-----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, WF6clBRFaGqf43JDAM5TF9p0Mqmp1FKiThsyaW22/Ux2WMF9HA258TY3FNR3meKn buGP9EZj+gjBRDlroUychQ== 0000927016-98-003098.txt : 19980814 0000927016-98-003098.hdr.sgml : 19980814 ACCESSION NUMBER: 0000927016-98-003098 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMC CORP CENTRAL INDEX KEY: 0000790070 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 042680009 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09853 FILM NUMBER: 98686523 BUSINESS ADDRESS: STREET 1: 171 SOUTH STREET CITY: HOPKINTON STATE: MA ZIP: 01748-9103 BUSINESS PHONE: 5084351000 MAIL ADDRESS: STREET 1: 171 SOUTH STREET CITY: HOPKINTON STATE: MA ZIP: 01748-9103 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-Q -------------- QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED: JUNE 30, 1998 COMMISSION FILE NUMBER 1-9853 EMC CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2680009 (State or other jurisdiction of (I.R.S. Employer organization or incorporation) Identification Number) 35 PARKWOOD DRIVE HOPKINTON, MASSACHUSETTS 01748-9103 (Address of principal executive offices, including zip code) (508) 435-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. COMMON STOCK, PAR VALUE $.01 PER SHARE 499,511,372 CLASS OUTSTANDING AS OF JUNE 30, 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EMC CORPORATION
PAGE NO ------- Part I--Financial Information Consolidated Balance Sheets at June 30, 1998 and December 31, 1997............................................................. 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 1998 and 1997..................................... 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997........................................... 5 Notes to Interim Consolidated Financial Statements............... 6-9 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 10-15 Part II--Other Information.......................................... 16-17 Signatures.......................................................... 18 Exhibit Index....................................................... 19
2 EMC CORPORATION PART I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1998 1997 ---------- ------------ ASSETS Current assets: Cash and cash equivalents........................... $ 983,784 $ 954,595 Short-term investments.............................. 402,113 419,262 Trade and notes receivable less allowance for doubtful accounts of $7,645 and $6,773, in 1998 and 1997, respectively................................. 814,076 788,869 Inventories......................................... 480,856 404,660 Deferred income taxes............................... 40,976 37,095 Other assets........................................ 43,884 22,545 ---------- ---------- Total current assets.................................. 2,765,689 2,627,026 Long-term investments................................. 481,693 276,776 Notes receivable, net................................. 24,064 20,013 Property, plant and equipment, net.................... 487,668 396,511 Deferred income taxes................................. 13,243 14,174 Intangible and other assets, net...................... 190,842 155,609 ---------- ---------- Total assets........................................ $3,963,199 $3,490,109 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations............ $ 17,414 $ 7,665 Accounts payable.................................... 220,160 187,117 Accrued expenses.................................... 186,927 151,216 Income taxes payable................................ 151,963 151,088 Deferred revenue.................................... 24,476 8,784 ---------- ---------- Total current liabilities............................. 600,940 505,870 Deferred income taxes................................. 44,464 45,353 Long-term obligations: 3 1/4% convertible subordinated notes due 2002...... 517,500 517,500 Notes payable....................................... 33,087 40,954 Other liabilities..................................... 3,205 4,131 ---------- ---------- Total liabilities................................... 1,199,196 1,113,808 ---------- ---------- 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 499,511,372 and 496,792,608, in 1998 and 1997, respectively............................. 4,995 4,968 Additional paid-in capital.......................... 728,096 670,297 Deferred compensation............................... (18,350) (12,738) Unrealized gain/(loss) on investments............... 146 (9) Retained earnings................................... 2,046,967 1,711,356 Cumulative translation adjustment................... 2,149 2,427 ---------- ---------- Total stockholders' equity........................ 2,764,003 2,376,301 ---------- ---------- Total liabilities and stockholders' equity...... $3,963,199 $3,490,109 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 3 EMC CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
FOR THE FOR THE THREE MONTHS ENDED SIX MONTHS ENDED -------------------- ---------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1998 1997 1998 1997 --------- --------- ---------- ---------- Revenues: Net sales...................... $918,822 $694,511 $1,724,755 $1,295,411 Service and rental............. 33,180 18,950 55,598 36,487 --------- --------- ---------- ---------- 952,002 713,461 1,780,353 1,331,898 Costs and expenses: Cost of sales and service...... 467,480 384,545 898,616 720,530 Research and development....... 74,228 53,446 139,903 101,537 Selling, general and administrative................ 177,353 114,640 330,849 212,264 --------- --------- ---------- ---------- Operating income................. 232,941 160,830 410,985 297,567 Investment income................ 23,954 17,412 46,461 29,096 Interest expense................. (4,999) (4,640) (9,729) (6,042) Other income/(expense), net...... 765 (369) (236) 1,728 --------- --------- ---------- ---------- Income before taxes.............. 252,661 173,233 447,481 322,349 Income tax provision............. 63,165 44,434 111,870 82,682 --------- --------- ---------- ---------- Net income....................... $189,496 $128,799 $ 335,611 $ 239,667 ========= ========= ========== ========== Net income per weighted average share, basic.................... $0.38 $0.26 $0.67 $0.49 ========= ========= ========== ========== Net income per weighted average share, diluted.................. $0.36 $0.25 $0.64 $0.47 ========= ========= ========== ========== Weighted average shares, basic... 498,648 492,477 497,944 492,037 Weighted average shares, diluted. 537,550 527,899 536,431 518,826
The accompanying notes are an integral part of the consolidated financial statements. 4 EMC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
FOR THE SIX MONTHS ENDED -------------------------- JUNE 30, JUNE 30, 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................... $ 335,611 $ 239,667 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................... 89,482 59,635 Deferred income taxes........................... (3,839) 1,643 Net loss on disposal of property and equipment.. 597 366 Tax benefit from stock options exercised........ 9,970 5,740 Changes in assets and liabilities: Trade and notes receivable................... (29,076) (78,258) Inventories.................................. (76,196) (110,227) Other assets................................. (26,780) (49,207) Accounts payable............................. 33,177 (18,097) Accrued expenses............................. 35,697 (7,000) Income taxes payable......................... 889 18,203 Other liabilities............................ 14,833 (3,927) ------------ ------------ Net cash provided by operating activities.. 384,365 58,538 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment....... (150,027) (82,289) Proceeds from sales of property and equipment.... 6 313 Capitalized software development costs........... (15,514) (12,400) Purchase of short-term and long-term investments, net............................................. (187,613) (209,981) Business acquisitions............................ (19,700) -- ------------ ------------ Net cash used by investing activities...... (372,848) (304,357) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock......................... 16,418 11,998 Redemption of 4 1/4% convertible subordinated notes due 2001.................................. -- (65) Issuance of 3 1/4% convertible subordinated notes due 2002, net of issuance costs................. -- 506,671 Payment of long-term and short-term obligations.. (8,747) (9,050) Issuance of long-term and short-term obligations. 10,632 1,419 ------------ ------------ Net cash provided by financing activities.. 18,303 510,973 ------------ ------------ Effect of exchange rate changes on cash............ (631) (2,405) Net increase in cash and cash equivalents.......... 29,820 265,154 Cash and cash equivalents at beginning of period... 954,595 496,377 ------------ ------------ Cash and cash equivalents at end of period......... $ 983,784 $ 759,126 ------------ ------------ Non-cash activity: Conversions of notes............................. -- $140,682 Business acquisitions............................ $22,300 --
The accompanying notes are an integral part of the consolidated financial statements. 5 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1. BASIS OF PRESENTATION Company EMC Corporation and its subsidiaries ("EMC" or the "Company") design, manufacture, market and support a wide range of enterprise systems and software products and related services for the 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. ("SGI") and other open systems and mainframe platforms. Accounting The accompanying consolidated interim financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles. These statements include the accounts of EMC and its subsidiaries. Certain information and footnote disclosures normally included in the Company's annual consolidated financial statements have been condensed or omitted. The interim consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the results for the interim periods ended June 30, 1998 and 1997. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the entire fiscal year. It is suggested that these interim consolidated financial statements be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1997, which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 6, 1998. 2. INVENTORY Inventories consist of:
JUNE 30, DECEMBER 31, 1998 1997 -------- ------------ Purchased parts......................................... $ 24,778 $ 24,641 Work-in-process......................................... 314,371 240,845 Finished goods.......................................... 141,707 139,174 -------- -------- $480,856 $404,660 ======== ========
6 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 3. NET INCOME PER SHARE Calculation of earnings per share is as follows:
FOR THE THREE MONTHS ENDED ----------------------------- JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- BASIC: Net income..................................... $ 189,496 $ 128,799 Weighted average shares, basic................. 498,647,929 492,476,670 Net income per share, basic.................... $ 0.38 $ 0.26 ============= ============= DILUTED: Net income..................................... $ 189,496 $ 128,799 Add back of interest expense on convertible notes......................................... 4,205 4,205 Less tax effect of interest expense on convertible notes............................. (1,682) (1,682) ------------- ------------- Net income for calculating diluted earnings per share......................................... $ 192,019 $ 131,322 Weighted average shares........................ 498,647,929 492,476,670 Weighted common stock equivalents.............. 38,901,715 35,422,810 ------------- ------------- Total weighted average shares, diluted......... 537,549,644 527,899,480 Net income per share, diluted.................. $ 0.36 $ 0.25 ============= ============= FOR THE SIX MONTHS ENDED ----------------------------- JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- BASIC: Net income..................................... $ 335,611 $ 239,667 Weighted average shares, basic................. 497,943,909 492,036,768 Net income per share, basic.................... $ 0.67 $ 0.49 ============= ============= DILUTED: Net income..................................... $ 335,611 $ 239,667 Add back of interest expense on convertible notes......................................... 8,409 5,092 Less tax effect of interest expense on convertible notes............................. (3,364) (2,037) ------------- ------------- Net income for calculating diluted earnings per share......................................... $ 340,656 $ 242,722 Weighted average shares........................ 497,943,909 492,036,768 Weighted common stock equivalents.............. 38,486,858 26,789,328 ------------- ------------- Total weighted average shares, diluted......... 536,430,767 518,826,096 Net income per share, diluted.................. $ 0.64 $ 0.47 ============= =============
7 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 4. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." 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. Financial statements for prior periods must be restated. The Company's total comprehensive income was as follows:
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED ----------------- ------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1998 1997 1998 1997 -------- -------- -------- -------- Net income............................. $189,496 $128,799 $335,611 $239,667 Other comprehensive income/(expense), net of tax: Unrealized gain on investments....... 409 -- 116 -- Cumulative translation adjustment.... 45 (514) (209) (1,304) -------- -------- -------- -------- Total other comprehensive income/(expense)...................... 454 (514) (93) (1,304) -------- -------- -------- -------- Total comprehensive income............. $189,950 $128,285 $335,518 $238,363 ======== ======== ======== ========
5. LITIGATION In August 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 amend the complaint to overcome the grounds for dismissal. In the amended complaint, TM alleged infringement only as to one of the two patents originally at issue. Fact discovery in this case has concluded. A trial is set for January 1999. The Company believes TM's claims are without merit. In December 1997, NewFrame Corporation Ltd. ("NewFrame") filed suit against the Company in the United States District Court for the District of Massachusetts. The suit contains a variety of allegations relating to the Company's use of NewFrame's software developments, including various contract claims and breach of fiduciary duty, and seeks monetary damages relating primarily to lost future profits. The Company filed a motion to dismiss the complaint, which was granted in part. The 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. Among other defenses, the Company has asserted that its activities are covered by a license agreement between the parties. A trial on the license issue was held from August 4 to August 6, 1998. A decision from the court is expected shortly. 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 operations or financial condition. 8 EMC CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 6. ACQUISITION In April 1998, the Company acquired all of the outstanding common stock of Groupe MCI, a French information technology professional services firm, in exchange for cash and common stock. The acquisition was accounted for as a purchase. Pro forma presentations have not been included as the acquisition was not material to the results of operations or financial condition of the Company. 7. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in either current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair- value hedge transactions in which the Company is hedging changes in fair value of an asset, liability, or firm commitment, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the fair value of the hedged item. For cash-flow hedge transactions, in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current earnings. The Company is assessing the impact of FAS 133, and currently believes it will not have a material impact on its earnings or statement of financial position. 9 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" set forth on page 15 and in EMC's other filings with the U.S. Securities and Exchange Commission. ALL DOLLAR AMOUNTS IN THE MD&A ARE IN MILLIONS. RESULTS OF OPERATIONS--SECOND QUARTER OF 1998 COMPARED TO SECOND QUARTER OF 1997 Revenues Total revenues for the second quarter of 1998 were $952.0 compared to $713.5 for the second quarter of 1997, an increase of $238.5 or 33%. Enterprise systems revenues from products sold directly and through OEMs and resellers were $765.8 in the second quarter of 1998, compared to $604.1 in the second quarter of 1997, an increase of $161.7 or 27%. The increase was due to continued strong demand for the Company's Symmetrix series of products in all geographies. 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. Enterprise software revenues from products sold directly and through OEMs and resellers were $97.9 in the second quarter of 1998 compared to $40.8 in the second quarter of 1997, an increase of $57.1 or 140%. Enterprise software products provide primary and extended functionality for the Company's storage products. Revenues from products sold by McDATA Corporation, primarily the ESCON Director series of products, were $55.1 in the second quarter of 1998, compared to $49.6 in the second quarter of 1997, an increase of $5.5 or 11%. Revenues from service and rental income were $33.2 in the second quarter of 1998, compared to $19.0 in the second quarter of 1997, an increase of $14.2 or 75%. In May 1998, the Company announced the expansion of the terms and scope of its original reseller agreement with HP. This will enable HP to resell the Company's enterprise systems and software for connection to its Intel-based HP NetServer Systems, a leading Windows NT platform. Revenues for the second quarter of 1998 and 1997 under this agreement were $186.2 and $118.6, or 20% and 17% of total revenues, respectively. Revenues on sales into the North American markets were $577.2 in the second quarter of 1998 compared to $400.5 in the second quarter of 1997, an increase of $176.7 or 44%. Revenues on sales into all markets outside North America were $374.8 in the second quarter of 1998 compared to $312.9 in the second quarter of 1997. This represented 39% and 44% of total revenues, respectively. Revenues on sales into the markets of Europe, Africa and the Middle East were $295.3 in the second quarter of 1998 compared to $238.8 in the second quarter of 1997, an increase of $56.5 or 24%. Revenues on sales into the markets of the Asia Pacific region were $71.1 in the second quarter of 1998 compared to $68.2 in the second quarter of 1997, an increase of $2.9 or 4%. Revenues on sales into the markets of South America were $8.5 in the second quarter of 1998 compared to $5.9 in the second quarter of 1997, an increase of $2.6 or 43%. 10 Gross Margins Gross margins increased to 50.9% of revenues in the second quarter of 1998, compared to 46.1% of revenues in the second quarter of 1997. This increase is primarily attributable to increased licensing of the Company's enterprise software which has higher gross margins than sales of hardware. Other factors affecting gross margins in the second quarter of 1998 include the impact of component cost declines being greater than the impact of price declines. The Company currently believes that price declines will continue. Research and Development Research and development ("R&D") expenses were $74.2 and $53.4 in the second quarters of 1998 and 1997, respectively, an increase of $20.8 or 38.9%. R&D expenses were 7.8% and 7.5% of revenues in the second quarters of 1998 and 1997, respectively. The dollar increase was partially due to the cost of additional technical staff to support a variety of projects including both fibre channel connectivity and enterprise software products. This increase is also attributable to expenses associated with computer equipment acquired to facilitate this development. The Company expects to continue to spend substantial amounts for R&D for the balance of 1998 and thereafter. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses were $177.4 and $114.6 in the second quarters of 1998 and 1997, respectively, an increase of $62.8 or 54.7%. SG&A expenses were 18.6% and 16.1% of revenues in the second quarters of 1998 and 1997, respectively. The dollar and percentage increase is due primarily to costs associated with a continued investment in additional worldwide sales and support personnel and their related overhead costs with the objective of achieving broader coverage and greater account depth around the world. SG&A expenses are expected to increase in dollar terms for the balance of 1998 and thereafter. Investment Income and Interest Expense Investment income was $24.0 in the second quarter of 1998 compared with $17.4 in the same period a year ago. Interest income was earned from investments in cash equivalents, and short and long-term investments. Investment income increased in the second quarter of 1998 primarily due to higher cash and investment balances which were derived from operations. Interest expense was $5.0 in the second quarter of 1998 as compared to $4.6 in the second quarter of 1997 and relates primarily to the $517.5 of 3 1/4% convertible subordinated notes due 2002 (the "Notes") issued in March 1997. Provision for Income Taxes The provision for income taxes was $63.2 and $44.4 in the second quarters of 1998 and 1997, respectively, which resulted in an effective tax rate of 25.0% in the second quarter of 1998 and 25.6% in the second quarter of 1997. 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. 11 RESULTS OF OPERATIONS--FIRST SIX MONTHS OF 1998 COMPARED TO FIRST SIX MONTHS OF 1997 Revenues Total revenues for the first six months ended June 30, 1998 were $1,780.4 compared to $1,331.9 for the first six months of 1997, an increase of $448.5 or 34%. Enterprise systems revenues from products sold directly and through OEMs and resellers were $1,464.6 in the first six months of 1998, compared to $1,135.0 in the first six months of 1997, an increase of $329.6 or 29%. The increase was due to continued strong demand for the Company's Symmetrix series of products in all geographies. 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. Enterprise software revenues from products sold directly and through OEMs and resellers were $163.9 in the first six months of 1998 compared to $67.4 in the first six months of 1997, an increase of $96.5 or 143%. Enterprise software products provide primary and extended functionality for the Company's storage products. Revenues from products sold by McDATA Corporation, primarily the ESCON Director series of products, were $96.3 in the first six months of 1998, compared to $93.1 in the first six months of 1997, an increase of $3.2 or 3%. Revenues from service and rental income were $55.6 in the first six months of 1998, compared to $36.5 in the first six months of 1997, an increase of $19.1 or 52%. In February 1998, the Company announced a reseller agreement under which SGI will resell the Company's enterprise systems and software for connection to SGI's Origin servers and Onyx2 graphics systems. In May 1998, the Company announced the expansion of the terms and scope of its original reseller agreement with HP. This will enable HP to resell the Company's enterprise systems and software for connection to its Intel-based HP NetServer Systems, a leading Windows NT platform. Revenues for the first six months of 1998 and 1997 under this agreement were $343.0 and $226.1, or 19% and 17% of total revenues, respectively. Revenues on sales into the North American markets were $1,058.9 in the first six months of 1998 compared to $762.2 in the first six months of 1997, an increase of $296.7 or 39%. Revenues on sales into all markets outside North America were $721.5 in the first six months of 1998 compared to $569.7 in the first six months of 1997. This represented 41% and 43% of total revenues, respectively. Revenues on sales into the markets of Europe, Africa and the Middle East were $557.4 in the first six months of 1998 compared to $435.1 in the first six months of 1997, an increase of $122.3 or 28%. Revenues on sales into the markets of the Asia Pacific region were $148.1 in the first six months of 1998 compared to $127.1 in the first six months of 1997, an increase of $21.0 or 17%. Revenues on sales into the markets of South America were $16.0 in the first six months of 1998 compared to $7.6 in the first six months of 1997, an increase of $8.4 or 111%. Gross Margins Gross margins increased to 49.5% of revenues in the first six months of 1998, compared to 45.9% of revenues in the first six months of 1997. This increase is primarily attributable to increased licensing of the Company's enterprise software which has higher gross margins than sales of hardware. Other factors affecting gross margins in the first six months of 1998 include the impact of component cost declines being greater than the impact of price declines. The Company currently believes that price declines will continue. 12 Research and Development Research and development ("R&D") expenses were $139.9 and $101.5 in the first six months of 1998 and 1997, respectively, an increase of $38.4 or 38%. R&D expenses were 7.9% and 7.6% of revenues in the first six months of 1998 and 1997, respectively. The dollar increase was partially due to the cost of additional technical staff to support a variety of projects including both fibre channel connectivity and enterprise software products. This increase is also attributable to expenses associated with computer equipment acquired to facilitate this development. The Company expects to continue to spend substantial amounts for R&D for the balance of 1998 and thereafter. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses were $330.8 and $212.3 in the first six months of 1998 and 1997, respectively, an increase of $118.5 or 56%. SG&A expenses were 18.6% and 15.9% of revenues in the first six months of 1998 and 1997, respectively. The dollar and percentage increase is due primarily to costs associated with a continued investment in additional worldwide sales and support personnel and their related overhead costs with the objective of achieving broader coverage and greater account depth around the world. SG&A expenses are expected to increase in dollar terms for the balance of 1998 and thereafter. Investment Income and Interest Expense Investment income was $46.5 in the first six months of 1998 compared with $29.1 in the same period a year ago. Interest income was earned from investments in cash equivalents, and short and long-term investments. Investment income increased in the first six months of 1998 primarily due to higher cash and investment balances which were derived from operations and the Notes issued in March 1997. Interest expense increased by $3.7 to $9.7 in the first six months of 1998 from $6.0 in the first six months of 1997. The increase was attributable to the Notes. Provision for Income Taxes The provision for income taxes was $111.9 and $82.7 in the first six months of 1998 and 1997, respectively, which resulted in an effective tax rate of 25.0% in the first six months of 1998 and 25.6% in the first six months of 1997. 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. 13 Financial Condition Cash and cash equivalents and short and long-term investments were $1,867.6 and $1,650.6 at June 30, 1998 and December 31, 1997, respectively, an increase of $217.0. Cash provided by operating activities for the first six months of 1998 was $384.4, generated primarily from net income. Cash used by investing activities was $372.8, principally from the purchase of short-term and long-term investments and additions to property, plant and equipment. Additions to property, plant and equipment include approximately $25.0 accrued for construction of the manufacturing facility in Franklin, Massachusetts. Cash provided by financing activities was $18.3, principally from the issuance of common stock from option exercises. At June 30, 1998, the Company had available for use its credit line of $50.0 and may elect to borrow at any time. Based on its current operating and capital expenditure forecasts, the Company presently believes that the combination of funds currently available, funds generated from operations and its available line of credit will be adequate to finance its ongoing operations. New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in either current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair- value hedge transactions in which the Company is hedging changes in fair value of an asset, liability, or firm commitment, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the fair value of the hedged item. For cash-flow hedge transactions, in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current earnings. The Company is assessing the impact of FAS 133, and currently believes it will not have a material impact on its earnings or statement of financial position. 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. 14 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. ECU Conversion On January 1, 1999, eleven of the fifteen member countries of the European Union are scheduled to establish fixed conversion rates between their existing sovereign currencies and the euro. The participating countries have agreed to adopt the euro as their common legal currency on that date. The euro will then trade on currency exchanges and be available for non-cash transactions. The participating countries will issue sovereign debt exclusively in euros, and will redenominate outstanding sovereign debt. At that time, the participating countries will no longer control their own monetary policies by directing independent interest rates for the legacy currencies. Instead, the authority to direct monetary policy, including money supply and official interest rates for the euro will be exercised by the new European Central Bank. Following the introduction of the euro, the legacy currencies are scheduled to remain legal tender in the participating countries as denominations of the euro between January 1, 1999 and January 1, 2002 (the "transition period"). During the transition period, public and private parties may pay for goods and services using either the euro or the participating country's legacy currency on a "no compulsion, no prohibition" basis. However, conversion rates no longer will be computed directly from one legacy currency to another. Instead, a triangular process will apply whereby an amount denominated in one legacy currency will first be converted into the euro. The resultant euro-denominated amount will then be converted into the second legacy currency. The Company has a task force assigned to address the business implications of conversion to the euro, including technical adaptation of information technology and other systems to accommodate euro-denominated transactions, long term competitive implications of the conversions and the effect on market risk with respect to financial instruments. At this time, management is in the process of evaluating the impact of this conversion on the Company. Factors That May Affect Future Results This Quarterly Report on Form 10-Q contains forward-looking statements as defined under the Federal Securities Laws. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including but not limited to: (i) a failure by any supplier of high density DRAMs, disk drives or other components to meet EMC's requirements for an extended period of time; (ii) delays in the development of new technology and the transition to new products; (iii) the historic and recurring "hockey stick" pattern of the Company's sales by which a disproportionate percentage of a quarter's total sales occur in the last month and weeks and days of each quarter; (iv) the "hockey stick" pattern of the Company's sales, making it extremely difficult to predict near-term demand and adjust production capacity accordingly; (v) competitive factors, including but not limited to pricing pressures, in the computer storage market; (vi) fluctuating currency exchange rates; (vii) the relative and varying rates of product price and component cost declines; (viii) deterioration or termination of the agreements with certain of the Company's OEMs or resellers; (ix) risks associated with acquisitions; (x) Year 2000 issues; (xi) other one-time events and other important factors disclosed previously and from time to time in EMC's other filings with the U.S. Securities and Exchange Commission. 15 EMC CORPORATION PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In August 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 amend the complaint to overcome the grounds for dismissal. In the amended complaint, TM alleged infringement only as to one of the two patents originally at issue. Fact discovery in this case has concluded. A trial is set for January 1999. The Company believes TM's claims are without merit. In December 1997, NewFrame Corporation Ltd. ("NewFrame") filed suit against the Company in the United States District Court for the District of Massachusetts. The suit contains a variety of allegations relating to the Company's use of NewFrame's software developments, including various contract claims and breach of fiduciary duty, and seeks monetary damages relating primarily to lost future profits. The Company filed a motion to dismiss the complaint, which was granted in part. The 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. Among other defenses, the Company has asserted that its activities are covered by a license agreement between the parties. A trial on the license issue was held from August 4 to August 6, 1998. A decision from the court is expected shortly. 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 operations or financial condition. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On April 23, 1998, the Company issued 602,702 shares of its common stock, $.01 par value per share, in connection with the acquisition of the outstanding common stock of Groupe MCI, a French information technology professional services firm. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), provided for in Section 4(2) thereunder. The Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission under the Securities Act, which became effective on August 5, 1998 and which permits the resale, on a registered basis, of these shares from time to time by the securityholders named therein. The Company also listed these shares of common stock on the New York Stock Exchange. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders was held on May 6, 1998. There was no solicitation in opposition to management's nominees as listed in the Company's proxy statement and all such nominees were elected as Class II directors for a three-year term. In addition, the stockholders approved an amendment to the Company's 1993 Stock Option Plan to increase the number of shares available for grant under the plan by 3,500,000, and an amendment to the Company's 1989 Employee Stock Purchase Plan to provide that employees whose customary employment is 20 hours or less per week are ineligible to participate in the plan. The results of the votes for each of these proposals were as follows: 16 1. Election of Class II Directors:
FOR WITHHELD ----------- ---------- John R. Egan............................................. 439,047,923 15,076,022 Joseph F. Oliveri........................................ 439,352,075 14,771,870 Michael C. Ruettgers..................................... 439,083,330 15,040,615
In addition to these directors, the Company's other incumbent directors (Richard J. Egan, Michael J. Cronin, John F. Cunningham, Maureen E. Egan, and W. Paul Fitzgerald) had terms that continued after the 1998 Annual Meeting. 2. To amend the Company's 1993 Stock Option Plan: For:........................................................ 379,030,950 Against:.................................................... 72,874,548 Abstain:.................................................... 2,217,047 Broker Non-Votes:........................................... 1,400
3. To amend the Company's 1989 Employee Stock Purchase Plan: For:........................................................ 442,646,692 Against:.................................................... 8,697,433 Abstain:.................................................... 2,778,420 Broker Non-Votes:........................................... 1,400
ITEM 5. OTHER INFORMATION On July 22, 1998, the Company's Board of Directors amended its By-laws, including certain amendments to Sections 2.4 and 3.2 thereof relating to advance notice procedures, which are as follows. Section 2.4 now provides that no business may be brought before an annual meeting except as specified in the notice of the meeting or as otherwise brought before the meeting by or at the direction of the Board of Directors, the presiding officer or by a stockholder entitled to vote at such annual meeting who has delivered notice to the principal executive offices of the Company (containing certain information specified in the By-laws) (i) not less than 95 days nor more than 125 days prior to the first anniversary of the preceding year's annual meeting, or (ii) for a special meeting or an annual meeting called for a date which is not within 30 days before or after such anniversary date, not later than the close of business on the 10th day following the date notice of such meeting is mailed or made public, whichever is earlier. Section 3.2 now provides that nominations for a director may be made only by the Board of Directors, a nominating committee of the Board of Directors, a person appointed by the Board of Directors or by a stockholder entitled to vote who has delivered notice to the principal executive offices of the Company (containing certain information specified in the By-laws) (i) not less than 95 days nor more than 125 days prior to the first anniversary of the preceding year's annual meeting, or (ii) if the meeting is called for a date which is not within 30 days before or after such anniversary date, not later than the close of business on the 10th day following the date notice of such meeting is mailed or made public, whichever is earlier. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (filed herewith). (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company for the quarter ended June 30, 1998. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EMC CORPORATION Date: August 13, 1998 By: /s/ COLIN G. PATTESON --------------------------------- Colin G. Patteson Senior Vice President, Chief Administrative Officer and Treasurer (Principal Financial Officer) By: /s/ WILLIAM J. TEUBER, JR. --------------------------------- William J. Teuber, Jr. Vice President and Chief Financial Officer (Principal Accounting Officer) 18 EXHIBIT INDEX Exhibit 27 Financial Data Schedule (filed herewith) 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EMC CORPORATION'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JUN-30-1998 983,784 402,113 814,076 7,645 480,856 2,765,689 487,668 298,348 3,963,199 600,940 517,500 0 0 4,995 2,759,008 3,963,199 1,724,755 1,780,353 898,616 1,369,368 0 0 9,729 447,481 111,870 335,611 0 0 0 335,611 .67 .64
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