -- -- -- -- -- -- 50 -- -- 50 Net income...... -- -- -- -- -- 326,845 -- -- -- 326,845 ----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ---------- Balance, December 30, 1995........... 465,035,690 4,650 348,664 (2,140) -- 786,599 3,766 5,292,906 (1,238) 1,140,301 ----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ---------- Exercise of stock options.. 2,685,792 27 2,408 -- -- -- -- (7,892,906) 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.... 8,757,862 88 85,548 -- -- -- -- -- -- 85,636 Amortization of deferred compensation... -- -- -- 2,051 -- -- -- -- -- 2,051 Purchase of treasury stock.......... -- -- -- -- -- -- -- 2,600,000 (27,457) (27,457) Cumulative translation adjustment..... -- -- -- -- -- -- 1,153 -- -- 1,153 Net income...... -- -- -- -- -- 386,229 -- -- -- 386,229 ----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ---------- Balance, December 31, 1996........... 476,479,344 4,765 461,304 (7,027) -- 1,172,828 4,919 -- -- 1,636,789 ----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ---------- Exercise of stock options.. 5,932,618 59 33,990 -- -- -- -- -- -- 34,049 Tax benefit from stock options exercised...... -- -- 18,540 -- -- -- -- -- -- 18,540 Grant of stock options........ -- -- 9,300 (9,300) -- -- -- -- -- -- Issuance of common stock pursuant to bond conversions.... 14,380,646 144 140,538 -- -- -- -- -- -- 140,682 Amortization of deferred compensation... -- -- -- 3,589 -- -- -- -- -- 3,589 Proceeds in excess of minority interest in new McDATA......... -- -- 6,625 -- -- -- -- -- -- 6,625 Unrealized gain/(loss) on investments.... -- -- -- -- (9) -- -- -- -- (9) Cumulative translation adjustment..... -- -- -- -- -- -- (2,492) -- -- (2,492) Net income...... -- -- -- -- -- 538,528 -- -- -- 538,528 ----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ---------- Balance, December 31, 1997........... 496,792,608 $4,968 $670,297 $(12,738) $ (9) $1,711,356 $ 2,427 -- -- $2,376,301 =========== ====== ======== ======== ======= ========== ======= ========== ======= ==========
The accompanying notes are an integral part of the consolidated financial statements. 27 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 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 enterprise storage market worldwide. EMC's products provide solutions for a wide range of customer information storage requirements, from the highest performance mission critical applications to extremely high capacity business support applications. EMC's solutions integrate with major open systems operating systems such as UNIX, Microsoft Corporation's Windows NT and International Business Machines Corporation's ("IBM") OS400 as well as major mainframe operating systems such as IBM's MVS. EMC's products are sold as storage solutions for customers utilizing a variety of computer system platforms including, but not limited to, IBM and IBM-compatible mainframe, Unisys Corporation, Compagnie des Machines Bull S.A., Hewlett-Packard Company ("HP"), NCR Corporation, Sequent Computer Systems, Inc., Siemens Nixdorf Informationssysteme AG, Silicon Graphics, Inc. and other open systems and mainframe 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. The Company treats gains/losses on sales of subsidiary stock of development stage companies as equity transactions. 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 1997 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 27,134,224 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 1995 financial information has been restated as if the transaction had occurred as of January 1, 1995. Separate company results for 1995 before the combination was consummated were as follows:
PERIOD ENDED DECEMBER 6, 1995 ------------------------------- REVENUES NET INCOME --------------- --------------- EMC......................................... $ 1,402,059 $ 197,303 McDATA...................................... 148,253 41,748 --------------- ------------- Total..................................... $ 1,550,312 $ 239,051 =============== =============
28 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) The Company has acquired several other companies, which have been accounted for using the purchase method, and are not significant to its financial position or results of operations. Under the purchase method, 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, 1997 and 1996 the net book value of goodwill associated with acquisitions was $7,830 and $12,870, respectively. Goodwill is being amortized on a straight line basis over five years and is included in intangible and other assets, net. Accumulated amortization was $8,234 and $6,996 on December 31, 1997 and 1996, respectively. 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 the majority of the Company's operations. Their assets and liabilities 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 and therefore, their functional currency is the U.S. dollar. Consolidated foreign currency transaction results included in other income/(expense), net were gains of $2,959 in 1997, $1,044 in 1996, and $1,667 in 1995. 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. Total cash equivalents were $749,693 and $256,943 at December 31, 1997 and 1996, respectively. Cash equivalents consist primarily of commercial paper and money market securities. Investments The Company's investments are comprised primarily of debt securities which are classified as either held-to-maturity or available for sale. 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. Statement of Cash Flows Supplemental Information
1997 1996 1995 -------- ------- ------- Cash paid for: Income taxes.................................... $106,677 $78,651 $70,389 Interest........................................ 15,401 11,428 12,965
29 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 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............................................. 3-10 years Improvements.......................................... 5-10 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 the statement of income. 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. Capitalized costs are amortized on a straight-line basis over two years. Unamortized software development costs were $30,099 and $22,508 at December 31, 1997 and 1996, respectively, and are included in intangible and other assets, net. Amortization expense was $19,594 and $7,185 in 1997 and 1996, respectively. 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. All income and tollgate tax obligations for the Company's former subsidiary in Puerto Rico 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. Earnings Per Share The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" for the fiscal year ended December 31, 1997. This Statement replaces the presentation of primary and fully diluted earnings per share ("EPS") with a presentation of diluted and basic EPS. Diluted EPS reflects the potential dilution that could occur if stock options were exercised or debt securities were converted to common stock while basic EPS excludes dilutive securities. A reconciliation of the basic EPS to diluted EPS and dual presentation on the face of the statement of income are also required. 30 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Accounting for Stock-Based Compensation 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. As provided for in SFAS 123, the Company elected to apply Accounting Principles Board ("APB") Opinion No. 25 and related Interpretations in accounting for its stock-based compensation plans. The required disclosures under SFAS 123 as if the Company had applied the new method of accounting are included in the footnotes to the financial statements. Accounting Pronouncements The Company will adopt Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" in 1998. This Statement establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This Statement requires the classification of items of comprehensive income by their nature in a financial statement and the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company believes that adoption of this Statement will not have a material effect on its financial statements. The Company will also adopt Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information" in 1998. This Statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. This Statement establishes standards for reporting information about operating segments in annual financial statements. Operating segments are defined as components of an enterprise evaluated regularly by the Company's senior management in deciding how to allocate resources and in assessing performance. The Company believes that adoption of this Statement will not significantly change its segment reporting disclosures. Lastly, the Company will adopt Statement of Position 97-2 "Software Revenue Recognition" in 1998. This Statement supersedes Statement of Position 91-1 on software revenue recognition. This Statement establishes revenue recognition criteria for arrangements to deliver software that do not require significant production, modification or customization of the software. This Statement also establishes requirements for recognizing revenue when multiple elements exist in a software arrangement. The Company believes that adoption of this Statement will not have a material effect on its financial statements. C. INVESTMENTS The Company's investment portfolio includes held-to-maturity and available for sale securities. The following tables summarize the composition of the Company's held-to-maturity short and long-term investments at December 31, 1997 and 1996, respectively.
DECEMBER 31, 1997 --------------------- AMORTIZED AGGREGATE COST BASIS FAIR VALUE ---------- ---------- U.S. corporate debt securities............................ $320,264 $320,186 U.S. government and agencies.............................. 124,415 125,040 Foreign debt securities................................... 61,140 61,201 -------- -------- Total................................................... $505,819 $506,427 ======== ========
31 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, 1996 --------------------- AMORTIZED AGGREGATE COST BASIS FAIR VALUE ---------- ---------- U.S. corporate debt securities............................ $155,375 $155,193 U.S. government and agencies.............................. 100,231 100,418 Foreign debt securities................................... 88,875 89,617 -------- -------- Total................................................... $344,481 $345,228 ======== ========
The contractual maturities of held-to-maturity investments held at December 31, 1997 and 1996 are as follows:
DECEMBER 31, 1997 --------------------- AMORTIZED AGGREGATE COST BASIS FAIR VALUE ---------- ---------- Due within one year....................................... $413,278 $413,231 Due after one year through five years..................... 92,541 93,196 -------- -------- Total................................................... $505,819 $506,427 ======== ========
DECEMBER 31, 1996 --------------------- AMORTIZED AGGREGATE COST BASIS FAIR VALUE ---------- ---------- Due within one year....................................... $230,981 $231,276 Due after one year through five years..................... 111,648 112,104 Due after ten years....................................... 1,852 1,848 -------- -------- Total................................................. $344,481 $345,228 ======== ========
The net unrealized gain for held-to-maturity securities of $608 at December 31, 1997 consisted of gross unrealized gains of $928 and gross unrealized losses of $320. The net unrealized gain of $747 at December 31, 1996 consisted of gross unrealized gains of $1,240 and gross unrealized losses of $493. The following tables summarize the composition of the Company's available for sale short and long-term investments at December 31, 1997. There were no available for sale securities in 1996.
DECEMBER 31, 1997 --------------------- AMORTIZED AGGREGATE COST BASIS FAIR VALUE ---------- ---------- U.S. government and agencies.............................. $140,218 $140,209 U.S. corporate debt securities............................ 30,772 30,772 Asset and mortgage-backed securities...................... 19,238 19,238 -------- -------- Total................................................... $190,228 $190,219 ======== ========
32 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) The contractual maturities of available for sale investments held at December 31, 1997 are as follows:
DECEMBER 31, 1997 --------------------- AMORTIZED AGGREGATE COST BASIS FAIR VALUE ---------- ---------- Due within one year....................................... $ 6,036 $ 6,036 Due after one year through five years..................... 184,192 184,183 -------- -------- Total................................................... $190,228 $190,219 ======== ========
The gross unrealized loss on available for sale securities at December 31, 1997 was nine thousand dollars. Investment income consists principally of interest income, including interest on notes receivable from sales-type leases. D. INVENTORY Inventories consist of:
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ Purchased parts.................................. $ 24,641 $ 16,610 Work-in-process.................................. 240,845 210,445 Finished goods................................... 139,174 109,526 -------- -------- $404,660 $336,581 ======== ========
E. LEASING TRANSACTIONS Notes receivable are primarily from installment sales of the Company's products. The payment schedule for such notes at December 31, 1997 is as follows: 1998.............................................................. $12,078 1999.............................................................. 10,555 2000.............................................................. 8,867 2001.............................................................. 803 2002.............................................................. 303 ------- Face value........................................................ 32,606 Less amounts representing interest................................ 2,692 ------- Present value..................................................... 29,914 Current portion................................................... 9,901 ------- Long-term portion................................................. $20,013 =======
Implicit interest rates range from approximately 8% to 9%. Actual cash collections may differ from amounts shown on the table due to customer early buyouts, upgrades and refinancings. 33 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) The Company may receive 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, 1997 and 1996 were $34,372 and $24,602, respectively, and are included in intangible and other assets, net. F. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of:
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ Furniture and fixtures........................... $ 16,978 $ 11,498 Equipment........................................ 459,756 322,104 Buildings and improvements....................... 121,541 76,427 Land............................................. 15,085 2,964 Construction in progress......................... 38,056 43,988 -------- -------- 651,416 456,981 Accumulated depreciation......................... (254,905) (180,594) -------- -------- $396,511 $276,387 ======== ========
G. ACCRUED EXPENSES Accrued expenses consist of:
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ Salaries and benefits........................... $ 76,387 $ 62,617 Warranty........................................ 25,315 20,870 Other........................................... 49,514 39,075 -------- -------- $151,216 $122,562 ======== ========
H. INCOME TAXES The Company's provision for income taxes consists of:
1997 1996 1995 -------- -------- -------- Federal and state Current..................................... $162,323 $ 88,208 $123,927 Deferred.................................... 7,790 39,394 (5,867) -------- -------- -------- 170,113 127,602 118,060 -------- -------- -------- Foreign Current..................................... 9,019 5,859 6,636 Deferred.................................... 377 (216) (720) -------- -------- -------- 9,396 5,643 5,916 -------- -------- -------- Total provision for income taxes.............. $179,509 $133,245 $123,976 ======== ======== ========
34 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Net undistributed earnings of foreign subsidiaries at December 31, 1997 and 1996 approximated $805,236 and $545,945, 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 1997, 1996 and 1995 approximated $269,157, $163,177 and $172,933, respectively. A reconciliation of the Company's income tax provision to the statutory federal tax rate is as follows:
1997 1996 1995 ----- ----- ---- Statutory federal tax rate............................. 35.0% 35.0% 35.0% State taxes, net of federal tax benefits............... 2.6 3.0 3.6 International tax benefits............................. (11.5) (10.8) (8.5) Tax credits............................................ (.7) (.8) (1.4) Other.................................................. (.4) (.7) (1.2) ----- ----- ---- 25.0% 25.7% 27.5% ===== ===== ====
The Company's manufacturing facility in Ireland incurs a 10% tax rate on income from manufacturing operations until the year 2010. The components of the current and noncurrent deferred tax assets and liabilities are as follows:
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ Current deferred tax assets: Accounts receivable............................ $ 10,819 $ 11,517 Inventory...................................... 16,166 16,336 Other liabilities.............................. 6,382 7,440 Other assets................................... 3,728 8,128 -------- -------- Total current deferred tax assets.......... $ 37,095 $ 43,421 ======== ======== Noncurrent deferred tax assets/(liabilities): Fixed assets................................... (66) 4,852 Intangible assets.............................. 7,922 4,069 Net operating loss carryforwards............... 6,552 10,933 Research and development credit carryforward... 1,342 1,342 Other.......................................... 3,096 2,830 Valuation reserve.............................. (4,672) (7,362) -------- -------- Deferred tax assets............................ 14,174 16,664 -------- -------- Deferral of lease revenue...................... (35,565) (37,082) Software development costs..................... (9,788) (8,920) -------- -------- Deferred tax liabilities....................... (45,353) (46,002) -------- -------- Total noncurrent deferred tax liabilities, net....................................... $(31,179) $(29,338) ======== ========
The valuation allowance on December 31, 1997 and 1996 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. 35 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) The Company has net operating loss carryforwards as of December 31, 1997 of $10,693 which expire at various dates from 1998 through 2008 and $7,129 which can be carried forward indefinitely. Of these, $12,999 are non-U.S. and $4,823 are U.S. The U.S. losses relate to the pre-acquisition losses of companies acquired. The non-U.S. losses primarily relate to a wholly-owned subsidiary in France. The examination of the Company's 1992, 1993 and 1994 U.S. income tax returns by the IRS was completed during 1997. The Company believes adequate accruals have been provided for all years. 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 total matching contribution per participant has a quarterly limit of $500. The Company's contribution amounted to approximately $4,990 in 1997, $3,836 in 1996 and $3,124 in 1995, pursuant to this formula. Costs associated with certain postretirement or postemployment benefit 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 $14,432, $12,196, and $11,095 in 1997, 1996 and 1995, respectively. The Company's commitments under its operating leases are as follows:
OPERATING FISCAL YEAR LEASES ----------- --------- 1998............................................................. $ 48,873 1999............................................................. 24,877 2000............................................................. 11,439 2001............................................................. 8,062 2002............................................................. 7,111 Thereafter....................................................... 9,197 -------- Total minimum lease payments..................................... $109,559 ========
Lines of Credit EMC has a line of credit providing a maximum of $50,000 at LIBOR plus 30 basis points. At December 31, 1997 and 1996, 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. 36 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 3 1/4% Notes In March 1997, the Company sold $517,500 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 at a conversion price of $22.655 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. 4 1/4% Notes 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 $9.92 per share. On January 2, 1997, the Company paid approximately sixty-five thousand dollars to redeem the 4 1/4% Notes outstanding and converted the remainder into Common Stock. Long-Term Obligations The Company has a $14,000 mortgage collateralized by a U.S. 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 due on April 1, 1999. IDA Grant The Industrial Development Authority ("IDA") of Ireland has granted the Company a total of $5,189 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 equipment. Remaining unamortized grants at December 31, 1997 are $4,230, of which $324 is current and $3,906 is long-term. Purchase of Patent Portfolio In February 1996, the Company acquired a patent portfolio valued at $40 million. Payments of $12 million have been made to date with the remainder due in annual installments over five years. The asset is being amortized over the remaining estimated useful life of approximately two years and is included in intangible and other assets, net. Accumulated amortization at December 31, 1997 and 1996 was approximately $16,333 and $7,333, respectively. Payments remaining on the above commitments and other noncurrent liabilities (excluding the IDA grant) are as follows:
FISCAL YEAR ----------- 1998.............................................................. $11,491 1999.............................................................. 20,982 2000.............................................................. 7,644 2001.............................................................. 7,583 2002.............................................................. 332 ------- Total minimum payments............................................ 48,032 Less amounts representing interest................................ 3,643 ------- Present value of net payments..................................... 44,389 Current portion................................................... 7,341 ------- Long-term portion................................................. $37,048 =======
37 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Minority Interest On October 1, 1997, the Company reorganized McDATA into a new McDATA Corporation ("New McDATA") and McDATA Holdings Corporation ("McDATA Holdings"). New McDATA designs, develops and markets fibre channel solutions for switched enterprise environments. McDATA Holdings, a wholly-owned subsidiary of EMC, is currently the majority shareholder in New McDATA. New McDATA is also currently performing services under the ESCON OEM Agreement with IBM on behalf of McDATA Holdings. The minority interest amounts are included in other liabilities and other income/(expense), net. K. STOCKHOLDERS' EQUITY Stock Split 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 been restated to reflect the stock split for all periods presented. Net Income Per Share Net income for computation of diluted EPS includes an add back of $8,101, $5,296 and $6,224 in 1997, 1996 and 1995, respectively, representing interest expense on the Company's convertible debt securities outstanding in each period, net of its tax effect. Calculation of per share earnings is as follows:
1997 1996 1995 ------------ ------------ ------------ BASIC: Net income..................... $ 538,528 $ 386,229 $ 326,845 Weighted average common shares outstanding................... 493,697,926 463,547,582 450,628,628 Net income per share, basic.... $ 1.09 $ 0.83 $ 0.73 ============ ============ ============ DILUTED: Net income..................... $ 538,528 $ 386,229 $ 326,845 Add back of interest expense on convertible notes............. 13,502 8,827 10,373 Less tax effect of interest expense on convertible notes.. (5,401) (3,531) (4,149) ------------ ------------ ------------ Net income for calculating diluted earnings per share.... $ 546,629 $ 391,525 $ 333,069 Weighted average common shares outstanding................... 493,697,926 463,547,582 450,628,628 Weighted common stock equivalents................... 31,801,719 35,042,840 45,908,586 ------------ ------------ ------------ Total weighted average shares.. 525,499,645 498,590,422 496,537,214 Net income per share, diluted.. $ 1.04 $ 0.79 $ 0.67 ============ ============ ============
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. 38 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Common Stock Repurchase Program In January 1996, the Company's Board of Directors authorized the repurchase of up to 30 million shares of the Company's Common Stock over a five year period. At December 31, 1996, the Company had repurchased 2.6 million shares of Common Stock for approximately $27,000, all of which has been reissued in connection with stock option exercises. In November 1996, the Company's Board of Directors announced the rescission of the program. 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 28 million and 72 million 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. In 1997, options to purchase 500,000 shares at $12.23 and 400,000 shares at $27.56 were granted to executive officers representing 50% and 90%, respectively, of the per share fair market value at the date of grant. In 1996, options to purchase 500,000 shares of Common Stock at $4.625 were granted to an executive officer, representing 50% of the per share fair market value at the date of grant. In 1994, options to purchase 10,000 shares of Common Stock at $4.97 were granted to an employee, representing 50% of the per share fair market value at the date of grant. Discounts from fair market value have been recorded as deferred compensation and are being amortized over the five year 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 3.6 million 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 1997, options to purchase 160,000 shares of Common Stock at $12.23 were granted to two directors, representing 50% of the per share fair market value at the date of grant. In 1996, options to purchase one million shares of Common Stock at $4.625 were granted to a director, representing 50% of the per share fair market value at the date of grant. In 1995, options to purchase 160,000 shares of Common Stock at $3.405 were granted to two directors, representing 50% of the per share fair market value at the date of grant. 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 39 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 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, 1997, options exercisable under the 1993 Plan, the 1985 Plan and the Directors Plan (the "Plans") approximated 7,402,806 and shares available for future option grants approximated 8,521,914. Options become exercisable in equal annual installments over either three or five years after the date of grant and expire after ten years. Supplemental Disclosures for Stock-Based Compensation Activity under the Plans for the year ended December 31, 1997 is as follows:
WTD. AVG. NUMBER OF EXERCISE SHARES PRICE ---------- --------- Outstanding, December 31, 1994....................... 31,570,414 $ 3.12 Options Relating to McDATA Merger.................... 986,774 0.43 Granted.............................................. 5,629,006 10.66 Canceled............................................. (2,830,086) 6.27 Exercised............................................ (8,327,414) 1.29 ---------- ------ Outstanding, December 30, 1995....................... 27,028,694 4.83 Granted.............................................. 8,427,938 8.64 Canceled............................................. (1,371,122) 8.68 Exercised............................................ (9,220,344) 2.35 ---------- ------ Outstanding, December 31, 1996....................... 24,865,166 6.80 Granted.............................................. 8,406,194 23.42 Canceled............................................. (930,650) 9.66 Exercised............................................ (5,329,276) 4.95 ---------- ------ Outstanding, December 31, 1997....................... 27,011,434 $12.24 ========== ======
Summarized information about stock options outstanding at December 31, 1997 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 --------------- ----------- ----------- -------- --------- -------- $ 0.14- 1.86 3,050,817 4.5 $ 0.92 2,900,426 $ 0.94 3.23- 5.72 2,427,358 7.1 4.21 810,804 4.08 6.21- 9.25 8,636,728 7.5 8.48 2,562,712 8.05 9.31-13.25 5,242,701 7.8 10.99 1,128,864 10.84 17.31-30.63 7,653,830 9.4 24.40 -- --
Options exercisable at December 31, 1997 and December 31, 1996 were 7,402,806 and 4,559,994, respectively. 40 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) The fair value of each option granted during 1997 and 1996 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
1997 1996 1995 ---- ---- ---- Dividend yield........................................... none none none Expected volatility...................................... 45.0% 45.0% 50.0% Risk-free interest rate.................................. 6.1% 6.5% 6.3% Expected life............................................ 5.0 5.0 5.0
Weighted average fair value of options granted at fair market value during: 1997................................................................... $11.53 ====== 1996................................................................... $ 4.58 ====== 1995................................................................... $ 5.52 ======
Weighted average fair value of options granted below fair market value during: 1997................................................................... $16.17 ====== 1996................................................................... $ 6.32 ====== 1995................................................................... $ 4.69 ======
Had compensation cost for the Company's 1997, 1996 and 1995 stock option grants and employee stock purchase plan issuances 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 PER NET INCOME SHARE, DILUTED SHARE, BASIC ---------- -------------- -------------- As reported: 1997............................ $538,528 $1.04 $1.09 1996............................ $386,229 $0.79 $0.83 1995............................ $326,845 $0.67 $0.73 Pro forma: 1997............................ $520,506 $1.01 $1.05 1996............................ $378,336 $0.77 $0.82 1995............................ $323,200 $0.66 $0.72
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 9.8 million 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 603,342, 1,358,354 and 279,196 shares in 1997, 1996 and 1995, respectively. The weighted average fair values of options granted under the 1989 Plan during 1997, 1996 and 1995 were $5.15, $2.32 and $3.27, respectively. 41 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) L. 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 alleging that the Company is infringing two patents and seeking unspecified damages. The Company filed a motion to transfer the case to the United States District Court for the District of Massachusetts and a motion to dismiss the suit. The Company's motion to transfer was granted with leave for the plaintiff to replead its suit. In the suit refiled in Massachusetts, TM alleged infringement only as to one of the two patents originally at issue. The Company believes TM's claims are without merit. On December 12, 1997, NewFrame Corporation Ltd. ("NewFrame") filed suit against the Company in the United States District Court for the District of Massachusetts. The suit contains a variety of allegations relating to the Company's use of NewFrame's software developments, including various contract claims and breach of fiduciary duty, and seeks monetary damages relating primarily to lost future profits. The Company has filed a motion to dismiss. The Company believes NewFrame's claims are without merit. In January 1998, Storage Technology Corporation ("STK") filed suit against the Company in the United States District Court for the Northern District of California alleging that the Company is infringing one patent and seeking unspecified damages. The Company has answered and counterclaimed. The Company believes STK'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, results of operation or financial condition. M. FINANCIAL INSTRUMENTS Off-Balance-Sheet Risk The Company enters into foreign currency forward and option contracts to hedge foreign currency cash flows on a continuing basis for periods consistent with its committed and anticipated exposures. The Company does not engage in currency speculation. The maximum amount of foreign currency contracts outstanding during 1997 and 1996 was $531,166 and $257,401, respectively. The Company uses forward exchange contracts to hedge its net asset (balance sheet) position and marks these hedges to market to offset gains and losses on the financial statements resulting from the revaluation of the underlying assets and liabilities. At December 31, 1997 and 1996, the Company had $309,970 and $257,401 of forward exchange contracts outstanding, respectively. The Company uses option contracts to hedge a portion of anticipated but not committed cash flows. The Company defers the recording of any gain or loss from these hedges until the underlying transaction has been realized. Deferred unrealized gains were not material at December 31, 1997. At December 31, 1997, the Company had $90,000 of foreign currency options outstanding. There were no outstanding option contracts at December 31, 1996. 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. 42 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) The carrying and estimated fair values of the 3 1/4% Notes were $517,500 and $631,350, respectively. The fair value of the 3 1/4% Notes was based on the closing price as of December 31, 1997. 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, alliances, international sales, management of growth, dependence upon key personnel, enforcement of the Company's intellectual property rights, future acquisitions and Year 2000 issues. Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments, short and long-term investments and trade and notes receivable. The Company places its temporary cash investments and short 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. HP represented 17% and 13% of the Company's total revenues in 1997 and 1996, respectively. During 1995, 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, marketing and supporting a wide range of storage-related hardware and software products and related services. 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 for 1997, 1996 and 1995. Intercompany transfers between geographic areas are accounted for at prices which are designed to be representative of unaffiliated party transactions. 43 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
EUROPE, NORTH/SOUTH MIDDLE EAST, ASIA CONSOLIDATED AMERICA AFRICA PACIFIC ELIMINATIONS TOTAL ----------- ------------ -------- ------------ ------------- 1997 Sales................... $1,801,770 $ 965,359 $170,731 $ -- $2,937,860 Transfers between areas.................. 49,494 155,214 -- (204,708) -- ---------- ---------- -------- --------- ---------- Total sales............. 1,851,264 1,120,573 170,731 (204,708) 2,937,860 Income (loss) from operations............. 406,335 266,788 (9,115) (2,096) 661,912 Identifiable assets at year end............... 2,653,063 977,996 124,075 (265,025) 3,490,109 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
P. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Q1 1997 Q2 1997 Q3 1997 Q4 1997 -------- -------- -------- -------- 1997 Net sales, service and rental.............. $618,437 $713,461 $732,570 $873,392 Gross profit............................... 282,452 328,916 341,292 414,188 Net income................................. 110,868 128,799 132,622 166,239 Net income per share, (diluted)............ $ 0.22 $ 0.25 $ 0.25 $ 0.32 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, (diluted)............ $ 0.17 $ 0.18 $ 0.18 $ 0.25
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. 44 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, 1997. 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. 45 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 49 are filed as part of this report. 2. Schedule The schedule listed in the accompanying Index to Consolidated Financial Statements and Schedule on page 49 is filed as part of this report. 3. Exhibits See Index to Exhibits on page 50 of this report. The exhibits are filed with or incorporated by reference in this report. (b) Reports on Form 8-K. On October 22, 1997, the registrant filed a report (Date of Report: October 22, 1997) on Form 8-K reporting, under Item 5, a 2-for-1 stock split in the form of a 100% stock dividend with a record date of October 31, 1997, a broker's cut off date of November 7, 1997 and a distribution date of November 17, 1997. 46 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 MARCH 6, 1998. EMC CORPORATION Richard J. Egan By: _________________________________ RICHARD J. EGAN CHAIRMAN OF THE BOARD 47 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 MARCH 6, 1998. SIGNATURE TITLE Richard J. Egan Chairman of the Board (Principal - ------------------------------------- Executive Officer) and Director RICHARD J. EGAN Michael C. Ruettgers President and Chief Executive Officer - ------------------------------------- and Director MICHAEL C. RUETTGERS John R. Egan Executive Vice President, Products and - ------------------------------------- Offerings and Director JOHN R. EGAN Colin G. Patteson Senior Vice President, Chief - ------------------------------------- Administrative Officer and Treasurer COLIN G. PATTESON (Principal Financial Officer) William J. Teuber, Jr. Vice President and Chief Financial - ------------------------------------- Officer (Principal Accounting Officer) WILLIAM J. TEUBER, JR. Michael J. Cronin Director - ------------------------------------- MICHAEL J. CRONIN John F. Cunningham Director - ------------------------------------- JOHN F. CUNNINGHAM Maureen E. Egan Director - ------------------------------------- MAUREEN E. EGAN W. Paul Fitzgerald Director - ------------------------------------- W. PAUL FITZGERALD Joseph F. Oliveri Director - ------------------------------------- JOSEPH F. OLIVERI 48 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, 1997 and December 31, 1996................................................................ p. 24 Consolidated Statements of Income for the years ended December 31, 1997, December 31, 1996 and December 30, 1995....................... p. 25 Consolidated Statements of Cash Flows for the years ended December 31, 1997, December 31, 1996 and December 30, 1995................... p. 26 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, December 31, 1996 and December 30, 1995.......... p. 27 Notes to Consolidated Financial Statements........................... pp. 28-44 Schedule: Schedule II--Valuation and Qualifying Accounts..................... p. S-1
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. 49 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 Articles of Amendment filed May 7, 1997./7/ 3.10 By-laws of EMC Corporation, as amended on July 21, 1995./8/ 4.1 Form of Stock Certificate./9/ 4.2 Indenture, dated as of March 11, 1997 between EMC Corporation and State Street Bank and Trust Company, Trustee./10/ 4.3 Form of 3 1/4% Convertible Subordinated Note due 2002./10/ 10.1 EMC Corporation 1985 Stock Option Plan, as amended./11/ 10.2 EMC Corporation 1989 Employee Stock Purchase Plan, as amended (filed herewith). 10.3 EMC Corporation 1992 Stock Option Plan for Directors, as amended./11/ 10.4 EMC Corporation 1993 Stock Option Plan, as amended (filed herewith). 10.5 McDATA Corporation 1997 Stock Option Plan (filed herewith). 21.1 Subsidiaries of Registrant (filed herewith). 23.1 Consent of Independent Accountants dated March 6, 1998 (filed herewith).
- -------- /1/ Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-3656). /2/ Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-17218). /3/ Incorporated by reference to the Company's Annual Report on Form 10-K filed February 12, 1993. /4/ Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-67224). /5/ Incorporated by reference to the Company's Current Report on Form 8-K filed November 19, 1993. /6/ Incorporated by reference to the Company's Current Report on Form 8-K filed May 26, 1995. /7/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed May 14, 1997. /8/ Incorporated by reference to the Company's Quarterly Report on Form 10-K filed August 11, 1995. /9/ Incorporated by reference to the Company's Annual Report on Form 10-K filed March 31, 1988. /10/ Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 333-24901). /11/ Incorporated by reference to the Company's Annual Report on Form 10-K filed February 27, 1997. 50 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, 1997 Allowance for doubtful accounts..... $7,368 $1,842 -- $(2,437) $6,773 Year ended December 31, 1996 Allowance for doubtful accounts..... $7,062 $1,927 -- $(1,621) $7,368 Year ended December 30, 1995 Allowance for doubtful accounts..... $6,272 $2,435 -- $(1,645) $7,062
S-1 EX-10.2 2 1989 EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED Exhibit 10.2 EMC CORPORATION 1989 EMPLOYEE STOCK PURCHASE PLAN, as amended January 21, 1998 Section 1. Purpose of Plan The EMC Corporation 1989 Employee Stock Purchase Plan (the "Plan") is intended to provide a method by which eligible employees of EMC Corporation and its subsidiaries (collectively, the "Company") may use voluntary, systematic payroll deductions to purchase the Company's common stock, $.01 par value, ("stock") and thereby acquire an interest in the future of the Company. For purposes of the Plan, a subsidiary is any corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock unless the Board of Directors of the Company (the "Board of Directors") determines that employees of a particular subsidiary shall not be eligible. Section 2. Options to Purchase Stock Under the Plan as now amended, no more than 9,800,000 shares are available for purchase (subject to adjustment as provided in Section 16) pursuant to the exercise of options ("options") granted under the Plan to employees of the Company ("employees"). The stock to be delivered upon exercise of options under the Plan may be either shares of the Company's authorized but unissued stock, or shares of reacquired stock, as the Board of Directors shall determine. Section 3. Eligible Employees Except as otherwise provided in Section 20, each employee who has completed six months or more of continuous service in the employ of the Company shall be eligible to participate in the Plan. Section 4. Method of Participation The periods January 1 to June 30 and July 1 to December 31 of each year shall be option periods. Each person who will be an eligible employee on the first day of any option period may elect to participate in the Plan by executing and delivering, at least 15 days prior to such day, a payroll deduction authorization in accordance with Section 5. Such employee shall thereby become a participant ("participant") on the first day of such option period and shall remain a participant until his or her participation is terminated as provided in the Plan. Section 5. Payroll Deductions The payroll deduction authorization shall request withholding, at a rate of not less than 2% nor more than 10% from the participant's compensation (subject to a maximum of $2,500 per option period), by means of substantially equal payroll deductions over the option period; provided, however, that in the event -------- ------- any amount remaining in a participant's withholding account at the end of an option period (which would be equal to a fractional share) is rolled over to the opening balance in a participant's withholding account for the next option period pursuant to Section 8 below (a "rollover"), such amount will be applied to the last payroll deduction for the next option period, thereby reducing the amount of that payroll deduction; further provided that the maximum of $2,500 ---------------- per option period shall be reduced by the amount of any rollover. For purposes of the Plan, "compensation" shall mean all cash compensation paid to the participant by the Company. A participant may change the withholding rate of his or her payroll deduction authorization by written notice delivered to the Company at least 15 days prior to the first day of the option period as to which the change is to be effective. All amounts withheld in accordance with a participant's payroll deduction authorization shall be credited to a withholding account for such participant. Section 6. Grant of Options Each person who is a participant on the first day of an option period shall as of such day be granted an option for such period. Such option shall be for the number of shares of stock to be determined by dividing (a) the balance in the participant's withholding account on the last day of the option period by (b) the purchase price per share of the stock determined under Section 7, and eliminating any fractional share from the quotient. In the event that the number of shares then available under the Plan is otherwise insufficient, the Company shall reduce on a substantially proportionate basis the number of shares of stock receivable by each participant upon exercise of his or her option for an option period and shall return the balance in a participant's withholding account to such participant. Section 7. Purchase Price The purchase price of stock issued pursuant to the exercise of an option shall be 85% of the fair market value of the stock at (a) the time of grant of the option or (b) the time at which the option is deemed exercised, whichever is less. Fair market value shall be determined in accordance with the applicable provisions of the Internal Revenue Code of 1986, as amended or restated from time to time (the "Code"), or regulations issued thereunder, or, in the absence of any such provisions or regulations, shall be deemed to be the last sale price at which the stock is traded on the day in question or the last prior date on which a trade occurred as reported in The Wall Street Journal; or, if The Wall ----------------------- -------- Street Journal is not published or does not list the stock, then in such other - -------------- appropriate newspaper of general circulation as the Board of Directors 2 may prescribe; or, if the last price at which the stock traded is not generally reported then the mean between the reported bid and asked prices at the close of the market on the day in question or the last prior date when such prices were reported. Section 8. Exercise of Options If an employee is a participant in the Plan on the last business day of an option period, he or she shall be deemed to have exercised the option granted to him or her for that period. Upon such exercise, the Company shall apply the balance of the participant's withholding account to the purchase of the number of whole shares of stock determined under Section 6, and as soon as practicable thereafter shall issue and deliver certificates for said shares to the participant. The balance, if any, of the participant's withholding account in excess of the total purchase price of the whole shares so issued shall be applied to the opening balance in his or her withholding account for the next option period. No fractional shares shall be issued hereunder. Notwithstanding anything herein to the contrary, the Company shall not be obligated to deliver any shares unless and until, in the opinion of the Company's counsel, all requirements of applicable federal and state laws and regulations (including any requirements as to legends) have been complied with, nor, if the outstanding stock is at the time listed on any securities exchange, unless and until the shares to be delivered have been listed (or authorized to be added to the list upon official notice of issuance) upon such exchange, nor unless or until all other legal matters in connection with the issuance and delivery of shares have been approved by the Company's counsel. Section 9. Interest No interest will be payable on withholding accounts. Section 10. Cancellation and Withdrawal A participant who holds an option under the Plan may at any time prior to exercise thereof under Section 8 cancel all (but not less than all) of his or her option by written notice delivered to the Company. Upon such cancellation, the balance in his or her withholding account shall be returned to him or her. A participant may terminate his or her payroll deduction authorization as of any date by written notice delivered to the Company and shall thereby cease to be a participant as of such date. Any participant who voluntarily terminates his or her payroll deduction authorization prior to the last business day of an option period shall be deemed to have cancelled his or her option. 3 Section 11. Termination of Employment Except as otherwise provided in Section 12, upon the termination of a participant's employment with the Company for any reason whatsoever, he or she shall cease to be a participant, and any option held by him or her under the Plan shall be deemed cancelled, the balance of his or her withholding account shall be returned to him or her, and he or she shall have no further rights under the Plan. For purposes of this Section 11, a participant's employment will not be considered terminated in the case of sick leave or other bona fide leave of absence approved for purposes of this Plan by the Company or a subsidiary or in the case of a transfer to the employment of a subsidiary or to the employment of the Company. Section 12. Death or Retirement of Participant In the event a participant holds any option hereunder at the time his or her employment with the Company is terminated (1) by his or her retirement with the consent of the Company, and such retirement is within three months of the time such option becomes exercisable, or (2) by his or her death, whenever occurring, then such participant (or his or her legal representative), may, by a writing delivered to the Company on or before the date such option is exercisable, elect either (a) to cancel any such option and receive in cash the balance in his or her withholding account, or (b) to have the balance in his or her withholding account applied as of the last day of the option period to the exercise of his or her option pursuant to Section 8, and have the balance, if any, in such account in excess of the total purchase price of the whole shares so issued returned in cash. In the event such participant (or his or her legal representative) does not file a written election as provided above, any outstanding option shall be treated as if an election had been filed pursuant to subparagraph 12(a) above. Section 13. Participant's Rights Not Transferable, etc. All participants granted options under the Plan shall have the same rights and privileges. Each participant's rights and privileges under any option granted under the Plan shall be exercisable during his or her lifetime only by him or her, and shall not be sold, pledged, assigned, or otherwise transferred in any manner whatsoever except by will or the laws of descent and distribution. In the event any participant violates the terms of this Section, any options held by him or her may be terminated by the Company and, upon return to the participant of the balance of his or her withholding account, all his or her rights under the Plan shall terminate. 4 Section 14. Employment Rights Neither the adoption of the Plan nor any of the provisions of the Plan shall confer upon any participant any right to continued employment with the Company or a subsidiary or affect in any way the right of the Company to terminate the employment of such participant at any time. Section 15. Rights as a Shareholder A participant shall have the rights of a shareholder only as to stock actually acquired by him or her under the Plan. Section 16. Change in Capitalization In the event of a stock dividend, stock split or combination of shares, recapitalization, merger in which the Company is the surviving corporation or other change in the Company's capital stock, the number and kind of shares of stock or securities of the Company to be subject to the Plan and to options then outstanding or to be granted hereunder, the maximum number of shares or securities which may be delivered under the Plan, the option price and other relevant provisions shall be appropriately adjusted by the Board of Directors, whose determination shall be binding on all persons. In the event of a consolidation or merger in which the Company is not the surviving corporation or in the event of the sale or transfer of substantially all the Company's assets (other than by the grant of a mortgage or security interest), all outstanding options shall thereupon terminate, provided that prior to the effective date of any such merger, consolidation or sale of assets, the Board of Directors shall either (a) return the balance in all withholding accounts and cancel all outstanding options, or (b) accelerate the exercise date provided for in Section 8, or (c) if there is a surviving or acquiring corporation, arrange to have that corporation or an affiliate of that corporation grant to the participants replacement options having equivalent terms and conditions as determined by the Board of Directors. Section 17. Administration of Plan The Plan will be administered by the Board of Directors. The Board of Directors will have authority, not inconsistent with the express provisions of the Plan, to take all action necessary or appropriate hereunder, to interpret its provisions, and to decide all questions and resolve all disputes which may arise in connection therewith. Such determinations of the Board of Directors shall be conclusive and shall bind all parties. The Board may, in its discretion, delegate its powers with respect to the Plan to an Employee Benefit Plan Committee or any other committee (the "Committee"), in which event all references to the Board of Directors hereunder, including without limitation the references in Section 17, shall be deemed to refer to the Committee. A 5 majority of the members of any such 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. Section 18. Amendment and Termination of Plan The Board of Directors may at any time or times amend the Plan or amend any outstanding option or options for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law, provided that (except to the extent explicitly required or permitted herein) no such amendment will, without the approval of the shareholders of the Company, (a) increase the maximum number of shares available under the Plan, (b) reduce the option price of outstanding options or reduce the price at which options may be granted, (c) change the conditions for eligibility under the Plan, or (d) amend the provisions of this Section 18 of the Plan, and no such amendment will adversely affect the rights of any participant (without his or her consent) under any option theretofore granted. The Plan may be terminated at any time by the Board of Directors, but no such termination shall adversely affect the rights and privileges of holders of the outstanding options. Section 19. Approval of Shareholders The Plan shall be subject to the approval of the shareholders of the Company, which approval shall be secured within twelve months after the date the Plan is adopted by the Board of Directors. Notwithstanding any other provisions of the Plan, no option shall be exercised prior to the date of such approval. Section 20. Limitations Notwithstanding any other provision of the Plan: (a) An employee shall not be eligible to receive an option pursuant to the Plan if, immediately after the grant of such option to him or her, he or she would (in accordance with the provisions of Sections 423 and 425(d) of the Code) own or be deemed to own stock possessing 5% or more of the total combined voting power or value of all classes of stock of the employer corporation or of its parent or subsidiary corporation, as defined in Section 425 of the Code. (b) No employee shall be granted an option under this Plan that would permit his or her rights to purchase shares of stock under this Plan of the Company to accrue at a rate which exceeds $25,000 in fair market value of such stock (determined at the 6 time the option is granted) for each calendar year during which any such option granted to such employee is outstanding at any time, as provided in Sections 423 and 425 of the Code. (c) No employee shall be granted an option under this Plan that would permit him or her to withhold more than $2,500 in each option period or $5,000 per calendar year, less the amount of any rollover. (d) No employee whose customary employment is 20 hours or less per week shall be eligible to participate in the Plan.* (e) No independent contractor shall be eligible to participate in the Plan. *Subsection 20(d) is subject to stockholder approval at the Annual Meeting of Stockholders to be held on May 6, 1998. 7 EX-10.4 3 1993 STOCK OPTION PLAN, AS AMENDED Exhibit 10.4 EMC CORPORATION 1993 STOCK OPTION PLAN, as amended January 21, 1998 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. Page 1 of 10 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 Page 2 of 10 extent, if any, as the Committee or the Board, as applicable, may have determined or approved pursuant to the provisions of the Plan. 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 31,500,000*, 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), or if shares of Common Stock are reacquired by the Company upon the rescission of an exercise of an option, the number of shares of Common Stock as to which an option has not been exercised prior to termination, or have been reacquired upon the rescission of an option, 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. *Subject to stockholder approval at the Annual Meeting of Stockholders to be held on May 6, 1998. Page 3 of 10 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. 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 Page 4 of 10 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. 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 Page 5 of 10 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 (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. Page 6 of 10 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 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 Page 7 of 10 Committee shall also determine all other matters relating to continuous employment. 7.3.10 Cancellation and Rescission of Options. (A) Unless the -------------------------------------- certificate or agreement evidencing the option specifies otherwise, the Committee may cancel, rescind, suspend, withhold or otherwise limit or restrict any unexpired option at any time if the Participant engages in "Detrimental Activity." As used in this subsection 7.3.10, "Detrimental Activity" shall include: (i) the rendering of services for any organization or engaging directly or indirectly in any business which is or becomes competitive with the Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company; (ii) the disclosure to anyone outside the Company, or the use in other than the Company's business, without prior written authorization from the Company, of any Confidential Information as defined in the Company's Key Employee Agreement, relating to the business of the Company, acquired by the Participant either during or after employment with the Company; (iii) the failure or refusal to disclose promptly and to assign to the Company, pursuant to the Company's Key Employee Agreement, all right, title and interest in any invention or idea, patentable or not, made or conceived by the Participant during employment by the Company, relating in any manner to the actual or anticipated business, research or development work of the Company or the failure or refusal to do anything reasonably necessary to enable the Company to secure a patent where appropriate in the United States and in other countries; (iv) activity that results in termination of the Participant's employment for cause; (v) the Participant otherwise fails to comply with the terms of the certificate or agreement evidencing the option, the Plan or the Key Employee Agreement; (vi) a violation of any rules, policies, procedures or guidelines of the Company, including but not limited to the Company's Business Conduct Guidelines; (vii) any attempt directly or indirectly to induce any employee of the Company to be employed or perform services elsewhere or any attempt directly or indirectly to solicit the trade or business of any current or prospective customer, supplier or partner of the Company; (viii) the Participant being convicted of, or entering a guilty plea with respect to a crime, whether or not connected with the Company; or (ix) any other conduct or act determined to be injurious, detrimental or prejudicial to any interest of the Company. (B) Upon exercise of an option, the Participant shall certify, in a manner acceptable to the Company, that he or she is in compliance with the terms and conditions of the Plan. In the event a Participant engages in Detrimental Activity prior to or during the six months after any exercise of an option, such exercise may be rescinded within two years thereafter. In the event of any such rescission, the Participant shall pay to the Company the amount of any gain realized as a result of the rescinded exercise in such a manner and on such terms and conditions as may be required, and the Company Page 8 of 10 shall be entitled to set-off against the amount of any such gain any amount owed to the Participant by the Company. 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. 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. Page 9 of 10 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 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. Page 10 of 10 EX-10.5 4 MCDATA CORPORATION 1997 STOCK OPTION PLAN Exhibit 10.5 MCDATA CORPORATION 1997 STOCK OPTION PLAN ADOPTED OCTOBER 1, 1997 1. PURPOSE. (a) The purpose of the Plan is to provide a means by which selected Employees and Directors of the Company, and its Affiliates, may be given an opportunity to purchase stock of the Company. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of the Company or its Affiliates, to secure and retain the services of new Employees and Directors, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Options issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either Incentive Stock Options or Nonstatutory Stock Options. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means McDATA Corporation, a Delaware corporation. (f) "CONTINUOUS STATUS AS AN EMPLOYEE OR DIRECTOR" means that the service of an individual to the Company, whether as an Employee or Director, is not interrupted or terminated. 1 The Board or the chief executive officer of the Company may determine, in that party's sole discretion, whether Continuous Status as an Employee or Director shall be considered interrupted in the case of: (i) any leave of absence approved by the Board or the chief executive officer of the Company, including sick leave, military leave, or any other personal leave; or (ii) transfers between the Company, Affiliates or their successors. (g) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to stockholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (h) "DIRECTOR" means a member of the Board. (i) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (k) "FAIR MARKET VALUE" means, as of any date, the value of the Class B Common Stock of the Company determined as follows: (1) If the Class B Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Class B Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Company's Class B Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (2) In the absence of such markets for the Class B Common Stock, the Fair Market Value shall be determined in good faith by the Board. (l) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (m) "LISTING DATE" means the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange, or designated 2 (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system. (n) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non- employee director" for purposes of Rule 16b-3. (o) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (p) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (q) "OPTION" means a stock option granted pursuant to the Plan. (r) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (s) "OPTIONEE" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (t) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. 3 (u) "PLAN" means this 1997 Stock Option Plan. (v) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect with respect to the Company at the time discretion is being exercised regarding the Plan. (w) "SECURITIES ACT" means the Securities Act of 1933, as amended. 3. ADMINISTRATION. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (1) To determine from time to time which of the persons eligible under the Plan shall be granted Options; when and how each Option shall be granted; whether an Option will be an Incentive Stock Option or a Nonstatutory Stock Option; the provisions of each Option granted (which need not be identical), including the time or times such Option may be exercised in whole or in part; and the number of shares for which an Option shall be granted to each such person. (2) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (3) To amend the Plan or an Option as provided in Section 12. (4) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company. (c) The Board may delegate administration of the Plan to a committee of the Board composed of not fewer than two (2) members (the "Committee"), all of the members of which Committee may be, in the discretion of the Board, Non- Employee Directors and/or Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee of two (2) or more Outside Directors any of the 4 administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or such a subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Additionally, prior to the Listing Date, and notwithstanding anything to the contrary contained herein, the Board may delegate administration of the Plan to a committee of one or more members of the Board and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. Notwithstanding anything in this Section 3 to the contrary, the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Options to eligible persons who (1) are not then subject to Section 16 of the Exchange Act and/or (2) are either (i) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Option, or (ii) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to Options shall not exceed in the aggregate nine million five hundred thousand (9,500,000) shares of the Company's Class B Common Stock. If any Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not purchased under such Option shall revert to and again become available for issuance under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) Incentive Stock Options may be granted only to Employees. Nonstatutory Stock Options may be granted only to Employees or Directors. (b) No person shall be eligible for the grant of an Incentive Stock Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Incentive Stock Option 5 is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Incentive Stock Option is not exercisable after the expiration of five (5) years from the date of grant. (c) Subject to the provisions of Section 10 relating to adjustments upon changes in stock, no person shall be eligible to be granted Options covering more than two million (2,000,000) shares of the Company's Class B Common Stock in any calendar year. This subsection 5(c) shall not apply prior to the Listing Date and, following the Listing Date, shall not apply until (i) the earliest of: (A) the first material modification of the Plan (including any increase to the number of shares reserved for issuance under the Plan in accordance with Section 4); (B) the issuance of all of the shares of Class B Common Stock reserved for issuance under the Plan; (C) the expiration of the Plan; or (D) the first meeting of stockholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security under Section 12 of the Exchange Act; or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) PRICE. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted; the exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) percent of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or 6 substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other Class B Common Stock of the Company or (B) in any other form of legal consideration that may be acceptable to the Board. (d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Incentive Stock Option is granted only by such person. A Nonstatutory Stock Option shall only be transferable with the Optionee upon such terms and conditions as are set forth in the Option Agreement for such Nonstatutory Stock Option, as the Board or the Committee shall determine in its discretion, except that each Nonstatutory Stock Option may be transferred to the spouse, children, lineal ancestors and lineal descendants of the Optionee (or to a trust created solely for the benefit of the Optionee and the foregoing persons) or to an organization exempt from taxation pursuant to Section 501(c)(3) of the Code or to which tax deductible charitable contributions may be made under Section 170 of the Code (excluding such organizations classified as private foundations under applicable regulations and rulings). The person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option. (e) VESTING. The total number of shares of stock subject to an Option shall be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The provisions of 7 this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or any person to whom an Option is transferred under subsection 6(d), as a condition of exercising any such Option, (1) to give written assurances satisfactory to the Company as to the Optionee's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Option for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the Option has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may require the Optionee to provide such other representations, written assurances or information which the Company shall determine is necessary, desirable or appropriate to comply with applicable securities and other laws as a condition of granting an Option to such Optionee or permitting the Optionee to exercise such Option. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR. In the event an Optionee's Continuous Status as an Employee or Director terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionee's Continuous Status as an Employee or Director, or such longer or shorter period specified in the Option Agreement, or (ii) the expiration of the term of the Option as set forth in 8 the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee or Director terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (i) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or within a period specified in the Option Agreement after the termination of, the Optionee's Continuous Status as an Employee or Director, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option as of the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the 9 shares covered by such Option shall revert to and again become available for issuance under the Plan. (j) RIGHT OF REPURCHASE. The Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to repurchase all or any part of the vested shares exercised pursuant to the Option. (k) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to exercise a right of first refusal following receipt of notice from the Optionee of the intent to transfer all or any part of the shares exercised pursuant to the Option. (l) WITHHOLDING. To the extent provided by the terms of an Option Agreement, the Optionee may satisfy any federal, state or local tax withholding obligation relating to the exercise of such Option by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the Class B Common Stock otherwise issuable to the Optionee as a result of the exercise of the Option; or (3) delivering to the Company owned and unencumbered shares of the Class B Common Stock of the Company. (m) LOCK-UP. In connection with a public offering of the Company's Common Stock resulting in gross proceeds to the Company and the selling stockholders, if any, of not less than $30 million (prior to expenses and underwriting commissions) and at an offering price per share representing a pre-offering valuation of the Company of at least $500 million, the Company (or a representative of the underwriters) may require that an Optionee sign a "lock- up" agreement providing that the Optionee will not sell or otherwise transfer or dispose of any shares of Class B Common Stock or other securities of the Company during a period as may be specified by the representative of the underwriters of Common Stock (or other securities) of the Company and agreed to by EMC Corporation and the Company, provided that all executive officers and directors of the Company enter into similar agreements. The Company may impose stop- transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. 10 7. COVENANTS OF THE COMPANY. (a) During the terms of the Options, the Company shall keep available at all times the number of shares of stock required to satisfy such Options. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Option or any stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Options unless and until such authority is obtained. 8. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Options shall constitute general funds of the Company. 9. MISCELLANEOUS. (a) The Board shall have the power to accelerate the time at which an Option may first be exercised or the time during which an Option or any part thereof will vest pursuant to subsection 6(e), notwithstanding the provisions in the Option stating the time at which it may first be exercised or the time during which it will vest. (b) Neither an Optionee nor any person to whom an Option is transferred under subsection 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Option unless and until such person has satisfied all requirements for exercise of the Option pursuant to its terms. (c) Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Employee, Director or Optionee any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director) or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee, with or without cause, or to remove any Director as provided in the Company's By-Laws and the provisions of the General Corporation Law of the State of Delaware. 11 (d) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) (1) The Board or the Committee shall have the authority to effect, at any time and from time to time (i) the repricing of any outstanding Options under the Plan and/or (ii) with the consent of the affected holders of Options, the cancellation of any outstanding Options and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of Class B Common Stock, but having an exercise price per share not less than eighty-five percent (85%) of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option or, in the case of a ten percent (10%) stockholder (as defined in subsection 5(b)), in the case of an Incentive Stock Option, not less than one hundred and ten percent (110%) of the Fair Market Value) per share of Class B Common Stock on the new grant date. (2) Shares subject to an Option canceled under this subsection 9(e) shall continue to be counted, for the applicable period in which it was granted, against the maximum award of Options permitted to be granted pursuant to subsection 5(c) of the Plan. The repricing of an Option under this subsection 9(e), resulting in a reduction of the exercise price, shall be deemed to be a cancellation of the original Option and the grant of a substitute Option; in the event of such repricing, both the original and the substituted Options shall be counted for the applicable period against the maximum awards of Options permitted to be granted pursuant to subsection 5(c) of the Plan. The provisions of this subsection 9(e)(2) shall be applicable only to the extent required by Section 162(m) of the Code. 10. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any Option (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of 12 consideration by the Company), the Plan will be appropriately adjusted in the type(s) and maximum number of securities subject to the Plan pursuant to subsection 4(a) and the maximum number of securities subject to award to any person during any calendar year period pursuant to subsection 5(c), and the outstanding Options will be appropriately adjusted in the type(s) and number of securities and price per share of stock subject to such outstanding Options. Such adjustments shall be made by the Board or Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") (b) In the event of: (1) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; or (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's Class B Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then: (i) any surviving or acquiring corporation shall assume any Options outstanding under the Plan or shall substitute similar options (including an option to acquire the same consideration paid to the stockholders in the transaction described in this subsection 10(b)) for those outstanding under the Plan, or (ii) in the event any surviving or acquiring corporation refuses to assume such Options or to substitute similar options for those outstanding under the Plan, (A) with respect to Options held by persons then performing services as Employees or Director, the vesting of such Options and the time during which such Options may be exercised shall be accelerated prior to such event and the Options terminated if not exercised after such acceleration and at or prior to such event, and (B) with respect to any other Options outstanding under the Plan, such Options shall be terminated if not exercised prior to such event. 11. CONVERSION OF INCENTIVE STOCK OPTIONS INTO NONSTATUTORY OPTIONS. Notwithstanding the foregoing, in the case of an Incentive Stock Option, at the written request or with the written consent of an Optionee (to the extent such Optionee's option has not been exercised at such time) the Board may take such actions as may be necessary to convert such Optionee's Incentive Stock Option into a Nonstatutory Stock Option. Such actions may include, but shall not be limited to, extending the exercise period or reducing the exercise price of the 13 appropriate installments of such Incentive Stock Option. At the time of such conversion, the Board (with the consent of the Optionee) may impose such conditions on the exercise of the resulting Nonstatutory Stock Option as the Board in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. 12. AMENDMENT OF THE PLAN AND OPTIONS. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (1) Increase the number of shares reserved for Options under the Plan; (2) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or (3) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3. (b) The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Optionees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) Rights and obligations under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing. 14 (e) The Board at any time, and from time to time, may amend the terms of any one or more Options; provided, however, that the rights and obligations under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on September 30, 2007, which shall be within ten (10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the written consent of the person to whom the Option was granted. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Options granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 15 EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1--SUBSIDIARIES OF REGISTRANT The following is a list of the Corporation's consolidated subsidiaries as of January 31, 1998. 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 NAME OF 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.) Ltd. ............ 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 Austria GmbH............ Austria 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 Spain S.L. ............. Spain 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 Holdings Corporation.................. Delaware McDATA International, Inc. .................. U.S. Virgin Islands McDATA UK Limited............................ United Kingdom
- -------- * 95% owned by EMC Corporation. ** 89% owned by McDATA Holdings Corporation. EX-23.1 6 CONSENT OF INDEPENDENT ACCOUNTANTS DATED 03/06/98 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of EMC Corporation on Form S-3 as amended (File Nos. 333-24901 and 333-41079) and on Form S-8 (File Nos. 33-51800, 33-54860, 33-63665, 333-1375, 333-5133 and 333- 31471) of our report dated January 21, 1998 on our audits of the Consolidated Financial Statements and Consolidated Financial Statement Schedule of EMC Corporation as of December 31, 1997 and 1996 and for each of three years in the period ended December 31, 1997, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 6, 1998 EX-27 7 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-31-1997 DEC-31-1996 DEC-31-1997 954,595 686,038 788,869 6,773 404,660 2,627,026 396,511 89,632 3,490,109 505,870 517,500 0 0 4,968 2,371,333 3,490,109 2,862,646 2,937,860 1,571,012 1,571,012 704,936 0 15,463 718,037 179,509 538,528 0 0 0 538,528 1.09 1.04
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