<PAGE>
As filed with the Securities and Exchange Commission on November 28, 1995
Registration No. 33-63993
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------
EMC CORPORATION
(Exact name of Registrant as specified in its charter)
Massachusetts 3572 04-2680009
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
171 South Street
Hopkinton, Massachusetts 01748
(508) 435-1000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------------------
Paul T. Dacier
Vice President and General Counsel
EMC Corporation
171 South Street
Hopkinton, Massachusetts 01748
(508) 435-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------------
Copies to:
David T. Brewster John G. Lewis
Skadden, Arps, Slate, Meagher & Flom Ireland, Stapleton, Pryor & Pascoe, P.C.
One Beacon Street 1675 Broadway, Suite 2600
Boston, Massachusetts 02108 Denver, Colorado 80202
(617) 573-4800 (303) 623-2700
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective
and certain other conditions under the Merger Agreement are met or waived.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
EMC CORPORATION
CROSS-REFERENCE SHEET SHOWING LOCATIONS IN THE PROSPECTUS
OF THE RESPONSES TO THE ITEMS OF FORM S-4
(PURSUANT TO ITEM 501 OF REGULATION S-K)
<TABLE>
<CAPTION>
FORM S-4 LOCATION IN PROSPECTUS
ITEM NUMBER AND CAPTION
<S> <C>
A. INFORMATION ABOUT THE
TRANSACTION
1. Forepart of the Registration Statement and Facing Page, Cross Reference Sheet; Outside
Outside Front Cover Page of Prospectus Front Cover Page of Consent
Solicitation/Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page of Consent
of Prospectus Solicitation/Prospectus; Available
Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and Summary; Risk Factors; Selected Historical
Other Information Financial Data
4. Terms of the Transaction Summary; The Merger; The Merger Agreement
5. Pro Forma Financial Information *
6. Material Contacts with the Company Being Summary; The Merger; The Merger Agreement
Acquired
7. Additional Information Required for Reoffering by *
Persons and Parties Deemed to be Underwriters
8. Interests of Named Experts and Counsel Legal Matters
9. Disclosure of Commission Position on *
Indemnification for Securities Act
Liabilities
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants *
11. Incorporation of Certain Information by *
Reference
12. Information with Respect to S-2 or S-3 *
Registrants
13. Incorporation of Certain Information by *
Reference
14. Information with Respect to Registrants Available Information; Summary; Selected
Other Than S-3 or S-2 Registrants Historical Financial Data; Information
Concerning EMC; Consolidated Financial
Statements of EMC
C. INFORMATION ABOUT THE COMPANY
BEING ACQUIRED
15. Information with Respect to S-3 Companies *
16. Information with Respect to S-2 or S-3 Companies *
17. Information with Respect to Companies Summary; Selected Historical Financial
Other Than S-3 or S-2 Companies Data; Information Concerning McDATA;
Consolidated Financial Statements of McDATA
</TABLE>
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<TABLE>
<S> <C>
D. VOTING AND MANAGEMENT
INFORMATION
18. Information if Proxies, Consents or Outside Front Cover Page of Consent
Authorization are to be Solicited Solicitation/Prospectus; Summary; The
Consent Solicitation; The Merger;
Information Concerning EMC; Comparison of
Stockholder Rights
19. Information if Proxies, Consents or *
Authorization are not to be Solicited or in
an Exchange Offer
</TABLE>
----------
* Not Applicable
<PAGE>
[LETTERHEAD OF MCDATA CORPORATION APPEARS HERE]
November 29, 1995
To Our Stockholders:
The enclosed Notice of Consent Solicitation of Stockholders, Consent
Solicitation/Prospectus and form of consent are being delivered to you in
connection with a Consent Solicitation of Stockholders (the "Consent
Solicitation") of McDATA Corporation ("McDATA") for approval of (i) the
Agreement and Plan of Merger, dated as of October 25, 1995 (the "Merger
Agreement"), by and among EMC Corporation ("EMC"), EMC Merger Corporation 1995
("Sub") and McDATA, pursuant to which Sub shall merge with and into McDATA and
McDATA shall survive such merger (the "Merger") as a wholly owned subsidiary
of EMC (the "Merger Proposal"); and (ii) the conversion of all outstanding
shares of Series A Convertible Preferred Stock, par value $.001 per share, of
McDATA ("McDATA Series A Preferred Stock") and Series B Convertible Preferred
Stock, par value $.001 per share, of McDATA ("McDATA Series B Preferred
Stock") into Class A Common Stock, par value $.001 per share, of McDATA
("McDATA Class A Common Stock"), which will cause the automatic conversion of
all outstanding shares of Class B Common Stock, par value $.001 per share, of
McDATA ("McDATA Class B Common Stock") into McDATA Class A Common Stock (the
"Conversion Proposal").
In the Merger, holders of outstanding shares of McDATA Class A Common Stock
will receive a number of shares of common stock, $.01 par value per share, of
EMC ("EMC Common Stock") for each share of McDATA Class A Common Stock held by
them equal to the Exchange Ratio (as defined in the Merger Agreement). If the
value of the shares of EMC Common Stock, as of the closing determined in
accordance with the Merger Agreement and net of the portion thereof to be
placed in escrow, to be received for each share of McDATA Class A Common Stock
is less than $43.86, then EMC and McDATA have agreed to defer the closing
until such time as revised information regarding the value of the shares of
EMC Common Stock to be received in the Merger is made available to you and
your votes have been resolicited.
By way of example, if the Merger were consummated on November 30, 1995,
McDATA estimates that each outstanding share of McDATA Class A Common Stock
would be converted, based on the Exchange Ratio, into a number of shares of
EMC Common Stock having a value, as of such date determined in accordance with
the Merger Agreement and net of the portion thereof to be placed in escrow, of
approximately $45.34. However, the actual Exchange Ratio will be determined at
the closing in accordance with the Merger Agreement and as described in the
Consent Solicitation/Prospectus. Accordingly, no assurance can be given that
you will receive shares of EMC Common Stock having value, as of the closing
determined in accordance with the Merger Agreement and net of the portion
thereof to be placed in escrow, for each share of McDATA Class A Common Stock
of more than $43.86.
The enclosed Consent Solicitation/Prospectus provides you with detailed
information concerning the Merger Proposal, the Conversion Proposal and
related matters. Please give all of this information your careful attention.
The Board of Directors of McDATA has, after careful consideration,
determined the Merger to be fair to and in the best interests of McDATA and
its stockholders. The Board has approved the Merger Agreement and unanimously
recommends the Merger Proposal and the Conversion Proposal to the stockholders
of McDATA.
Montgomery Securities, McDATA's financial advisor in connection with the
Merger, has rendered an opinion to the Board of Directors of McDATA that, as
of the date of such opinion, the consideration to be received by McDATA's
stockholders pursuant to the Merger is fair to such stockholders from a
financial point of view.
Your vote is of great importance. Approval of the Merger Proposal requires
the affirmative vote of the (i) holders of at least a majority of the
outstanding shares of McDATA Class A Common Stock, voting as a
<PAGE>
separate class, (ii) holders of a majority of the outstanding shares of McDATA
Class B Common Stock, voting as a separate class, and (iii) holders of 66 2/3%
of the outstanding shares of McDATA Series A Preferred Stock and McDATA Series
B Preferred Stock, voting together as a single class. Approval of the
Conversion Proposal requires the affirmative vote of the holders of 66 2/3% of
the outstanding shares of McDATA Series A Preferred Stock and McDATA Series B
Preferred Stock, voting together as a single class.
In order to assure your participation in the Consent Solicitation, you are
urged to complete, sign, date and return the accompanying form of consent by
hand delivery to McDATA at 310 Interlocken Parkway, Broomfield, Colorado 80021-
3464, by facsimile to McDATA at (303) 460-4472 or by mail in the enclosed
postage-paid, addressed return envelope. No additional postage is required if
mailed in the United States. Such consents must be received by McDATA by
December 6, 1995, unless the Consent Solicitation is extended.
Sincerely,
John F. McDonnell
President
<PAGE>
MCDATA CORPORATION
310 INTERLOCKEN PARKWAY
BROOMFIELD, COLORADO 80021-3464
NOTICE OF CONSENT SOLICITATION OF STOCKHOLDERS
To the Stockholders of McDATA Corporation:
NOTICE IS HEREBY GIVEN that a Consent Solicitation of Stockholders (the
"Consent Solicitation") of McDATA Corporation, a Delaware corporation
("McDATA"), will begin on November 29, 1995 and, unless extended, expire on the
earlier of (i) the date that McDATA notifies the McDATA stockholders that the
Merger Proposal and the Conversion Proposal (each as defined below) have
received the requisite vote by written consent of those stockholders of McDATA
entitled to vote on such matters or (ii) December 6, 1995, for the following
purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger, dated as of October 25, 1995 (the "Merger Agreement"), by and
among EMC Corporation, a Massachusetts corporation ("EMC"), EMC Merger
Corporation 1995, a Delaware corporation ("Sub"), and McDATA, pursuant to
which Sub shall merge with and into McDATA and McDATA shall survive as a
wholly owned subsidiary of EMC (the "Merger Proposal"); and
2. If you are the holder of any shares of Series A Convertible Preferred
Stock, par value $.001 per share, of McDATA ("McDATA Series A Preferred
Stock") or Series B Convertible Preferred Stock, par value $.001 per share,
of McDATA ("McDATA Series B Preferred Stock"), to consider and vote upon a
proposal to approve the conversion of all outstanding shares of McDATA
Series A Preferred Stock and McDATA Series B Preferred Stock into Class A
Common Stock, par value $.001 per share, of McDATA ("McDATA Class A Common
Stock"), which will cause the automatic conversion of all outstanding
shares of Class B Common Stock, par value $.001 per share, of McDATA into
McDATA Class A Common Stock (the "Conversion Proposal").
Stockholders of record at the close of business on October 20, 1995 are
entitled to notice of, and to vote during the Consent Solicitation.
A Consent Solicitation/Prospectus (including a form of consent) containing
more detailed information with respect to the matters to be considered during
the Consent Solicitation accompany this Notice.
Section 262 of the Delaware General Corporation Law, which governs rights of
dissenting stockholders, is summarized in the Consent Solicitation/Prospectus
under the caption "THE MERGER--Appraisal Rights" and is reproduced as Annex C
to the Consent Solicitation/Prospectus.
The Board of Directors unanimously recommends that you vote in favor of the
Merger Proposal and the Conversion Proposal.
In order to ensure your representation in the Consent Solicitation, you are
urged to complete, sign, date and return the enclosed consent by hand delivery
to McDATA at the above address, by facsimile to McDATA at (303) 460-4472 or by
mail in the enclosed postage-paid addressed return envelope. Such consents must
be received by McDATA by December 6, 1995, unless the Consent Solicitation is
extended.
By Order of the Board of Directors
Dee J. Perry
Secretary
Broomfield, Colorado
November 29, 1995
----------------
YOUR VOTE IS IMPORTANT.
TO VOTE YOUR SHARES, PLEASE COMPLETE, SIGN, DATE AND
RETURN THE ENCLOSED CONSENT BY HAND DELIVERY OR FACSIMILE TO MCDATA
OR MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
PLEASE DO NOT SEND STOCK CERTIFICATES AT THIS TIME.
----------------
<PAGE>
MCDATA CORPORATION
CONSENT SOLICITATION
----------------
EMC CORPORATION
PROSPECTUS
----------------
This Consent Solicitation/Prospectus is being furnished to the stockholders
of McDATA Corporation, a Delaware corporation ("McDATA"), in connection with
the solicitation of consents by the Board of Directors of McDATA. This Consent
Solicitation/Prospectus relates to the proposed merger of EMC Merger
Corporation 1995 ("Sub"), a Delaware corporation and a wholly owned subsidiary
of EMC Corporation, a Massachusetts corporation ("EMC"), with and into McDATA
(the "Merger") and certain related transactions contemplated by the Agreement
and Plan of Merger, dated as of October 25, 1995 (the "Merger Agreement"), by
and among EMC, Sub and McDATA, a copy of which is attached hereto as Annex A.
This Consent Solicitation/Prospectus also constitutes a prospectus of EMC
with respect to 17,500,000 shares of common stock, $.01 par value per share, of
EMC ("EMC Common Stock"), estimated to be the maximum number of shares of EMC
Common Stock to be issued in the Merger in exchange for outstanding shares of
Class A Common Stock, par value $.001 per share, of McDATA ("McDATA Class A
Common Stock"), including shares issued upon conversion or exercise of
outstanding securities or options of McDATA. All information contained in this
Consent Solicitation/Prospectus relating to EMC has been supplied by EMC, and
all information relating to McDATA has been supplied by McDATA.
This Consent Solicitation/Prospectus and the accompanying form of consent are
first being mailed or delivered to stockholders of McDATA on or about November
29, 1995.
SEE "RISK FACTORS" ON PAGE 15 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY MCDATA STOCKHOLDERS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS CONSENT SOLICITATION/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Consent Solicitation/Prospectus is November 28, 1995.
<PAGE>
No persons have been authorized to give any information or to make any
representation other than those contained in this Consent
Solicitation/Prospectus in connection with the solicitation of consents or the
offering of securities made hereby and, if given or made, such information or
representation must not be relied upon as having been authorized by EMC,
McDATA or any other person. This Consent Solicitation/Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities, or the solicitation of a consent, in any jurisdiction to or from
any person to whom it is not lawful to make any such offer or solicitation in
such jurisdiction. Neither the delivery of this Consent
Solicitation/Prospectus nor any distribution of securities made hereunder
shall under any circumstances create an implication that there has been no
change in the affairs of EMC or McDATA since the date hereof or that the
information herein is correct as of any time subsequent to its date.
AVAILABLE INFORMATION
EMC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The reports, proxy statements and other information filed
by EMC with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and should be available at the Commission's Regional
Offices located at 7 World Trade Center, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such material also can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 at prescribed rates. EMC Common Stock is
listed and traded on the New York Stock Exchange, Inc. (the "NYSE"). Reports,
proxy statements and other information concerning EMC can also be inspected at
the offices of the NYSE, 20 Broad Street, New York, New York 10005.
EMC has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of EMC Common Stock to be issued pursuant to the Merger Agreement. This
Consent Solicitation/Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits thereto. Such additional
information may be obtained from the Commission's principal office in
Washington, D.C. Statements contained in this Consent Solicitation/Prospectus
as to the contents of any contract or other document referred to herein are
not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
ChannelScope (R) is a trademark of McDATA Corporation. McDATA has sufficient
rights to use the McDATA (R) trademark in connection with computers, computer
peripheral equipment and controllers, including the computer software programs
used in connection therewith, in the conduct of McDATA's business. McDATA is
the exclusive licensee of the McDATA(R) service mark for consulting services
for data processing. Enterprise Systems Connection Architecture (TM) and
ESCON (TM) are trademarks of International Business Machines Corporation.
EMC (R) is a registered trademark of EMC Corporation. Symmetrix (TM),
Harmonix (TM), Centriplex (TM), Voyager (TM) and Epoch Data Manager (TM) are
trademarks of EMC Corporation.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION...................................................... 2
SUMMARY.................................................................... 5
RISK FACTORS............................................................... 15
THE CONSENT SOLICITATION................................................... 16
General.................................................................. 16
Purpose.................................................................. 16
Record Date and Consent Required......................................... 16
Procedure................................................................ 17
Expenses................................................................. 17
THE MERGER................................................................. 18
General.................................................................. 18
Background of the Merger................................................. 18
McDATA's Reasons for the Merger; Recommendation of the McDATA Board...... 20
EMC's Reasons for the Merger............................................. 21
Opinion of Financial Advisor............................................. 21
Interests of Certain Persons in the Merger............................... 24
Certain Federal Income Tax Consequences.................................. 24
Accounting Treatment..................................................... 25
Regulatory Filings and Approvals......................................... 26
Federal Securities Law Consequences...................................... 26
Listing of EMC Common Stock on the NYSE.................................. 27
Appraisal Rights......................................................... 27
THE MERGER AGREEMENT....................................................... 29
Closing; Effective Time.................................................. 29
Form of Merger........................................................... 29
Conversion of Shares..................................................... 29
Exchange of Stock Certificates........................................... 31
Representations and Warranties........................................... 32
Conduct of Business Prior to the Effective Time.......................... 32
No Solicitation.......................................................... 33
Pooling and Reorganization Treatment..................................... 33
Indemnification; Escrow Shares........................................... 34
Conditions............................................................... 35
Stock Option Plans....................................................... 35
Termination; Termination Fees and Expenses............................... 36
Amendment, Extension and Waiver.......................................... 37
Related Matters After the Merger......................................... 37
COMPARATIVE PER SHARE MARKET PRICE DATA.................................... 38
McDATA................................................................... 38
EMC...................................................................... 38
SELECTED CONSOLIDATED FINANCIAL DATA....................................... 39
McDATA................................................................... 39
EMC...................................................................... 40
INFORMATION CONCERNING McDATA.............................................. 41
Business................................................................. 41
McDATA's Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 41
Principal Stockholders................................................... 45
</TABLE>
3
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<TABLE>
<S> <C>
INFORMATION CONCERNING EMC................................................. 46
Business................................................................. 46
Properties............................................................... 52
Legal Proceedings........................................................ 52
EMC's Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 53
Executive Officers and Directors......................................... 59
Executive Compensation................................................... 62
Principal Stockholders................................................... 63
Compensation of Directors................................................ 64
Compensation Committee Interlocks and Insider Participation.............. 64
Certain Relationships and Related Transactions........................... 64
Description of EMC Capital Stock......................................... 65
COMPARISON OF STOCKHOLDER RIGHTS........................................... 66
Special Meetings of Stockholders......................................... 66
Inspection Rights........................................................ 67
Action By Consent of Stockholders........................................ 68
Cumulative Voting........................................................ 68
Dividends and Stock Repurchases.......................................... 68
Classification of the Board of Directors................................. 69
Removal of Directors..................................................... 69
Vacancies on the Board of Directors...................................... 69
Exculpation of Directors................................................. 70
Indemnification of Directors, Officers and Others........................ 70
Interested Director Transactions......................................... 71
Liquidation Preferences.................................................. 72
Fundamental Transactions................................................. 72
Amendments to Charter.................................................... 73
Amendments to Bylaws..................................................... 73
Appraisal Rights......................................................... 74
"Anti-Takeover" Statutes................................................. 74
LEGAL MATTERS.............................................................. 75
EXPERTS.................................................................... 75
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
Annex A--Agreement and Plan of Merger dated as of October 25, 1995, by and
among EMC Corporation, EMC Merger Corporation 1995 and McDATA Corporation. A-1
Annex B--Opinion of Montgomery Securities.................................. B-1
Annex C--Section 262 of the Delaware General Corporation Law............... C-1
</TABLE>
4
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Consent Solicitation/Prospectus and the Annexes hereto. Reference is made to,
and this summary is qualified in its entirety by, the more detailed information
contained in this Consent Solicitation/Prospectus and the Annexes hereto. All
share and per share data in this Consent Solicitation/Prospectus reflect all
previous stock splits of EMC Common Stock.
THE COMPANIES
MCDATA CORPORATION
McDATA Corporation, a Delaware corporation ("McDATA"), designs, manufactures,
markets and supports high performance information switching products,
delivering innovative networking solutions for large-scale computing
applications, including local, metropolitan and wide-area connectivity. The
mailing address of McDATA's principal executive offices is 310 Interlocken
Parkway, Broomfield, Colorado 80021-3464, and its telephone number is (303)
460-9200.
EMC CORPORATION
EMC Corporation, a Massachusetts corporation ("EMC"), and its subsidiaries
design, manufacture, market and support high performance storage products and
provide related services for mainframe and midrange computer systems
manufactured primarily by International Business Machines Corporation, Unisys
Corporation and Compagnie des Machines Bull S.A. EMC has announced and is
shipping a family of products aimed at the open systems storage marketplace.
EMC develops its products by integrating technologically advanced industry
standard components and devices with EMC designed proprietary controller
technology to produce storage products that enhance the performance,
reliability, availability, connectivity and functionality of computer systems.
The mailing address of EMC's principal executive offices is 171 South Street,
Hopkinton, Massachusetts 01748, and its telephone number is (508) 435-1000.
EMC MERGER CORPORATION 1995
EMC Merger Corporation 1995, a Delaware corporation and a wholly owned
subsidiary of EMC ("Sub"), was incorporated in September 1995 for purposes of
the Merger. Sub engages in no other business. The mailing address of Sub's
principal executive offices is 171 South Street, Hopkinton, Massachusetts
01748, and its telephone number is (508) 435-1000.
THE CONSENT SOLICITATION
PURPOSE
The purpose of the solicitation (the "Consent Solicitation") of written
consents (individually, a "Consent" and collectively, the "Consents") from the
stockholders of McDATA is to consider and vote by Consent upon the following
proposals: (i) the approval of the Agreement and Plan of Merger, dated as of
October 25, 1995 (the "Merger Agreement"), by and among EMC, Sub and McDATA,
pursuant to which Sub shall merge with and into McDATA and McDATA shall survive
such merger (the "Merger") as a wholly owned subsidiary of EMC (the "Merger
Proposal"); and (ii) the conversion of all outstanding shares of Series A
Convertible Preferred Stock, par value $.001 per share, of McDATA ("McDATA
Series A Preferred Stock") and Series B Convertible Preferred Stock, par value
$.001 per share, of McDATA ("McDATA Series B Preferred Stock") into Class A
Common Stock, par value $.001 per share, of McDATA ("McDATA Class A Common
Stock"), which will cause the automatic conversion of all outstanding shares of
Class B
5
<PAGE>
Common Stock, par value $.001 per share, of McDATA ("McDATA Class B Common
Stock" and together with McDATA Series A Preferred Stock, McDATA Series B
Preferred Stock and McDATA Class A Common Stock, "McDATA Capital Stock") into
McDATA Class A Common Stock (the "Conversion Proposal"). See "THE CONSENT
SOLICITATION--General" and "THE CONSENT SOLICITATION--Purpose."
RECORD DATE AND CONSENT REQUIRED
The Board of Directors of McDATA (the "McDATA Board") has fixed the close of
business on October 20, 1995 as the record date (the "Record Date") for the
determination of stockholders of McDATA entitled to notice of and to vote by
Consent during the Consent Solicitation on the Merger Proposal or the
Conversion Proposal. As of the Record Date, there were (i) 3,153,936 and
203,140 shares of McDATA Class A Common Stock and McDATA Class B Common Stock,
respectively, issued and outstanding, each of which will be entitled to vote on
the Merger Proposal, and (ii) 27,520 and 1,121,425 shares of McDATA Series A
Preferred Stock and McDATA Series B Preferred Stock, respectively, issued and
outstanding, each of which will be entitled to vote on the Merger Proposal and
the Conversion Proposal. The Merger Proposal requires the Consent of (i)
holders of a majority of the outstanding shares of McDATA Class A Common Stock,
voting as a separate class, (ii) holders of a majority of outstanding shares of
McDATA Class B Common Stock, voting as a separate class, and (iii) holders of
66 2/3% of the outstanding shares of McDATA Series A Preferred Stock and McDATA
Series B Preferred Stock, voting together as a single class. The Conversion
Proposal requires the Consent of the holders of 66 2/3% of the outstanding
shares of McDATA Series A Preferred Stock and McDATA Series B Preferred Stock,
voting together as a single class. Holders of McDATA Capital Stock on the
Record Date are entitled to one vote per share on each proposal presented to
such holder for Consent.
As of the Record Date, directors and executive officers of McDATA and their
affiliates had the right to vote approximately 37.6% of all issued and
outstanding shares of McDATA Class A Common Stock, 15.6% of all issued and
outstanding shares of McDATA Class B Common Stock, 0% of all issued and
outstanding shares of McDATA Series A Preferred Stock and 74.1% of all issued
and outstanding shares of McDATA Series B Preferred Stock. See "THE CONSENT
SOLICITATION--Record Date and Consent Required."
PROCEDURE
Stockholders of McDATA should complete, sign, date and return the Consent to
McDATA by hand delivery, facsimile at (303) 460-4472 or in the postage-paid,
addressed envelope on or before December 6, 1995. Consents delivered by McDATA
stockholders may be revoked at any time on or prior to December 6, 1995, unless
the Consent Solicitation is extended. See "THE CONSENT SOLICITATION--
Procedure."
THE MERGER
CLOSING; EFFECTIVE TIME
The closing of the transactions contemplated by the Merger Agreement (the
"Closing") shall take place on the later of (i) November 30, 1995 or (ii) the
day which is one business day after the first date on which each of certain
conditions to Closing set forth in the Merger Agreement is satisfied or waived,
subject to the right of EMC to extend the Closing for up to 90 days under
certain circumstances, or at such other time as EMC and McDATA agree (the
"Closing Date"). The Merger shall become effective (the "Effective Time") upon
the filing of a certificate of merger with the Secretary of State of the State
of Delaware in the form required by, and executed in accordance with, the
General Corporation Law of the State of Delaware (the "DGCL"). Such filing
shall be made on the Closing Date. See "THE MERGER AGREEMENT--Closing;
Effective Time" and "THE MERGER AGREEMENT--Conditions."
6
<PAGE>
FORM OF MERGER
At the Effective Time, Sub shall merge with and into McDATA and McDATA shall
survive such Merger as a wholly owned subsidiary of EMC. See "THE MERGER
AGREEMENT--Form of Merger."
CONVERSION OF SHARES
This portion of the summary describes how the number of shares of EMC Common
Stock to be received in the Merger by holders of McDATA Capital Stock will be
determined. As described more fully below, if the value of the shares of EMC
Common Stock, as of the Closing Date determined in accordance with the Merger
Agreement, to be received for each share of McDATA Class A Common Stock, net of
the portion thereof to be placed in escrow, is less than $43.86, then EMC and
McDATA have agreed to defer the Closing until such time as revised information
regarding the value of the shares of EMC Common Stock to be received in the
Merger is made available to the stockholders of McDATA and their votes have
been resolicited.
On the first business day prior to the Closing Date and pursuant to the
Conversion Proposal, the outstanding shares of McDATA Series A Preferred Stock,
McDATA Series B Preferred Stock and McDATA Class B Common Stock will be
converted into shares of McDATA Class A Common Stock. Such conversions will be
made pursuant to the conversion formulas set forth in the Amended and Restated
Certificate of Incorporation of McDATA. The shares of McDATA Series A Preferred
Stock and McDATA Series B Preferred Stock will be converted into shares of
McDATA Class A Common Stock on a one-for-one basis. Based on the McDATA Class B
Common Stock conversion formula and currently available information, McDATA
estimates that each share of McDATA Class B Common Stock will be converted to
1.19 shares of McDATA Class A Common Stock (the "Class B Conversion Factor").
The Class B Conversion Factor is based on certain assumptions by McDATA
including that all of the vested options for the purchase of McDATA Class B
Common Stock will be exercised prior to the consummation of the Merger. If such
assumptions are not correct, the Class B Conversion Factor will change. The
actual Class B Conversion Factor will be determined on the first business day
prior to the Closing Date. See "THE MERGER AGREEMENT--Conversion of Shares."
At the Effective Time, each issued and outstanding share of McDATA Class A
Common Stock, other than shares held by McDATA as treasury stock or by EMC, Sub
or any other subsidiary of EMC and shares as to which appraisal rights have
been duly asserted and perfected under the DGCL, shall be converted into the
right to receive a number of shares of EMC Common Stock (hereinafter referred
to as the "Exchange Ratio") determined by dividing the aggregate number of
shares of common stock, $.01 par value per share, of EMC ("EMC Common Stock")
to be issued in the Merger by the number of shares of McDATA Class A Common
Stock outstanding on the Closing Date. The aggregate number of shares of EMC
Common Stock to be issued in the Merger (hereinafter referred to as the "Merger
Shares") shall be determined by dividing the sum of $180,000,000 and the amount
of net quick assets of McDATA as of the Closing Date computed in accordance
with the Merger Agreement (the "Net Quick Assets Amount") by the average of the
closing prices of EMC Common Stock on the New York Stock Exchange (the "NYSE")
composite tape as reported in The Wall Street Journal on each of the ten
trading days immediately preceding the Closing Date (the "Closing Average").
The Net Quick Assets Amount shall be the positive difference, if any, between
(i) the sum of McDATA's cash and cash equivalents, short term investments and
accounts receivable as of the Closing Date, subject to certain adjustments, and
(ii) the sum of McDATA's accounts payable, taxes payable and accrued
liabilities as of the Closing Date, subject to certain adjustments.
Ninety percent of the Merger Shares (the "Fixed Shares") will be immediately
available for distribution to holders of record of McDATA Class A Common Stock
as of the Effective Time pursuant to the exchange procedures set forth in the
Merger Agreement and in an Exchange and Escrow Agreement (the "Exchange and
Escrow Agreement") to be entered into at the Closing by EMC, John F. McDonnell,
as the representative
7
<PAGE>
of the stockholders of McDATA, and State Street Bank and Trust Company (the
"Exchange and Escrow Agent"). See "THE MERGER AGREEMENT--Exchange of Stock
Certificates." The remaining ten percent of the Merger Shares (the "Escrow
Shares") shall be placed in escrow pursuant to the Exchange and Escrow
Agreement and shall be the source from which EMC may seek indemnification
pursuant to the Merger Agreement. See "THE MERGER AGREEMENT--Indemnification;
Escrow Shares."
McDATA estimates that, as of November 30, 1995, the Net Quick Assets Amount
will be approximately $52,290,000 and that the number of outstanding shares of
McDATA Class A Common Stock will be approximately 4,610,000 (assuming the
conversion of the outstanding shares of McDATA Series A Preferred Stock, McDATA
Series B Preferred Stock and McDATA Class B Common Stock into shares of McDATA
Class A Common Stock pursuant to the Conversion Proposal). Accordingly, if the
Merger were consummated as of that date, each outstanding share of McDATA Class
A Common Stock would be converted, based upon the Exchange Ratio, into a number
of shares of EMC Common Stock having a value, as of such date based on the
Closing Average computed as of such date, of approximately $50.38, of which
approximately $45.34 of value would be represented by Fixed Shares immediately
available for distribution and approximately $5.04 of value would be
represented by Escrow Shares to be placed in escrow. See "THE MERGER
AGREEMENT--Exchange of Stock Certificates" and "THE MERGER AGREEMENT--
Indemnification; Escrow Shares."
The actual Exchange Ratio will be determined as of the Closing Date based on
the actual number of shares of McDATA Class A Common Stock outstanding on such
date, the actual Net Quick Assets Amount as of such date and the Closing
Average. As noted above, if the actual value of the number of shares of EMC
Common Stock represented by the Exchange Ratio, as of the Closing Date based on
the Closing Average, is less than $48.73 (or $43.86 net of the portion thereof
represented by Escrow Shares), which would occur if the Net Quick Assets Amount
as of the Closing Date is less than the Net Quick Assets Amount of $44,653,150
as of October 27, 1995, then EMC and McDATA have agreed to defer the Closing
until such time as revised information concerning the Exchange Ratio is made
available to stockholders of McDATA entitled to vote on the Merger Proposal or
the Conversion Proposal and their required votes by Consents have been
resolicited.
The market price of the shares of EMC Common Stock received in the Merger may
be different from the value thereof, as of the Closing Date based on the
Closing Average, and will, after the Merger, fluctuate. See "COMPARATIVE PER
SHARE MARKET PRICE DATA--EMC." MCDATA STOCKHOLDERS ARE URGED TO OBTAIN A
CURRENT MARKET QUOTATION FOR EMC COMMON STOCK.
All shares of McDATA Class A Common Stock owned at the Effective Time by
McDATA as treasury stock or by EMC, Sub or any other subsidiary of EMC shall be
cancelled pursuant to the Merger Agreement. As of the date of this Consent
Solicitation/Prospectus, neither EMC nor any subsidiary of EMC (including Sub)
owns any shares of McDATA Class A Common Stock. See "THE MERGER AGREEMENT--
Conversion of Shares."
Each holder of McDATA Class A Common Stock who would otherwise have been
entitled to a fraction of a share of EMC Common Stock upon surrender for
exchange of McDATA Certificates (as defined below) will, upon surrender of such
McDATA Certificates, be entitled to receive a cash payment in lieu of such
fractional share of EMC Common Stock in an amount equal to such fraction
multiplied by the Closing Average. See "THE MERGER AGREEMENT--Conversion of
Shares."
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the Effective Time, the Exchange and Escrow
Agent will mail transmittal instructions and a form of letter of transmittal to
each person who was, at the Effective Time, a holder of record of McDATA Class
A Common Stock. The transmittal instructions will describe the procedures for
8
<PAGE>
surrendering certificates that prior to the Merger represented McDATA Capital
Stock ("McDATA Certificates") in exchange for certificates representing EMC
Common Stock. McDATA stockholders should not submit their McDATA Certificates
for exchange unless and until they have received the transmittal instructions
and a form of letter of transmittal from the Exchange and Escrow Agent. See
"THE MERGER AGREEMENT--Exchange of Stock Certificates."
MCDATA'S REASONS FOR THE MERGER
The McDATA Board has determined the Merger to be fair to and in the best
interest of McDATA and its stockholders and believes that the Merger offers
significant benefits to the stockholders of McDATA in that, among other things,
it offers them the opportunity to participate, as EMC stockholders, in a
larger, more diversified publicly-held company of which McDATA would become a
part, and to do so by means of a transaction designed to be tax-free to the
McDATA stockholders. See "THE MERGER--McDATA's Reasons for the Merger;
Recommendation of the McDATA Board."
RECOMMENDATION OF THE MCDATA BOARD
The McDATA Board has unanimously approved and adopted the Merger Agreement
and unanimously recommends that requisite holders of McDATA Capital Stock vote
FOR the Merger Proposal and the Conversion Proposal. The McDATA Board's
recommendation is based upon a number of factors described in this Consent
Solicitation/Prospectus. See "THE MERGER--McDATA's Reasons for the Merger;
Recommendation of the McDATA Board."
OPINION OF FINANCIAL ADVISOR
Montgomery Securities, McDATA's financial advisor, has delivered a written
opinion to the McDATA Board to the effect that, as of October 25, 1995, the
consideration to be received by the holders of McDATA Class A Common Stock is
fair to such stockholders from a financial point of view. The full text of such
opinion, which sets forth the assumptions made, matters considered and
limitations on the review undertaken, is attached as Annex B to this Consent
Solicitation/Prospectus. Stockholders of McDATA are urged to read the
Montgomery Securities opinion in its entirety. See "THE MERGER--Opinion of
Financial Advisor."
CONDITIONS TO THE MERGER
The respective obligations of EMC, McDATA and Sub to consummate the Merger
are subject to the fulfillment or waiver (where permissible) of certain
conditions set forth in the Merger Agreement, including, among others,
obtaining requisite stockholder and regulatory approvals, approval for listing
on the NYSE of the shares of EMC Common Stock issuable in the Merger, the
absence of any injunction prohibiting consummation of the Merger, the
continuing accuracy of the representations and warranties made in the Merger
Agreement on and as of the Closing Date, the receipt of certain legal opinions
(including with respect to tax matters) and the receipt of certain accountants'
letters with respect to qualification of the Merger as a pooling of interests
transaction. See "THE MERGER AGREEMENT--Conditions."
TERMINATION
The Merger Agreement is subject to termination (i) by mutual written consent
of EMC and McDATA, (ii) by McDATA if the Merger shall not have been consummated
by February 28, 1996, subject to certain restrictions, (iii) by EMC or McDATA
if the Merger is not consummated by June 30, 1996, subject to certain
restrictions, or (iv) by EMC or McDATA upon the occurrence of certain events.
Under certain circumstances, either EMC or McDATA may be required to pay the
other party (as liquidated damages) a termination fee of $5,000,000 and McDATA
may be required to pay EMC (as liquidated damages) a termination fee of
$10,000,000. See "THE MERGER AGREEMENT--Termination; Termination Fees and
Expenses."
9
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the McDATA Board with respect to the
Merger, stockholders of McDATA should be aware that certain members of McDATA's
management and the McDATA Board have certain interests in the Merger that are
in addition to the interests of stockholders of McDATA generally. See "THE
MERGER--Interests of Certain Persons in the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger is conditioned upon the receipt by each of EMC and
McDATA of legal opinions from their respective counsel substantially to the
effect that the Merger will be treated as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended. If the Merger
so qualifies, (i) no gain or loss will be recognized by EMC, Sub or McDATA in
the Merger and (ii) no gain or loss will be recognized by the stockholders of
McDATA upon the exchange of their shares of McDATA Class A Common Stock solely
for shares of EMC Common Stock in the Merger, except to the extent cash is
received in lieu of fractional shares. See "THE MERGER--Certain Federal Income
Tax Consequences."
ACCOUNTING TREATMENT
EMC and McDATA intend to treat the Merger as a "pooling of interests" for
accounting and financial reporting purposes. The receipt by (i) EMC of a letter
from its independent public accountants stating that the transaction will
qualify as a pooling of interests and (ii) McDATA of a letter from its
independent public accountants stating that, subject to certain qualifications,
neither McDATA nor any of its subsidiaries has taken or agreed to take any
action that would prevent EMC from accounting for the Merger as a pooling of
interests, are conditions precedent to the obligations of EMC and Sub to effect
the Merger. See "THE MERGER--Accounting Treatment."
CERTAIN REGULATORY MATTERS
Certain federal regulatory requirements must be complied with before the
Merger is consummated. See "THE MERGER--Regulatory Filings and Approvals."
RESALE RESTRICTIONS
All shares of EMC Common Stock received in connection with the Merger by
stockholders of McDATA will be freely transferable except that shares of EMC
Common Stock received by persons who are deemed to be "affiliates" (as such
term is defined for purposes of Rule 145 under the Securities Act of 1933, as
amended) of McDATA prior to the Merger will be subject to certain resale
restrictions. See "THE MERGER--Federal Securities Law Consequences."
APPRAISAL RIGHTS
Under Delaware law, holders of McDATA Capital Stock who comply with the
requirements of Section 262 of the DGCL will be entitled to appraisal rights in
connection with the Merger. A copy of Section 262 is attached to this Consent
Solicitation/Prospectus as Annex C. See "THE MERGER--Appraisal Rights."
STOCKHOLDER RIGHTS
See "COMPARISON OF STOCKHOLDER RIGHTS" for a summary of the material
differences between the rights of holders of EMC Common Stock and McDATA
Capital Stock.
RISK FACTORS
Stockholders of McDATA should carefully evaluate the matters set forth under
"RISK FACTORS." Factors to be considered, among other things, include risks
related to competition, technological change, manufacturing, dependence upon
suppliers and key personnel and earnings fluctuations.
10
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
MCDATA
The following consolidated statement of operations data for McDATA for the
years ended December 30, 1994, December 31, 1993 and December 25, 1992 and the
consolidated balance sheet data for McDATA at December 30, 1994 and December
31, 1993 were derived from the audited consolidated financial statements of
McDATA for and as of such dates included elsewhere in this Consent
Solicitation/Prospectus. The consolidated statement of operations data for
McDATA for the years ended December 27, 1991 and December 28, 1990 and the
consolidated balance sheet data for McDATA at December 25, 1992, December 27,
1991 and December 28, 1990 were derived from audited financial statements for
and as of such dates not included herein. The consolidated statement of
operations data for McDATA for the nine months ended September 29, 1995 and
September 30, 1994 and the consolidated balance sheet data for McDATA as of
September 29, 1995 were derived from the unaudited consolidated financial
statements of McDATA for and as of such dates included elsewhere in this
Consent Solicitation/Prospectus. Such unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of McDATA, include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation thereof. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for the entire year.
All amounts shown are in thousands, except per share data.
The following table data should be read in conjunction with "McDATA's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and McDATA's consolidated financial statements and notes thereto
included elsewhere in this Consent Solicitation/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
------------------- ----------------------------------------------
SEPT. 29, SEPT. 30, DEC. 30, DEC. 31, DEC. 25, DEC. 27, DEC. 28,
1995 1994 1994 1993 1992 1991 1990
--------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF
OPERATIONS DATA:
Revenue................ $113,609 $15,678 $43,431 $34,390 $40,234 $50,491 $ 46,396
Operating income
(loss)................ 53,720 (3,332) 6,071 (6,931) (5,431) 1,931 (10,167)
Net income (loss)...... 36,013 (3,351) 9,809 (6,584) (4,600) 2,023 (5,785)
Net income (loss) per
common share (1)...... 7.99 (1.26) 2.43 (2.44) (1.77) 0.41 (2.37)
Average number of com-
mon and common equiva-
lent shares outstand-
ing................... 4,506 2,766 4,031 2,771 2,760 4,914 2,656
HISTORICAL BALANCE SHEET
DATA:
Working capital........ $ 54,028 $17,732 $ 5,929 $11,072 $19,044 $ 17,977
Total assets........... 64,648 33,432 17,651 24,550 31,054 29,258
Long term obligations
and redeemable
preferred shares
(excluding current
portion).............. 2,725 2,847 2,828 2,680 4,801 5,113
Stockholders' equity... 54,413 17,971 8,286 15,068 19,818 17,922
</TABLE>
- --------
(1) Loss per common share is calculated after subtracting from net loss, the
preferred stock dividend requirement of $126,000 for the nine months ended
September 30, 1994, $172,000 for the fiscal year ended December 31, 1993,
$285,000 for the fiscal year ended December 25, 1992 and $514,000 for the
fiscal year ended December 28, 1990. In calculating income per common share
for the nine months ended September 29, 1995 and for the fiscal years ended
December 30, 1994 and December 27, 1991, the preferred dividend requirement
is not subtracted from net income as it is assumed that the mandatorily
redeemable preferred stock, as a common stock equivalent, was converted to
common stock at the beginning of the respective periods.
11
<PAGE>
EMC
The following consolidated statement of operations data for EMC for the years
ended December 31, 1994, January 1, 1994 and January 2, 1993 and the
consolidated balance sheet data for EMC at December 31, 1994 and January 1,
1994 were derived from the audited consolidated financial statements of EMC for
and as of such dates included elsewhere in this Consent
Solicitation/Prospectus. The consolidated statement of operations data for EMC
for the years ended December 28, 1991 and December 29, 1990 and the
consolidated balance sheet data for EMC at January 2, 1993, December 28, 1991
and December 29, 1990 were derived from audited financial statements for and as
of such dates not included herein. The consolidated statement of operations and
balance sheet data for EMC as of the nine months ended September 30, 1995 and
October 1, 1994 and the consolidated balance sheet data for EMC as of September
30, 1995 were derived from the unaudited consolidated financial statements of
EMC for and as of such dates included elsewhere in this Consent
Solicitation/Prospectus. Such unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of EMC, include all adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation thereof.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the entire year. The unaudited pro forma data
give effect to the Merger under the pooling of interests method of accounting.
The unaudited pro forma statement of operations data combine the historical
results of EMC for the nine months ended September 30, 1995 with the historical
results of McDATA for the nine months ended September 29, 1995. The unaudited
pro forma balance sheet data combine EMC's September 30, 1995 balance sheet
with McDATA's September 29, 1995 balance sheet. The pro forma combined
information is presented for illustrative purposes only and is not necessarily
indicative of the consolidated operating results or financial position that
would have occurred had the Merger been consummated at the beginning of the
period presented, or that may be obtained in the future. All amounts shown are
in thousands, except per share data.
The following table data should be read in conjunction with "EMC's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and EMC's audited consolidated financial statements and unaudited
consolidated interim financial statements and notes thereto included elsewhere
in this Consent Solicitation/Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS NINE MONTHS ENDED YEAR ENDED
----------- ------------------- ----------------------------------------------
SEPT. 30, SEPT. 30, OCT. 1, DEC. 31, JAN. 1, JAN. 2, DEC. 28, DEC. 29,
1995 1995 1994 1994 1994 1993 1991 1990
----------- ---------- -------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $1,402,190 $1,288,581 $946,756 $1,377,492 $782,621 $385,706 $260,337 $189,734
Operating income....... 364,325 310,605 243,364 350,532 180,428 48,575 20,378 3,888
Net income............. 264,720 228,707 172,804 250,668 127,122 29,508 11,409 3,527
Net income per weighted
average common share
(fully diluted)(1)(2). $ 1.09 $ 1.00 $ 0.76 $ 1.10 $ 0.60 $ 0.16 $ 0.07 $ 0.02
Weighted average common
shares (fully
diluted)(1)(2)........ 247,937 234,389 233,753 234,255 217,225 190,548 166,220 158,523
BALANCE SHEET DATA:
Working capital(3)..... $ 877,761 $ 831,733 $ 600,341 $516,876 $149,335 $ 77,033 $ 81,177
Total assets........... 1,636,510 1,571,862 1,317,500 829,646 338,780 205,503 167,547
Long-term
obligations(4)........ 247,016 246,738 286,106 274,029 76,093 16,165 16,814
Stockholders'
equity(3)............. 1,058,032 $1,009,172 $ 727,641 $419,094 $168,266 $135,009 $113,620
</TABLE>
- --------
(1) In addition to common stock equivalents, fully diluted earnings per share
for 1994 and 1993 reflect the dilutive effects of EMC's 4 1/4% Convertible
Subordinated Notes due 2001 and EMC's 6 1/4% Convertible Subordinated
Debentures due 2002. Fully diluted earnings per share for 1992 reflect the
dilutive effects of EMC's 6 1/4% Convertible Subordinated Debentures due
2002.
(2) Pro forma weighted average common shares data reflects an assumed exchange
ratio of 2.981 shares of EMC Common Stock for each share of McDATA Class A
Common Stock. See "THE MERGER AGREEMENT--Conversion of Shares."
12
<PAGE>
(3) EMC anticipates that the combined companies will incur merger-related
expenses totalling approximately $8 million. Such expenses include
investment advisory fees, legal, accounting and other transaction costs
associated with the Merger. The effects of these costs have not been
reflected in the statement of operations data, but are reflected in the pro
forma balance sheet data.
(4) Excludes current portion of long-term debt.
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The following table sets forth (i) audited and unaudited historical income
per share from continuing operations and historical book value per share data
of EMC; (ii) audited and unaudited historical income (loss) per share from
continuing operations and historical book value per share data of McDATA; and
(iii) unaudited pro forma combined income per share from continuing operations
and unaudited pro forma book value per share data of EMC after giving effect to
the Merger on a pooling of interests basis and unaudited equivalent pro forma
combined income per share from continuing operations and unaudited equivalent
pro forma combined book value per share data of McDATA based upon an assumed
exchange ratio of 2.981 shares of EMC Common Stock for each share of McDATA
Class A Common Stock. See "THE MERGER AGREEMENT--Conversion of Shares." The
information in the table should be read in conjunction with the consolidated
financial statements of EMC and McDATA and the notes thereto included elsewhere
in this Consent Solicitation/Prospectus. The unaudited pro forma combined
financial data are not necessarily indicative of the income per share from
continuing operations or book value per share that would have been achieved had
the Merger been consummated as of the beginning of the periods presented and
should not be construed as representative of such amounts for any future dates
or periods.
<TABLE>
<CAPTION>
MCDATA
HISTORICAL EQUIVALENT
------------------ EMC PRO PRO FORMA
FORMA COMBINED
EMC MCDATA(1)(2) COMBINED(3) (3)(4)
----- ------------ ----------- ----------
<S> <C> <C> <C> <C>
INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS:
Nine months ended
September 30, 1995................ $1.00 $ 7.99 $1.09 $ 3.25
October 1, 1994................... 0.76 (1.26) 0.71 2.12
For the year ended
December 31, 1994................. 1.10 2.43 1.09 3.25
January 1, 1994................... 0.60 (2.44) 0.54 1.61
January 2, 1993................... 0.16 (1.77) 0.13 0.39
BOOK VALUE PER SHARE(5):
September 30, 1995................ $4.67 $16.21 $4.61 $13.74
December 31, 1994................. 3.65 6.45 3.49 10.40
</TABLE>
- --------
(1) For purposes of presentation above, the periods referenced are the fiscal
periods of EMC. The similar periods for McDATA are September 29, 1995 and
September 30, 1994 for nine month interim periods and December 30, 1994,
December 31, 1993 and December 25, 1992 for the twelve month periods then
ended.
(2) Loss per common share from continuing operations for McDATA is calculated
after subtracting from net loss, the preferred stock dividend requirement
of $126,000 for the nine months ended September 30, 1994, $172,000 for the
fiscal year ended December 31, 1993, and $285,000 for the fiscal year ended
December 25, 1992. In calculating income per common share for the nine
months ended September 29, 1995 and for the fiscal year ended December 30,
1994, the preferred dividend requirement is not subtracted from net income
as it is assumed that the mandatorily redeemable preferred stock, as a
common stock equivalent, was converted to common stock at the beginning of
the respective periods.
13
<PAGE>
(3) EMC and McDATA anticipate that the combined companies will incur merger-
related expenses totalling approximately $8 million. Such expenses include
investment advisory fees, legal, accounting and other transaction costs
associated with the Merger. The effects of these costs have not been
reflected in the historical or pro forma income (loss) per share from
continuing operations data, but are reflected in the pro forma book value
per share data.
(4) The unaudited McDATA equivalent pro forma combined per share amounts are
calculated by multiplying the EMC pro forma combined per share amounts by
an assumed exchange ratio of 2.981 shares of EMC Common Stock for each
share of McDATA Class A Common Stock. See "THE MERGER AGREEMENT--Conversion
of Shares."
(5) Historical book value per share is calculated by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period. EMC pro forma combined book value per share amounts are
calculated by dividing pro forma stockholders' equity by the pro forma
number of shares of EMC Common Stock which would have been outstanding had
the Merger been consummated as of each balance sheet date, based on an
assumed exchange ratio of 2.981 shares of EMC Common Stock for each share
of McDATA Class A Common Stock. See "THE MERGER AGREEMENT--Conversion of
Shares."
14
<PAGE>
RISK FACTORS
In evaluating the proposed Merger, stockholders of McDATA should carefully
consider the following factors as well as the other information included in
this Consent Solicitation/Prospectus and the Annexes hereto.
Competition. The computer data storage industry is extremely competitive. EMC
competes with many companies, including International Business Machines
Corporation ("IBM"), which have substantially greater financial and
technological resources, larger distribution capabilities, earlier access to
customers and greater customer loyalty than EMC. Additionally, most of EMC's
products are designed to be fully compatible with IBM computers and IBM
operating systems. As a result, EMC's business may be adversely affected by,
among other factors, modifications in the design or configuration of IBM
computer systems, the announcement or introduction of new products by IBM or
other competitors, or reductions in the pricing of IBM or IBM compatible
equipment or service. EMC could also be adversely affected by the
implementation of certain marketing strategies by IBM or other competitors that
conflict with those of EMC. See "INFORMATION CONCERNING EMC--Business;
Competition." Additionally, McDATA's operations are heavily dependent on IBM,
its exclusive customer for its 9032 ESCON Model 3 Director, which is sold to
IBM pursuant to an agreement which is terminable by IBM under certain
circumstances. See "THE MERGER AGREEMENT--Termination; Termination Fees and
Expenses," "INFORMATION CONCERNING McDATA--Business" and "INFORMATION
CONCERNING McDATA--McDATA's Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Technological Factors. The computer data storage industry is characterized by
rapidly changing technology and user needs which require ongoing technological
development and introduction of new products. Sales of the Symmetrix series
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 future. EMC
expects competition in the sale of Integrated Cached Disk Array ("ICDA")
products to increase, and there can be no assurance that the Symmetrix series
products will continue to achieve market acceptance. Significant delays in the
development of ICDA technology for future products or product enhancements
would be to the advantage of EMC's competitors. Furthermore, the continued
development of ICDA technology and its incorporation into EMC's future
generations of products cannot be assured even with significant additional
investments. See "INFORMATION CONCERNING EMC--Business--Technological Factors."
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 or production 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.
EMC's failure to monitor, develop and implement appropriate test and
manufacturing processes for its products, especially the Symmetrix series,
could have substantial adverse effects on EMC's operations and ultimately on
its financial results.
Dependence on Suppliers. EMC 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 high density memory components ("DRAMs") and 5 1/4" and 3
1/2" disk drives, which EMC purchases from a small number of qualified
suppliers. A failure by any supplier of high density DRAMs, disk drives or disk
drive components to meet EMC's requirements for an extended period of time
could have a material adverse effect on EMC. From time to time, because of high
industry demand, EMC experienced delays in deliveries of high density DRAMs and
disk drives needed to satisfy orders for ICDA products. If such shortages
continue or intensify, EMC may lose some time-sensitive customer orders.
Additionally, McDATA's operations are heavily dependent on IBM, the supplier of
the largest portion of its components. See "INFORMATION CONCERNING McDATA--
McDATA's Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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Dependence Upon Key Personnel. EMC's success is highly dependent upon senior
management and other key employees, the loss of whom could adversely affect
EMC. EMC also believes that its future success will depend in large part upon
its ability to attract and retain additional key employees, of which there can
be no assurance.
Earnings Fluctuations. Due to (i) customers' tendencies to make purchase
decisions late in each fiscal quarter, (ii) the desire by customers to evaluate
new, more expensive products for longer periods of time, (iii) the timing of
product and technology announcements by EMC and its competitors and (iv)
fluctuating currency exchange rates, EMC's period-to-period revenues and
earnings can fluctuate significantly. See "INFORMATION CONCERNING EMC--
Business--Earnings Fluctuations."
THE CONSENT SOLICITATION
GENERAL
This Consent Solicitation/Prospectus is being furnished to stockholders of
McDATA in connection with the solicitation (the "Consent Solicitation") of
written consents (individually, a "Consent" and collectively, the "Consents")
by the Board of Directors of McDATA (the "McDATA Board") in order for such
stockholders to consider and vote by Consent upon the following proposals: (i)
the approval of the Merger Agreement, pursuant to which Sub shall merge with
and into McDATA and McDATA shall survive the Merger as a wholly owned
subsidiary of EMC (the "Merger Proposal"); and (ii) the conversion of all
outstanding shares of Series A Convertible Preferred Stock, par value $.001 per
share, of McDATA ("McDATA Series A Preferred Stock") and Series B Convertible
Preferred Stock, par value $.001 per share, of McDATA ("McDATA Series B
Preferred Stock") into McDATA Class A Common Stock, which will cause the
automatic conversion of all outstanding shares of Class B Common Stock, par
value $.001 per share, of McDATA ("McDATA Class B Common Stock" and together
with McDATA Series A Preferred Stock, McDATA Series B Preferred Stock and
McDATA Class A Common Stock, "McDATA Capital Stock") into McDATA Class A Common
Stock (the "Conversion Proposal").
This Consent Solicitation/Prospectus and the accompanying form of Consent are
first being mailed or delivered to stockholders of McDATA on or about November
29, 1995.
PURPOSE
The purpose of the solicitation of Consents from the stockholders of McDATA
is to consider and vote by Consent upon the Merger Proposal and the Conversion
Proposal.
RECORD DATE AND CONSENT REQUIRED
The McDATA Board has fixed the close of business on October 20, 1995 as the
record date (the "Record Date") for the determination of stockholders entitled
to notice of and to vote by Consent during the Consent Solicitation for the
Merger Proposal or the Conversion Proposal. As of the Record Date, there were
(i) 3,153,936 and 203,140 shares of McDATA Class A Common Stock and McDATA
Class B Common Stock, respectively, issued and outstanding, each of which will
be entitled to vote on the Merger Proposal, and (ii) 27,520 and 1,121,425
shares of McDATA Series A Preferred Stock and McDATA Series B Preferred Stock,
respectively, issued and outstanding, each of which will be entitled to vote on
the Merger Proposal and the Conversion Proposal. The Merger Proposal requires
the Consent of (i) holders of a majority of outstanding shares of McDATA Class
A Common Stock, voting as a separate class, (ii) holders of a majority of
outstanding shares of McDATA Class B Common Stock, voting as a separate class,
and (iii) holders of 66 2/3% of the outstanding shares of McDATA Series A
Preferred Stock and McDATA Series B Preferred Stock, voting together as a
single class. The Conversion Proposal requires the Consent of the holders of 66
2/3% of the outstanding shares of McDATA Series A Preferred Stock and McDATA
Series B Preferred Stock, voting together as a single class. Holders of McDATA
Capital Stock on the Record Date are entitled to one vote per share on each
proposal presented to such holder for Consent.
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As of the Record Date, directors and executive officers of McDATA and their
affiliates had the right to vote approximately 37.6% of all issued and
outstanding shares of McDATA Class A Common Stock, 15.6% of all issued and
outstanding shares of McDATA Class B Common Stock, 0% of all issued and
outstanding shares of McDATA Series A Preferred Stock and 74.1% of all issued
and outstanding shares of McDATA Series B Preferred Stock. Such persons have
indicated to McDATA that they intend to vote all such shares in favor of the
Merger Proposal or the Conversion Proposal.
PROCEDURE
Stockholders of McDATA should complete, sign, date and return the Consent to
McDATA by hand delivery, facsimile at (303) 460-4472 or in the postage-paid,
addressed envelope on or before December 6, 1995. Consents delivered by McDATA
stockholders may be revoked at any time on or prior to December 6, 1995, unless
the Consent Solicitation is extended by McDATA, whereupon McDATA stockholders
could revoke a previously delivered Consent on or prior to the termination date
of the extended Consent Solicitation. To revoke a Consent, a written notice of
revocation must be timely received by McDATA on or prior to December 6, 1995 or
the termination date of the extended Consent Solicitation, if applicable, at
its address set forth herein. Notice of revocation of a Consent must contain a
description of the McDATA Capital Stock to which it relates (including the
certificate number(s)) and be signed by the McDATA stockholder in the same
manner as the Consent by which such stockholder consented. Any Consent so
revoked will be deemed not to have been validly given for the purpose of the
Consent Solicitation unless the Consent so revoked is validly redelivered.
Properly revoked Consents may be redelivered at any time prior to December 6,
1995.
EXPENSES
The expenses incurred in connection with printing and mailing or delivering
this Consent Solicitation/Prospectus will be shared equally by EMC and McDATA.
STOCKHOLDERS SHOULD NOT SEND IN ANY MCDATA STOCK CERTIFICATES WITH THEIR
CONSENTS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF MCDATA
STOCK CERTIFICATES WILL BE MAILED AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
TIME OF THE MERGER.
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THE MERGER
GENERAL
The discussion in this Consent Solicitation/Prospectus of the Merger and the
Merger's principal terms is qualified in its entirety by reference to the
Merger Agreement, attached to this Consent Solicitation/Prospectus as Annex A,
and incorporated herein by reference.
BACKGROUND OF THE MERGER
In February 1995, Mr. Stephen Smith of Broadview Associates, L.P., an
investment banking firm which had represented EMC in prior acquisitions
("Broadview"), contacted Mr. Edward L. Breslow, Vice President, Corporate
Business Development of EMC, to inform him that Broadview had received
confidential information concerning the potential sale of a company, which
Broadview declined to name at that time, but which Broadview viewed as a
potential acquisition candidate for EMC, and to inquire whether EMC would be
interested in receiving confidential information concerning the company. Mr.
Breslow informed Mr. Smith that EMC was not interested in exploring the
opportunity further at that time. In May 1995, Mr. Peter Stoneberg of
Montgomery Securities, McDATA's financial advisor ("Montgomery"), contacted Mr.
Breslow and discussed the potential sale of the same company, this time naming
McDATA, and inquired whether EMC would be interested in investigating the
possible acquisition of McDATA. Mr. Breslow agreed to investigate the
opportunity further.
On June 16, 1995, EMC and McDATA entered into a confidentiality agreement,
which provides, among other things, that EMC will maintain the confidentiality
of all confidential information made available to it by McDATA and that EMC and
McDATA would not, without the consent of the other, disclose the fact that
discussions concerning a possible transaction involving EMC and McDATA were
taking place. On that date, Montgomery sent EMC a confidential memorandum
describing McDATA.
On July 6 and August 10, 1995, representatives of EMC and McDATA met to
discuss the possible synergies between McDATA and EMC. At these meetings,
representatives of McDATA briefed EMC's representatives regarding McDATA's
technology, strategy and research and development activities and summarized
McDATA's business relationship with IBM.
During the remainder of August 1995, and through mid-September 1995, there
were discussions involving representatives of EMC, McDATA, Broadview and
Montgomery concerning, among other things, the interest EMC had in McDATA, the
timing and amount of any offer that EMC might make to acquire McDATA, McDATA's
intent to declare and pay a cash dividend and the implications thereof for the
possible acquisition of McDATA by EMC and McDATA's financial forecasts.
On September 17, Mr. Breslow and John F. McDonnell, President and Chief
Executive Officer of McDATA, discussed, among other things, that EMC could
potentially offer up to $200,000,000 in EMC Common Stock, plus EMC Common Stock
having a value equal to the amount of McDATA's net quick assets, for all the
outstanding shares of McDATA Capital Stock, which Mr. McDonnell indicated was
within the range McDATA was considering. On September 18, 1995, Mr. Breslow
sent to Mr. McDonnell a letter with respect to a possible transaction on these
terms.
On September 19, 1995, representatives of EMC and McDATA discussed, among
other things, alternative structures for the potential acquisition of McDATA by
EMC, including whether the number of shares of EMC Common Stock to be issued in
any such potential acquisition should be fixed or adjustable, based on the
value of such stock and, if adjustable, subject to "collars" or not, and
whether or not such shares would be registered under the Securities Act.
On September 23, 1995, representatives of EMC, McDATA, Broadview and
Montgomery met to discuss further the possible acquisition of McDATA by EMC. At
this meeting, these representatives prepared an
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outline of their discussions with respect to a potential transaction whereby
EMC would acquire all the outstanding shares of McDATA Capital Stock. The
outline of discussions covered, among other things, that (i) EMC would pay a
fixed number of 10,500,000 shares of EMC Common Stock, plus a number of shares
of EMC Common Stock having a value equal to the amount of McDATA's net quick
assets, for all the outstanding shares of McDATA Capital Stock, (ii) McDATA
would have the right to terminate such transaction if the per share trading
price of EMC Common Stock was below $15 as of the closing or EMC announced
another transaction not acceptable to McDATA, (iii) EMC and McDATA would be
entitled to termination fees if such transaction were terminated by the other
under certain circumstances, (iv) such transaction would be subject to EMC's
satisfactory completion of due diligence, the approval of the Boards of
Directors of EMC and McDATA, the execution of a definitive agreement providing
therefor and regulatory approvals and (v) the closing of such transaction would
be on November 30, 1995, subject to delay in the case of certain events.
On October 3, 1995, Mr. McDonnell met with Richard J. Egan, Chairman of the
Board of Directors of EMC, and later with Mr. Michael C. Ruettgers, President
and Chief Executive Officer of EMC, and Mr. Breslow to discuss the potential
acquisition of McDATA by EMC.
On October 4, 1995, Mr. Ruettgers and Mr. McDonnell met with representatives
of IBM to discuss McDATA's business relationship with IBM and IBM's reaction to
the potential acquisition of McDATA by EMC.
During the week of October 9, representatives of EMC and Broadview continued
their due diligence investigation of McDATA by reviewing certain documents made
available by McDATA and in sessions with representatives of McDATA. During the
course of these due diligence sessions, representatives of McDATA and
Montgomery expressed their concerns and the concerns of certain of McDATA's
stockholders regarding the trading price of the EMC Common Stock, which was
then trading at between $13.75 and $16.75 per share as compared to $18.625 per
share when the outline of discussions was prepared. While these sessions were
ongoing, on October 11, 1995, EMC's legal representatives delivered to McDATA's
legal representatives an initial draft of the Merger Agreement providing for
the acquisition of McDATA by EMC on the terms contained in the outline of
discussions. On October 12, 1995, representatives of McDATA and its legal
representatives briefed representatives of EMC on their comments on the draft
of the Merger Agreement.
On October 15, 1995, Paul T. Dacier, Vice President and General Counsel of
EMC, and EMC's legal representatives discussed McDATA's comments on the draft
of the Merger Agreement with McDATA's legal representatives.
Also on October 15, 1995, representatives of EMC, McDATA, Broadview and
Montgomery continued their discussion of the concerns previously expressed
regarding the trading price of EMC Common Stock and the implications thereof
for the structure of the transaction reflected in the outline of discussions,
particularly the contemplated payment by EMC of a fixed number of shares of EMC
Common Stock and McDATA's right to terminate the transaction based on the
trading price of EMC Common Stock as of the closing. Certain of these
representatives discussed alternative structures for the transaction to address
these concerns. Discussion of certain of these matters continued on October 16,
1995, on which date representatives of EMC, McDATA, Broadview and Montgomery
agreed to meet the following day at EMC's offices to further discuss these
matters and provide EMC with an opportunity to brief McDATA's representatives
regarding EMC's business plan. At this meeting on October 17, 1995, after EMC's
business plan briefing, representatives of EMC, McDATA, Broadview and
Montgomery discussed alternative ways to restructure the transaction described
in the outline of discussions.
As a result of these discussions, the transaction was structured to provide
that EMC would pay a number of shares of EMC Common Stock having a value equal
to $180,000,000, plus a number of shares of EMC Common Stock having a value
equal to the amount of McDATA's net quick assets, for all the outstanding
shares of McDATA Capital Stock, and to eliminate McDATA's right to terminate
the transaction based on
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the trading price of EMC Common Stock as of the closing. During the remainder
of the week of October 16, 1995, EMC and McDATA and their financial and legal
representatives continued their due diligence investigations and negotiation of
the Merger Agreement and related documents.
On October 20, 1995, a meeting of the McDATA Board was convened. The terms of
the Merger, as structured as a result of the discussions on October 17, 1995,
were fully discussed. As indicated below, under "McDATA's Reasons for the
Merger; Recommendation of the McDATA Board," the McDATA Board reviewed a number
of factors, including McDATA's future prospects as a stand alone company and
its current dependence on its business relationship with IBM. At the meeting,
Montgomery rendered its opinion that the Merger was fair from a financial point
of view to the stockholders of McDATA. At the meeting, McDATA's counsel
reviewed the terms of the Merger Agreement with the McDATA Board. There
followed a final review of other possible alternatives available to McDATA and
its stockholders, including possible liquidity through cash dividends and the
potential of McDATA diversifying its product and customer base over a period of
time and achieving liquidity for its stockholders in the future. At the
conclusion of the meeting, the McDATA Board unanimously approved the Merger and
resolved that the Merger was fair to and in the best interests of the holders
of the McDATA Capital Stock. It was agreed that all directors of McDATA would
review a final draft of the Merger Agreement, resolving the remaining issues
being negotiated by the parties' respective legal representatives and, absent
any material change in the terms reflected in that draft, Mr. McDonnell would
proceed to execute the Merger Agreement on behalf of McDATA.
Also on October 20, 1995, a regularly scheduled meeting of the Board of
Directors of EMC (the "EMC Board") was convened. One of the topics discussed at
this meeting was the possible acquisition of McDATA. The EMC Board authorized
Mr. Ruettgers and Mr. Breslow to continue negotiations regarding this possible
acquisition.
On October 23, 1995, representatives of EMC and McDATA and their respective
legal representatives resumed negotiations with respect to the Merger Agreement
and related documents, revised drafts of which had been circulated during the
week of October 16.
On October 25, 1995, a special meeting of the EMC Board was convened. At this
special meeting, the EMC Board reviewed and discussed the terms of the Merger
and the EMC Board unanimously approved the Merger Agreement.
During the course of the day on October 25, 1995, representatives of McDATA
and EMC and their respective legal representatives resolved the remaining
issues with respect to the Merger Agreement and the related documents, after
which EMC and McDATA signed the Merger Agreement.
MCDATA'S REASONS FOR THE MERGER; RECOMMENDATION OF THE MCDATA BOARD
The McDATA Board has determined the Merger to be fair to and in the best
interests of McDATA and its stockholders. Accordingly, the McDATA Board has
approved the Merger Agreement and unanimously recommends that the stockholders
of McDATA vote for approval of the Merger Proposal and the Conversion Proposal.
In reaching its determination, the McDATA Board considered, without assigning
relative weights to, a variety of factors, including, among other things: (i)
industry, economic and market conditions; (ii) the presentation by McDATA's
management; (iii) the presentation by and the opinion of Montgomery as to the
fairness of the consideration, from a financial point of view, to be received
by McDATA stockholders in the Merger; (iv) the terms of the Merger Agreement,
including the consideration to be received by McDATA stockholders in the
Merger, and the representations, warranties, covenants and conditions of the
parties contained therein; (v) the opportunity for McDATA stockholders to
participate, as EMC stockholders, in a larger, more diversified publicly-held
company of which McDATA would become a part, and to do so by
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means of a transaction designed to be tax-free to the McDATA stockholders; and
(vi) the other possible alternatives available to McDATA.
THE MCDATA BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF MCDATA VOTE FOR
APPROVAL OF THE MERGER PROPOSAL AND THE CONVERSION PROPOSAL.
EMC'S REASONS FOR THE MERGER
EMC believes that the Merger will help position EMC at the center of the
networked data and open systems marketplaces, thereby permitting EMC to play an
even more critical role in helping EMC's customers establish information-
centric computing strategies.
OPINION OF FINANCIAL ADVISOR
Pursuant to an engagement letter dated February 14, 1995 (the "Engagement
Letter"), McDATA retained Montgomery as its financial advisor in connection
with the consideration by the McDATA Board of a possible sale of McDATA.
Montgomery is a nationally recognized firm and, as part of its investment
banking activities, is regularly engaged in the valuation of businesses and
their securities in connection with merger transactions and other types of
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. McDATA selected Montgomery as its financial advisor on the basis of
its experience and expertise in transactions similar to the Merger and its
reputation in the networking, storage computer and investment communities.
At the October 20, 1995 meeting of the McDATA Board, Montgomery delivered its
oral opinion, subsequently confirmed in writing as of October 25, 1995, that
the consideration to be received by the stockholders of McDATA pursuant to the
Merger was fair to McDATA's stockholders, from a financial point of view, as of
such date. No limitations were imposed by McDATA on Montgomery with respect to
the investigations made or procedures followed in rendering its opinion.
The full text of Montgomery's written opinion to the McDATA Board is attached
hereto as Annex B and is incorporated herein by reference and should be read
carefully and in its entirety in connection with this Consent
Solicitation/Prospectus. The following summary of Montgomery's opinion is
qualified in its entirety by reference to the full text of the opinion.
Montgomery's opinion is addressed to the McDATA Board only and does not
constitute a recommendation to any McDATA stockholder as to how such
stockholder should vote in the Consent Solicitation. In furnishing its opinion,
Montgomery did not admit that it is an expert within the meaning of the term
"expert" as used in the Securities Act and the rules and regulations
promulgated thereunder, or that its opinion constitutes a report or valuation
within the meaning of Section 11 of the Securities Act and the rules and
regulations promulgated thereunder, and statements to such effect are included
in the text of Montgomery's written opinion.
In connection with its opinion, Montgomery, among other things: (i) reviewed
certain publicly available financial and other data with respect to EMC, and
certain financial and other data with respect to McDATA provided to Montgomery
by McDATA's management, including the consolidated financial statements for
recent years and interim periods to July 1, 1995, in the case of EMC, and
September 29, 1995, in the case of McDATA, and certain other relevant financial
and operating data relating to EMC and McDATA made available to Montgomery from
published sources, in the case of EMC, and from the internal records of McDATA
and EMC; (ii) reviewed a draft dated October 20, 1995 of the Merger Agreement
provided to Montgomery by McDATA; (iii) reviewed certain historical market
prices and trading volumes of EMC Common Stock as reported on the NYSE; (iv)
compared McDATA and EMC from a financial point of view with certain other
companies in the networking and storage computer industries that Montgomery
deemed to be relevant; (v) considered the financial terms, to the extent
publicly available, of selected business combinations of companies in the
networking and storage computer industries that Montgomery deemed to be
comparable, in whole or in part, to the Merger; (vi) reviewed and discussed
with representatives of the
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management of McDATA and EMC certain information of a business and financial
nature regarding McDATA and EMC, furnished to Montgomery by them, including
financial forecasts and related assumptions of McDATA and EMC; (vii) made
inquiries regarding and discussed the Merger and the draft of the Merger
Agreement and other matters related thereto with McDATA's counsel; and (viii)
performed such other analyses and examinations as Montgomery has deemed
appropriate.
In connection with its review, Montgomery assumed and relied upon the
accuracy and completeness of the foregoing information and did not assume any
responsibility for independent verification of such information. With respect
to the financial forecasts for McDATA and EMC provided to Montgomery by their
respective managements, Montgomery assumed for purposes of its opinion that the
forecasts were reasonably prepared on bases reflecting the best available
estimates and judgments of their respective managements at the time of
preparation as to the future financial performance of McDATA and EMC and that
they provided a reasonable basis upon which Montgomery could form its opinion.
With respect to the forecasts for McDATA provided to Montgomery by McDATA's
management, for purposes of Montgomery's analyses, Montgomery projected future
financial performance of McDATA for a period of two years beyond management's
forecast period. In preparing such projections, Montgomery used assumptions
more conservative than those used by McDATA's management in preparing its
projections. Montgomery discussed the adjusted forecasts and related
assumptions with management of McDATA and they have acknowledged Montgomery's
use of such adjusted forecasts and assumptions in arriving at its opinion.
Neither McDATA nor EMC publicly discloses internal management forecasts of the
type provided to Montgomery in connection with Montgomery's review of the
Merger. Such forecasts were not prepared with a view toward public disclosure.
In addition, such forecasts were based upon numerous variables and assumptions
that are inherently uncertain, including, without limitation, factors related
to general economic and competitive conditions. Accordingly, actual results
could vary significantly from those set forth in such forecasts. Montgomery has
assumed no liability for such forecasts. Montgomery also assumed that there
were no material changes in McDATA's or EMC's assets, financial condition,
results of operations, business or prospects since the respective dates of the
last financial statements made available to Montgomery, and that there will be
no indemnification claims of EMC under the Merger Agreement for breaches of the
representations, warranties and covenants of McDATA contained therein.
Montgomery relied on advice of counsel and independent accountants to McDATA as
to all legal and financial reporting matters with respect to McDATA, the Merger
and the draft of the Merger Agreement. Montgomery assumed that the Merger will
be consummated in a manner that complies in all respects with the applicable
provisions of the Securities Act, the Exchange Act and all other applicable
federal and state statutes, rules and regulations. In addition, Montgomery did
not assume responsibility for making an independent evaluation, appraisal or
physical inspection of the assets or individual properties of McDATA or EMC,
nor was Montgomery furnished with any such appraisals. Further, Montgomery's
opinion was based on economic, monetary and market and other conditions as in
effect on, and the information made available to Montgomery existing as of,
October 25, 1995.
Montgomery further assumed, with McDATA's consent, that the Merger will be
consummated in accordance with the terms described in the draft of the Merger
Agreement without any amendments thereto, and without waiver by McDATA or EMC
of any of the conditions to their respective obligations thereunder.
Set forth below is a brief summary of the report presented by Montgomery to
the McDATA Board on October 20, 1995 in connection with the McDATA Board's
consideration of the Merger.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis,
Montgomery estimated the present value of the future streams of after-tax cash
flows that McDATA could produce through 2002, assuming McDATA performed in
accordance with the earnings forecasts through 2000, prepared by its
management, and the earnings forecasts for 2001 and 2002, prepared by
Montgomery as described above. McDATA's management did not provide Montgomery
with any financial forecasts for years after 2000. Montgomery estimated the
terminal value of McDATA at the end of the period by applying multiples ranging
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from 18.0x to 22.0x to McDATA's estimated terminal year earnings. The cash flow
streams and terminal values were then discounted to present values using
discount rates ranging from 20.0% to 30.0%, in the case of the cash flow
streams, and equal to 40.0% and 50.0%, in the case of the terminal values,
chosen to reflect different assumptions regarding McDATA's cost of capital and
future business prospects. This discounted cash flow analysis indicated a
reference range between $165,517,000 and $232,487,000 in the aggregate equity
value of McDATA.
Solicitation of Market Interest. Commencing in February 1995, Montgomery
contacted fifteen potential acquirors of McDATA. The parties contacted included
but were not limited to companies in the networking and storage computer
industries throughout the United States. Four potential acquirors, including
EMC, executed confidentiality agreements and were furnished with a confidential
memorandum describing McDATA. Of those parties, McDATA elected to pursue
further discussions with EMC, which culminated in the Merger. See "THE MERGER--
Background of the Merger."
The summary set forth above does not purport to be a complete description of
the presentation by Montgomery to the McDATA Board or of the analyses performed
by Montgomery. The preparation of a fairness opinion necessarily is not
susceptible to partial analysis or summary description. Montgomery believes
that its analyses and the summary set forth above must be considered as a whole
and that selecting portions of its analyses and of the factors considered,
without considering all analyses and factors, would create an incomplete view
of the process underlying the analyses set forth in its presentation to the
McDATA Board. In addition, Montgomery may have given various analyses more or
less weight than other analyses, and may have deemed various assumptions more
or less probable than other assumptions, so that the ranges of valuations
resulting from any particular analysis described above should not be taken to
be Montgomery's view of the actual value of McDATA or the combined companies.
The fact that any specific analysis has been referred to in the summary above
is not meant to indicate that such analysis was given greater weight than any
other analysis.
In performing its analyses, Montgomery made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of McDATA or EMC. The analyses
performed by Montgomery are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
Montgomery's analysis of the fairness of the Merger to the stockholders of
McDATA and were provided to the McDATA Board in connection with the delivery of
Montgomery's opinion. The analyses do not purport to be appraisals or to
reflect the prices at which a company might actually be sold or the prices at
which any securities may trade at the present time or at any time in the
future. Montgomery used in its analyses various projections of future
performance prepared by the managements of McDATA and EMC, and, in the case of
McDATA, by Montgomery, as discussed above. The projections are based on
numerous variables and assumptions which are inherently unpredictable and must
be considered not certain of occurrence as projected. Accordingly, actual
results could vary significantly from those set forth in such projections.
As described above, Montgomery's opinion and presentation to the McDATA Board
were among the many factors taken into consideration by the McDATA Board in
making its determination to approve the Merger.
Pursuant to the Engagement Letter, McDATA engaged Montgomery to act as its
financial advisor in connection with the Merger. Montgomery's fee will be equal
to a percentage of the consideration to be received by the stockholders of
McDATA in the Merger, calculated as set forth in the Engagement Letter (the
"Consideration"), such percentage to be determined by dividing the
Consideration by $100 million. For example, if the Merger were consummated on
November 30, 1995, McDATA estimates that the Consideration would be
approximately $232,290,000 and that Montgomery's fee would be approximately
$5.40 million. McDATA paid Montgomery $50,000 upon the execution of the
Engagement Letter, which will be credited against the remainder of Montgomery's
fee. McDATA will be obligated to pay Montgomery
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the remainder of its fee upon the consummation of the transactions contemplated
by the Merger Agreement. McDATA has also agreed to reimburse Montgomery for its
reasonable out-of-pocket expenses. Pursuant to a separate letter agreement,
McDATA has agreed to indemnify Montgomery, its affiliates, and their respective
partners, directors, officers, agents, consultants, employees and controlling
persons against certain liabilities, including liabilities under the federal
securities laws.
In the ordinary course of its business, Montgomery actively trades equity
securities of EMC for its own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the McDATA Board with respect to the
Merger, stockholders of McDATA should be aware that certain members of McDATA's
management and the McDATA Board have certain interests in the Merger that are
in addition to the interests of stockholders of McDATA generally. The McDATA
Board was aware of these interests and considered them, among other matters, in
approving the Merger Agreement and the transactions contemplated thereby.
Severance Arrangements with McDATA Officers. Under severance agreements with
certain officers of McDATA, those officers may become entitled to benefits in
event of a change of control of McDATA. Those officers are John F. McDonnell,
Paul F. Lilly, Rory Enright, Dee J. Perry and Richard A. Carlson. The Merger
will constitute such a change of control. If such person's employment is
terminated within one year following the change of control, such person will be
entitled to severance compensation in an amount equal to such person's
compensation for a period of six or twelve months. If all such persons were to
become eligible for such severance compensation, as of October 27, 1995, they
would be entitled to compensation of approximately $940,000 in the aggregate.
In addition, the severance agreements provide that in the event of a
termination within one year following a change of control, all stock options
held by each such person immediately prior to termination shall become
exercisable even if the vesting conditions set forth therein have not been
satisfied, and shall remain exercisable for a period of three months following
such termination. As of the date of this Consent Solicitation/Prospectus, one
such person has been notified that he will be terminated following the Merger.
McDATA does not know whether any of the other covered officers will receive
severance payments. Under the terms of the severance agreements, no obligation
to make payments thereunder can arise until the Effective Time.
The respective interests of the members of McDATA's management and the McDATA
Board described above constitute all of the material interests of those persons
in the Merger that are known to McDATA to be different from, or that constitute
an extra or special benefit not shared on a pro rata basis with, the
stockholders of McDATA.
Security Ownership. For information regarding the security ownership of
McDATA Capital Stock by McDATA's directors and executive officers, see
"INFORMATION CONCERNING McDATA--Principal Stockholders."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences of
the Conversion Proposal and the Merger to the holders of McDATA Capital Stock.
The discussion is based on currently existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations thereunder,
current administrative rulings and court decisions. All of the foregoing are
subject to change and any such change could affect the continuing validity of
this discussion. This summary applies to holders of McDATA Capital Stock who
hold their shares of McDATA Capital Stock as capital assets. This summary does
not discuss all aspects of income taxation that may be relevant to a particular
holder of McDATA Capital Stock in light of such holders' specific circumstances
or to certain types of holders subject to special treatment under
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the Federal income tax laws (for example, foreign persons, dealers in
securities, banks and other financial institutions, insurance companies, tax-
exempt organizations and holders who acquired shares of McDATA Capital Stock
pursuant to the exercise of options or otherwise as compensation or through a
tax-qualified retirement plan), and it does not discuss any aspect of state,
local, foreign or other tax laws. Accordingly, each holder of McDATA Capital
Stock is urged to consult such holder's tax advisor as to the specific tax
consequences to such holder of the Conversion Proposal and the Merger,
including the application of state, local and foreign tax laws.
It is a condition to the consummation of the Merger that EMC receive an
opinion from its counsel, Skadden, Arps, Slate, Meagher & Flom ("Skadden,
Arps"), and that McDATA receive an opinion from its counsel, Ireland,
Stapleton, Pryor & Pascoe, P.C. ("Ireland, Stapleton," and together with
Skadden, Arps, "Tax Counsel"), substantially to the effect that, based on the
accuracy of certain representations made by the respective managements of EMC,
McDATA, Sub and others and the facts at the Effective Time (as defined below),
for federal income tax purposes, the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code and accordingly, (i) no gain
or loss will be recognized by EMC, Sub or McDATA as a result of the Merger,
(ii) no gain or loss will be recognized to the stockholders of McDATA upon the
exchange of their McDATA Class A Common Stock solely for shares of EMC Common
Stock pursuant to the Merger, (iii) the aggregate tax basis of the shares of
the EMC Common Stock received solely in exchange for McDATA Class A Common
Stock pursuant to the Merger (including fractional shares of EMC Common Stock
for which cash is received) will be the same as the aggregate tax basis of the
McDATA Class A Common Stock exchanged therefor, (iv) the holding period for EMC
Common Stock received in exchange for McDATA Class A Common Stock pursuant to
the Merger will include the holding period of the McDATA Class A Common Stock
exchanged therefor, provided such McDATA Class A Common Stock was held as a
capital asset at the Effective Time and (v) a McDATA stockholder who receives
cash proceeds in lieu of a fractional share of EMC Common Stock or a holder
which exercises its appraisal rights (a "Dissenting Stockholder") in accordance
with the General Corporation Law of the State of Delaware (the "DGCL") will
recognize gain or loss equal to the difference, if any, between such
stockholder's tax basis allocated to such fractional share or to such
Dissenting Stockholder's McDATA Class A Common Stock (as described in clause
(iii) above), as the case may be, and the amount of cash received, and such
gain or loss will constitute capital gain or loss if such stockholder's McDATA
Class A Common Stock with respect to which gain or loss is recognized is held
as a capital asset at the Effective Time.
The foregoing consequences will also apply to holders of McDATA Class A
Common Stock who received such stock upon the exchange of their McDATA Series A
Preferred Stock, McDATA Series B Preferred Stock or McDATA Class B Common Stock
(collectively, the "McDATA Exchanged Stock") pursuant to the Conversion
Proposal. In the exchange pursuant to the Conversion Proposal, (i) no gain or
loss will be recognized to the stockholders of McDATA upon the exchange of
their McDATA Exchanged Stock solely in exchange for McDATA Class A Common
Stock, (ii) the aggregate tax basis of the shares of McDATA Class A Common
Stock received will be the same as the aggregate tax basis of the McDATA
Exchanged Stock exchanged therefor, and (iii) the holding period for the McDATA
Class A Common Stock received in exchange for McDATA Exchanged Stock will
include the holding period of the McDATA Exchanged Stock exchanged therefor,
provided such McDATA Exchanged Stock was held as a capital asset at the
Effective Time. The tax treatment of the Conversion Proposal and the Merger, in
effect, produces the same results to holders of McDATA Exchanged Stock that
would occur if such holders had exchanged their McDATA Exchanged Stock directly
for EMC Common Stock in the Merger.
ACCOUNTING TREATMENT
EMC and McDATA intend to treat the Merger as a "pooling of interests" for
accounting and financial reporting purposes. The receipt by (i) EMC of a letter
from its independent public accountants, dated not earlier than two business
days prior to the Closing Date (as defined below), stating that the transaction
will qualify as a pooling of interests transaction under generally accepted
accounting principles, and (ii) McDATA
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of a letter from its independent public accountants, dated not earlier than two
business days prior to the Closing Date, stating that, subject to certain
qualifications, neither McDATA nor any of its subsidiaries has taken or agreed
to take any action that would prevent EMC from accounting for the business
combination to be effected by the Merger as a pooling of interests transaction
under generally accepted accounting principles, are conditions precedent to the
obligations of EMC and Sub to effect the Merger.
Under a "pooling of interests" method of accounting, the historical
accounting bases of the assets and liabilities of EMC and McDATA will be
combined and carried forward at their recorded amounts; income of the combined
corporation will include income of EMC and McDATA for the entire fiscal year in
which the combination occurs; and the reported income of the separate
corporations for prior periods will be combined and restated as income of the
combined company or recorded as an adjustment to retained earnings at the
beginning of the period in which consummation of the Merger occurs.
REGULATORY FILINGS AND APPROVALS
Antitrust. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Merger may not be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the Department of Justice (the "Antitrust
Division") and specified waiting period requirements have been satisfied. EMC
and McDATA filed notification and report forms under the HSR Act with the FTC
and the Antitrust Division on October 26, 1995. Early termination of the
required waiting period under the HSR Act was requested by both parties and was
granted by the FTC and the Antitrust Division on November 14, 1995.
Notwithstanding such termination, at any time before or after consummation of
the Merger, the Antitrust Division or the FTC could take such action under the
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the consummation of the Merger or seeking
divestiture of substantial assets of EMC or McDATA or businesses of EMC or
McDATA. At any time before or after the Effective Time of the Merger, and
notwithstanding that the HSR Act waiting period has been terminated, any state
could take such action under the antitrust laws as it deems necessary or
desirable in the public interest. Such action could include seeking to enjoin
the consummation of the Merger or seeking divestiture of substantial assets of
EMC or McDATA or businesses of EMC or McDATA. Private parties may also seek to
take legal action under the antitrust laws under certain circumstances.
Based on information available to them, EMC and McDATA believe that the
Merger can be effected in compliance with federal and state antitrust laws.
However, there can be no assurance that a challenge to the consummation of the
Merger on antitrust grounds will not be made or that, if such a challenge were
made, EMC and McDATA would prevail or would not be required to accept certain
conditions possibly including certain divestitures in order to consummate the
Merger.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of EMC Common Stock received by McDATA stockholders in the Merger
will be freely transferable, except that shares of EMC Common Stock received by
persons who are deemed to be affiliates of McDATA prior to the Merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 promulgated under the Securities Act (or Rule 144 in the case of such
persons who become affiliates of EMC) or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of McDATA or EMC
generally include individuals or entities that control, are controlled by, or
are under common control with, such party and may include certain officers and
directors of such party as well as principal stockholders of such party. The
Merger Agreement requires McDATA to use its reasonable best efforts to cause
each of its affiliates to execute a written agreement to the effect that such
person will not offer or sell or otherwise dispose of any of the shares of EMC
Common Stock issued to such person in or pursuant to the Merger in violation of
the Securities Act or the rules and regulations promulgated by the Commission
thereunder.
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LISTING OF EMC COMMON STOCK ON THE NYSE
It is a condition to the Merger that the shares of EMC Common Stock to be
issued pursuant to the Merger Agreement and required to be reserved for
issuance in connection with the Merger be approved for listing on the NYSE. An
application will be filed for listing the shares of EMC Common Stock on the
NYSE.
APPRAISAL RIGHTS
If the Merger is consummated, a holder of record of McDATA Capital Stock on
the date of making a demand for appraisal, as described below, who continues to
hold such shares though the Effective Time, who has not voted such shares in
favor of the Merger Proposal and who strictly complies with the procedures set
forth under Section 262 of the DGCL ("Section 262") will be entitled to have
such shares appraised by the Delaware Court of Chancery under Section 262 and
to receive payment of the "fair value" of such shares in lieu of the
consideration provided for in the Merger Agreement. THE STATUTORY RIGHT OF
APPRAISAL GRANTED BY SECTION 262 REQUIRES STRICT COMPLIANCE WITH THE PROCEDURES
SET FORTH IN SECTION 262. FAILURE TO FOLLOW ANY OF SUCH PROCEDURES MAY RESULT
IN A TERMINATION OR WAIVER OF APPRAISAL RIGHTS UNDER SECTION 262.
The following is a summary of certain of the provisions of Section 262 and is
qualified in its entirety by reference to the full text of Section 262, a copy
of which is attached to this Consent Solicitation/Prospectus as Annex C.
Under Section 262, if the Merger Proposal is approved by Consent by the
requisite votes, McDATA shall, either before the Effective Time or within 10
days thereafter, notify each of the stockholders entitled to appraisal rights
of the Effective Time and that appraisal rights are available for any or all of
such stockholder's shares of McDATA Capital Stock (the "Notice"). The Notice
will include a copy of Section 262. A holder of McDATA Capital Stock electing
to exercise appraisal rights under Section 262 must deliver a written demand
for appraisal of such stockholder's shares to McDATA within 20 days after the
date of mailing of the Notice. Such written demand must reasonably inform
McDATA of the identity of the stockholder of record and of such stockholder's
intention to demand appraisal of such stockholder's shares. All such demands,
as will be set forth in the Notice, should be delivered to McDATA Corporation,
Attention: Dee J. Perry, Secretary.
Holders of shares of McDATA Capital Stock on the date of making such written
demand for appraisal who continuously hold such shares through the Effective
Time are entitled to seek appraisal. Demand for appraisal must be executed by
or for the holder of record, fully and correctly, as such holder's name appears
on the holder's stock certificates representing shares of McDATA Capital Stock.
If McDATA Capital Stock is owned of record in a fiduciary capacity, such as by
a trustee, guardian or custodian, the demand should be made in that capacity,
and if McDATA Capital Stock is owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand should be made by or for all
owners of record. An authorized agent, including one or more joint owners, may
execute the demand for appraisal for a holder of record; however, such agent
must identify the record owner or owners and expressly disclose in such demand
that the agent is acting as agent for the record owner or owners of such
shares.
Within 120 days after the Effective Time, McDATA or any stockholder who has
complied with the requirements of Section 262 may file a petition in the
Delaware Court of Chancery demanding a determination of the fair value of the
shares of McDATA Capital Stock held by all stockholders seeking appraisal. A
petitioning stockholder must serve a copy of such petition on McDATA. If no
petition is filed by either McDATA or a dissenting stockholder within such 120
day period, the rights of all dissenting stockholders to appraisal shall cease.
McDATA stockholders seeking to exercise appraisal rights should not assume that
McDATA will file a petition with respect to the appraisal of the fair value of
their shares or that McDATA will initiate any negotiations with respect to the
fair value of such shares. McDATA is under no
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obligation to and has no present intention to take any action in this regard.
Accordingly, McDATA stockholders who wish to seek appraisal of their shares
should initiate all necessary action with respect to the perfection of their
appraisal rights within the time periods and in the manner prescribed in
Section 262. FAILURE TO FILE THE PETITION ON A TIMELY BASIS WILL CAUSE THE
STOCKHOLDER'S RIGHT TO AN APPRAISAL TO CEASE.
Within 120 days after the Effective Time, any stockholder who has complied
with subsections (a) and (d) of Section 262 is entitled, upon written request,
to receive from McDATA a statement setting forth the aggregate number of shares
of McDATA Capital Stock with respect to which demands for appraisal have been
received by McDATA and the number of holders of such shares. Such statement
must be mailed within 10 days after the written request therefor has been
received by McDATA or within 10 days after expiration of the time for delivery
of demands for appraisal under Section 262, whichever is later.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court of Chancery will determine which stockholders are
entitled to appraisal rights and will appraise the shares of McDATA Capital
Stock owned by such stockholders, determining the fair value of such shares,
exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest to be paid, if
any, upon the amount determined to be the fair value. In determining fair
value, the court is to take into account all relevant factors. The Delaware
Supreme Court has stated that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered in the appraisal
proceedings. The Delaware Supreme Court has stated that, in making this
determination of fair value, the court must consider "market value, asset
value, dividends, earnings prospects, the nature of the enterprise and any
other facts which were known or which could be ascertained as of the date of
the merger which throw any light on future prospects of the merged
corporation." The Delaware Supreme Court has also held that "elements of future
value, including the nature of the enterprise, which are known or susceptible
of proof as of the date of the merger and not the product of speculation, may
be considered." In addition, Delaware courts have decided that the statutory
appraisal remedy, depending on factual circumstances, may or may not be a
dissenter's exclusive remedy.
Stockholders considering seeking appraisal should consider that the fair
value of their shares determined under Section 262 could be more, the same, or
less than the value of the consideration to be received pursuant to the Merger
Agreement without the exercise of appraisal rights, and that investment banking
opinions as to fairness from a financial point of view are not necessarily
opinions as to fair value as determined under Section 262. The cost of the
appraisal proceeding may be determined by the Court of Chancery and assessed
against the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the court may order that all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding (including without limitation reasonable attorney's fees and the
fees and expenses of experts) be charged pro rata against the value of all
shares of the McDATA Capital Stock entitled to appraisal. In the absence of
such a determination or assessment, each party bears its own expenses.
Any stockholder who has fully demanded appraisal in compliance with Section
262 will not, after the Effective Time, be entitled to vote such McDATA Capital
Stock for any purpose or receive payment of dividends or other distributions on
such stock, except for dividends or distributions payable to stockholders of
record at a date prior to the Effective Time.
A McDATA stockholder may withdraw a demand for appraisal and accept the terms
of the Merger at any time within 60 days after the Effective Time, or
thereafter may withdraw such demand with the written approval of McDATA. In the
event an appraisal proceeding is properly instituted, such proceeding may not
be dismissed as to any stockholder without the approval of the Delaware Court
of Chancery, and any such approval may be conditioned on the terms the Court of
Chancery deems just.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF DELAWARE LAW, ANY
STOCKHOLDER OF MCDATA WHO IS CONSIDERING EXERCISING APPRAISAL RIGHTS SHOULD
CONSULT HIS OR HER LEGAL ADVISOR.
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See "THE MERGER--Certain Federal Income Tax Consequences" for a brief
description of certain federal income tax consequences resulting from the
receipt of the fair value of appraised shares.
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, attached to this Consent Solicitation/Prospectus as Annex A, and
incorporated herein by reference. Such summary is qualified in its entirety by
reference to the Merger Agreement. Stockholders of McDATA are urged to read the
Merger Agreement in its entirety for a more complete description of the Merger.
CLOSING; EFFECTIVE TIME
The closing of the transactions contemplated by the Merger Agreement (the
"Closing") shall take place on the later of (i) November 30, 1995 or (ii) the
day which is one business day after the first date on which each of certain
conditions to Closing set forth in the Merger Agreement is satisfied or waived,
or at such other time as EMC and McDATA agree; provided, however, that EMC may
by notice to McDATA extend the Closing for up to 90 days from the later of the
dates specified in clause (i) or (ii) if EMC determines in the good faith
judgment of EMC's general counsel that the issuance of shares of EMC Common
Stock in the Merger would require disclosure of material information which EMC
has a bona fide business purpose for preserving as confidential. The date on
which the Closing shall occur is referred to herein as the "Closing Date." The
Merger shall become effective (the "Effective Time") upon the filing by McDATA
of a certificate of merger with the Secretary of State of the State of Delaware
in the form required by, and executed in accordance with, the DGCL. Such filing
shall be made on the Closing Date.
FORM OF MERGER
The Merger Agreement provides that, following the approval of the Merger
Proposal and the Conversion Proposal by the stockholders of McDATA, and the
satisfaction or waiver of the other conditions to the Merger, Sub shall be
merged with and into McDATA and McDATA shall survive the Merger as a wholly
owned subsidiary of EMC (the "Surviving Corporation").
CONVERSION OF SHARES
This portion of the summary of the Merger Agreement describes how the number
of shares of EMC Common Stock to be received in the Merger by holders of McDATA
Capital Stock will be determined. As described more fully below, if the value
of the shares of EMC Common Stock, as of the Closing Date determined in
accordance with the Merger Agreement, to be received for each share of McDATA
Class A Common Stock, net of the portion thereof to be placed in escrow, is
less than $43.86, then EMC and McDATA have agreed to defer the Closing until
such time as revised information regarding the value of the shares of EMC
Common Stock to be received in the Merger is made available to the stockholders
of McDATA and their votes have been resolicited.
On the first business day prior to the Closing Date and pursuant to the
Conversion Proposal, the outstanding shares of McDATA Series A Preferred Stock,
McDATA Series B Preferred Stock and McDATA Class B Common Stock will be
converted into shares of McDATA Class A Common Stock. Such conversions will be
made pursuant to the conversion formulas set forth in the Amended and Restated
Certificate of Incorporation of McDATA (the "McDATA Certificate of
Incorporation"). The shares of McDATA Series A Preferred Stock and McDATA
Series B Preferred Stock will be converted into shares of McDATA Class A Common
Stock on a one-for-one basis. Based on the McDATA Class B Common Stock
conversion formula and currently available information, McDATA estimates that
each share of McDATA Class B Common Stock will be converted into 1.19 shares of
McDATA Class A Common Stock ("Class B Conversion Factor"). The Class B
Conversion Factor is based on certain assumptions by McDATA including that all
of the vested options for the purchase of McDATA Class B Common Stock will be
exercised prior to the consummation of the Merger. If such assumptions are not
correct, the Class B Conversion Factor will change. The actual Class B
Conversion Factor will be determined on the first business day prior to the
Closing Date.
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At the Effective Time, each issued and outstanding share of McDATA Class A
Common Stock, other than shares held by McDATA as treasury stock or by EMC, Sub
or any other subsidiary of EMC and shares as to which appraisal rights have
been duly asserted and perfected under the DGCL, shall be converted into the
right to receive a number of shares of EMC Common Stock (hereinafter referred
to as the "Exchange Ratio") determined by dividing the aggregate number of
shares of EMC Common Stock to be issued in the Merger by the number of shares
of McDATA Class A Common Stock outstanding on the Closing Date. The aggregate
number of shares of EMC Common Stock to be issued in the Merger (hereinafter
referred to as the "Merger Shares") shall be determined by dividing the sum of
$180,000,000 and the amount of net quick assets of McDATA as of the Closing
Date computed in accordance with the Merger Agreement (the "Net Quick Assets
Amount") by the average of the closing prices of EMC Common Stock on the NYSE
composite tape as reported in The Wall Street Journal on each of the ten
trading days immediately preceding the Closing Date (the "Closing Average").
The Net Quick Assets Amount shall be the positive difference, if any, between
(i) the sum of McDATA's cash and cash equivalents, short term investments and
accounts receivable as of the Closing Date, subject to the certain adjustments,
and (ii) the sum of McDATA's accounts payable, taxes payable and accrued
liabilities as of the Closing Date, subject to certain adjustments.
Ninety percent of the Merger Shares (the "Fixed Shares") will be immediately
available for distribution to holders of record of McDATA Class A Common Stock
as of the Effective Time pursuant to the exchange procedures set forth in the
Merger Agreement and in an Exchange and Escrow Agreement (the "Exchange and
Escrow Agreement") to be entered into at the Closing by EMC, John F. McDonnell,
as the representative of the stockholders of McDATA (the "McDATA
Representative"), and State Street Bank and Trust Company (the "Exchange and
Escrow Agent"). See "THE MERGER AGREEMENT--Exchange of Stock Certificates." The
remaining ten percent of the Merger Shares (the "Escrow Shares") shall be
placed in escrow pursuant to the Exchange and Escrow Agreement and shall be the
source from which EMC may seek indemnification pursuant to the Merger
Agreement. See "THE MERGER AGREEMENT--Indemnification; Escrow Shares." The
McDATA Representative will have the power to receive notice of, determine,
accept service of process, contest, settle or arbitrate all claims of EMC made
pursuant to the Merger Agreement or the Exchange and Escrow Agreement.
McDATA estimates that, as of November 30, 1995, the Net Quick Assets Amount
will be approximately $52,290,000 and that the number of outstanding shares of
McDATA Class A Common Stock will be approximately 4,610,000 (assuming the
conversion of the outstanding shares of McDATA Series A Preferred Stock, McDATA
Series B Preferred Stock and McDATA Class B Common Stock into shares of McDATA
Class A Common Stock pursuant to the Conversion Proposal). Accordingly, if the
Merger were consummated as of that date, each outstanding share of McDATA Class
A Common Stock would be converted, based upon the Exchange Ratio, into a number
of shares of EMC Common Stock having a value, as of such date based on the
Closing Average computed as of such date, of approximately $50.38, of which
approximately $45.34 of value would be represented by Fixed Shares immediately
available for distribution and approximately $5.04 of value would be
represented by Escrow Shares to be placed in escrow. See "THE MERGER
AGREEMENT--Exchange of Stock Certificates" and "THE MERGER AGREEMENT--
Indemnification; Escrow Shares."
The actual Exchange Ratio will be determined as of the Closing Date based on
the actual number of shares of McDATA Class A Common Stock outstanding on such
date, the actual Net Quick Assets Amount as of such date and the Closing
Average. As noted above, if the actual value of the number of shares of EMC
Common Stock represented by the Exchange Ratio, as of the Closing Date based on
the Closing Average, is less than $48.73 (or $43.86 net of the portion thereof
represented by Escrow Shares), which would occur if the Net Quick Assets Amount
as of the Closing Date is less than the Net Quick Assets Amount of $44,653,150
as of October 27, 1995, then EMC and McDATA have agreed to defer the Closing
until such time as revised information concerning the Exchange Ratio is made
available to stockholders of McDATA entitled to vote on the Merger Proposal or
the Conversion Proposal and their required votes by Consents have been
resolicited.
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The market price of the shares of EMC Common Stock received in the Merger
may be different from the value thereof, as of the Closing Date based on the
Closing Average, and will, after the Merger, fluctuate. See "COMPARATIVE PER
SHARE MARKET PRICE DATA - EMC." MCDATA STOCKHOLDERS ARE URGED TO OBTAIN A
CURRENT MARKET QUOTATION FOR EMC COMMON STOCK.
Each holder of McDATA Class A Common Stock who would otherwise have been
entitled to a fraction of a share of EMC Common Stock upon surrender for
exchange of certificates that prior to the Merger represented McDATA Capital
Stock ("McDATA Certificates") will, upon surrender of McDATA Certificates, be
entitled to receive a cash payment in lieu of such fractional share of EMC
Common Stock in an amount equal to such fraction multiplied by the Closing
Average. All shares of McDATA Class A Common Stock owned at the Effective Time
by McDATA as treasury stock or by EMC, Sub or any other subsidiary of EMC
shall be cancelled pursuant to the Merger Agreement. As of the date of this
Consent Solicitation/Prospectus, neither EMC nor any subsidiary of EMC
(including Sub) owns any McDATA Class A Common Stock.
A description of the relative rights, privileges and preferences of EMC
Common Stock, including certain material differences between the rights of
holders of McDATA Capital Stock and EMC Common Stock, is set forth under
"COMPARISON OF STOCKHOLDER RIGHTS."
EXCHANGE OF STOCK CERTIFICATES
At the Effective Time, EMC shall deposit with the Exchange and Escrow Agent,
(i) for each holder of record of McDATA Class A Common Stock at the Effective
Time, one certificate representing the number of whole Fixed Shares issuable
to such holder pursuant to the Merger Agreement (a "Fixed Shares Certificate")
and (ii) for all holders of record of McDATA Class A Common Stock at the
Effective Time, one certificate representing the aggregate number of whole
Escrow Shares. In addition, EMC shall, from time to time, make available to
the Exchange and Escrow Agent sufficient cash to make all cash payments in
lieu of fractional shares pursuant to the Merger Agreement.
As soon as practicable after the Effective Time, the Exchange and Escrow
Agent will mail transmittal instructions and a form of letter of transmittal
to each person who was, at the Effective Time, a holder of record of McDATA
Class A Common Stock. The transmittal instructions will describe the
procedures for surrendering McDATA Certificates in exchange for certificates
representing EMC Common Stock (the "EMC Certificates"). McDATA stockholders
should not submit their McDATA Certificates for exchange unless and until they
have received the transmittal instructions and a form of letter of transmittal
from the Exchange and Escrow Agent.
When a holder of McDATA Class A Common Stock delivers his or her McDATA
Certificates to the Exchange and Escrow Agent along with a properly executed
letter of transmittal and any other required documents, such McDATA
Certificates shall be cancelled and the stockholder shall receive (i) promptly
upon delivery of such McDATA Certificates, his or her Fixed Shares Certificate
and payment in cash in lieu of any fractional Fixed Shares which would
otherwise be issuable to such holder as a result of the Merger and (ii) at the
time stated in and subject to the terms of the Exchange and Escrow Agreement,
EMC Certificates representing the number of whole Escrow Shares issuable to
such holder pursuant to the Merger Agreement and the Exchange and Escrow
Agreement and payment in cash in lieu of any fractional Escrow Shares which
would have been otherwise issuable to such stockholder as a result of the
Merger. See "THE MERGER AGREEMENT--Indemnification; Escrow Shares." If any EMC
Certificate is to be issued in a name other than that in which the
corresponding McDATA Certificate is registered, it is a condition to the
exchange of the McDATA Certificate that the holder of such certificate comply
with applicable transfer requirements and pay any applicable transfer or other
taxes.
Holders of McDATA Class A Common Stock will not be entitled to receive any
dividends or other distributions on EMC Common Stock until the Merger has been
consummated and they have surrendered their McDATA Certificates in exchange
for EMC Certificates. Subject to applicable laws, such dividends and
distributions, if any, which have a record date on or after the Effective Time
and a payment date prior to
31
<PAGE>
surrender will be paid upon surrender of the stockholder's McDATA Certificates,
and such dividends and distributions, if any, which have a record date on or
after the Effective Time and a payment date subsequent to such surrender will
be paid at the appropriate payment date following surrender of the
stockholder's McDATA Certificates.
The Exchange and Escrow Agreement will terminate on the later of eighteen
months after the Effective Time or six months after all claims thereunder are
resolved. Upon termination, any portion of the cash or securities in escrow
which remain undistributed to the stockholders of McDATA shall be delivered to
EMC. Thereafter, the stockholders of McDATA must look only to EMC for payment
of their claim of EMC Common Stock, any cash in lieu of fractional shares of
EMC Common Stock and any dividends or distributions with respect to EMC Common
Stock.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties by EMC and McDATA relating to, among other things, (i) the due
organization, valid existence and good standing of each of McDATA, EMC and each
of their respective subsidiaries and certain similar corporate matters,
(ii) the capital structure of each of McDATA, EMC and Sub, (iii) the
authorization, execution, delivery and enforceability of the Merger Agreement,
the consummation of the transactions contemplated therein and related matters,
(iv) conflicts under charters or bylaws of McDATA, EMC or Sub, required
consents or approvals and violations of any instruments or law, (v) documents
and financial statements filed by EMC with the Commission and the accuracy of
information contained therein, (vi) financial statements of McDATA and their
compliance with generally accepted accounting principles, (vii) the absence of
certain changes or events of McDATA and EMC, (viii) litigation and (ix) the
accuracy of information supplied by each of McDATA and EMC in connection with
the Registration Statement and this Consent Solicitation/Prospectus.
Additional customary representations and warranties of McDATA relate to,
among other things, (i) undisclosed liabilities, (ii) accounts receivable,
(iii) inventory, (iv) properties and encumbrances, (v) plant and equipment,
(vi) bank accounts, (vii) taxes, (viii) intellectual property, (ix) contracts
and commitments, (x) customers and suppliers, (xi) orders, commitments and
returns, (xii) insurance, (xiii) labor difficulties, (xiv) products liability,
(xv) environmental matters, (xvi) employee benefit plans, (xvii) personnel,
(xviii) agreements in full force and effect, (xix) compliance with laws, (xx)
pooling of interests, (xxi) insider interests, (xxii) the absence of existing
discussions with other parties and (xxiii) the opinion of its financial
advisor.
CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME
Pursuant to the Merger Agreement, McDATA, EMC and Sub have agreed to
cooperate, make all filings, registrations and submissions, and use all
reasonable best efforts to consummate the Merger. McDATA has also agreed that
(subject to certain qualifications), during the period from the date of the
Merger Agreement until the Effective Time, or otherwise as contemplated by the
Merger Agreement, it and its subsidiaries will (i) carry on its business in the
usual, regular and ordinary course in substantially the same manner as
previously conducted, (ii) pay its debts and taxes when due subject to good
faith disputes over such debts or taxes, and pay or perform other obligations
when due, (iii) preserve intact its present business organization, (iv) not
accelerate, amend or change the period of exercisability of options or
restricted stock granted under any employee stock plan or authorize cash
payments in exchange for any options granted under any employee stock plan,
except as required pursuant to the plan or any related agreement, (v) not
transfer or license or otherwise extend, amend or modify any rights to its
intellectual property rights, other than in the ordinary course of business
consistent with past practices, (vi) not declare, set aside or pay any
dividends on or make other distributions in respect of any of its capital stock
(other than cash dividends on the McDATA Series A Preferred Stock and McDATA
Series B Preferred Stock), not effect certain other changes in its
capitalization, and not purchase or otherwise acquire, directly or indirectly,
any shares of its capital stock, (vii) not issue or sell, or authorize or
propose the issuance or sale of, any shares of its capital stock or securities
convertible
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<PAGE>
into shares of its capital stock, or any subscriptions, rights, warrants, or
options to acquire or other agreements obligating it to issue any such shares
or other convertible securities, subject to certain exceptions, (viii) not
merge or consolidate with another business organization or engage in material
acquisitions or enter into any material contract, commitment or transaction
outside the ordinary course of business consistent with past practices, (ix)
subject to certain exceptions, not sell, lease, license, encumber or otherwise
dispose of any of its properties or assets except in the ordinary course of
business consistent with past practices, (x) not incur, assume or prepay any
indebtedness other than in the ordinary course of business consistent with past
practices, (xi) not increase the compensation payable to its directors,
officers or employees (except for increases to salaried employees consistent
with past practices), grant any severance or termination pay or enter into
employment agreements with directors, officers or employees (except in the
ordinary course of business consistent with past practices), enter into any
collective bargaining agreement or establish, adopt, enter into or amend any
plan for the benefit of its directors, officers, or employees, (xii) not take
any action with respect to, or make any material change in accounting or tax
policies or procedures, except as may be required by changes in generally
accepted accounting principles, (xiii) not revalue any of its assets, including
writing down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business consistent with past practices
not exceeding $50,000 in the aggregate, (xiv) not amend its certificate of
incorporation or bylaws, except as contemplated by the Merger Agreement, (xv)
not take any action that would or is reasonably likely to result in any of its
representations and warranties becoming untrue, (xvi) not permit the amount of
its consolidated inventories to be reduced by more than $500,000 or permit any
such reduction which would jeopardize shipments to any customer and (xvii)
confer on a regular basis with EMC on operational matters of materiality.
NO SOLICITATION
The Merger Agreement provides that McDATA and each of its subsidiaries and
affiliates will not, directly or indirectly, through any officer, director,
employee, representative or agent of McDATA or any of its subsidiaries, (i)
solicit, initiate, facilitate or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, a proposal or offer for
a merger, consolidation, business combination, sale of substantial assets, sale
of shares of capital stock or similar transactions involving McDATA or any of
its subsidiaries, other than the transactions contemplated by the Merger
Agreement (any of the foregoing inquiries or proposals being referred to in the
Merger Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or
discussions concerning, or provide any non-public information to any person or
entity relating to, any Acquisition Proposal or (iii) agree to, approve or
recommend any Acquisition Proposal; provided, however, that nothing contained
in the Merger Agreement shall prevent McDATA or the McDATA Board from
furnishing non-public information to, or entering into discussions or
negotiations with, any person or entity in connection with an unsolicited bona
fide written Acquisition Proposal by such person or entity or recommending an
unsolicited bona fide written Acquisition Proposal to the stockholders of
McDATA, if and only to the extent that the McDATA Board believes in good faith
by a majority vote (after consultation with its financial advisor) that such
Acquisition Proposal would, if consummated, result in a transaction more
favorable to the stockholders of McDATA from a financial point of view than the
transaction contemplated by the Merger Agreement (any such more favorable
Acquisition Proposal being referred to in the Merger Agreement as a "Superior
Proposal") and the McDATA Board receives a written opinion of outside legal
counsel that failing to take such action would result in a breach of its
fiduciary duties to stockholders under applicable law.
McDATA is required to notify EMC immediately (and no later than 24 hours)
after receipt of any Acquisition Proposal or request for non-public information
or access to its properties, books or records in connection with an Acquisition
Proposal.
POOLING AND REORGANIZATION TREATMENT
Pursuant to the Merger Agreement, EMC and McDATA have agreed to use their
reasonable best efforts to cause the Merger to be treated as a reorganization
within the meaning of Section 368(a) of the Code and
33
<PAGE>
the business combination to be effected by the Merger to be accounted for as a
pooling of interests for accounting purposes and have agreed not to knowingly
take any action, or knowingly fail to take any action, that would be reasonably
likely to jeopardize such treatment or accounting.
INDEMNIFICATION; ESCROW SHARES
The Merger Agreement provides that (i) the stockholders of McDATA Class A
Common Stock as of the Closing Date (the "McDATA Stockholders") shall indemnify
EMC and its affiliates and their respective officers, directors, employees and
agents against and hold them harmless from any loss, liability, damage, demand,
claim, cost, suit, action or cause of action, judgment, award, assessment,
interest, penalty or expense (any of the foregoing being hereinafter referred
to individually, as a "Loss" and collectively, as "Losses") suffered or
incurred in connection with any breach of any representation or warranty or
covenant or agreement of McDATA contained in the Merger Agreement and (ii) EMC
shall indemnify the McDATA Stockholders and hold them harmless from, any Losses
suffered or incurred in connection with any breach of any representation or
warranty or covenant or agreement of EMC or Sub contained in the Merger
Agreement or the Exchange and Escrow Agreement. Subject to certain exceptions,
no indemnification for any Loss suffered or incurred by (i) EMC or any of its
affiliates or their respective officers, directors, employees or agents or (ii)
the McDATA Stockholders, shall be made until the aggregate amount of Losses
suffered by the indemnified parties exceeds $1,000,000 (the "Minimum Amount"),
in which event the indemnifying party shall be liable for the aggregate amount
of such Losses, which amount shall include such party's Minimum Amount. The
Merger Agreement further provides that the sole and exclusive source from which
EMC or any of its affiliates or their respective officers, directors, employees
or agents may seek indemnification shall be the Escrow Shares pursuant to the
Exchange and Escrow Agreement. The Merger Agreement further provides that any
indemnification obligations of EMC with respect to Losses incurred by the
McDATA Stockholders shall not exceed an amount equal to the product of the
number of Escrow Shares times the Closing Average.
The Exchange and Escrow Agent shall agree to hold the Escrow Shares, cash for
payments in lieu of fractional shares, together with any dividends or other
distributions on the Escrow Shares (the "Escrow Fund"), in escrow in accordance
with the Exchange and Escrow Agreement.
The Exchange and Escrow Agreement provides that any time prior to the first
anniversary of the Effective Time (the "Escrow Fund Release Date"), EMC may
give notice to the Exchange and Escrow Agent and the McDATA Representative of a
claim for indemnification under the Merger Agreement. Whenever any EMC claim
for indemnification is resolved (either by the McDATA Representative's failure
to object thereto or EMC's pursuit of such remedies as may be available under
applicable law to enforce its rights to indemnification), the Exchange and
Escrow Agent shall release to EMC a number of Escrow Shares determined by
dividing the amount of the Loss involved in such resolved claim by the Closing
Average, plus all dividends or other distributions held by the Exchange and
Escrow Agent with respect to such Escrow Shares so released.
The Exchange and Escrow Agreement provides that at the Escrow Fund Release
Date, the Exchange and Escrow Agent shall distribute the Escrow Shares then in
the Escrow Fund (other than a number of Escrow Shares equal to the aggregate
Losses involved in all of EMC's claims for indemnification which remain
unresolved as of such date) to the McDATA Stockholders in proportion to their
ownership interest in McDATA as of the Closing. The Exchange and Escrow
Agreement further provides that when all of EMC's claims for indemnification
are resolved, the Exchange and Escrow Agent shall distribute the Escrow Shares
then in the Escrow Fund to the McDATA Stockholders in proportion to their
ownership interests in McDATA as of the Closing.
Approval of the Merger Proposal and the Conversion Proposal by the McDATA
Stockholders shall constitute such stockholders' express (i) assumption of
their indemnification obligations pursuant to the Merger Agreement and (ii) the
appointment of John F. McDonnell to act as the McDATA Representative pursuant
to the terms and conditions set forth in the Merger Agreement and the Exchange
and Escrow Agreement.
34
<PAGE>
CONDITIONS
The respective obligations of EMC and McDATA to effect the Merger are subject
to a number of conditions, including among others, that (i) the Merger Proposal
and the Conversion Proposal shall have been approved by the stockholders of
McDATA, (ii) the waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated, (iii) the receipt of
all material governmental authorizations, consents, orders or approvals, (iv)
the Registration Statement shall have become effective and shall not be the
subject of a stop order or proceedings seeking a stop order, (v) no order,
ruling or injunction shall be in effect prohibiting consummation of the Merger
or limiting or restricting EMC's operation of its business after the Merger nor
shall there be any statute, rule or regulation enacted, enforced or deemed
applicable to the Merger which makes consummation of the Merger illegal, (vi)
the approval of the shares of EMC Common Stock to be issued in the Merger for
listing on the NYSE, (vii) EMC, the McDATA Representative and the Exchange and
Escrow Agent shall have executed the Exchange and Escrow Agreement and (viii)
each of EMC and McDATA shall have received from its legal advisor a "tax
opinion" with respect to the "tax-free" status of the Merger.
The Merger Agreement further provides that McDATA's obligation to effect the
Merger is subject to certain additional conditions, including that (i) all of
EMC's and Sub's representations and warranties contained in the Merger
Agreement shall be true and correct in all material respects, subject to
certain qualifications, (ii) EMC and Sub shall have performed in all material
respects all obligations required to be performed by them under the Merger
Agreement and (iii) EMC shall have delivered to McDATA the opinion of EMC's
Vice President and General Counsel (or other counsel reasonably acceptable to
McDATA) covering certain legal matters.
The Merger Agreement further provides that EMC's and Sub's obligation to
effect the Merger are subject to certain additional conditions, including that
(i) all of McDATA's representations and warranties contained in the Merger
Agreement shall be true and correct in all material respects, subject to
certain qualifications, (ii) McDATA shall have performed in all material
respects all obligations required to be performed by it under the Merger
Agreement, (iii) McDATA shall have delivered to EMC the opinion of Ireland,
Stapleton covering certain legal matters, (iv) all necessary state securities
or "blue sky" authorizations shall have been received, (v) EMC shall have
received a "pooling letter" from Coopers & Lybrand L.L.P., its independent
auditors, stating that the business combination to be effected by the Merger
will qualify as a pooling of interests transaction, (vi) McDATA shall have
received a "pooling letter" from Price Waterhouse LLP, its independent
auditors, that, subject to certain qualifications, neither McDATA nor any of
its subsidiaries has taken or agreed to take any action that would prevent EMC
from accounting for the business combination to be effected by the Merger as a
pooling of interests transaction, (vii) EMC shall have received an Affiliate
Agreement from each affiliate of McDATA as contemplated by the Merger Agreement
and (viii) McDATA shall not have declared, set aside or paid any amount with
respect to the dividend that McDATA gave notice of its intent to declare, which
notice was dated September 7, 1995, and no stockholder of McDATA shall have
asserted or claimed any right to such amount, which assertion or claim EMC
determines, subject to certain conditions, is reasonably likely to prevent the
Merger from being accounted for as a pooling of interests.
STOCK OPTION PLANS
The Merger Agreement provides that each option to purchase McDATA Class A
Common Stock or McDATA Class B Common Stock (individually, a "McDATA Stock
Option" and collectively, the "McDATA Stock Options") granted under the 1990
Class A Stock Option Plan of McDATA, the 1990 Class B Stock Option Plan of
McDATA or the Director's Stock Option Plan of McDATA, which is outstanding and
not exercisable as of the Effective Time shall be deemed to constitute, as of
the Effective Time, an option to acquire, on the same terms and conditions as
were applicable to such McDATA Stock Option prior to the Effective Time, the
same number of shares of EMC Common Stock (rounded to the nearest whole number)
as the holder of such McDATA Stock Option would have been entitled to receive
pursuant to the Merger
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<PAGE>
had such holder exercised such option in full immediately prior to the
Effective Time (and, in the case of McDATA Stock Options exercisable for McDATA
Class B Common Stock, had such McDATA Class B Common Stock been converted into
McDATA Class A Common Stock immediately prior to the Effective Time), at a
price per share (rounded up to the nearest whole cent) equal to (i) the
aggregate exercise price for the shares of McDATA Class A Common Stock or
McDATA Class B Common Stock otherwise purchasable pursuant to such McDATA Stock
Option divided by (ii) the number of full shares of EMC Common Stock deemed
purchasable pursuant to such McDATA Stock Option in accordance with the
foregoing.
EMC has agreed that as soon as practicable after the Effective Time, it shall
deliver to the participants in the McDATA Stock Option Plans an appropriate
notice setting forth such participant's rights pursuant thereto and the McDATA
Stock Options which were outstanding and not exercisable as of the Effective
Time shall continue in effect on the same terms and conditions. McDATA has
agreed to use its reasonable efforts to cause holders of McDATA Stock Options
which will be outstanding and exercisable as of the Effective Time to exercise
such McDATA Stock Options prior to the Effective Time.
TERMINATION; TERMINATION FEES AND EXPENSES
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of McDATA: (a) by mutual written consent of
EMC and McDATA; (b) by EMC or McDATA if the Merger shall not have been
consummated by June 30, 1996; provided, that the right to terminate will not be
available to any party whose failure to fulfill any obligation under the Merger
Agreement has been the cause of or resulted in the foregoing; (c) by EMC or
McDATA if a court of competent jurisdiction or other governmental entity shall
have issued a nonappealable final order, ruling or injunction or taken any
other action, in each case having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger; provided, that the right to
terminate will not be available to any party unless such party complied with
its obligations under the Merger Agreement and used its reasonable best efforts
to have such order, ruling, injunction or other action vacated or lifted; (d)
by EMC or McDATA if the requisite vote of the stockholders of McDATA in favor
of the Merger Proposal or the Conversion Proposal shall not have been obtained;
(e) by EMC, if (i) the McDATA Board shall have withdrawn or modified its
recommendation of the Merger Proposal or the Conversion Proposal in a manner
adverse to EMC or shall have resolved to do any of the foregoing, (ii) the
McDATA Board shall have recommended to the stockholders of McDATA an
Acquisition Transaction (as defined below) or (iii) McDATA or the McDATA Board
takes any action described in the "No Solicitation" section above which is
prohibited; (f) by EMC or McDATA if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other party
set forth in the Merger Agreement, which breach shall not have been cured; (g)
by McDATA if EMC enters into (or discloses to McDATA an intention to enter
into) a definitive agreement to merge or consolidate with another corporation,
partnership or other business organization or acquire an equity interest in or
assets of another corporation, partnership or other business organization
pursuant to which EMC would issue a number of shares of EMC Common Stock (or
securities convertible into a number of shares of EMC Common Stock) in excess
of 20% of the number of shares of EMC Common Stock outstanding prior to such
merger (or cash or other consideration having a value in excess of the market
value of 20% of the number of shares of EMC Common Stock outstanding prior to
such merger, consolidation or acquisition), consolidation or acquisition and
the McDATA Board determines in good faith by majority vote that, in light of
such merger, consolidation or acquisition, the Merger is no longer in the best
interest of McDATA and its stockholders; (h) by EMC if EMC determines in good
faith that consummation of the Merger will result in a material adverse change
in the business relationship of McDATA with IBM, which determination could
result if, among other things, IBM advised McDATA or EMC that it intended to
terminate its agreements with McDATA, which are terminable by IBM under certain
circumstances; or (i) by McDATA if, subject to certain conditions, the Merger
shall not have been consummated by February 28, 1996. An "Acquisition
Transaction" means either (i) a transaction or a merger or other business
combination involving McDATA pursuant to which any person (or group of
36
<PAGE>
persons) other than EMC or its affiliates (a "Third Party"), acquires 50% or
more of the outstanding equity securities of McDATA or the entity surviving
such merger or business combination, (ii) any other transaction pursuant to
which any Third Party acquires control of assets (including for this purpose
the outstanding equity securities of subsidiaries of McDATA) of McDATA having a
fair market value (as determined by the EMC Board, in good faith) equal to 50%
or more of the fair market value of all the assets of McDATA, and its
subsidiaries, taken as a whole, immediately prior to such transaction or (iii)
any public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing.
In the event of a termination of the Merger Agreement as described above, the
Merger Agreement shall become void and there will be no liability or obligation
on the part of EMC, McDATA or Sub or any of their respective officers,
directors, stockholders or affiliates, and all rights and obligations under the
Merger Agreement will cease, except for the fees and expenses described below.
The Merger Agreement provides that all fees and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such expenses, whether or not the Merger
is consummated; provided, however, that EMC and McDATA shall share equally all
fees and expenses, other than attorneys' or accountants' fees, incurred in
relation to the printing and filing of the Registration Statement (including
this Consent Solicitation/Prospectus).
The Merger Agreement also provides that (i) McDATA shall pay EMC (as
liquidated damages) a termination fee of $5,000,000 upon termination of the
Merger Agreement by EMC or McDATA pursuant to (d) above or by EMC pursuant to
(e) or (f) above; (ii) EMC shall pay McDATA (as liquidated damages) a
termination fee of $5,000,000 upon termination of the Merger Agreement by
McDATA pursuant to (f) above; and (iii) McDATA shall pay EMC (as liquidated
damages) a termination fee of $10,000,000 less any amounts paid pursuant to (i)
above if EMC or McDATA shall have terminated the Merger Agreement pursuant to
(d) above or EMC shall have terminated the Merger Agreement pursuant to (e) or
(f) above and, prior to or within six months after any such termination, McDATA
or any of its subsidiaries shall have, directly or indirectly, entered into a
definitive agreement for, or shall have consummated an Acquisition Transaction.
AMENDMENT, EXTENSION AND WAIVER
The Merger Agreement may be amended at any time by action taken or authorized
by the respective Boards of Directors of EMC and McDATA, but after approval by
the stockholders of McDATA of the matters presented in connection with the
Merger to them, no amendment shall be made which by law requires further
approval by such stockholders, without such further approval. EMC and McDATA,
by action taken or authorized by their respective Boards of Directors, may
extend the time for performance of the obligations or other acts of the other
parties to the Merger Agreement, may waive inaccuracies in the representations
or warranties contained in the Merger Agreement and may waive compliance with
any agreements or conditions contained in the Merger Agreement.
RELATED MATTERS AFTER THE MERGER
At the Effective Time, Sub shall be merged with and into McDATA, and McDATA
shall be the Surviving Corporation and a wholly owned subsidiary of EMC. Each
share of Common Stock, par value $.01 per share, of Sub issued and outstanding
immediately prior to the Effective Time shall be converted into and exchanged
for one validly issued, fully paid and nonassessable share of common stock, par
value $.01 per share, of the Surviving Corporation.
At and after the Effective Time, (i) the Certificate of Incorporation of Sub,
as in effect immediately prior to the Effective Time, will be the Certificate
of Incorporation of the Surviving Corporation, until amended in accordance with
the DGCL, except that the name of the Surviving Corporation shall be McDATA
Corporation; (ii) the By-laws of Sub, as in effect immediately prior to the
Effective Time, will be the By-laws of the Surviving Corporation, until amended
in accordance with the DGCL; and (iii) the directors and officers
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<PAGE>
of the Surviving Corporation shall be determined by EMC, each to hold office in
accordance with the Certificate of Incorporation and By-laws of the Surviving
Corporation.
COMPARATIVE PER SHARE MARKET PRICE DATA
MCDATA
McDATA Class A Common Stock is held by 414 record holders and McDATA Class B
Common Stock is held by 155 record holders. Because McDATA is a privately-held
entity, there has been no public trading market for McDATA Capital Stock.
In accordance with the terms of the McDATA Certificate of Incorporation, from
February 1993 until January 1995, McDATA did not pay any dividends on the
outstanding McDATA Capital Stock. Also in accordance with the terms of the
McDATA Certificate of Incorporation, on January 24, 1995, McDATA paid accrued
dividends on the McDATA Series A Preferred Stock and McDATA Series B Preferred
Stock of $.2548 and $.294, respectively, per share. McDATA has since continued
to pay quarterly dividends on the McDATA Series A Preferred Stock and McDATA
Series B Preferred Stock of $.03185 and $.03675, respectively, per share.
McDATA has never paid any dividends on the McDATA Class A Common Stock or
McDATA Class B Common Stock.
EMC
EMC Common Stock is listed and traded on the NYSE under the symbol "EMC."
The table below sets forth, for the fiscal quarters indicated, the reported
high and low sale prices of EMC Common Stock as reported on the NYSE.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1993
First Quarter.................................................. $ 7.19 $ 5.13
Second Quarter................................................. 11.31 5.81
Third Quarter.................................................. 19.00 10.13
Fourth Quarter................................................. 19.50 14.75
1994
First Quarter.................................................. 23.00 15.50
Second Quarter................................................. 21.25 12.63
Third Quarter.................................................. 20.13 12.75
Fourth Quarter................................................. 24.00 18.25
1995
First Quarter.................................................. 22.75 15.25
Second Quarter................................................. 25.38 16.75
Third Quarter.................................................. 27.13 18.00
Fourth Quarter (through November 24, 1995)..................... 18.63 13.63
</TABLE>
As of October 27, 1995, there were approximately 4,633 record holders of EMC
Common Stock.
EMC has never paid cash dividends on its EMC Common Stock. While subject to
periodic review, the current policy of the EMC Board is to retain all earnings
to provide funds for EMC's continued growth.
MCDATA STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE
EMC COMMON STOCK.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
MCDATA
The following consolidated statement of operations data for McDATA for the
years ended December 30, 1994, December 31, 1993 and December 25, 1992 and the
consolidated balance sheet data for McDATA at December 30, 1994 and December
31, 1993 were derived from the audited consolidated financial statements of
McDATA for and as of such dates included elsewhere in this Consent
Solicitation/Prospectus. The consolidated statement of operations data for
McDATA for the years ended December 27, 1991 and December 28, 1990 and the
consolidated balance sheet data for McDATA at December 25, 1992, December 27,
1991 and December 28, 1990 were derived from audited financial statements for
and as of such dates not included herein. The consolidated statement of
operations data for McDATA for the nine months ended September 29, 1995 and
September 30, 1994 and the consolidated balance sheet data for McDATA as of
September 29, 1995 were derived from the unaudited consolidated financial
statements of McDATA for and as of such dates included elsewhere in this
Consent Solicitation/Prospectus. Such unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of McDATA, include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation thereof. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for the entire year.
All amounts shown are in thousands, except per share data.
The following table data should be read in conjunction with "McDATA's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and McDATA's consolidated financial statements and notes thereto
included elsewhere in this Consent Solicitation/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
------------------- ----------------------------------------------
SEPT. 29, SEPT. 30, DEC. 30, DEC. 31, DEC. 25, DEC. 27, DEC. 28,
1995 1994 1994 1993 1992 1991 1990
--------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $113,609 $15,678 $43,431 $34,390 $40,234 $50,491 $ 46,396
Operating income
(loss)................ 53,720 (3,332) 6,071 (6,931) (5,431) 1,931 (10,167)
Net income (loss)...... 36,013 (3,351) 9,809 (6,584) (4,600) 2,023 (5,785)
Net income (loss) per
common share(1)....... 7.99 (1.26) 2.43 (2.44) (1.77) 0.41 (2.37)
Average number of
common and common
equivalent shares
outstanding........... 4,506 2,766 4,031 2,771 2,760 4,914 2,656
BALANCE SHEET DATA:
Working capital........ $54,028 $17,732 $ 5,929 $11,072 $19,044 $ 17,977
Total assets........... 64,648 33,432 17,651 24,550 31,054 29,258
Long term obligations
and redeemable
preferred shares
(excluding current
portion).............. 2,725 2,847 2,828 2,680 4,801 5,113
Stockholders' equity... 54,413 17,971 8,286 15,068 19,818 17,922
</TABLE>
- --------
(1) Loss per common share is calculated after subtracting from net loss, the
preferred stock dividend requirement of $126,000 for the nine months ended
September 30, 1994, $172,000 for the fiscal year ended December 31, 1993,
$285,000 for the fiscal year ended December 25, 1992 and $514,000 for the
fiscal year ended December 28, 1990. In calculating income per common share
for the nine months ended September 29, 1995 and for the fiscal years ended
December 30, 1994 and December 27, 1991, the preferred dividend requirement
is not subtracted from net income as it is assumed that the mandatorily
redeemable preferred stock, as a common stock equivalent, was converted to
common stock at the beginning of the respective periods.
39
<PAGE>
EMC
The following consolidated statement of operations data for EMC for the years
ended December 31, 1994, January 1, 1994 and January 2, 1993 and the
consolidated balance sheet data for EMC at December 31, 1994 and January 1,
1994 were derived from the audited consolidated financial statements of EMC for
and as of such dates included elsewhere in this Consent
Solicitation/Prospectus. The consolidated statement of operations data for EMC
for the years ended December 28, 1991 and December 29, 1990 and the
consolidated balance sheet data for EMC at January 2, 1993, December 28, 1991
and December 29, 1990 were derived from audited financial statements for and as
of such dates not included herein. The consolidated statement of operations and
balance sheet data for EMC as of the nine months ended September 30, 1995 and
October 1, 1994 and the consolidated balance sheet data for EMC as of September
30, 1995 were derived from the unaudited consolidated financial statements of
EMC for and as of such dates included elsewhere in this Consent
Solicitation/Prospectus. Such unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of EMC, include all adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation thereof.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the entire year. All amounts shown are in
thousands, except per share data.
The following table data should be read in conjunction with "EMC's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and EMC audited consolidated financial statements and unaudited
consolidated interim financial statements and notes thereto included elsewhere
in this Consent Solicitation/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
------------------- ----------------------------------------------
SEPT. 30, OCT. 1, DEC. 31, JAN. 1, JAN. 2, DEC. 28, DEC. 29,
1995 1994 1994 1994 1993 1991 1990
---------- -------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $1,288,581 $946,756 $1,377,492 $782,621 $385,706 $260,337 $189,734
Operating income....... 310,605 243,364 350,532 180,428 48,575 20,378 3,888
Net income............. 228,707 172,804 250,668 127,122 29,508 11,409 3,527
Net income per weighted
average common share
(fully diluted)(1).... $ 1.00 $ 0.76 $ 1.10 $ 0.60 $ 0.16 $ 0.07 $ 0.02
Weighted average common
shares (fully
diluted)(1)........... 234,389 233,753 234,255 217,225 190,548 166,220 158,523
BALANCE SHEET DATA:
Working capital........ $ 831,733 $ 600,341 $516,876 $149,335 $ 77,033 $ 81,177
Total assets........... 1,571,862 1,317,500 829,646 338,780 205,503 167,547
Long-term
obligations(2)........ 246,738 286,106 274,029 76,093 16,165 16,814
Stockholders' equity... $1,009,172 $ 727,641 $419,094 $168,266 $135,009 $113,620
</TABLE>
- --------
(1) In addition to common stock equivalents, fully diluted earnings per share
for 1994 and 1993 reflect the dilutive effects of EMC's 4 1/4% Convertible
Subordinated Notes due 2001 and EMC's 6 1/4% Convertible Subordinated
Debentures due 2002. Fully diluted earnings per share for 1992 reflect the
dilutive effects of EMC's 6 1/4% Convertible Subordinated Debentures due
2002.
(2) Excludes current portion of long-term debt.
40
<PAGE>
INFORMATION CONCERNING MCDATA
BUSINESS
McDATA designs, manufactures, markets and supports high performance
information switching products. Since its inception in 1982 by a group of data
communications professionals, McDATA has delivered innovative networking
solutions for large-scale computing applications, including local, metropolitan
and wide-area connectivity. McDATA's recent products have focused on fiber-
based, high-performance switches for the emerging information switching
marketplace.
Products currently offered by McDATA include advanced cluster controllers and
a series of high-bandwidth networking products that support Enterprise Systems
Connection Architecture ("ESCON"). ESCON is a high-speed, fiber-based channel
technology developed by IBM. McDATA currently offers several high-bandwidth
networking products. The 9032 ESCON Model 3 Director is a high speed, high
capacity fiber optic switch exclusively distributed by IBM. McDATA's 9191
Repeater provides reliable metropolitan area ESCON channel extension. McDATA's
ChannelScope products are tools for development and testing of ESCON products.
McDATA products are sold through indirect distribution channels worldwide,
with the exception of the ESCON test tools and Repeaters, which are sold
directly. McDATA, a Delaware corporation incorporated in 1986 (originally
incorporated in Colorado in 1982), is headquartered in Broomfield, Colorado,
and employs approximately 147 people at that location.
McDATA has established partnerships with numerous worldwide original
equipment manufacturers ("OEMs"). Design, test and market input from these
distribution partners is an integral part of the product development process at
McDATA, enabling McDATA and its partners to reduce elapsed time-to-market for
new products. These strategic partnerships have been and will continue to be a
primary focus at McDATA.
MCDATA'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table indicates results of operations of McDATA stated as a
percentage of total revenue.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 29, SEPTEMBER 30, DECEMBER 30, DECEMBER 31, DECEMBER 25,
1995 1994 1994 1993 1992
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue by product line:
Controllers........... 4.5% 55.3% 27.8% 58.6% 76.3%
Directors............. 91.6 26.3 62.7 -- --
Interoperability...... -- -- -- 17.4 9.7
Other sales, service
and rental........... 3.9 18.4 9.5 24.0 14.0
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
Cost of revenue......... 43.3 54.8 51.3 55.4 53.2
Research and product
development............ 6.1 44.8 23.3 28.5 26.6
Sales, general and ad-
ministrative........... 3.3 21.7 11.4 36.3 33.7
----- ----- ----- ----- -----
Operating income (loss). 47.3 (21.3) 14.0 (20.2) (13.5)
Interest income (ex-
pense), net............ 0.6 (0.1) -- 0.6 0.4
----- ----- ----- ----- -----
Income (loss) before
taxes.................. 47.9 (21.4) 14.0 (19.6) (13.1)
Income tax expense (ben-
efit).................. 16.2 -- (8.6) (0.4) (1.7)
----- ----- ----- ----- -----
Net income (loss)....... 31.7 (21.4) 22.6 (19.2) (11.4)
===== ===== ===== ===== =====
</TABLE>
41
<PAGE>
Nine months ended September 29, 1995 and September 30, 1994
Revenue. Revenue for the nine months ended September 29, 1995 was more than
seven times greater than revenue reported in the first nine months of fiscal
1994, reflecting the general availability of McDATA's Director product in
October, 1994. Revenue from sales of McDATA's other products declined 17%,
reflecting the reduced demand and pricing decreases in the Controller
marketplace.
Cost of Revenue. McDATA's cost of revenue as a percentage of revenue for the
nine months ended September, 1995 was 43%, compared to 55% for the comparable
period in 1994. The improvement in the gross margin percentage was the result
of increased shipments from the introduction of the Director product line
coupled with minimal increases to fixed manufacturing costs.
Research and Product Development. Research and product development expenses
were unchanged in the nine months ended September 29, 1995 from the comparable
period in 1994, reflecting continued expenditures for development of new
products.
Sales, General and Administrative. Selling, general and administrative
expenses in the first nine months of 1995 were 11% greater than those reported
in the comparable period of 1994, reflecting increased personnel expenses.
Although McDATA's revenue increased in 1995 from 1994 by 625%, its revenue
growth was predominantly from one of its OEMs; consequently, there were minimal
increases in sales and administrative costs associated with the increased
revenue.
Provision for Income Taxes. McDATA's effective combined federal and state
income tax rate was 34% of pre-tax income for the first nine months of 1995,
compared to no income tax expense or benefit for the nine months ending
September 30, 1994. Under Financial Accounting Standard No. 109, "Accounting
for Income Taxes," a tax valuation allowance was recorded for the nine months
ended September 30, 1994 as it was determined that the deferred tax assets
related to operating loss carryforward benefits and future tax deductible items
were more likely than not (a likelihood of greater than 50%) to not be
realized. McDATA's 1995 effective tax rate is less than the statutory rate of
approximately 38% due primarily to the tax benefits associated with export
sales through a foreign sales corporation.
Liquidity and Capital Resources
Working Capital and Cash Flows. Working capital increased 205% from December
30, 1994 to September 29, 1995, reflecting the substantial income from
operations generated during the first nine months of 1995 and the resultant
increase in cash and accounts receivable, offset by investments in property,
plant and equipment of $1.1 million and payment of dividends to preferred
shareholders of $0.4 million.
The current ratio increased from 2.4 as of December 30, 1994 to 8.2 as of
September 29, 1995. Accounts receivable increased from $12 million to $18
million due primarily to increased revenue in the third quarter of 1995
compared to the fourth quarter of 1994. Inventories at September 29, 1995
increased 23% from the balances at December 30, 1994 due to increased Director
component inventories.
Available Financing Lines. In June, 1995, McDATA entered into a secured line
of credit agreement with a bank. The agreement allows for maximum possible
borrowings of $7 million. The interest rate applicable for borrowings under the
line is the bank's prime lending rate (8.75% at September 29, 1995). The total
amount of credit available under the agreement is limited to a borrowing base
determined by McDATA's eligible accounts receivable. To obtain funds under the
agreement, McDATA is required to comply with certain financial and other
covenants. As of September 29, 1995 McDATA had no outstanding advances under
the agreement and had $7 million of available credit.
Repayment Obligations and Mandatorily Redeemable Preferred Stock. McDATA has
two series of mandatorily redeemable preferred stock, which are nonvoting and
have liquidation preferences. The dividends are cumulative at respective rates,
or at a specified rate in the event of default. McDATA is required
42
<PAGE>
to redeem the redeemable preferred stock in the event of default or at the
election of the stockholders during the period between January 1 and February
15 of each calendar year. The redeemable preferred stock is convertible into
common stock at the option of the stockholders at a conversion rate of one
common share for one preferred share. In addition, all redeemable preferred
stock of a specified series is convertible into common stock upon the closing
of a public offering of a specified minimum size or upon the vote or written
consent of holders of at least 66 2/3% of the outstanding redeemable preferred
stock voting together as a single class at the then-current conversion rate, as
defined.
Other Factors That May Affect Future Results. The ability of McDATA to
develop and produce new products will determine its results of operations and
financial strength in the future. Many of McDATA's competitors have
substantially more resources than McDATA. McDATA generally does not acquire
patents for its products and technologies, although it does claim copyright
protection for the software in its products. Customers licensing its software
are subject to the protections provided McDATA in the license agreements with
such customers, and McDATA claims trade secret protection on all its
proprietary technologies. McDATA's operations are heavily dependent on IBM, its
exclusive customer for its Director product and the supplier of the largest
portion of its components.
Years Ended December 30, 1994 and December 31, 1993
Revenue. Revenue for the fiscal year ended December 30, 1994 increased 26%
from the prior year, reflecting the initial production shipments of McDATA's
Director product in the second half of 1994. Director revenue comprised
approximately 63% of revenue for 1994. Sales of McDATA's Controller products
decreased by 40% in 1994 compared to 1993, reflecting McDATA's changed focus to
the Director product line and reduced demand and pricing decreases in the
Controller marketplace. Revenue from the Interoperability product line declined
to zero in 1994, as the product line was sold in March of 1994.
Cost of Revenue. McDATA's cost of revenue as a percentage of revenue for the
fiscal year ended December 30, 1994 was 51%, compared to 55% in the prior year.
The increase in gross margin percentage was the result of increased shipment
volumes associated with the introduction of the Director product line coupled
with minimal increases in fixed manufacturing costs.
Research and Product Development. Expenditures for research and product
development increased 3% in 1994 compared to 1993. McDATA management maintained
its level of investment in research and product development in 1994 to assure
completion of the development program for its Director product.
Sales, General and Administrative. Selling, general and administrative
expenses decreased 60% from 1994 to 1993 as a result of the sale of the
Interoperability product line and the termination of McDATA's end user sales
channel in the first half of 1994. This sale and termination resulted in a
significant reduction in the sales and marketing workforce which reduced costs.
Although McDATA's revenue increased in 1994 from 1993, its revenue growth was
predominantly from its original equipment customers, consequently, there was no
significant increase in sales and administrative costs associated with the
incremental revenue.
Provision for Income Taxes. McDATA's 1994 benefit from income taxes was the
result of the reversal of a previously recorded valuation allowance against
deferred tax assets. This reversal was the result of McDATA's return to
profitability in 1994 and prospects for continued profitability.
Liquidity and Capital Resources
Working Capital and Cash Flows. Working capital increased two-fold from
December 31, 1993 to December 30, 1994, primarily as a result of the income
generated from operations during 1994 and the resultant increase in cash and
accounts receivable.
The current ratio increased to 2.4 as of December 30, 1994 from 1.9 as of
December 31, 1993. Accounts receivable increased from $6.3 million to $12.1
million due primarily to increased revenue in the fourth quarter of 1994
compared to the fourth quarter of 1993. Inventories as of December 30, 1994
increased $1.6 million from December 31, 1993, due primarily to materials
acquired to meet scheduled shipments of the Director product.
43
<PAGE>
Years Ended December 31, 1993 and December 25, 1992
Revenue. Revenue for the year ended December 30, 1993 decreased 15% from 1992
as a result of the decline in sales of McDATA's Controller products. Unit
shipments of Controllers declined 42% in 1993 from 1992. The largest portion of
the decline was in unit sales to McDATA's OEM customers, most of whom are
located in Europe, reflecting generally poor economic conditions in that
marketplace. The decline was partly offset by an increase in revenue from the
Interoperability product line of 53%, as McDATA successfully broadened demand
for this product line with improved sales and support techniques.
Cost of Revenue. McDATA's cost of revenue as a percentage of revenue for the
year ended December 31, 1993 was 55%, compared to 53% in 1992. This increase
reflects the impact of fixed factory overhead cost spread over a smaller volume
of shipments.
Research and Product Development. Research and product development
expenditures decreased 8% in 1993 from 1992 as a result of staffing reductions
implemented during the second half of 1992. While management intended to reduce
its investment in research and product development as a percentage of revenue,
it intended to maintain expenditure levels sufficient to enable development of
new products as well as enhancements to existing product lines.
Sales, General and Administrative. Sales, general and administrative expenses
decreased 8% in 1993 from 1992 as a result of workforce reductions implemented
by McDATA during 1992 and 1993.
Provision for Income Taxes. McDATA's effective tax benefit rate in 1993 was
2% of pretax income, reflecting a valuation allowance recorded against deferred
tax benefits. Under Financial Accounting Standard No. 109, "Accounting for
Income Taxes," a tax asset valuation allowance was recorded at the end of 1993
as it was determined that the deferred tax assets related to operating loss
carryforward benefits and future tax deductible items were more likely than not
(a likelihood of more than 50%) to not be realized.
Liquidity and Capital Resources
Working Capital and Cash Flows. Working capital decreased 46% from December
25, 1992 to December 31, 1993, as a result of losses generated from operations
during 1993 and the resultant decrease in accounts receivable and the purchase
of plant and equipment of $1.6 million.
The current ratio decreased to 1.9 as of December 31, 1993 from 2.6 as of
December 25, 1992. Accounts receivable decreased from $8.4 million as of
December 25, 1992 to $6.3 million as of December 31, 1993 as a result of
decreased revenue in the fourth quarter of 1993 compared to the fourth quarter
of 1992. Inventories as of December 31, 1993 decreased 13% from balances at
December 25, 1992 as a result of reduced Controller shipments scheduled for the
first quarter of 1994 compared to the first quarter of 1993.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding all stockholders
known by McDATA to be beneficial owners of more than 5% of any class of the
outstanding voting securities of McDATA as of November 27, 1995 and of all
officers and directors of McDATA as a group:
<TABLE>
<CAPTION>
POST CONVERSION
SHARES OF CLASS A
COMMON STOCK
--------------------
NUMBER OF NUMBER OF
SHARES SHARES
TITLE OF BENEFICIALLY PERCENT BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER CLASS OWNED (1) OF CLASS OWNED PERCENT
- ------------------------------------ -------- ------------ -------- ------------ -------
<S> <C> <C> <C> <C> <C>
Austin Ventures, Inc.(2)... Series B 830,950 74.1% 1,252,597 27.1%
Class A 421,647 13.4%
Colorado Venture
Management(3)............. Series A 27,520 100.0% 59,409 1.3%
Series B 23,809 2.1%
Class A 8,080 0.3%
Greater Washington
Investors(4).............. Series B 166,666 14.9% 191,666 4.1%
Class A 25,000 0.8%
Piper Jaffrey, Inc.(5)..... Series B 78,672 7.0% 79,954 1.7%
Class A 1,282 0.0%
John F. McDonnell(6)....... Class A 491,219 15.3% 491,219 10.6%
Paul F. Lilly(6)........... Class A 187,580 5.8% 187,580 4.1%
James P. Fugere(6)......... Class A 303,134 9.4% 303,134 6.6%
Bruce D. Walsh(6).......... Class A 276,504 8.6% 276,504 6.0%
Wilfred F. Behl(6)......... Class A 269,165 8.4% 269,165 5.8%
Edward P. Gistaro(7)....... Class A 17,465 0.5% 45,231 1.0%
Class B 23,333 10.7%
McDATA 401(k) Trust(6)..... Class B 73,826 34.0% 87,853 1.9%
All directors and officers
as a group (8 persons).... Series B 830,950 74.1% 2,088,972 45.2%
Class A 1,220,339 37.9%
Class B 31,666 14.6%
</TABLE>
- --------
(1) All persons have sole voting and investment ownership with respect to their
shares. All amounts shown in this column include shares obtainable upon
exercise of stock options exercisable within 60 days from the date of this
table.
(2) 114 West 7th Street, Suite 1300, Austin, TX 78701
(3) 4845 Pearl East Circle, Boulder, CO 80301
(4) 39 West Montgomery Ave., Rockville, MD 20850
(5) 222 South 9th Street, Minneapolis, MN 55402
(6) 310 Interlocken Parkway, Broomfield, CO 80021
(7) 7461 Callaghan Road, San Antonio, TX 78229
45
<PAGE>
INFORMATION CONCERNING EMC
BUSINESS
EMC and its subsidiaries design, manufacture, market and support high
performance storage products and provide related services for mainframe and
midrange computer systems manufactured primarily by IBM, Unisys Corporation
("Unisys") and Compagnie des Machines Bull S.A. ("Bull"). EMC has announced and
is shipping a family of products aimed at the open systems storage marketplace.
EMC develops its products by integrating technologically advanced industry
standard components and devices with EMC designed proprietary controller
technology to produce storage products that enhance the performance,
reliability, availability, connectivity and functionality of computer systems.
EMC's principal products are based on ICDA technology which combines high-
speed semiconductor cache memory with an array of industry standard disk
drives. ICDA-based products represented approximately 93% of EMC's revenues in
1994, 91% in 1993 and 74% in 1992. These products include the Symmetrix series
of high speed ICDA-based storage systems for the IBM and IBM-compatible,
mainframe, Unisys and Bull mainframe, AS/400 and open systems computer markets.
In November 1992, the Symmetrix product line was expanded to include the Model
5500 which features storage capacities of up to 360 gigabytes ("GB's"),
hardware and channel redundancy, full system battery backup, nondisruptive
component upgrade and replacement and remote diagnostic features. In May 1994,
EMC introduced an expanded version of the Model 5500, extending its capacity to
over one terabyte of storage. EMC also markets the Harmonix series of high
speed ICDA-based storage systems for the IBM AS/400 midrange computer market.
In November 1994, EMC introduced its Centriplex family of ICDA products for the
developing open systems storage marketplace. In April 1995, EMC added the
Symmetrix 3000 Series product line to its open systems storage facility. Also,
EMC introduced its first product into the integrated backup solution market
with Epoch Data Manager.
Additionally, EMC provides solid-state disk devices, main memory products and
tape back-up systems.
The customers for these products are located worldwide and represent a cross
section of industries and government agencies that range in size from Fortune
500 companies to small businesses. EMC markets its products in North and South
America, Europe and the Asia Pacific region through its direct sales force,
distributors and OEMs. All products sold directly to end-users are maintained
and serviced by EMC or third party providers. Products sold through
distributors or OEMs are normally maintained by the reseller.
EMC, a Massachusetts corporation incorporated in 1979, has its corporate
headquarters located at 171 South Street, Hopkinton, Massachusetts.
Company Strategy. EMC's objective is to be a leading provider of high
performance, high reliability storage systems to selected mainframe and
midrange computer markets as well as the open systems storage market. Over the
past decade the technological advances made in central processing units
("CPUs") have far exceeded advances made in the area of data storage systems.
These CPU advances have created an input/output bottleneck which limits the
performance of computer systems running applications that require frequent and
high speed access to data. EMC's products have been designed to significantly
reduce this performance bottleneck. The major elements of EMC's strategy are
set forth below.
Innovative Architectural Design. EMC has developed a common product
architecture, called MOSAIC:2000, on which its principal products are based.
This architectural framework is based upon a modular design and industry
standard interface that allows new technologies to be incorporated more rapidly
than with traditional architectures and enhances portability to non-IBM
environments. This facilitates upgrades and enhancements that can extend the
useful life of EMC's storage systems and also extend the useful life of the
customer's CPU.
46
<PAGE>
Proprietary Software Technology. EMC's products achieve high performance
levels due in part to proprietary software and microcode controller technology.
This proprietary controller technology, combined with large amounts of high
speed cache memory and arrays of industry standard disk drives, creates storage
devices that provide computer systems with enhanced performance, reliability
and functionality.
Multi-Channel Distribution Focus. EMC's strategy is to continue to expand in
four distinct product markets: the IBM and IBM-compatible mainframe market, the
IBM AS/400 midrange market, the OEM market and the open systems storage market.
To access these markets EMC has adopted a multi-channel distribution approach.
EMC utilizes a direct sales force in the U.S., Canada, Europe and Japan. EMC
also utilizes third party distributors and OEMs.
Mainframe Market. The mainframe storage market is estimated to be a
multibillion dollar market which EMC has penetrated with its ICDA-based
products. EMC believes that it is currently the leading manufacturer of storage
systems that allow users to bridge the gap between the speed at which the CPU
can process data and the traditional storage device's ability to provide data
to the CPU.
Product sales to the mainframe storage market represented approximately 88%,
82% and 70%, respectively, of EMC's 1994, 1993 and 1992 product revenue. In
September 1990, EMC introduced the Symmetrix series of ICDA-based products for
IBM and IBM-compatible mainframe computers. Symmetrix was the first
commercially available disk storage system for the IBM mainframe marketplace
that utilized arrays of smaller, industry standard 5 1/4" disk drives as an
alternative to the larger more expensive disk drives that traditionally had
been used with mainframe computers. By combining these smaller disk drives with
an integrated control unit, large amounts of cache memory and battery backup,
Symmetrix provides the user with what EMC believes to be the highest performing
disk storage product available in the marketplace today. As a result of this
integrated design, Symmetrix also occupies a smaller footprint and has lower
operating costs than data storage systems based on conventional technology.
Since the introduction of the first Symmetrix model, the Model 4400 with a
maximum capacity of 24 GB's, EMC has added additional models that are both
smaller (the Model 4200 with a capacity of up to 16 GB's) and larger (the Model
4800 with a capacity of up to 90 GB's) than the original. In November 1992, EMC
introduced a new series of Symmetrix products called the Model 5500 (with a
capacity of up to 360 GB's). The Model 5500 has many built-in redundancy
features allowing for continuous operation of the disk storage system. This is
particularly attractive to users whose data storage requirements are dependent
upon high performance and continuously available data for mission critical
applications. Each Model 5500 contains EMC's Auto Call feature, which
automatically generates a diagnostic phone call from the unit to EMC's 24 hour
Remote Support Facility if the unit detects a possible problem. EMC has
continually enhanced the Symmetrix family of products with additional features
and improved performance through a combination of hardware and microcode
enhancements. For example, in September 1993, EMC announced the Model 4208-2S
which increased the capacity of the Symmetrix Model 4200 from 8 GB's to 16 GB's
by using 3 1/2" disk technology. In May 1994, EMC introduced an expanded
version of the Model 5500, extending its capacity to over one terabyte of
storage. The 5200 series was also introduced in May 1994 with capacities
ranging from 32 GB's to 272 GB's. The wide range of Symmetrix models allows EMC
to broaden its marketing efforts to address the storage needs of virtually all
sizes of IBM mainframe computer users.
EMC also designs and manufactures plug compatible main memory products for
IBM air cooled model 9121 mainframe computers and provides plug-in storage
modules for IBM 3990-3 cache control units.
Midrange Market. EMC believes that there is a large portion of the IBM AS/400
midrange storage market that has not been penetrated by EMC's ICDA-based
products.
Midrange revenues grew modestly during 1994, with product sales to the
midrange storage market representing approximately 10%, 15% and 28%,
respectively, of EMC's product revenue in 1994, 1993 and 1992. In 1992, EMC
introduced the first ICDA-based storage systems for the IBM AS/400 midrange
47
<PAGE>
computer market. This series of products, called Harmonix, uses both 5 1/4" and
3 1/2" disk drives integrated with cache memory to provide high performance,
high capacity storage solutions for the AS/400 user. During 1994, EMC expanded
the Harmonix product line to allow EMC to reach new users by including models
featuring high capacity at a lower cost as well as other models emphasizing
high availability. During the first quarter of 1995, the Symmetrix Series was
improved to allow connection for AS/400 computer systems.
EMC also offers the Voyager line of 8 millimeter ("mm") based Intelligent
Cached Tape Subsystems, which provides AS/400 users with high capacity, high
performance and unattended backup. These products feature an advanced
controller design and cache buffer combined with the ability to interleave data
to up to four 8 mm tape transports simultaneously, greatly improving the speed
of the backup operations. EMC's August 1993 acquisition of Magna Computer
Corporation augmented the Voyager line of tape products by adding 4 mm and
additional 8 mm and reel to reel tape products to EMC's product portfolio.
EMC also provides main memory upgrades for selected AS/400 CPU models.
OEM Market. The MOSAIC:2000 framework and the inherent flexibility of its
open system make EMC's products well suited to be sold by strategic OEMs in
partnership with EMC.
Since January 15, 1992, EMC has had an OEM agreement with Unisys for the sale
of Unisys-compatible Symmetrix products. This agreement currently extends
through December 31, 1998. As of December 1994, a Unisys-compatible version of
EMC's Modarray I product was added to this agreement. Unisys maintains
worldwide marketing rights to both the Symmetrix and Modarray I products for
use with Unisys Systems under certain terms and conditions.
On February 11, 1993, EMC entered into a three-year OEM agreement with Bull.
Pursuant to the agreement, EMC granted Bull exclusive worldwide marketing
rights, with the exception of Japan, to EMC's Symmetrix 4800 series of ICDA-
based storage products for Bull mainframe computers, provided that Bull
purchases all of its requirements for high speed cached disk array storage
devices from EMC and meets certain minimum purchase requirements.
Open Systems Storage Market. In May 1993, EMC formed a Client/Server Division
to develop storage products for the growing open systems storage market. In
November 1994, this division became known as the Open Storage Group. EMC
believes that this market requires sophisticated data management technology to
allow for sharing of information while maintaining data integrity and
reliability. In November 1994, the Open Storage Group introduced the Centriplex
family of ICDA products aimed at the open systems storage marketplace.
Centriplex connects up to eight heterogeneous open systems platforms to a
single scalable storage device. In 1993 and 1994, revenues from EMC's Open
Storage Group were immaterial.
In June 1995, the Symmetrix 3000 was added to the Open Storage Group product
line. Symmetrix 3000 scales to over one terabyte of capacity, four GB's of
cache, and up to 32 available host connections. The 3000 Series consists of the
3100, 3200 and 3500 models, differentiated only by capacity and the number of
hosts supported.
Marketing and Customers. EMC markets its products through multiple
distribution channels, including its direct sales force, selected distributors
and OEMs. EMC has a direct sales presence throughout North America and Europe,
and in parts of the Asia Pacific region and uses distributors as its primary
distribution channel in the rest of the Asia Pacific region, the Middle East,
Africa and South America. Over the past two years, EMC has expanded its North
American and European sales and marketing organizations significantly and
currently is expanding its sales and marketing organizations in the Asia
Pacific region. In this regard, in January 1994, EMC and its existing Japanese
distributor jointly formed a company in Japan, in which EMC held a 60%
interest. Through this entity, during 1994, EMC acquired and expanded its
direct sales force in Japan. In December 1994, EMC purchased an additional 35%
of this venture from the Japanese distributor, thereby making EMC the owner of
95% of the joint venture company. In June 1995, EMC
48
<PAGE>
purchased certain assets from its South African distributor and is now selling
direct in South Africa. In September 1995, EMC purchased certain assets from
its distributor in Scandinavia and is now selling direct in Sweden and will be
selling direct in the other countries in Scandinavia in the near future.
During 1994, EMC derived 63% of its product revenue from shipments into North
and South America, 32% from shipments into Europe, the Middle East and Africa,
and 5% from shipments into the Asia Pacific region. EMC's marketing and sales
personnel are organized into mainframe, midrange and open storage customer
groups to ensure that the necessary expertise is available to understand the
customer's requirements and properly apply EMC's product solutions. In
addition, EMC has dedicated personnel to support the needs of its distributors
and OEM customers, both domestically and internationally.
Operations. EMC's products utilize EMC's engineering designs, with industry
standard and semi-custom components and subsystems. The majority of EMC's
products are manufactured and tested at EMC's facilities in Hopkinton,
Massachusetts and Cork, Ireland. Products manufactured by subcontractors in the
U.S. and Europe are assembled in accordance with production standards and
quality controls established by EMC. EMC discontinued board assembly at its
Canovanas, Puerto Rico facility in February 1994 and such assembly is now being
performed by existing subcontractors. EMC believes its present level of
manufacturing capacity, along with its current plans for expansion, will be
sufficient to accommodate its requirements.
EMC 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 DRAMs
and 5 1/4" and 3 1/2" disk drives, which EMC purchases from a small number of
qualified suppliers. In some instances there is only a single source for such
components. A failure by any supplier of high density DRAMs or disk drives to
meet EMC's requirements for an extended period of time could have a material
adverse effect on EMC. From time to time during 1994, because of high industry
demand and/or the inability of certain vendors to consistently meet on a timely
basis EMC's component quality standards, EMC experienced delays in deliveries
of high density DRAMs and disk drives needed to satisfy orders for ICDA
products. During the latter part of 1994, EMC experienced difficulties in the
performance of certain disk drives, which required EMC to take certain remedial
measures, including mirroring of drives in selected systems. EMC is currently
working with the vendor to correct these problems and is also seeking
alternative sources of supply. If such shortages and/or performance problems
were to intensify, EMC could lose some time-sensitive customer orders which
could affect quarterly revenues.
EMC has implemented a Total Quality Management philosophy to ensure the
quality of its designs, manufacturing process and suppliers.
EMC's U.S. operation currently holds 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. EMC's Irish manufacturing operation also holds ISO
9002 certification. EMC's principal manufacturing operation in Hopkinton has
also been awarded Class A MRP II status by an independent evaluation
organization.
Manufacturing Risks. EMC's products operate near the limits of electronic and
physical performance and are designed and manufactured with relatively small
performance margins. If flaws in design or production occur, EMC could
experience a rate of failure in its products that would result in substantial
costs for the repair or replacement of defective products and potential damage
to EMC's reputation. Continued improvement in manufacturing capabilities,
control of supplier quality and manufacturing 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.
EMC's failure to monitor, develop and implement appropriate test and
manufacturing processes for its products, especially the Symmetrix series,
could have substantial adverse effects on EMC's operations and ultimately on
its financial results.
49
<PAGE>
Competition. EMC competes primarily with IBM in the sale of storage products
in the IBM and IBM-compatible mainframe and midrange marketplaces. EMC believes
that it has a number of competitive advantages over IBM, especially in the
areas of product performance, cost of ownership, and time-to-market. While EMC
believes that its ICDA technology provides a significant technological
advantage, competition in this area has begun and may increase significantly in
the future, which could adversely affect EMC's profitability. EMC also realizes
that IBM has certain competitive advantages including significantly greater
financial and technological resources, a larger distribution capability,
earlier access to customers and a greater level of customer loyalty. Other
important elements of competition in the computer storage industry are product
reliability and quality, continuing technological improvements, marketing and
customer service, and product design.
There are also a number of independent competitors in each of EMC's markets.
In the mainframe market those competitors include Hitachi Data Systems, Inc.,
Amdahl Corporation and Storage Technology Corporation ("STK"). In the midrange
market, competition has historically come from smaller companies, as well as
IBM and STK. EMC believes that it has similar advantages over these midrange
competitors, but increased competition from these or future entrants could
adversely affect EMC's profitability. In the open systems market, EMC's major
competitors include IBM, Hewlett-Packard Company, Sun Microsystems, Inc., and
AT&T Corporation.
Technological Factors. The computer data storage industry is characterized by
rapidly changing technology and user needs which require ongoing technological
development and introduction of new products. Recognizing this fact, EMC has
developed a storage system architecture called MOSAIC:2000 to allow EMC to take
better advantage of technological developments. By employing this architectural
approach to product development, EMC is able to quickly integrate new
technologies into its basic design. EMC works closely with its suppliers to
understand their technology direction and to plan for the integration of this
technology into its product architecture. The Symmetrix series, the Harmonix
series and the Centriplex family of products all use the MOSAIC:2000
architecture.
Sales of the Symmetrix series constitute the principal source of revenues for
EMC and such sales are expected to continue to be the principal source of
revenues in the future. In April 1992, EMC released a new series of midrange
disk storage systems, the Harmonix series. EMC expects competition in the sales
of ICDA-based products to increase and there can be no assurance that the
Symmetrix series and Harmonix series of products will continue to achieve
market acceptance. Significant delays in the development of ICDA technology for
future products or product enhancements would be to the advantage of EMC's
competitors, many of whom have significantly greater resources, and could
ultimately affect EMC's financial condition. Furthermore, the continued
development of ICDA technology and its incorporation into EMC's future
generations of products cannot be assured even with significant additional
investments.
Product Development. EMC's ability to compete successfully in present and
future markets depends upon the timely development and introduction of products
offering price/performance or capacity advantages and compatibility with the
computer systems for which they are designed. Achieving these goals requires
that EMC remain abreast of changing technology and design products that operate
within the architecture of various computer systems and deliver performance or
capacity advantages not offered by the original systems developer or by other
storage competitors. Moreover, the computer industry is subject to rapid
technological developments. Consequently, achieving such goals may become more
difficult, costly and time consuming as a result of technological developments
that cannot now be foreseen. Research and development costs were $117,922,000,
$58,977,000 and $33,591,000 for the fiscal years ended December 31, 1994,
January 1, 1994, and January 2, 1993, respectively.
Working Capital. It is typical for companies in the computer industry to
require significant amounts of working capital to finance inventory and
receivables. EMC believes that its working capital requirements are in
accordance with industry practices. In 1994, EMC financed its working capital
requirements from internally generated funds and existing cash and investments.
This also includes the net proceeds of
50
<PAGE>
$229,600,000 received from the sale in December 1993 of 4 1/4% Convertible
Subordinated Notes due 2001 (which includes exercise of the underwriters' over-
allotment option). As of September 30, 1995, EMC had available for use its
entire $65,000,000 of credit lines and EMC may elect to borrow capital at any
time to fund new growth opportunities. As EMC's product mix shifts to higher
cost products with longer sales cycles, EMC's need for working capital is
expected to increase.
Backlog. EMC 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 EMC shortly after receipt of the
order. Customers may reschedule orders with little or no penalty. For these
reasons, EMC's backlog at any particular time is not indicative of future sales
levels.
Employees. As of September 30, 1995, EMC had approximately 3,809 employees
worldwide including temporary employees. Continued growth in EMC's business
will require the hiring of additional qualified personnel. Under current market
conditions, EMC does not expect to encounter any difficulty in hiring such
personnel. None of EMC's domestic employees is represented by a labor union,
and EMC has never suffered an interruption of business as a result of a labor
dispute. EMC considers its relations with its employees to be good.
Dependence Upon Key Personnel. EMC's success is highly dependent upon senior
management and other key employees, the loss of whom could adversely affect
EMC. EMC also believes that its future success will depend in large part upon
its ability to attract and retain additional key employees, of which there can
be no assurance.
Environment. EMC'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 EMC.
Patents. EMC has twenty-two (22) U.S. patents and has approximately one
hundred (100) patent applications pending in the U.S. and foreign patent
offices relating to its products for the mainframe, midrange and open systems
storage markets. While EMC believes that the pending applications relate to
patentable devices or concepts, there can be no assurance that any patents will
issue or that any patent issued can be successfully defended or held valid by a
court of competent jurisdiction, or that such patents will provide protections
against competitive technology that circumvents such patents. In any case, EMC
believes that patents are of less significance in its industry than such
factors as innovative skills, technological expertise and the management
ability of its personnel.
Earnings Fluctuations. Due to (i) customers' tendencies to make purchase
decisions late in each fiscal quarter, (ii) the desire by customers to evaluate
new, more expensive products for longer periods of time, (iii) the timing of
product and technology announcements by EMC and its competitors, and (iv)
fluctuating currency exchange rates, EMC's period-to-period revenues and
earnings can fluctuate significantly.
Financial Information about Foreign and Domestic Operations and Export Sales.
EMC is active in one business segment: designing, manufacturing and marketing
high performance storage products. Information by geographic area is presented
below with exports shown in their area of origin. Sales and marketing
operations outside the U.S. are conducted through sales subsidiaries and
branches located principally in Europe and Asia and by direct sales from the
parent corporation or its Irish Manufacturing subsidiary. The U.S. market
amounted to greater than 95% of EMC's sales, income and identifiable assets in
the North/South America segment.
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<PAGE>
Intercompany transfers between geographic areas are accounted for at prices
which are designed to be representative of unaffiliated party transactions.
<TABLE>
<CAPTION>
EUROPE
NORTH/SOUTH MIDDLE EAST ASIA CONSOLIDATED
AMERICA AFRICA PACIFIC ELIMINATIONS TOTAL
-------------- ------------ ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1994
Sales.................. $ 871,048,000 $449,467,000 $56,977,000 $ -- $1,377,492,000
Transfers between
areas................. 123,587,000 61,577,000 110,000 (185,274,000) --
Total sales............ 994,635,000 511,044,000 57,087,000 (185,274,000) 1,377,492,000
Income (loss) from
operations............ 155,544,000 196,658,000 (97,000) (1,573,000) 350,532,000
Identifiable assets at
year end.............. 1,230,883,000 171,233,000 36,437,000 (121,053,000) 1,317,500,000
1993
Sales.................. $ 526,771,000 $251,363,000 $ 4,487,000 $ -- $ 782,621,000
Transfers between
areas................. 100,237,000 83,726,000 -- (183,963,000) --
Total sales............ 627,008,000 335,089,000 4,487,000 (183,963,000) 782,621,000
Income (loss) from
operations............ 107,512,000 70,324,000 (990,000) 3,582,000 180,428,000
Identifiable assets at
year end.............. 684,576,000 192,682,000 2,383,000 (49,995,000) 829,646,000
1992
Sales.................. $ 263,465,000 $111,117,000 $11,124,000 $ -- $ 385,706,000
Transfers between
areas................. 83,813,000 36,303,000 -- (120,116,000) --
Total sales............ 347,278,000 147,420,000 11,124,000 (120,116,000) 385,706,000
Income from operations. 34,915,000 25,008,000 1,255,000 (12,603,000) 48,575,000
Identifiable assets at
year end.............. 252,308,000 98,232,000 4,309,000 (16,069,000) 338,780,000
</TABLE>
PROPERTIES
EMC's mainframe marketing, research and development, and manufacturing
functions are located in a 229,000 square foot complex at 171 South Street in
Hopkinton, Massachusetts. This building complex consists of a building
purchased in December 1986, and an adjacent building constructed in 1988 and
occupied in January 1989. EMC is currently expanding this building by 20,000
square feet. EMC recently acquired a 60,000 square foot facility located at
Avenue E in Hopkinton, Massachusetts which is used for manufacturing.
In October 1992, EMC purchased a 62,000 square foot facility and an
additional 9 acres of land at 42 South Street in Hopkinton, Massachusetts. This
facility has been renovated by EMC and is in use as its customer demonstration
center and for certain administrative functions. In November 1993, EMC
transferred certain of its corporate and administrative functions to a leased
80,000 square foot building at 35 Parkwood Drive in Hopkinton, Massachusetts.
In July 1994, EMC leased a 255,000 square foot building at 5-9 Technology
Drive, Milford, Massachusetts that is in use for EMC's customer service, OEM
Sales, Quality and EMC's Open Storage Group. EMC currently leases other
buildings in Hopkinton, Massachusetts for certain manufacturing and quality
control functions.
Production currently is carried on in the Hopkinton facilities at 171 South
Street and Avenue E, the Milford facility and an 87,000 square foot facility
owned by EMC in Cork, Ireland.
EMC also leases space for its sales and service offices worldwide.
LEGAL PROCEEDINGS
On June 10, 1993, STK filed suit against EMC in the United States District
Court for the District of Colorado alleging that EMC is infringing three
patents. In the complaint, STK seeks injunctive relief, unspecified damages,
including treble damages, plus attorney's fees and costs. On July 20, 1993, EMC
answered the complaint, denied STK's allegations and counterclaimed. In the
counterclaims, EMC seeks unspecified damages, attorney's fees, costs and
interest. In a court hearing on October 12, 1994, STK's claims on two of the
three patents were dismissed with prejudice.
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On September 23, 1994, EMC filed suit against STK in the United States
District Court for Delaware alleging that STK is infringing one EMC patent. In
the complaint, EMC seeks injunctive relief and unspecified damages including
treble damages, plus attorney's fees and costs. On October 12, 1994, STK
answered the complaint, denied any infringement and counterclaimed. STK has
subsequently filed an additional counterclaim. EMC has denied STK's
allegations. Discovery on this case is currently in process. A trial is
currently scheduled for March 1996.
EMC 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 EMC's business or financial condition.
EMC'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Nine Months Ended September 30, 1995 and October 1, 1994
Revenues. Revenues for the nine months ended September 30, 1995 were
$1,288,581,000 compared to $946,756,000 for the first nine months of 1994, an
increase of $341,825,000 or 36%. While EMC expects total revenue to continue to
increase in the fourth quarter of 1995 as compared to the comparable period in
1994, such increase may not, on a percentage basis, continue at the level
experienced in the first nine months of 1995.
The increase in revenues was due to continued demand for EMC's series of ICDA
based products, which include the Symmetrix series of products in the mainframe
market, the Symmetrix series of products in the open systems storage market,
the Centriplex series of products in the open systems storage market and the
Harmonix series of products in the midrange market. Revenues from the Symmetrix
series of products in the mainframe market increased by $269,824,000, or 33%,
to $1,083,453,000 in the first nine months of 1995 from $813,629,000 in the
first nine months of 1994. Revenues from EMC's products in the open systems
storage market were $99,276,000 in the first nine months of 1995, an increase
of $82,725,000, or 500%, over the $16,551,000 for the first nine months of
1994. Revenues from the Harmonix series of IBM compatible disk products in the
midrange market decreased by $24,735,000, or 31%, to $55,848,000 in the first
nine months of 1995 from $80,583,000 in the first nine months of 1994.
Revenues on sales and service into the markets of North and South America
increased by $182,082,000, or 30%, to $790,691,000 in the first nine months of
1995 from $608,609,000 in the same period of 1994. This increase was primarily
due to growth in unit sales of the Symmetrix series of products in the IBM
mainframe storage market and unit sales of EMC's products in the open systems
storage market.
Revenues on sales and service into the markets of Europe, Africa and the
Middle East increased by $112,972,000, or 40%, to $396,266,000 in the first
nine months of 1995 from $283,294,000 in the same period of 1994, due primarily
to growth in unit sales of the Symmetrix series of products in the IBM
mainframe storage market.
Revenues on sales and service into the markets in the Asia Pacific region
increased by $46,771,000, or 85%, to $101,624,000 in the first nine months of
1995 from $54,853,000 in the same period of 1994, primarily due to growth in
unit sales of the Symmetrix series of products in the IBM mainframe storage
market.
EMC 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 DRAMs
and 5 1/4" and 3 1/2" disk drives, which EMC purchases from a small number of
qualified suppliers. A failure by any supplier of high density DRAMs or disk
drives to meet EMCs requirements for an extended period of time could have a
material adverse effect on EMC. From time to time, because of high industry
demand and/or the inability of certain vendors to consistently meet on a timely
basis EMC's component quality standards, EMC experienced delays in deliveries
of high density DRAMs
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<PAGE>
and disk drives needed to satisfy orders for ICDA products. EMC is currently
working with vendors to correct these problems and is also seeking alternative
sources of supply. If shortages and quality problems were to intensify, EMC
could lose some time-sensitive customer orders which could affect quarterly
revenues and earnings.
Cost of Sales and Service. As a percentage of revenues, cost of sales and
service increased to 49.8% in the first nine months of 1995 from 47.2% in the
first nine months of 1994. Demand for EMC's products continued, but competitive
pricing pressures in the mainframe storage market in the third quarter of 1995
were greater than usual and adversely affected the margin percent for the first
nine months of 1995.
Research and Development. Research and development ("R&D") expenses were
$117,138,000 and $81,000,000 in the first nine months of 1995 and 1994,
respectively, an increase of $36,138,000, or 45%. R&D expenses were 9.1% and
8.6% of revenues in the first nine months of 1995 and 1994, respectively.
Dollar increases in R&D spending reflect additional depreciation expenses
associated with purchases of state-of-the-art CAE/CAD design tools, the cost of
additional technical staff and costs to develop new products for the open
systems storage market. EMC expects to continue to spend substantial amounts
for R&D in the fourth quarter of 1995.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were $219,415,000 and $175,269,000 in the first nine months
of 1995 and 1994, respectively, an increase of $44,146,000 or 25.2%. SG&A
expenses were 17.0% and 18.5% of revenues in the first nine months of 1995 and
1994, respectively. The dollar increase is due primarily to costs associated
with additional sales and support personnel and their related overhead costs,
both domestically and internationally, in connection with EMCs increased
revenue levels and EMCs initiative to expand its open systems storage group,
international direct selling offices and OEM programs. SG&A expenses are
expected to increase in dollar terms in the fourth quarter of 1995.
Investment Income and Interest Expense. Investment income was $16,770,000 in
the first nine months of 1995 compared with $15,549,000 in the same period a
year ago. Interest income was earned from investments in cash equivalents and
long-term investments and, to a lesser extent, from sales-type leases of EMC's
products. Investment income increased in the first nine months of 1995 due to
investments made in the first quarter of 1995 at which time interest rates were
higher than interest rates over the same period in 1994.
Interest expense decreased in the first nine months of 1995 from the first
nine months of 1994, primarily due to conversions of the Debentures in March
1995.
Provision for Income Taxes. The provision for income taxes was $89,802,000
and $72,912,000 in the first nine months of 1995 and 1994, respectively, which
resulted in effective tax rates of 28.2% and 29.7%, respectively. The effective
tax rate in the first nine months of 1995 decreased from the same period in
1994 as a result of utilization of foreign net operating losses and the
realization of tax benefits associated with EMCs tax strategies. EMC provides
for income taxes based upon its estimate of full year earnings on a country-by-
country basis.
Earnings Fluctuations. Due to (i) customers' tendencies to make purchase
decisions late in each fiscal quarter, (ii) the desire by customers to evaluate
new, more expensive products for longer periods of time, (iii) the timing of
product and technology announcements by EMC and its competitors, and (iv)
fluctuating currency exchange rates, EMC's period to period revenues and
earnings can fluctuate significantly.
Financial Condition. Cash and cash equivalents were $208,997,000 and
$240,506,000 at September 30, 1995 and December 31, 1994. In the first nine
months of 1995, EMC's working capital increased by $231,392,000 from
$600,341,000 at December 31, 1994 to $831,733,000 at September 30, 1995. In the
first nine months of 1994, EMC's working capital increased by $34,977,000, from
$516,876,000 at January 1, 1994 to $551,853,000 at October 1, 1994, mainly due
to increased receivable and inventory balances.
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<PAGE>
In the first nine months of 1995, cash and cash equivalents decreased by
$31,509,000. Cash used by operating activities was $668,000 as a result of
increased receivable and inventory balances which offset increased net income
and taxes payable balances. The increase in receivables resulted principally
from customers making purchase decisions late in the quarter and EMC's granting
of certain extended payment terms due to competitive pressures in the
marketplace generally. The increase in inventory is primarily attributable to
an increase in the number of units in the field for trade-in, evaluation and
other purposes and an increase in production inventory of finished units. Cash
used by investing activities was $35,028,000 caused by additions to property,
plant and equipment of $61,560,000, offset by net maturities of long-term
investments of $26,083,000 and losses on disposals of property and equipment of
$449,000. Cash provided by financing activities was $3,745,000 caused primarily
by issuances of common stock of $12,776,000, pursuant to stock option exercises
and stock purchase plan activity, partially offset by payments of long-term
obligations of $9,161,000.
In October 1995, EMC announced an agreement to acquire McDATA Corporation, a
leader in data network switching solutions, in a stock transaction which is
currently valued at approximately $235,000,000. EMC intends to account for the
transaction as a pooling of interests.
At September 30, 1995, EMC had available for use its credit lines of
$65,000,000. Based on its current operating and capital expenditure forecasts,
EMC believes funds currently available, funds generated from operations and its
available lines of credit will be adequate to finance its operations.
To date, inflation has not had a material impact on EMC's financial results.
Years Ended December 31, 1994, January 1, 1994 and January 2, 1993
The following table represents certain statement of operations information
stated as a percentage of revenues.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
DECEMBER 31, 1994 JANUARY 1, 1994 JANUARY 2, 1993
----------------- --------------- ---------------
<S> <C> <C> <C>
Revenues
Net sales.................. 97.5% 96.8% 94.7%
Service and rental income.. 2.5 3.2 5.3
----- ----- -----
100.0 100.0 100.0
===== ===== =====
Cost and expenses
Cost of sales and service.. 47.9 48.7 53.7
Research and development... 8.6 7.5 8.7
Selling, general and admin-
istrative................. 18.1 20.8 25.0
Operating income............. 25.4 23.0 12.6
Investment income and inter-
est expense, net............ 0.5 -- (0.3)
Other expense, net........... (0.1) -- (1.1)
Income before income taxes... 25.8 23.0 11.2
Provision for income taxes... 7.6 6.8 3.5
Net income................... 18.2% 16.2% 7.7%
</TABLE>
Revenues. Revenues increased by $594,871,000 or 76%, in 1994 from 1993
compared to an increase of $396,915,000 or 103%, in 1993 from 1992. Revenues
from net sales increased by $582,272,000, or 77%, in 1994 from 1993 levels,
while revenues from service and rental income increased by $9,599,000, or 39%,
in 1994 from 1993.
In 1994, EMC continued to derive the majority of its revenues from the sale
of disk systems, due primarily to the continued market acceptance and unit
sales growth from products featuring EMC's ICDA
55
<PAGE>
technology, which includes the Symmetrix, Harmonix and Centriplex series of
products. Revenues from the Symmetrix series in the IBM, Bull and Unisys
mainframe markets were $1,177,014,000 in 1994, $620,178,000 in 1993 and
$235,720,000 in 1992, representing an increase in 1994 from 1993 of
$556,836,000 or 90%. Revenues from the Harmonix series were $110,717,000 in
1994, $92,672,000 in 1993 and $49,147,000 in 1992. In 1994, EMC generated
approximately 94% of its revenue from sales of ICDA-based products versus
approximately 91% and 74% in 1993 and 1992, respectively. It is expected that
revenues from ICDA-based products will continue to be the most significant
component of EMC's revenues in 1995. While EMC expects revenue to continue to
grow in 1995; such growth may not, on a percentage basis, continue at the level
experienced in 1994.
Revenues on sales into the markets of North and South America increased by
$346,750,000 or 67%, to $865,687,000 in 1994 from $518,937,000 in 1993 due
primarily to increased unit sales of the Symmetrix series of products,
including the Symmetrix 5500 series and the Symmetrix 5200 series which was
introduced in 1994, both in the IBM mainframe storage market. Revenues on sales
into the markets of North and South America from the Symmetrix series of
products were $732,883,000 in 1994, or 85% of revenues in this region and
$400,933,000 in 1993 or 77% of revenues in this region.
Revenues on sales into the markets of Europe, the Middle East and Africa
increased by $213,291,000, or 94%, to $439,524,000 in 1994 from $226,233,000 in
1993 due primarily to continued growth in unit sales of the Symmetrix series of
products in the IBM, Bull and Unisys mainframe storage markets.
Revenues on sales into the markets of the Asia Pacific region increased by
$34,830,000, or 93%, to $72,281,000 in 1994 from $37,451,000 in 1993 due
primarily to the growth in unit sales of the Symmetrix series of products in
the IBM mainframe storage market. EMC strengthened its sales presence in the
Asia Pacific region with the formation of EMC Japan K.K. in January 1994.
Worldwide revenue data presented in the segment footnote shows revenues on
shipments originating from each area as follows. Revenues on shipments from the
North and South American region were $871,048,000 and $526,771,000 in 1994 and
1993, respectively. Revenues on shipments from the Europe, Middle East and
Africa region were $449,467,000 and $251,363,000 in 1994 and 1993,
respectively. Revenues on shipments from the Asia Pacific Region were
$56,977,000 and $4,487,000 in 1994 and 1993, respectively.
EMC has OEM agreements with Bull and Unisys. EMC's OEM agreement for the sale
of EMC's mainframe products as Unisys-compatible products to Unisys extends
through December 31, 1998. In February 1993, EMC entered into a three-year OEM
agreement with Bull. Pursuant to this agreement, EMC grants Bull the exclusive
worldwide marketing rights, with the exception of Japan, to EMC's Symmetrix
4800 series of ICDA-based storage products for Bull mainframe computers,
provided that Bull purchases all of its requirements for high speed cached disk
array storage devices from EMC. Failure by Bull in the future to purchase at
least 45% of forecasted purchases at designated times, on a cumulative basis,
may result in loss of exclusivity to Bull.
Historically, EMC has competed with OEMs and other independent suppliers on
the basis of product performance, quality and price. EMC expects that there
will be performance and pricing pressures with respect to the sale of its
products throughout 1995. See also "Cost of Sales and Service".
EMC 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 DRAMs
and 5 1/4" and 3 1/2" disk drives, which EMC purchases from a small number of
qualified suppliers. In some instances there is only a single source for such
components. A failure by any supplier of high density DRAMs or disk drives to
meet EMC's requirements for an extended period of time could have a material
adverse effect on EMC. From time to time during 1994, because of high industry
demand and/or the inability of certain vendors to consistently meet on a timely
basis EMC's component quality standards, EMC experienced delays in deliveries
of high density DRAMs and disk drives needed to
56
<PAGE>
satisfy orders for ICDA products. During the latter part of 1994, EMC
experienced difficulties in the performance of certain disk drives, which
required EMC to take certain remedial measures, including mirroring of drives
in selected systems. EMC is currently working with the vendor to correct these
problems and is also seeking alternative sources of supply. If such shortages
and/or performance problems were to intensify, EMC could lose some time-
sensitive customer orders and this could affect quarterly revenues.
Cost of Sales and Service. As a percentage of revenue, cost of sales amounted
to 47.9% in 1994, 48.7% in 1993 and 53.7% in 1992. The improvement in the cost
of sales percentage in 1994 and 1993 over 1992 was due primarily to continuing
increased sales of the higher margin Symmetrix series of products through EMC's
direct sales force. During 1994, EMC experienced some gross margin pressure in
the mainframe and midrange product markets primarily due to competitive pricing
pressures and the increased material costs associated with the need to
specially configure selected systems on a mirrored basis. EMC expects that
pricing pressures are likely to continue. Gross margins may be affected so long
as pricing pressures continue and/or EMC maintains its disk mirroring program.
Research and Development. R&D expenses were $117,922,000, $58,977,000, and
$33,591,000 in 1994, 1993 and 1992, respectively. As a percentage of revenue,
such expenses were 8.6%, 7.5% and 8.7% in 1994, 1993 and 1992, respectively.
Increases in R&D spending in 1994 and 1993 reflect additional purchases of
state-of-the-art CAE/CAD design tools and the cost of additional technical
staff and other costs associated with EMC's Open Systems Storage Group and the
Centriplex product. Increases in R&D spending in 1994 over 1993 also reflect
the costs of EMC's R&D facilities at Epoch beginning in the third quarter of
1993 and at Coperniqiue, Array and at EMC's subsidiary in Israel beginning in
the first quarter of 1994. EMC expects to continue to spend substantial amounts
for R&D in 1995.
Selling, General and Administrative. SG&A expenses increased by $86,543,000,
or 53% in 1994, $66,200,000, or 69% in 1993 and $19,567,000, or 26%, in 1992.
As a percentage of revenues, SG&A expenses were 18.1%, 20.8% and 25.0% in 1994,
1993 and 1992, respectively.
The dollar increases in all three years were due primarily to costs
associated with additional sales and support personnel, and related overhead
costs, both domestically and internationally, repaired to support the increased
revenue levels and EMC's initiative to expand its OEM and international
distribution programs. SG&A expenses are expected to increase in dollar terms
in 1995, approximately in proportion to growth in revenues.
Investment Income and Interest Expense. Investment income increased to
$21,619,000 in 1994 from $7,988,000 in 1993 and $3,830,000 in 1992. Income was
earned from investments in cash equivalents and long-term investments and from
sales-type leases of EMC's products. Investment income in 1994 increased due to
higher average cash and investment balances caused primarily by the
availability of funds from the issuance of the 4 1/4% Convertible Subordinated
Notes due 2001 (the "Notes") in December 1993 and January 1994. Investment
income in 1993 increased due to higher average cash and investment balances
caused primarily by the proceeds received from the sale of the Notes in
December 1993, the offering of EMC Common Stock in March 1993, and a full
year's availability of funds from the issuance of the Debentures in March 1992.
Interest expense increased to $15,311,000 in 1994 from $6,043,000 in 1993 and
$4,865,000 in 1992. The increase of $9,268,000 in 1994 from 1993 levels was due
primarily to the provision for interest payments due on the Notes throughout
1994.
Provision for Taxes. The provision for income taxes was $104,716,000 in 1994,
$52,534,000 in 1993 and $13,567,000 in 1992, which resulted in effective tax
rates of 29.5%, 29% and 32% in 1994, 1993 and 1992, respectively. The increase
in the effective tax rate in 1994 from 1993 is mainly attributable to a
decrease in tax credits. The decrease in the effective tax rate in 1993 from
1992 is mainly attributable to an increase of tax benefits from EMC's Irish
operations.
57
<PAGE>
See Note C of the Notes to Consolidated Financial Statements for a detailed
analysis of EMC's effective tax rates for 1994, 1993 and 1992.
Earnings Fluctuations. Due to (i) customers' tendencies to make purchase
decisions late in each fiscal quarter, (ii) the desire by customers to evaluate
new, more expensive products for longer periods of time, (iii) the timing of
product and technology announcements by EMC and its competitors, and (iv)
fluctuating currency exchange rates, EMC's period to period revenues and
earnings can fluctuate significantly.
Financial Position. At the end of the fiscal years 1994, 1993 and 1992, cash
and cash equivalents totaled $240,506,000, $345,300,000 and $62,103,000
respectively. In 1994, working capital increased by $83,465,000 from
$516,876,000 to $600,341,000. In 1993, working capital increased by
$367,541,000 from $149,335,000 to $516,876,000.
As of February 1, 1995, EMC had available for use its entire $65,000,000 of
credit lines. Based on its current operating and capital expenditure forecasts,
EMC believes funds currently available, funds generated from operations and its
available lines of credit will be adequate to finance its operations.
In February 1995, EMC notified holders of its Debentures that EMC intends to
redeem the Debentures on April 1, 1995, unless the holders choose to convert on
or prior to such date.
To date, inflation has not had a material impact on EMC's financial results.
Cash Flows. In 1994, cash and cash equivalents decreased by $104,794,000.
Cash provided by operating activities was $77,406,000. Balances in receivables,
inventory, payables and accrued expenses increased substantially associated
with EMC's growth. Net trade and notes receivable increased by $221,708,000
from 1993 to 1994 and inventory increased by $133,159,000 from 1993 to 1994.
Days Sales Outstanding was 76 at December 31, 1994. In 1994, $233,762,000 was
used by investing activities principally to fund additions to property, plant
and equipment of $108,968,000 and net increase in long-term investments of
$125,239,000. Cash provided by financing activities of $49,069,000 was
primarily from $29,350,000 in net proceeds from the January 1994 overallotment
of the offering of the Notes, and $9,596,000 from issuances of EMC's Common
Stock.
In 1993, cash and cash equivalents increased by $283,197,000, of which
$56,796,000 was provided by operating activities. Net income was $127,122,000
in 1993, an increase of $97,614,000 or 331% over 1992 and balances in
receivables, inventory, accounts payable and accrued expenses increased
associated with this growth. Net trade and notes receivable increased by
$73,252,000 and inventory increased by $60,937,000. $79,829,000 was used by
investing activities in 1993 mainly caused by additions to property, plant and
equipment of $51,303,000 and a net increase in long-term investments of
$29,100,000. $305,008,000 was provided by financing activities including
$194,987,000 net proceeds from the December 1993 offering of the Notes, and
$112,451,000 from issuances of EMC's Common Stock.
58
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of EMC are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard J. Egan............. 59 Chairman of the Board and Director
Michael C. Ruettgers........ 52 President, Chief Executive Officer and Director
John R. Egan................ 38 Executive Vice President, Sales and Director
Harold P. Ano............... 47 Senior Vice President, Marketing
Joel Beck................... 56 Senior Vice President, Worldwide Operations
L. Daniel Butler............ 57 Senior Vice President, Customer Service
Raymond Fortune............. 56 Senior Vice President, International Sales
Robert T. O'Connell......... 57 Senior Vice President, Chief Staff Officer
James B. Rothnie............ 46 Senior Vice President, Marketing
Neal M. Waddington.......... 48 Senior Vice President and General Manager, Open
Storage Group
Paul T. Dacier.............. 37 Vice President and General Counsel
Michael R. Grilli........... 56 Vice President, Strategic Accounts
Paul E. Noble, Jr. ......... 40 Vice President and General Manager, OEM
Operations
Colin G. Patteson........... 46 Vice President, Chief Financial Officer and
Treasurer
William J. Teuber........... 44 Vice President and Controller
W. Paul Fitzgerald.......... 55 Director
Joseph F. Oliveri........... 46 Director
Michael J. Cronin........... 57 Director
Maureen E. Egan............. 58 Director
John F. Cunningham.......... 52 Director
</TABLE>
Richard J. Egan is a founder of EMC and has served as a Director since EMC's
inception in 1979. He was elected Chairman of the Board of EMC in January 1988.
Prior to January 1988, he was also President of EMC. From 1979 to January 1992,
he was Chief Executive Officer of EMC. He is also a director of Cognition
Corporation, a CAD/CAM software supplier.
Michael C. Ruettgers served as Executive Vice President, Operations of EMC
from July 1988 to October 1989, when he became President. From September 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 EMC. Before joining EMC, he was Chief Operating Officer at
Technical Financial Services, Incorporated, a high technology consulting
company which he joined in February 1987. He is also a director of Cross Comm,
Inc., a manufacturer of computer network products, and Commonwealth Energy
Corp.
John R. Egan became Executive Vice President, Sales of EMC in January 1992
and was elected a Director in May 1992. Previously, he held several executive
positions with EMC, including Executive Vice President, International Sales and
Executive Vice President, Marketing.
Harold P. Ano joined EMC in April 1990 as Senior Vice President of Marketing.
Previously, he held several executive positions with Wang Laboratories, Inc., a
computer manufacturer, most recently as Senior Vice President and General
Manager of the Wang Microsystems Division. Mr. Ano has resigned from EMC
effective January 1996.
Joel Beck joined EMC in July 1995. Previously, he served in several executive
positions with Bull Electronics--U.S., a computer manufacturer, including Vice
President of U.S. manufacturing from 1987 to July 1993 and as President from
July 1993 to July 1995.
59
<PAGE>
L. Daniel Butler joined EMC in August 1990 as Vice President of Customer
Service and became Senior Vice President of Customer Service in February 1993.
Prior to joining EMC, Mr. Butler was the founder and President of DMX, Inc., an
electronic board assembling company, from October 1989 to August 1990. From
October 1987 to September 1989, he was Director of Logistics Planning at Data
General Corporation, a computer manufacturer.
Raymond Fortune joined EMC in July 1994 as Senior Vice President,
International Sales. From November 1989 to March 1991, Mr. Fortune was
Executive Vice President of Commercial Products, and from May 1993 to June 1994
he was Chief Operating Officer, at Kendall Square Research Corporation, a
computer manufacturer. From May 1991 to April 1993, Mr. Fortune was Chief
Executive Officer at Ultra Network Technologies, Incorporated, a high speed
networking products manufacturer.
Robert T. O'Connell joined EMC in July 1995. Previously, he held several
executive positions with General Motors Corporation, an automobile
manufacturer, including Senior Vice President from 1992 to 1994 and Chief
Financial Officer from 1988 to 1992.
James B. Rothnie joined EMC in October 1995. Previously, he was Vice
President of Software Development at Data General Corporation, a computer
manufacturer from October 1994 to October 1995. From 1987 to 1994, Mr. Rothnie
served in several executive capacities at Kendall Square Research Corporation,
a computer manufacturer, most recently as Executive Vice President.
Neal M. Waddington joined EMC in November 1994 as Senior Vice President and
General Manager of EMC's Open Storage Group. From May 1992 to October 1994, Mr.
Waddington was Vice President and General Manager of the Integrity Systems
Division of Tandem Computers Incorporated, a computer manufacturer. From
October 1991 to April 1992, Mr. Waddington was Vice President-Marketing and
President of North American Sales at Concurrent Computer Systems, a computer
manufacturer. From May 1990 to June 1991, he was Vice President of Marketing at
Sequent Computer Systems, a computer manufacturer. Previously, Mr. Waddington
held various senior-level positions at Sperry Computer Systems and Unisys,
computer manufacturers, in senior marketing, product development and division
general management positions.
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.
Michael R. Grilli has been Vice President of Strategic Accounts for EMC since
January 1995. From October 1993 to January 1995, he was Vice President--Sales,
Europe, Middle East and Africa for EMC. From January 1993 to September 1993, he
was Vice President, Europe and from October 1989 to December 1992, he was
Southern Area Manager for EMC.
Paul E. Noble, Jr. has been Vice President and General Manager of OEM
Operations at EMC from June 1992 to present. From June 1989 through May 1992 he
was a Vice President of Sales and from March 1987 to May 1989, he was Vice
President of Customer Service at EMC.
Colin G. Patteson joined EMC in January 1989 as European Controller. He has
been Chief Financial Officer and Treasurer of EMC since April 1995. In March
1991, he became Corporate Controller and in February 1993, he became Vice
President and Controller.
William J. Teuber joined EMC in August 1995 as Vice President and Controller.
From 1988 to August 1995, Mr. Teuber was a partner at Coopers & Lybrand,
L.L.P., an accounting firm.
W. Paul Fitzgerald has been a Director of EMC since March 1991. From January
1988 to March 1995, he was Senior Vice President, Finance and Administration
and Chief Financial Officer of EMC. From October 1991 to March 1995, Mr.
Fitzgerald was Treasurer of EMC.
60
<PAGE>
Joseph F. Oliveri has been a Director of EMC since March 1993. From March
1983 to the present, Mr. Oliveri has been President and Chief Executive Officer
of Interface Electronics Corporation, a distributor of a diversified group of
semiconductor, electronic component and subsystem component products.
Mr. Oliveri is a member of the Audit Committee and the Mergers and Acquisitions
Committee of EMC.
Michael J. Cronin has been a Director of EMC since May 1990. He was Chief
Financial Officer and President of Automatix, Inc., an industrial vision
systems manufacturer, from June 1984 to September 1990. He has been Chief
Executive Officer of Cognition Corporation from September 1987 to the present.
Mr. Cronin is also Chairman of the Board of Cognition Corporation. He is also a
Director of Leeman Labs, Inc., a manufacturer of analytical instruments for the
environmental and industrial markets. Mr. Cronin is a member of the Audit
Committee, the Executive Compensation and Stock Option Committee and the
Mergers and Acquisitions Committee of EMC.
Maureen E. Egan has been a Director of EMC since March 1993. She was one of
EMC's initial investors and its first employee. Mrs. Egan was employed in a
number of administrative capacities from the Company's inception in 1979 until
her retirement in 1985. Mrs. Egan is a founder and member of the Hopkinton
Technology for Education Trust, a non-profit organization in Hopkinton,
Massachusetts.
John F. Cunningham has been a Director of EMC since November 1991. He was a
consultant to EMC from January 1992 to December 1993. He has been Chairman and
Chief Executive Officer of Cunningham & Company, a corporation involved in
private investments and financial consulting from February 1989 to the present.
From July 1985 to January 1989 he was Chairman of the Board and Chief Executive
Officer of Computer Consoles, Inc., a manufacturer of computers and
telecommunications equipment. Prior to such time, Mr. Cunningham served in
various capacities at Wang Laboratories, Inc., a manufacturer of computers,
most recently as President and Chief Operating Officer and a Director. He is
also a Director of Computervision Corporation, a CAD/CAM software company. Mr.
Cunningham is a member of the Executive Compensation and Stock Option Committee
and the Mergers and Acquisitions Committee of EMC.
----------------
Richard J. Egan, Chairman of the Board and a Director of EMC, is the husband
of Maureen E. Egan, a Director of EMC. He also is the brother-in-law of W. Paul
Fitzgerald, a Director of EMC. W. Paul Fitzgerald is the brother of Maureen E.
Egan. John R. Egan, Executive Vice President, Sales and Marketing and a
Director of EMC is the son of Richard J. and Maureen E. Egan.
61
<PAGE>
EXECUTIVE COMPENSATION
The following table discloses compensation received by EMC's Chief Executive
Officer and the four remaining most highly paid executive officers for the
three fiscal years in the period ended December 31, 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
-------------------------- ------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS(#) COMPENSATION($)(2)
- --------------------------- ---- --------- ----------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Michael C. Ruettgers.... 1994 260,000 366,660 -- 2,000(2)
President, Chief Execu-
tive 1993 225,000 536,363 -- 2,000(2)
Officer and Director 1992 207,800 365,000 1,200,000 2,000(2)
Richard J. Egan......... 1994 260,000 366,660 -- 371,147(3)
Chairman of the Board 1993 225,000 536,363 -- 278,971(4)
and Director 1992 163,556 181,500 -- 2,000(2)
Frank M. Keaney......... 1994 175,000 293,250 -- 2,000(2)
Senior Vice President, 1993 175,000 383,116 100,000 2,000(2)
North American Sales 1992 156,600 297,100 -- 2,000(2)
W. Paul Fitzgerald...... 1994 165,000 214,560 -- 2,000(2)
Senior Vice President,
Finance and 1993 160,000 383,116 -- 2,000(2)
Administration and Di-
rector 1992 157,800 287,500 -- 2,000(2)
John R. Egan............ 1994 200,000 266,425 -- 2,000(2)
Executive Vice Presi-
dent, Sales 1993 175,000 490,389 -- 2,000(2)
and Director 1992 156,500 304,000 1,800,000 2,000(2)
</TABLE>
- --------
(1) Includes performance bonuses and commissions accrued in year of service
whether paid during year of service or in succeeding year.
(2) The amounts noted in this column were paid to each of the named executive
officers' accounts in the EMC 401K Plan.
(3) Includes the amount of $2,000 paid to Mr. Egan's account in the EMC 401K
Plan. Also includes $369,147 reflecting the present value of the economic
benefit to Mr. Egan of the non-term portion of the premium advanced, on a
non-interest bearing basis, by EMC during 1994 ($766,131) with respect to a
split-dollar insurance agreement (see "Certain Relationships and Related
Transactions" below for a description of such agreement), based on the
earliest possible date on which EMC may terminate the split dollar
agreement and receive back all funds advanced, which is August 16, 2002.
EMC did not pay any portion of the term life insurance portion of the
premium in 1994.
(4) Includes the amount of $2,000 paid to Mr. Egan's account in the EMC 401K
Plan. Also includes $276,971 reflecting the present value of the economic
benefit to Mr. Egan of the non-term portion of the premium advanced, on a
non-interest bearing basis, by EMC during 1993 ($611,439) with respect to
the split-dollar insurance agreement described in Note 3 above. EMC did not
pay any portion of the term life insurance portion of the premium in 1993.
62
<PAGE>
There were no option grants in fiscal 1994 to EMC's named executive officers.
The following table provides information on option exercises in fiscal 1994 by
EMC's named executive officers and the value of such officers' unexercised
options at December 31, 1994.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END (#) AT FISCAL YEAR END ($)(1)
------------------------- -------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael C. Ruettgers.... 300,876 5,722,743 -- 801,552 -- 16,193,192
Richard J. Egan......... -- -- -- -- -- --
Frank M. Keaney......... 20,000 208,100 -- 60,000 -- 909,300
John R. Egan............ 798,000 14,055,942 379,200 1,140,000 7,845,178 23,053,800
W. Paul Fitzgerald...... -- -- 353,200 60,000 7,306,250 1,239,960
</TABLE>
- --------
(1) Fiscal year ended December 31, 1994. The closing price of EMC Common Stock
on December 30, 1994 (which was the last trading day in 1994) on the NYSE
was $21.63 per share.
(2) The above options were granted under EMC's 1985 Stock Option Plan.
PRINCIPAL STOCKHOLDERS
Except as otherwise noted, the following table sets forth certain information
regarding EMC Common Stock owned on September 30, 1995 (i) by each person who
is known by EMC to own beneficially more than 5% of EMC Common Stock, (ii) by
each of EMC's directors owning EMC Common Stock, (iii) by each of the executive
officers named in the Summary Compensation Table above, and (iv) by all
directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OUTSTANDING SHARES
- ------------------------ --------------------- ------------------
<S> <C> <C>
Richard J. Egan(2).................... 11,750,080 5.4 %
Maureen E. Egan(3).................... 2,719,901 1.26
Michael J. Cronin..................... 19,000 *
John F. Cunningham(4)................. 48,000 *
John R. Egan(5)....................... 921,850 *
W. Paul Fitzgerald(6)................. 420,854 *
Joseph F. Oliveri..................... -0- *
Michael C. Ruettgers(7)............... 310,729 *
FMR Corp.(8).......................... 25,917,075 13.1
The Equitable Companies
Incorporated(9)...................... 10,105,005 5.1
All directors and officers as a group
(20 persons)(10)..................... 16,872,909 7.8
</TABLE>
- --------
* Less than 1%
(1) Except as otherwise noted, all persons have sole voting and investment
ownership with respect to their shares. All amounts shown in this column
include shares obtainable upon exercise of stock options exercisable
within 60 days from the date of this table.
(2) Excludes 3,082,551 shares held by Mr. Egan's wife, Maureen E. Egan, and
John R. Egan, as to which Mr. Egan disclaims beneficial ownership.
(3) Excludes 12,112,730 shares held by Mrs. Egan's husband, Richard J. Egan,
and John R. Egan, as to which Mrs. Egan disclaims beneficial ownership.
(4) Mr. Cunningham is deemed to own these shares by virtue of a currently
exercisable option to purchase these shares.
(5) John R. Egan is deemed to own 559,200 of these shares by virtue of
currently exercisable options to purchase these shares.
63
<PAGE>
(6) W. Paul Fitzgerald is deemed to own 60,000 of these shares by virtue of
currently exercisable options to purchase these shares.
(7) Excludes 3,900 shares owned by Mr. Ruettgers' children, as to which he
disclaims beneficial ownership.
(8) EMC has relied on the Schedule 13G of FMR Corp. dated February 13, 1995
for information relating to its share ownership. Of these shares, FMR
Corp. has the sole power to vote or direct the vote of 1,541,800 shares
and the sole power to dispose of or direct the disposition of 25,917,075
shares. The number of shares of EMC Common Stock beneficially owned by FMR
Corp. includes 2,612,248 shares of Common Stock resulting from the assumed
conversion of $8,000,000 principal amount of the Debentures.
(9) EMC has relied on the Schedule 13G filed jointly by The Equitable
Companies Incorporated ("Equitable"), Alpha Assurances I.A.R.D. Mutuelle,
Alpha Assurances Vie Mutuelle, AXA Assurances I.A.R.D. Mutuelle, AXA
Assurances Vie Mutuelle, Uni Europe Assurance Mutuelle and AXA dated
February 10, 1995 for information relating to their share ownership. Of
these shares, Equitable, through its subsidiaries, has the sole power to
vote or direct the vote of 9,547,605 shares and the sole power to dispose
of or direct the disposition of 10,105,005 shares. The number of shares of
EMC Common Stock beneficially owned by Equitable, through its
subsidiaries, includes 1,210,305 shares of EMC Common Stock resulting from
the assumed conversion of the Debentures.
(10) Includes 892,300 shares of EMC Common Stock beneficially owned by all
executive officers and directors as a group based upon stock options
exercisable within 60 days from the date of this table. Excludes shares as
to which the named individuals have disclaimed beneficial ownership as
described above. Also excludes shares held by Mr. Keaney, who resigned as
an executive officer of EMC as of December 31, 1994.
The address of all persons listed above, other than FMR Corp. and Equitable,
is c/o EMC Corporation, 171 South Street, Hopkinton, Massachusetts 01748. The
address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109. The
address of Equitable is 787 Seventh Avenue, New York, New York 10019.
COMPENSATION OF DIRECTORS
EMC compensates each director who is not an employee of EMC $10,000 per
annum, $2,000 for each regularly scheduled director's meeting attended and
$1,500 per annum for each committee on which they serve.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Michael J. Cronin and John F. Cunningham, non-employee directors, serve on
the Compensation Committee of EMC's Board of Directors. Richard J. Egan,
Chairman of the Board of EMC, is also a member of the Compensation Committee.
Richard J. Egan is a member of the Board of Directors of Cognition
Corporation. Michael J. Cronin, the Chief Executive Officer of Cognition
Corporation, serves as Chairman of the Compensation Committee of EMC.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1995, EMC rented the private airplane of Richard J. Egan and Maureen E.
Egan for use for EMC business trips and sales activities, for which payments
will aggregate approximately $206,860. Richard J. Egan is Chairman of the Board
of Directors of EMC and Maureen E. Egan is a Director of EMC.
In 1994, EMC retained the Thomas A. Fitzgerald Company to provide various
forms of corporate insurance and paid premiums of approximately $620,732.
Thomas A. Fitzgerald is the brother of W. Paul Fitzgerald, a Director of EMC
and of Maureen E. Egan, a Director of EMC and the brother-in-law of Richard J.
Egan, Chairman of the Board of Directors of EMC.
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In 1994, EMC purchased approximately $1,543,580 of electronic components from
Interface Electronics Corporation. Joseph F. Oliveri, a Director of EMC, is the
President and Chief Executive Officer of Interface Electronics Corporation.
In January 1993, EMC entered into a "split dollar" life insurance agreement
with the Egan Family Irrevocable Insurance Trust, for the benefit of the
Richard J. Egan family. Richard J. Egan is Chairman of the Board and Maureen E.
Egan is a Director of EMC. Under the agreement, premiums equivalent, in general
terms to the aggregate annual increase in the cash value of the policies will
be advanced by EMC to the Egan Family Irrevocable Insurance Trust and will be
required to be repaid to EMC (without interest) upon death or at such time as
the aggregate cash value of the fully funded policies equals EMC's total
premium advances. All EMC advances will be collateralized by the aggregate cash
value of the policies. In 1994, EMC paid $768,131 in premiums pursuant to this
agreement.
EMC believes that the terms of the arrangements described above were fair and
not less favorable to EMC than could have been obtained from unaffiliated
parties.
DESCRIPTION OF EMC CAPITAL STOCK
Currently, the total number of shares of all classes of capital stock which
EMC is authorized to issue is 525,000,000 shares, consisting of 500,000,000
shares of EMC Common Stock and 25,000,000 shares of preferred stock, $.01 par
value per share (the "EMC Preferred Stock").
EMC Common Stock. Holders of EMC Common Stock are entitled to one vote for
each share held and have no preemptive or other rights to subscribe for
additional shares from EMC. There are no cumulative voting rights, with the
result that holders of more than 50% of the shares of EMC Common Stock are able
to elect 100% of EMC's directors. All outstanding shares of EMC Common Stock
are validly issued, fully paid and nonassessable. Holders of EMC Common Stock
are entitled to such dividends as may be declared by the Board of Directors of
EMC out of funds legally available therefor. Upon any voluntary or involuntary
liquidation, dissolution or winding up of EMC, the holders of EMC Common Stock
are entitled to receive the net assets of EMC, after EMC shall have satisfied
or made provision for its debts and obligations and for the payment to holders
of shares of any class or series (including any then outstanding shares of EMC
Preferred Stock) having preferential rights to receive distributions of the net
assets of EMC.
The transfer agent and registrar for the EMC Common Stock is Boston Financial
Data Services, Inc.
EMC Preferred Stock. The shares of EMC Preferred Stock may be issued from
time to time in one or more series without further action by the stockholders
of EMC, except as may be required by applicable law or stock exchange rules.
The EMC Board may determine, in whole or in part, the preferences, voting
powers, qualifications and special or relative rights or privileges, if any, of
any such series before the issuance of any shares of that series, provided,
however, that if and to the extent that shares of any series have voting
rights, such rights shall not be in excess of the greater of (i) one vote per
share of such series or (ii) if the shares of such series are convertible into
shares of EMC Common Stock, such number of votes per share as equals the number
of shares of EMC Common Stock into which shares of such series is at the time
of such vote convertible. The EMC Board shall determine the number of shares
constituting each series of EMC Preferred Stock and each series shall have a
distinguishing designation.
It is not possible to state the precise effects of the authorization of the
EMC Preferred Stock upon the rights of holders of EMC Common Stock until the
EMC Board determines the respective preferences, limitations and relative
rights of the holders of one or more series of EMC Preferred Stock. However,
such effects might include (i) a reduction of the amount otherwise available
for payment of any dividends on EMC Common Stock, to the extent dividends are
payable on any issued shares of EMC Preferred Stock, and restrictions on
dividends on EMC Common Stock if dividends on outstanding EMC Preferred Stock
are in arrears; (ii) dilution of the voting power of the EMC Common Stock to
the extent that outstanding EMC
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Preferred Stock has voting rights; and (iii) the holders of EMC Common Stock
not being entitled to share in EMC's assets upon liquidation until satisfaction
of any liquidation preference granted to outstanding EMC Preferred Stock.
The EMC Preferred Stock might have the effect of discouraging an attempt by
another person or entity, through the acquisition of a substantial number of
shares of EMC Common Stock, to acquire control of EMC with a view to imposing a
merger, sale of all or any part of EMC's assets or a similar transaction or
otherwise to exercise such control, since the issuance of new shares of EMC
Preferred Stock could be used to dilute the stock ownership or voting rights of
such person or entity. Furthermore, shares of EMC Preferred Stock, or warrants
or other rights to acquire shares of EMC Preferred Stock or EMC Common Stock
could be issued to holders of the EMC Common Stock under a stockholders' rights
plan (or otherwise) on terms designed to enable stockholders to receive fair
and equal treatment in the event of any proposed acquisition of EMC. The
adoption of such a rights plan could make it more difficult for a third party
to acquire, or could discourage a third party from acquiring, EMC or a large
block of EMC Common Stock. Management is not aware of any effort by any person
to gain control of EMC. The EMC Board, however, has periodically over the past
four years, reviewed the advantages and disadvantages of adopting a
stockholders' rights plan. Although the EMC Board has considered, based upon
such review, that it may be in the best interests of EMC and its stockholders
to enact such a plan, the EMC Board has not decided to enact a stockholders'
rights plan as of the date of this Consent Solicitation/Prospectus.
EMC has no current agreements, commitments or understandings with respect to
the sale or issuance of the shares of EMC Preferred Stock.
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of certain of the material differences between the
rights of holders of EMC Common Stock and the rights of holders of McDATA
Capital Stock.
If the Merger is consummated, holders of McDATA Capital Stock will become
holders of EMC Common Stock. Upon consummation of the Merger, the rights of the
former McDATA stockholders will be governed by the laws of The Commonwealth of
Massachusetts, including the Massachusetts Business Corporation Law (the
"MBCL"), and will also be governed by the Restated Articles of Organization, as
amended, of EMC (the "EMC Articles") and the Amended and Restated Bylaws of EMC
(the "EMC Bylaws"). The rights of EMC shareholders under the EMC Articles, the
EMC Bylaws and the MBCL differ in certain respects from the rights of McDATA
stockholders under the McDATA Certificate of Incorporation, the Bylaws of
McDATA (the "McDATA Bylaws") and the laws of the State of Delaware, including
the DGCL. Certain differences between the rights of EMC stockholders and McDATA
stockholders are summarized below. While EMC believes that this summary covers
the material aspects of the information summarized therein, this summary does
not purport to be complete and is qualified in its entirety by reference to the
full text of such documents and the relevant statutory provisions.
SPECIAL MEETINGS OF STOCKHOLDERS
The DGCL provides that special meetings of stockholders may be called only by
the directors or by any other person or persons as may be authorized by the
corporation's certificate of incorporation or bylaws. The McDATA Bylaws provide
that special meetings may be called, at any time, by the President, the Board
of Directors, or the holders of not less than one-tenth ( 1/10th) of all shares
entitled to vote on the subject matter for which the special meeting is called.
The EMC Bylaws provide that special meetings of stockholders may be called by
the President at the direction of the Chairman of the Board, or a majority of
the Directors, and shall be called by the Clerk (or,
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in certain circumstances, any other officer) upon written application of
stockholders who hold eighty-five percent (85%) in interest of the capital
stock of EMC entitled to be voted at the proposed meeting. Under the MBCL,
special meetings of stockholders of a corporation with a class of voting stock
registered under the Exchange Act, unless otherwise provided in the articles of
organization or bylaws, must be called by the clerk (or, in certain
circumstances, any other officer) upon written application by stockholders who
hold at least forty percent (40%) in interest of the capital stock entitled to
vote thereat.
INSPECTION RIGHTS
Under the DGCL, every stockholder has a right to examine, in person or by
agent or attorney, during the usual hours for business, for any proper purpose
the corporation's stock ledger, a list of its stockholders and its other books
and records, and to make copies or extracts therefrom. In order to exercise the
foregoing right, a stockholder must submit a written demand to the corporation,
under oath, stating the purpose of the inspection. Upon refusal of the
corporation (or its agent or an officer of the corporation) to permit an
inspection demanded by a stockholder, or of a failure to reply to a
stockholder's demand within five business days after such demand has been made,
a stockholder may apply to the Court of Chancery to compel the inspection.
Where a stockholder seeks to have the Chancery Court compel an inspection of
the corporation's books and records, other than its stock ledger or list of
stockholders, the stockholder must first establish that it has complied with
the formal requirements of making a demand for inspection and that the
inspection is for a proper purpose. For purposes of this provision of the DGCL,
a "proper purpose" is one that is reasonably related to such person's interest
as a stockholder. The McDATA Bylaws provide that McDATA shall prepare a
complete list of stockholders entitled to vote at a given meeting, at least ten
(10) days before such meeting. Such list shall be open for examination by any
stockholder for any purpose germane to the relevant meeting, during regular
business hours, for a period of ten (10) days prior to such meeting.
The MBCL requires that every domestic corporation maintain in Massachusetts,
and make available for inspection by its stockholders, the original, or
attested copies of, the corporation's articles of organization, bylaws, records
of all meetings of incorporators and stockholders, and the stock and transfer
records listing the names of all stockholders and their record addresses and
the amount of stock held by each. The MBCL further provides that if any officer
or agent of a corporation having charge of such corporate records (or copies
thereof) refuses or neglects to exhibit them in legible form or to produce for
examination a list of stockholder names, record addresses and amount of stock
held by each, such officer or agent or the corporation will be liable to any
stockholder for actual damages sustained by reason of such refusal or neglect.
However, in an action for damages or a proceeding in equity under the foregoing
provision, it is a defense to such action that the actual purpose and reason
for the inspection being sought is to secure a list of stockholders or other
information for the purpose of selling the list or other information or of
using them for purposes other than in the interest of the person seeking them,
as a stockholder, relative to the affairs of the corporation. The foregoing
rights relating to inspection are deemed to include the right to copy materials
and to be represented by agent or counsel in exercising these rights. In
addition to the rights of inspection provided by the MBCL, a stockholder of a
Massachusetts corporation has a common law right to inspect additional
documents which, if such request is refused by the corporation, may be obtained
by petitioning a court for the appropriate order. In petitioning a court for
such an order, the granting of which is discretionary, the stockholder has the
burden of demonstrating (i) that he is acting in good faith and for the
purposes of advancing the interests of the corporation and protecting his own
interest as a stockholder and (ii) that the requested documents are relevant to
those purposes.
The EMC Bylaws provide that no stockholder shall have any right to examine
any property, or any books, accounts or writings of EMC upon a vote of the
Directors refusing such permission and stating that in the opinion of the
Directors such examination would be adverse to the interests of EMC. Such vote
shall be prima facie evidence that such examination would be adverse to the
interests of EMC. Every such examination shall also be subject to such
reasonable regulations as the Directors may establish.
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ACTION BY CONSENT OF STOCKHOLDERS
Under the DGCL, unless the certificate of incorporation provides otherwise,
any action required or permitted to be taken by stockholders at a meeting may
be taken without a meeting, without prior notice and without a vote, if the
stockholders having the number of votes that would be necessary to take such
action at a meeting at which all stockholders were present and voted, consent
to the action in writing and the written consents are filed with the records of
the meetings of stockholders. The McDATA Certificate of Incorporation does not
provide otherwise.
Under the MBCL, any action required or permitted to be taken by stockholders
at a meeting may be taken without a meeting if all stockholders entitled to
vote on the matter consent to the action in writing and the written consents
are filed with the records of the meetings of stockholders. A corporation may
not provide otherwise in its articles of organization or bylaws.
CUMULATIVE VOTING
Under the DGCL, a corporation may provide in its certificate of incorporation
for cumulative voting by stockholders in the election of directors. The McDATA
Certificate of Incorporation expressly provides that voting is not cumulative.
The MBCL has no cumulative voting provision, and the EMC Articles do not
provide for it.
DIVIDENDS AND STOCK REPURCHASES
Under the DGCL, a corporation generally is permitted to declare and pay
dividends out of surplus or out of net profits for the current and/or preceding
fiscal year, provided that the capital of the corporation is not less than the
aggregate amount of capital represented by the issued and outstanding stock of
all classes having a preference upon the distribution of assets. In addition,
under the DGCL a corporation may generally redeem or repurchase shares of its
stock if the capital of the corporation is not impaired and if such redemption
or repurchase will not impair the capital of the corporation. Under the DGCL,
the directors of a corporation are jointly and severally liable for negligently
or willfully making improper dividend payments, stock repurchases or
redemptions. Directors held to be liable pursuant to this provision of the DGCL
are entitled to be subrogated to the rights of the corporation against
stockholders receiving dividends on, or assets for the sale or redemption of,
their stock with knowledge that such dividend, repurchase or redemption was
unlawful.
Under the MBCL, the directors of a corporation will be jointly and severally
liable if a payment of dividends or a repurchase of a corporation's stock is
(i) made when the corporation is insolvent, (ii) renders the corporation
insolvent or (iii) violates the corporation's articles of organization.
Stockholders to whom a corporation makes any distribution (except a
distribution of stock of the corporation) if the corporation is, or is thereby
rendered, insolvent, are liable to the corporation for the amount of such
distribution made, or for the amount of such distribution which exceeds that
which could have been made without rendering the corporation insolvent, but in
either event only to the extent of the amount paid or distributed to them,
respectively. In such event, a stockholder who pays more than his proportionate
share of such distribution or excess shall have a claim for contribution
against the other stockholders.
The McDATA Certificate of Incorporation provides that holders of McDATA
Series A Preferred Stock and McDATA Series B Preferred Stock are entitled to
quarterly dividends in the amount of $0.1274 per share of McDATA Series A
Preferred Stock and $0.147 per share of McDATA Series B Preferred Stock (the
"Preferred Dividends"). The Preferred Dividends cumulate and accrue
automatically and all accrued but unpaid Preferred Dividends must be paid in
full before dividends may be paid in respect of any other class of McDATA
stock. Holders of McDATA Series A Preferred Stock and McDATA Series B Preferred
Stock are entitled to participate proportionally in any dividend declared on
any other class of McDATA stock.
The McDATA Certificate of Incorporation also provides that holders of McDATA
Class B Common Stock are entitled to an annual dividend in the amount of five
percent (5%) of a fraction, the numerator of
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which is the total consideration for which shares of McDATA Class B Common
Stock were issued during the relevant fiscal year and the denominator of which
is the total number of shares of McDATA Class B Common Stock issued during such
fiscal year (the "Class B Common Dividends"). The Class B Common Dividends are
not cumulative and accrue only at the election of the McDATA Board. All accrued
but unpaid Class B Common Dividends must be paid in full before dividends may
be paid in respect of McDATA Class A Common Stock. Holders of McDATA Class B
Common are entitled to participate proportionally in any dividend declared on
McDATA Class A Common Stock.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The DGCL permits (but does not require) classification of a corporation's
board of directors into one, two or three classes. Neither the McDATA Articles
nor the McDATA Bylaws provide for a classified board, and all members of the
McDATA Board are elected annually.
The MBCL requires classification of a public corporation's board of directors
into three classes (each having a three year term) and imposes certain other
obligations, unless the directors of such public corporation elect by vote to
be exempt from such requirement or the stockholders of such public corporation,
at a meeting duly called for such purpose, elect to be exempt from such
requirement by a vote of two-thirds of each class of stock outstanding. The EMC
Board elected to be exempt from such requirement by board resolutions dated
April 12, 1990. Subsequently, the EMC Board opted to be subject to the
classification provisions of the MBCL, by board resolutions dated February 11,
1994. The EMC Board is currently classified in accordance with the provisions
of the MBCL.
REMOVAL OF DIRECTORS
Under the DGCL stockholders may generally remove directors with or without
cause by majority vote; however, stockholders may remove members of a
classified board only for cause, unless the certificate of incorporation
provides otherwise. The McDATA Bylaws provide that any one or all of the
directors may be removed, with or without cause, by the holders of a majority
of the shares then entitled to vote at an election of directors, except that
directors elected by the holders of a particular class or series of stock may
be removed without cause only by a majority vote of the holders of the
outstanding shares of such class or series. Delaware law does not permit
directors to remove other directors.
Under the MBCL, in the case of a public company such as EMC, which has not
elected to be exempt from the provision of the MBCL that requires a classified
board, directors may be removed by the stockholders only for cause by the
affirmative vote of a majority of the shares entitled to vote in the election
of directors.
VACANCIES ON THE BOARD OF DIRECTORS
Under the DGCL, unless otherwise provided in the certificate of incorporation
or bylaws, vacancies on the board of directors and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a vote of the majority of directors then in office, even though less than a
quorum. The DGCL also provides that where directors are elected by classes or
series of stock, vacancies are to be filled by the remaining directors elected
by the class or series in whose directorships the vacancy occurs. The McDATA
Bylaws provide that if, at the time of filling any vacancy or newly created
directorship, the directors then in office shall constitute less than a
majority of the whole board (as measured prior to the vacancy or newly created
directorship), a stockholder or stockholders holding at least ten percent (10%)
of the total number of shares at the time outstanding having the right to vote
in the election of directors, may petition the Court of Chancery to summarily
order an election to fill such vacancies or newly created directorships, or to
replace the directors chosen by the directors then in office.
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The MBCL provides that in the case of a classified board (such as EMC's), any
vacancy in the board of directors, including a vacancy resulting from the
enlargement of the board of directors, shall be filled solely by the
affirmative vote of a majority of the directors then in office, even though
less than a quorum.
EXCULPATION OF DIRECTORS
The DGCL permits a corporation to provide in its certificate of incorporation
that a director shall not be personally liable for monetary damages stemming
from breaches of fiduciary duties. Under the DGCL, a charter provision limiting
directorial liability cannot relieve a director of personal liability for (i)
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payment of
dividends or unlawful repurchases or redemptions of stock or, (iv) any
transactions from which the director derived an improper personal benefit.
In Massachusetts, a corporation's articles of organization may limit the
personal liability of its directors for breaches of their fiduciary duties.
However, under the MBCL, this limitation is generally unavailable for acts or
omissions by a director which (i) were in violation of such director's duty of
loyalty, (ii) were in bad faith or which involved intentional misconduct or a
knowing violation of law or (iii) involved a financial profit or other
advantage to which the director was not legally entitled. The MBCL also
prohibits the elimination or limitation of director liability for unauthorized
loans to insiders or distributions which occur when a corporation is, or which
renders a corporation, insolvent.
The McDATA Certificate of Incorporation and the EMC Articles provide for
limitations on directors' liability as permitted by the DGCL and the MBCL,
respectively.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
Both the DGCL and the MBCL generally permit indemnification of directors,
officers, employees and certain others for expenses incurred by them by reason
of their position with the corporation, if such person has acted in good faith
and with the reasonable belief that his or her conduct was in the best interest
of the corporation. However, unlike the MBCL, the DGCL does not permit a
corporation to indemnify persons against judgments in actions brought by or in
the right of the corporation (although it does permit indemnification in such
situations if approved by the Delaware Court of Chancery and for expenses
related to such actions). In Delaware, any indemnification shall be made by a
corporation only as authorized in a specific case upon a determination that the
indemnified person has met the required standard of conduct by: (i) a majority
vote of the directors not party to the relevant action, even though less than a
quorum, or if there are no such directors, or if the directors so direct, by
independent legal counsel in a written opinion, or (ii) by the stockholders.
Under the MBCL, indemnification may be provided for in a corporation's articles
of organization, bylaws adopted by stockholders or by a vote of stockholders
entitled to vote in the election of directors.
McDATA's Bylaws provide that McDATA shall indemnify any director, officer or
trustee to the fullest extent permitted by Section 145 of the DGCL. McDATA's
obligations to provide indemnification are to be offset to the extent of any
other source of indemnification or any otherwise applicable insurance coverage
under a policy maintained by the corporation or any other person.
The EMC Bylaws provide that EMC shall, to the extent legally permissible,
indemnify each of its directors and officers (including persons who were acting
at its request as directors, officers or trustees of another organization or in
any capacity with respect to any employee benefit plan) against all liabilities
and expenses, including amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and counsel fees, reasonably incurred by
him in connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened; provided, however, that as to any matter disposed
of by a compromise payment by such director or officer,
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pursuant to a consent decree or otherwise, no indemnification either for said
payment or for any other expenses shall be provided unless such compromise
shall be approved as in the best interests of the corporation, after notice
that it involves such indemnification: (i) by a disinterested majority of the
directors then in office; or (ii) by a majority of the disinterested directors
then in office, provided that there has been obtained an opinion in writing of
independent legal counsel to the effect that such director or officer appears
to have acted in good faith in the reasonable belief that his action was in the
best interests of the corporation; or (iii) by the holders of a majority of the
outstanding stock at the time entitled to vote for directors, voting as a
single class, exclusive of any stock owned by any interested director or
officer.
INTERESTED DIRECTOR TRANSACTIONS
The DGCL provides that no transaction between a corporation and one or more
of its directors or officers, or an entity in which one or more of its
directors or officers are directors or officers or have a financial or other
interest, shall be void or voidable solely for that reason, nor will such a
transaction be void or voidable solely because the director or officer is
present at or votes at the meeting of the board of directors or committee which
authorizes the transaction or solely because his or her votes are counted for
such purpose, provided that (i) the material facts as to the relationship or
interest and as to the transaction are disclosed or are known to the board of
directors or a committee and the board or committee authorizes the transaction
by the affirmative vote of a majority of the disinterested directors even
though the disinterested directors number less than a quorum, (ii) the material
facts as to the interested director's or officer's relationship or interest and
as to the transaction are disclosed or are known to the stockholders entitled
to vote thereon and the transaction is specifically approved in good faith by
vote of those stockholders or (iii) the transaction is fair as to the
corporation as of the time it is authorized, approved or ratified by the board
of directors or committee or the stockholders. The DGCL permits common or
interested directors to be counted in determining the presence of a quorum at a
meeting of the board or of a committee that authorizes an interested director
or officer transaction.
The McDATA Bylaws substantially restate the foregoing provisions of Delaware
law.
The MBCL contains no provision comparable to that of the DGCL; however, the
EMC Articles provide that, in the absence of fraud, any director, officer or
stockholder individually (or any individual having any interest in any concern
which is a stockholder of EMC, or any concern in which any of such directors,
officers, stockholders or individuals has any interest) may be a party to, or
may be pecuniarily or otherwise interested in, any contract, transaction or
other act of EMC and (i) such contract, transaction or act shall not be in any
way invalidated or otherwise affected by that fact, (ii) no such director,
officer, stockholder or individual shall be liable to account to EMC for any
profit or benefit realized through any such contract, transaction or act and
(iii) any such director of EMC may be counted in determining the existence of a
quorum at any meeting of the directors or of any committee thereof which shall
authorize any such contract, transaction or act, and may vote to authorize the
same; provided, however, that any contract, transaction or act in which any
director or officer of EMC is so interested individually or as a director,
officer, trustee or member of any concern which is not a subsidiary or
affiliate of, or in which any directors or officers are so interested as
holders, collectively, of a majority of shares of capital stock or other
beneficial interest at the time outstanding in any concern which is not a
subsidiary or affiliate of EMC, shall be duly authorized or ratified by a
majority of the directors who are not so interested, to whom the nature of such
interest has been disclosed.
The EMC Articles further provide that, to the extent permitted by law, the
authorizing or ratifying vote of the holders of a majority of the shares of
each class of the capital stock of EMC outstanding and entitled to vote for
directors at any meeting duly called for that purpose shall validate any
contract, transaction or act of EMC, or of the Board of Directors or any
committee thereof, with regard to all stockholders of EMC, whether or not of
record at the time of such vote, and with regard to all creditors and other
claimants under EMC; provided, however, that the nature of such contracts,
transactions or acts and the interests of any director, officer or stockholder
therein shall be summarized in the notice of any such meeting, or in a
statement or letter accompanying such notice, and shall be fully disclosed at
any such meeting; and any failure
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of the stockholders to authorize or ratify such contract, transaction or act
shall not be deemed in any way to invalidate the same or to deprive this
corporation, its directors, officers or employees of its or their right to
proceed with such contract, transaction or act.
LIQUIDATION PREFERENCES
Upon liquidation of McDATA each holder of McDATA Series A Preferred Stock and
McDATA Series B Preferred Stock is entitled to receive an amount equal to $1.82
per share and $2.10 per share, respectively, plus all accrued and unpaid
Preferred Dividends before any payment can be made to the holders of any other
class of McDATA stock.
Holders of McDATA Class B Common Stock are entitled, following payment of the
foregoing amounts to the holders of McDATA Series A Preferred Stock and McDATA
Series B Preferred Stock, to an amount per share equal to (i) the greater of,
(a) a fraction, the numerator of which is the total consideration received by
McDATA for the outstanding shares of McDATA Class B Common Stock and the
denominator of which is the total number of McDATA Class B Common Shares
outstanding, or (b) $2.10, plus (ii) all accrued but unpaid Class B Common
Dividends.
Holders of McDATA Class A Common Stock are entitled, upon liquidation, and
upon payment of the foregoing preferential amounts, to receive $2.10 per share
plus all accrued and unpaid dividends. Any assets of McDATA remaining after
payment of the preceding amounts to holders of McDATA Capital Stock, are to be
distributed pro rata among all McDATA stockholders.
FUNDAMENTAL TRANSACTIONS
The DGCL generally requires that mergers and consolidations, and sales,
leases or exchanges of all or substantially all of a corporation's property and
assets be approved by the directors and by a vote of the holders of a majority
of the outstanding stock entitled to vote, though a corporation's certificate
of incorporation may require a greater-than-majority vote. Under the DGCL, a
surviving corporation need not have stockholder approval for a merger if, (i)
each share of the surviving corporation's stock, outstanding prior to the
merger, remains outstanding in identical form after the merger, (ii) there is
no amendment to its certificate of incorporation and (iii) the consideration
going to stockholders of the non-surviving corporation is not common stock (or
securities convertible into common stock) of the surviving corporation or, if
it is such stock or securities convertible into such stock, the aggregate
number of common shares actually issued or delivered, or initially issuable
upon conversion does not exceed twenty percent (20%) of the shares of the
survivor's common stock outstanding immediately prior to the effective date of
the merger. The McDATA Certificate of Incorporation provides that McDATA shall
not consolidate with or merge into any other corporation or permit any other
corporation to merge into or sell substantially all of its assets to McDATA, or
sell, lease, transfer or otherwise dispose of all or substantially all of its
assets, without the consent of the holders of at least 66 2/3% of the shares of
McDATA Series A Preferred Stock and McDATA Series B Preferred Stock, voting
together as a single class.
The MBCL generally requires approval of mergers and consolidations and sales,
mortgages, leases or exchanges of all or substantially all of a corporation's
property by a vote of two-thirds of the shares of each class of stock
outstanding and entitled to vote thereon, except that (i) the articles of
organization may provide (which the EMC Articles do not) for a vote of a lesser
proportion but not less than a majority of each such class and (ii) unless
required by the corporation's articles of organization (which the EMC Articles
do not), an agreement providing for a merger need not be submitted to the
stockholders of a corporation surviving a merger but may be approved by vote of
its directors if (a) the agreement of merger does not change the name, the
amount of shares authorized of any class of stock or other provisions of the
articles of organization of such corporation, (b) the authorized unissued
shares or shares held in the treasury of such corporation of any class of stock
of such corporation to be issued or delivered pursuant to the agreement of
merger do not exceed fifteen percent (15%) of the shares of such corporation of
the same class outstanding immediately
72
<PAGE>
prior to the effective date of the merger, and (c) the issue by vote of the
directors of any unissued stock to be issued pursuant to the agreement of
merger has been authorized in accordance with the provision of the MBCL
governing the issue of authorized but unissued capital stock.
AMENDMENTS TO CHARTER
Under the DGCL, charter amendments require the approval of the board of
directors and both a general vote of a majority of all outstanding shares
entitled to vote thereon, and a class vote of a majority of outstanding shares
of each class entitled to vote as a class. In addition, Delaware law requires a
class vote when, among other things, an amendment will adversely affect the
powers, preferences or special rights of a particular class of stock. The
McDATA Certificate of Incorporation provides that holders of 66 2/3% of the
shares of McDATA Series A Preferred Stock and McDATA Series B Preferred Stock,
voting together as a single class, must approve all amendments to the McDATA
Certificate of Incorporation which would alter the preferences, rights,
privileges, powers or restrictions benefitting such holders or which would
authorize, create or issue shares of any security having any preference or
priority as to dividends or assets on a parity with or superior to any
preferences or priorities of McDATA Series A Preferred Stock or McDATA Series B
Preferred Stock.
Under the MBCL, a majority vote of each class of stock outstanding and
entitled to vote thereon is required to authorize an amendment of the articles
of organization effecting one or more of the following: (i) an increase or
reduction of the capital stock of any authorized class, (ii) a change in the
par value of authorized shares with par value, or any class thereof, (iii) a
change of authorized shares (or any class thereof) from shares with par value
to shares without par value, or from shares without par value to shares with
par value, (iv) certain changes in the number of authorized shares (or any
class thereof) or (v) a corporate name change. Subject to certain conditions, a
two-thirds vote of each class of stock outstanding and entitled to vote thereon
is required to authorize any other amendment of the articles of organization,
or, if the articles of organization so provide (and the EMC Articles do not), a
vote of a lesser proportion but not less than a majority of each class of stock
outstanding and entitled to vote thereon. If any amendment requiring a two-
thirds vote would adversely affect the rights of any class or series of stock,
a two-thirds vote of such class voting separately, or a two-thirds vote of such
series, voting together with any other series of the same class adversely
affected in the same manner, is also necessary to authorize such amendment.
AMENDMENTS TO BYLAWS
Both Delaware and Massachusetts law provide that stockholders may amend a
corporation's bylaws and, if so provided in its charter, the board of directors
may also have this power. Under the DGCL, the power to adopt, amend or repeal
bylaws lies in the stockholders entitled to vote; provided, however, that any
corporation may, in its certificate of incorporation, confer the power to
adopt, amend or repeal bylaws upon the directors. Under the MBCL, the power to
make, amend or repeal bylaws also lies in the stockholders entitled to vote;
provided, that if authorized by the articles of organization, the bylaws may
provide that the directors may also make, amend or repeal the bylaws, except
with respect to any provision which by law, the articles of organization or the
bylaws requires action by the stockholders.
The McDATA Certificate of Incorporation and the McDATA Bylaws provide that
the Board of Directors may adopt, alter, amend or repeal bylaws by a majority
vote of the directors present at any meeting at which a quorum is present.
However, the McDATA Certificate of Incorporation provides that holders of 66
2/3% of the shares of McDATA Series A Preferred Stock and McDATA Series B
Preferred Stock, voting together as a single class, must approve all amendments
to the McDATA Bylaws which would alter the preferences, rights, privileges,
powers or the restrictions benefitting such holders or which would authorize,
create or issue shares of any security having any preference or priority as to
dividends or assets on a parity with or superior to any preferences or
priorities of McDATA Series A Preferred Stock or McDATA Series B Preferred
Stock. The McDATA Bylaws also expressly recognize the right of the stockholders
to adopt, alter, amend or repeal bylaws, upon a majority vote of the issued and
outstanding stock entitled to vote at a meeting of the stockholders.
73
<PAGE>
The EMC Articles provide that the EMC Board of Directors, as well as the
stockholders, may amend or repeal EMC's Bylaws to the extent permitted by law.
EMC's Bylaws provide that any alteration, amendment or repeal of a bylaw by the
Board may be amended or repealed by the stockholders. The EMC Bylaws further
provide that the Board of Directors may not take any action which provides for
the indemnification of directors or which would alter the EMC Bylaw provisions
relating to amendments to the Bylaws.
APPRAISAL RIGHTS
Under the DGCL, appraisal rights are available to dissenting stockholders in
connection with a statutory merger or consolidation in certain specified
situations. Appraisal rights are not available under the DGCL when a
corporation is to be the surviving corporation and no vote of its stockholders
is required in order to approve the merger. In addition, unless otherwise
provided in a corporation's charter, no appraisal rights are available under
the DGCL to holders of shares of any class of stock which is either: (a) listed
on a national securities exchange or designated as a national market system
security on an inter-dealer quotation system by the National Association of
Securities Dealers, Inc. or (b) held of record by more than 2,000 stockholders,
unless such stockholders (in (a) or (b)) are required by the terms of the
merger to accept in exchange for their shares anything other than: (i) shares
of stock of the surviving corporation; (ii) shares of stock of another
corporation which are or will be listed on a national securities exchange or
designated as a national market system security on an inter-dealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 stockholders; (iii) cash in lieu of fractional shares
of such stock; or (iv) any combination thereof. Appraisal rights are not
available under the DGCL in the event of the sale, lease or exchange of all or
substantially all of a corporation's assets or the adoption of an amendment to
its certificate of incorporation, unless such rights are granted in the
certificate of incorporation. The McDATA Certificate of Incorporation does not
grant such rights.
Under the MBCL, a properly dissenting stockholder is entitled to receive the
appraised value of his shares when the corporation votes (i) to sell, lease, or
exchange all or substantially all of its property and assets, (ii) to adopt an
amendment to its articles of organization which adversely affects the rights of
the stockholder, or (iii) to merge or consolidate with another corporation,
unless a vote of the stockholders was not required to approve such merger or
consolidation.
For a more complete discussion of the appraisal rights of holders of McDATA
Capital Stock in the Merger see "THE MERGER--Appraisal Rights."
"ANTI-TAKEOVER" STATUTES
Business Combination Statutes. Delaware's "business combination" statute is
substantially similar to its Massachusetts counterpart. However, whereas the
DGCL provides that, if a person acquires 15% or more of the stock of a Delaware
corporation without the approval of the board of directors of that corporation,
he may not engage in certain transactions with the corporation for a period of
three years, in Massachusetts, the threshold is only 5%, with certain persons
being excluded. Both the Delaware and Massachusetts statutes include certain
exceptions to this prohibition. If for example, the board of directors approves
the stock acquisition or the transaction prior to the time that the person
becomes an interested stockholder, or if the interested stockholder acquires
85% (in the Delaware statute) or 90% (in the Massachusetts statute) of the
voting stock of the corporation (excluding voting stock owned by directors who
are also officers and certain employee stock plans) in one transaction, or if
the transaction is approved by the board of directors and by the affirmative
vote of two-thirds of the outstanding voting stock which is not owned by the
interested stockholder, then the prohibition on business combinations is not
applicable. McDATA is not currently subject to the Delaware business
combination statute since its stock is not listed on a national securities
exchange, is not authorized for quotation "over-the-counter" by a registered
national securities dealer association and is not held by more than 2,000
stockholders. As is permitted by Massachusetts Law, EMC (through an appropriate
bylaw provision) has elected not to be governed by the Massachusetts business
combination statute.
74
<PAGE>
Control Share Acquisition Statute. Under the Massachusetts control share
acquisition statute for Massachusetts corporations, a person who acquires
beneficial ownership of shares of stock of a corporation in a threshold amount
equal to or greater than one-fifth, one-third, or a majority of the voting
stock of the corporation (a "control share acquisition"), must obtain the
approval of a majority of shares entitled to vote generally in the election of
directors (excluding (i) any shares owned by such person acquiring or proposing
to acquire beneficial ownership of shares in a control share acquisition, (ii)
any shares owned by any officer of the corporation and (iii) any shares owned
by any employee of the corporation who is also a director of the corporation)
in order to vote the shares that such person acquires in crossing the foregoing
thresholds. The statute does not require that such person consummate the
purchase before the stockholder vote is taken.
The Massachusetts Control Share Acquisition statute permits, to the extent
authorized by a corporation's articles of organization or bylaws, redemption of
all shares acquired by an acquiring person in a control share acquisition for
fair value (which is to be determined in accordance with procedures adopted by
the corporation) if (i) no control acquisition statement is delivered by the
acquiring person or (ii) a control share acquisition statement has been
delivered and voting rights were not authorized for such shares by the
stockholders in accordance with applicable law.
The Massachusetts Control Share Acquisition statute permits a Massachusetts
corporation to elect not to be governed by the statute's provisions, by
including a provision in the corporation's articles of organization or bylaws
pursuant to which the corporation opts out of the statute. The EMC Bylaws
contain an opt-out provision but give EMC the power to redeem shares acquired
in a control share acquisition, if the Massachusetts Control Share Acquisition
statute becomes applicable to EMC.
----------------
The foregoing summary does not purport to be a complete statement of the
rights of holders of EMC Common Stock and McDATA Capital Stock under, and is
qualified in its entirety by reference to, the DGCL, MBCL and the respective
charters and bylaws of EMC and McDATA.
LEGAL MATTERS
The legality of the shares of EMC Common Stock to be issued in connection
with the Merger and certain other legal matters in connection with the Merger
will be passed upon for EMC by Skadden, Arps, Slate, Meagher & Flom, Boston,
Massachusetts and New York, New York. Certain legal matters in connection with
the Merger will be passed upon for McDATA by Ireland, Stapleton, Pryor &
Pascoe, P.C., Denver, Colorado.
EXPERTS
The consolidated financial statements of McDATA as of December 30, 1994 and
December 31, 1993 and for each of the three years ended in the period ended
December 30, 1994 included in this Consent Solicitation/Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on authority of said firm as experts in auditing and
accounting.
The consolidated balance sheets of EMC as of December 31, 1994 and January 1,
1994 and the consolidated statements of income, retained earnings and cash
flows for each of the three years in the period ended December 31, 1994 and the
related financial statements schedule included in this Consent Solicitation/
Prospectus have been included herein in reliance on the report of Coopers &
Lybrand, L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
75
<PAGE>
INDEX TO FINANCIAL STATEMENTS
MCDATA CORPORATION
<TABLE>
<S> <C>
Consolidated Financial Statements
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheet at September 29, 1995 (unaudited), December
31, 1994 and December 31, 1993.......................................... F-3
Consolidated Statement of Operations for the nine months ended September
29, 1995 and September 30, 1994 (unaudited) and the years ended December
30, 1994, December 31, 1993 and December 25, 1992....................... F-4
Consolidated Statement of Cash Flows for the nine months ended September
29, 1995 and September 30, 1994 (unaudited) and the years ended December
30, 1994, December 31, 1993 and December 25, 1992....................... F-5
Consolidated Statement of Changes in Common Stock and other Stockholders'
Equity for the nine months ended September 29, 1995 (unaudited), and the
years ended December 30, 1994, December 31, 1993 and December 25, 1992.. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
EMC CORPORATION
<TABLE>
<S> <C>
Audited Consolidated Financial Statements
Report of Independent Accountants....................................... F-16
Consolidated Balance Sheets at December 31, 1994 and January 1, 1994.... F-17
Consolidated Statements of Operations for the years ended December 31,
1994, January 1, 1994 and January 2, 1993.............................. F-18
Consolidated Statements of Cash Flows for the years ended December 31,
1994, January 1, 1994 and January 2, 1993.............................. F-19
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, January 1, 1994 and January 2, 1993................. F-20
Notes to Consolidated Financial Statements.............................. F-21
Unaudited Consolidated Interim Financial Statements
Consolidated Balance Sheets at September 30, 1995 and December 31, 1994
(audited).............................................................. F-35
Consolidated Statements of Operations for the three and nine months
ended September 30, 1995 and October 1, 1994........................... F-36
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1995
and October 1, 1994.................................................... F-37
Notes to Interim Consolidated Financial Statements...................... F-38
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of McDATA Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows, and of changes in common
stock and other stockholders' equity present fairly, in all material respects,
the financial position of McDATA Corporation and its subsidiaries at December
30, 1994 and December 31, 1993, and the results of their operations and their
cash flows for each of the three years in the period ended December 30, 1994,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Boulder, Colorado
April 19, 1995
F-2
<PAGE>
MCDATA CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 29, DECEMBER 30, DECEMBER 31,
1995 1994 1993
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $29,528 $ 9,324 $ 2,802
Short-term investments.................. 6,021 -- --
Accounts receivable, net of allowance
for doubtful accounts of $191 in 1995
(unaudited), $338 in 1994 and $700 in
1993................................... 18,155 12,129 6,273
Inventories, net........................ 5,409 4,389 2,779
Evaluation equipment, net of accumulated
depreciation of $34 in 1995
(unaudited), $21 in 1994 and $50 in
1993................................... 66 21 363
Deferred income tax benefit............. 1,944 4,259 --
Prepaid expenses........................ 415 224 249
------- ------- -------
Total current assets................ 61,538 30,346 12,466
Property and equipment, net of
accumulated depreciation............... 2,838 2,459 2,717
Field spares, net of accumulated
depreciation and reserves of $357 in
1995 (unaudited), $619 in 1994 and $857
in 1993................................ -- -- 981
Other assets, net....................... 272 627 1,487
------- ------- -------
$64,648 $33,432 $17,651
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt......................... -- $ 2,986 --
Accounts payable........................ $ 1,217 5,109 $ 2,295
Accrued liabilities..................... 3,835 3,773 3,843
Income tax payable, net................. 2,458 746 399
------- ------- -------
Total current liabilities........... $ 7,510 $12,614 $ 6,537
Obligations under capital leases due
after one year......................... 278 102 251
Mandatorily redeemable preferred stock:
Stated value.......................... 2,405 2,405 2,405
Accrued dividends..................... 42 340 172
------- ------- -------
2,447 2,745 2,577
Commitments
Common stock and other stockholders'
equity:
Common stock, Class B, $.001 par
value; 1,500,000 shares authorized,
220,613, 129,433 and 127,893 shares
issued in 1995 (unaudited), 1994 and
1993, respectively; liquidation
preference $531 (unaudited)............ -- -- --
Common stock, Class A, $.001 par
value; 10,000,000 shares authorized,
3,237,718, 2,754,300 and 2,745,736
issued in 1995 (unaudited), 1994 and
1993, respectively................... 4 3 3
Capital-in-excess of par.............. 2,757 2,176 2,165
Retained earnings..................... 51,928 16,041 6,481
Treasury stock, 17,473, 12,270 shares
and 10,902 shares of Class B in 1995
(unaudited), 1994 and 1993,
respectively; 83,782, 83,543 and
99,206 shares of Class A in 1995
(unaudited), 1994 and 1993,
respectively......................... (276) (249) (363)
------- ------- -------
Total Common Stock and Other
Stockholders' Equity............... 54,413 17,971 8,286
------- ------- -------
$64,648 $33,432 $17,651
======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
MCDATA CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
--------------------------- --------------------------------------
SEPTEMBER 29, SEPTEMBER 30, DECEMBER 30, DECEMBER 31, DECEMBER 25,
1995 1994 1994 1993 1992
------------- ------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................. $113,609 $15,678 $43,431 $34,390 $40,234
Cost of revenue......... 49,146 8,592 22,260 19,036 21,406
Research and product de-
velopment costs........ 6,977 7,026 10,137 9,815 10,718
Sales, general, adminis-
trative and other ex-
penses................. 3,766 3,392 4,963 12,470 13,541
-------- ------- ------- ------- -------
Income (loss) from oper-
ations................. 53,720 (3,332) 6,071 (6,931) (5,431)
Interest income (ex-
pense), net............ 643 (19) 6 197 166
-------- ------- ------- ------- -------
Income (loss) before in-
come taxes............. 54,363 (3,351) 6,077 (6,734) (5,265)
Income tax expense (ben-
efit).................. 18,350 -- (3,732) (150) (665)
-------- ------- ------- ------- -------
Net income (loss)....... 36,013 (3,351) 9,809 (6,584) (4,600)
Dividend requirements on
mandatorily redeemable
preferred stock........ 126 126 168 172 285
-------- ------- ------- ------- -------
Income (loss) available
for common stock....... $ 35,887 $(3,477) $ 9,641 $(6,756) $(4,885)
======== ======= ======= ======= =======
Net income (loss) per
common share........... $ 7.99 $ (1.26) $ 2.43 $ (2.44) $ (1.77)
======== ======= ======= ======= =======
Weighted average common
shares and equivalents. 4,506 2,766 4,031 2,771 2,760
======== ======= ======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
MCDATA CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
--------------------------- --------------------------------------
SEPTEMBER 29, SEPTEMBER 30, DECEMBER 30, DECEMBER 31, DECEMBER 25,
1995 1994 1994 1993 1992
------------- ------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operat-
ing activities:
Net income (loss)..... $36,013 $(3,351) $ 9,809 $(6,584) $(4,600)
Adjustments to recon-
cile net income
(loss) to net cash
provided by operating
activities:
Depreciation and am-
ortization........... 1,081 1,279 1,532 2,504 2,388
(Increase) decrease
in short-term in-
vestments............ (6,021) -- -- 1,700 300
(Gain) loss on dis-
posal of assets...... 18 (20) 298 299 35
(Increase) decrease
in accounts receiv-
able, net............ (6,026) 2,895 (5,856) 2,096 1,696
(Increase) decrease
in inventories, net.. (1,020) 262 (1,610) 415 1,839
(Increase) decrease
in prepaid expenses.. (190) (18) 25 190 25
(Increase) decrease
in deferred tax ben-
efit................. 2,315 (3) (4,259) -- 1,559
(Increase) decrease
in evaluation equip-
ment................. (45) 323 342 370 (539)
Increase (decrease)
in accounts payable.. (3,893) (532) 2,814 606 (830)
Increase (decrease)
in income tax pay-
able................. 1,713 266 347 (113) 257
Increase (decrease)
in accrued liabili-
ties................. 61 (1,350) (70) 937 42
Stock contribution to
Employee Retirement
Plan................. -- -- -- -- 95
------- ------- ------- ------- -------
Net cash provided by
(used in) opera-
tions.............. 24,006 (249) 3,372 2,420 2,267
------- ------- ------- ------- -------
Cash flows from invest-
ing activities:
Purchases of property
and equipment........ (1,052) (680) (1,434) (1,168) (1,997)
(Increase) decrease in
field spares......... -- 910 919 (505) (492)
(Increase) decrease in
other assets, net.... 314 384 822 (147) (376)
------- ------- ------- ------- -------
Net cash provided by
(used in) investing
activities......... (738) 614 307 (1,820) (2,865)
------- ------- ------- ------- -------
Cash flow from financ-
ing activities:
Decrease in obliga-
tions under capital
leases............... (209) (147) (187) (113) (28)
Increase (decrease) in
short term debt...... (2,986) 674 2,986 (898) --
Redemption of
mandatorily
redeemable preferred
stock................ -- -- -- -- (1,379)
Issuance of common
stock................ 582 10 11 8 39
Issuance (purchase) of
treasury stock, net.. (27) (7) 33 (34) 1
Dividends paid........ (424) -- -- (168) (199)
------- ------- ------- ------- -------
Net cash provided by
(used in) financing
activities......... (3,064) 530 2,843 (1,205) (1,566)
------- ------- ------- ------- -------
Increase (decrease) in
cash and cash equiva-
lents................. 20,204 895 6,522 (605) (2,164)
Cash and cash equiva-
lents, beginning of
period................ 9,324 2,802 2,802 3,407 5,571
------- ------- ------- ------- -------
Cash and cash equiva-
lents, end of period.. $29,528 $ 3,697 $ 9,324 $ 2,802 $ 3,407
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMA-
TION:
Interest paid......... $ 63 $ 180 $ 226 $ 100 $ 342
Income taxes paid..... $14,374 $ 88 $ 132 $ 193 $ 742
SUPPLEMENTAL DISCLOSURE
OF NONCASH INVESTING
AND FINANCING
ACTIVITIES:
Capital lease obliga-
tions incurred....... $ 385 $ 13 $ 38 $ 398 $ 98
Notes payable issued
for preferred stock
redemption........... -- -- -- -- $ 898
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
MCDATA CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCK AND OTHER STOCKHOLDERS'
EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK COMMON STOCK
--------------- CAPITAL IN TREASURY AND OTHER
EXCESS OF RETAINED STOCK, STOCKHOLDERS'
CLASS A CLASS B PAR VALUE EARNINGS AT COST EQUITY
------- ------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 27,
1991................... $ 3 $ 0 $2,023 $18,126 $(334) $19,818
---- ---- ------ ------- ----- -------
Purchase of common
stock, Class B--4,383
shares................. -- -- -- -- (4) (4)
Issuance of treasury
stock--1,222 shares.... -- -- -- (4) 9 5
Issuance of common
stock, Class A--10,202
shares and Class B--
1,023.................. -- -- 23 -- -- 23
Exercise of stock
options, Class A--5,722
shares and Class B--400
shares................. -- -- 16 -- -- 16
Issuance of common
stock, Class B to
Employee Retirement
Plan--39,904 shares.... -- -- 95 -- -- 95
Mandatorily redeemable
preferred stock
dividends.............. -- -- -- (285) -- (285)
Net loss................ -- -- -- (4,600) -- (4,600)
---- ---- ------ ------- ----- -------
Balances at December 25,
1992................... 3 0 2,157 13,237 (329) 15,068
---- ---- ------ ------- ----- -------
Purchase of common
stock, Class A--27,206
shares and Class B--
6,519 shares........... -- -- -- -- (34) (34)
Issuance of common
stock, Class A--7,999
shares................. -- -- 8 -- -- 8
Mandatorily redeemable
preferred stock
dividends.............. -- -- -- (172) -- (172)
Net loss................ -- -- -- (6,584) -- (6,584)
---- ---- ------ ------- ----- -------
Balances at December 31,
1993................... 3 0 2,165 6,481 (363) 8,286
---- ---- ------ ------- ----- -------
Issuance of treasury
stock--14,295 shares... -- -- -- (81) 114 33
Issuance of common
stock, Class A--8,189
shares................. -- -- 9 -- -- 9
Exercise of stock
options, Class A--375
shares and Class B--
1,540 shares........... -- -- 2 -- -- 2
Mandatorily redeemable
preferred stock
dividends.............. -- -- -- (168) -- (168)
Net income.............. -- -- -- 9,809 -- 9,809
---- ---- ------ ------- ----- -------
Balances at December 30,
1994................... 3 0 2,176 16,041 (249) 17,971
---- ---- ------ ------- ----- -------
Purchase of treasury
stock--5,442 shares
(unaudited)............ -- -- -- -- (27) (27)
Exercise of stock war-
rants, Class A--171,358
shares (unaudited)..... -- -- 171 -- -- 171
Issuance of common
stock, Class A--1,723
shares (unaudited)..... -- -- 8 -- -- 8
Exercise of stock op-
tions, Class A- 310,337
shares and Class B--
91,180 shares (unau-
dited)................. 1 -- 402 -- -- 403
Mandatorily redeemable
preferred stock divi-
dends (unaudited)...... -- -- -- (126) -- (126)
Net income (unaudited).. -- -- -- 36,013 -- 36,013
---- ---- ------ ------- ----- -------
Balances at September
29, 1995 (unaudited)... $ 4 $ 0 $2,757 $51,928 $(276) $54,413
==== ==== ====== ======= ===== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
MCDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
McDATA Corporation ("McDATA") started business on August 3, 1982 and is
incorporated under the laws of the state of Delaware. McDATA engages in the
design, development, manufacture and marketing of computer-based hardware and
software systems.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
McDATA and all wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated. Certain amounts in prior years'
consolidated financial statements have been reclassified to conform to the
current year financial statement presentation.
Unaudited Interim Information
In the opinion of McDATA management, the unaudited information as of and for
the nine months ended September 29, 1995, and for the nine months ended
September 30, 1994, includes all adjustments necessary for a fair presentation
of results for the periods presented in accordance with generally accepted
accounting principles, and such adjustments are of a normal, recurring nature.
All information included in these consolidated financial statements and
footnotes as of and for the nine months ended September 29, 1995 and for the
nine months ended September 30, 1994 is unaudited.
Revenue Recognition
Revenue from sales to original equipment manufacturers and distributors is
recognized upon shipment. Revenue from end-user sales is generally recorded at
time of acceptance by the customer. Revenue from maintenance and support
contracts is recorded as earned.
Costs associated with post-installation support periods granted on products
are estimated and accrued at time of sale.
Concentration of Credit Risk and Major Customers
McDATA's customers primarily include original equipment manufacturers, as
well as distributors and end users. Accounts receivable are primarily
concentrated in the computer industry. Sales to a single customer amounted to
92% of consolidated revenue for the nine months ended September 29, 1995 and
63% of revenue for the year ended December 30, 1994; no single customer
accounted for more than 10% of revenue in fiscal 1993 or in fiscal 1992.
Financial instruments which potentially subject McDATA to concentrations of
credit risk are primarily accounts receivable and cash equivalents. McDATA has
a cash investment policy which generally restricts investments to ensure
preservation of principal and maintenance of liquidity.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Field Spares
The costs of field spares are depreciated using the straight-line method over
a four-year life. Excess parts and equipment are reserved.
F-7
<PAGE>
MCDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are both
readily convertible to cash and have remaining maturities of three months or
less at the time of acquisition. The carrying value of cash equivalents
approximates fair market value. Investments that do not qualify as cash
equivalents are classified as short-term investments.
Depreciation and Amortization
Property and equipment is recorded at cost and depreciated on a straight-line
basis over its estimated useful lives. Equipment capitalized under capital
leases is depreciated over its estimated useful service life or the terms of
the leases, as applicable. Leasehold improvements are amortized over the term
of the lease.
Research and Development
Research and development costs are expensed as incurred.
Foreign Currencies
Monetary assets and liabilities of international subsidiaries are remeasured
into U.S. dollars at period-end exchange rates while non-monetary items are
remeasured at historical exchange rates. Revenue and expenses are remeasured
using average exchange rates prevailing during the period, except for
depreciation, which is remeasured at historical exchange rates. Remeasurement
and transaction gains and losses are included in the Consolidated Statements of
Operations.
Per Share Amounts
Net income (loss) per common share is computed under the treasury stock
method using the weighted average number of common shares and dilutive common
stock equivalent shares outstanding during the period. The mandatorily
redeemable preferred stock is considered to be a common stock equivalent and,
therefore, the related dividends are excluded from earnings in the computation
of earnings per common share in periods with net income. In a period in which a
loss is sustained, only the weighted average number of common shares
outstanding is used to compute the loss per share as the inclusion of common
stock equivalents would be antidilutive.
NOTE 2--INVENTORIES
Inventories, which include material, labor and factory overhead, consist of
the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 29, DECEMBER 30, DECEMBER 31,
1995 1994 1993
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................... $4,324 $3,513 $1,504
Work-in-progress................. 704 666 591
Finished goods................... 381 210 684
------ ------ ------
$5,409 $4,389 $2,779
====== ====== ======
</TABLE>
F-8
<PAGE>
MCDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1994 1993
------------ ------------
(THOUSANDS)
<S> <C> <C>
Equipment and furniture............................ $10,702 $ 9,917
Leasehold improvements............................. 778 757
Less accumulated depreciation and amortization..... (9,021) (7,957)
------- -------
$ 2,459 $ 2,717
======= =======
</TABLE>
Equipment and furniture at December 30, 1994 and December 31, 1993 includes
assets under capitalized leases of $741,000 and $708,000 with related
accumulated depreciation of $521,000 and $316,000, respectively.
The minimum future lease payments under capital leases as of December 30,
1994 are as follows (amounts in thousands):
<TABLE>
<S> <C>
1995................................................................... $176
1996................................................................... 72
1997................................................................... 31
Beyond................................................................. 15
----
294
Less amount representing interest...................................... (26)
----
Present value of minimum lease payments (including $166 current)....... $268
====
</TABLE>
NOTE 4--SHORT-TERM DEBT
On March 30, 1993, McDATA entered into a secured term note with a bank in the
amount of $675,000 to retire the remaining outstanding debt incurred in
association with the redemption of preferred stock. The note required monthly
payments of principal and interest for eight months. The note bore interest at
the bank's prime rate plus 1/2%. The debt was retired during 1993.
On February 4, 1994, McDATA entered into a secured loan agreement with a
bank. The loan was collateralized by accounts receivable and secured by all
assets of McDATA and bore interest at the bank's prime rate plus three percent
(11.5% at December 30, 1994). Principal payments consisted of all of McDATA's
cash receipts. McDATA could withdraw funds up to a defined borrowing base
consisting of eligible accounts receivable. The maximum borrowings under the
loan, subject to collateral restrictions, were $6,000,000. As of December 30,
1994, McDATA had available credit of $3,014,000 under the line of credit
agreement. The loan agreement expired February 28, 1995 and all amounts were
repaid by McDATA.
In June, 1995, McDATA entered into a secured line of credit agreement with a
bank in the amount of $7,000,000, subject to borrowing base restrictions. The
loan is collateralized by accounts receivable. The agreement has a term of one
year and requires monthly payments of interest. The loan balance, if any,
incurs interest at the bank's prime rate. As of September 29, 1995, McDATA had
no balance due on the line.
F-9
<PAGE>
MCDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Wages and employee benefits........................ $2,088 $2,186
Deferred revenue................................... 428 705
Warranty and upgrade reserves...................... 367 307
Other taxes........................................ 387 432
Other accrued liabilities.......................... 503 213
------ ------
$3,773 $3,843
====== ======
</TABLE>
NOTE 6--MANDATORILY REDEEMABLE PREFERRED AND COMMON STOCK INFORMATION
Information regarding mandatorily redeemable preferred and common stock as of
December 30, 1994 is as follows:
<TABLE>
<CAPTION>
PAR SHARES SHARES SHARES LIQUIDATION
VALUE AUTHORIZED ISSUED OUTSTANDING PREFERENCE
------ ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Mandatorily redeemable
preferred stock........ $0.001 5,000,000
Series A.............. 27,520 27,520 $ 50,000
Series B.............. 1,121,425 1,121,425 2,355,000
Common stock
Class B............... 0.001 1,500,000 129,433 117,163 459,000
Class A............... 0.001 10,000,000 2,754,300 2,670,757
</TABLE>
Mandatorily Redeemable Preferred Stock
The two series of mandatorily redeemable preferred stock ("Redeemable
Preferred Stock") are nonvoting (except for certain circumstances set forth in
McDATA's Amended and Restated Certificate of Incorporation and as may be
required by Delaware law) and have liquidation preferences of $1.82 per share
plus accrued dividends for Series A and $2.10 per share plus accrued dividends
for Series B. The holders of the Redeemable Preferred Stock have priority to
receive dividends, accruable quarterly and payable upon two consecutive
quarters of profitability, at rates of $.1274 and $.147 per share per annum,
respectively. The dividends are cumulative at the respective rates, or at a
specified rate in event of default. In accordance with the provisions of the
Preferred Stock Purchase Agreements, the Board of Directors authorized
dividends on the Redeemable Preferred Stock of $168,000, $172,000 and $285,000
for the years ended December 30, 1994, December 31, 1993 and December 25, 1992,
respectively. The Board of Directors declared, and McDATA paid, $0, $168,000
and $199,000 in dividends for the years ended December 30, 1994, December 31,
1993 and December 25, 1992, respectively. The Redeemable Preferred Stock is
convertible into Class A common stock at the option of the stockholders at a
conversion rate of one common share for one preferred share. In addition, all
Redeemable Preferred Stock of a specified series is convertible into Class A
common stock upon the closing of a public offering of a specified minimum size
or upon the vote or written consent of holders of at least 66 2/3% of the
outstanding Redeemable Preferred Stock voting together as a single class at the
then-current conversion rate, as defined.
McDATA is required to redeem the Redeemable Preferred Stock in the event of
default or at the election of the stockholders during the period between
January 1 and February 15 of each calendar year. In 1992, 798,333 Series B
shares and 218,182 Series C shares were redeemed for $2,277,000; McDATA also
paid $116,000 in dividends related to this redemption. In 1993, warrants to
purchase 172,344 shares of Class A common stock at an exercise price of $1.00
were issued to holders of Series A and Series B Preferred Stock in
F-10
<PAGE>
MCDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
consideration of changes to the Preferred Stock Purchase Agreements, including,
among others, postponement of redemption rights until after December 31, 1994
and limitations on the number of stock options granted at prices less than the
preferred stock redemption price under any of McDATA's option plans.
Common Stock
McDATA has two series of common stock, Class A and Class B. On May 31, 1988,
the stockholders of McDATA authorized the Class B common stock, which is
nonvoting (except with regard to voting on transactions required by Delaware
law) and has liquidation and dividend preferences junior to McDATA's Redeemable
Preferred Stock but senior to the Class A common stock. The liquidation
preference of the Class B common stock is equal to the average price per share
paid by all holders of Class B common stock ($2.61 liquidation value, for an
aggregate liquidation value of $531,000 at September 29, 1995). The non-
cumulative dividend preference is equal to five percent of the liquidation
preference. The Class B common stock will automatically be converted to Class A
common stock upon consummation of an initial public offering, upon concurrence
of holders of 50% or more of the then outstanding Class B common stock or upon
the conversion of outstanding Series A and Series B preferred stock into Class
A common stock. The conversion rate will be determined at the time of
conversion and will generally be based on the results of a computation
utilizing the liquidation value described above. In addition, the Class B
common stock can only be issued through McDATA's stock purchase and option
plans.
NOTE 7--EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS
Employee Retirement Plan
McDATA has a defined contribution plan that covers eligible employees.
Effective January 1, 1990, the Board of Directors authorized McDATA to provide
a matching contribution to the McDATA Retirement Savings Plan (the "Plan") at a
rate of 25% of an employee's contribution up to 6% of the employee's
compensation and an additional 25% of an employee's contribution may be
authorized if McDATA profits justify such a contribution. Such McDATA
contributions were made in shares of McDATA's Class B common stock, contributed
at a price which approximated market value as established at the beginning of
each quarter by the Board of Directors. During fiscal 1992, 39,904 shares were
contributed at an average price of $2.38. Effective October 23, 1992, the Board
of Directors amended McDATA's matching contribution whereby it is made in cash
and is limited to 10% of income before taxes in each quarter. On January 28,
1993, the Board of Directors authorized McDATA to make a $32,000 cash
contribution to the Plan for 1992. In March, 1993, the Board of Directors
authorized a profit sharing plan whereby McDATA contributes a portion of each
year's profits to a profit sharing pool. The profit sharing amount is
determined annually by the Board of Directors and is distributed to employees
50% in cash and 50% in the employees' behalf as contributions to the McDATA
Retirement Savings Plan. The contribution to the Plan for profits earned in
1994 was $384,000. No contribution was made for 1993.
Employee Stock Purchase Plans
On March 17, 1983, the Board of Directors adopted an Employee Stock Purchase
Plan under which employees may purchase, on a quarterly basis, McDATA Class A
common stock, by contributing up to the lesser of 10% of their base salary or
$2,000. During fiscal 1992, 1,222 shares were issued at an average price of
$4.50. No shares were issued in 1993 or 1994.
On April 1, 1988, the Board of Directors adopted an Employee Stock Purchase
Plan under which employees who have not previously participated in the 1983
Employee Stock Purchase Plan or McDATA's
F-11
<PAGE>
MCDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
incentive stock option plans may purchase McDATA Class B common stock. During
fiscal 1992; 1,023 shares were issued at an average price of $4.50. No shares
were issued in 1993 or 1994.
All shares were purchased at a price which approximated market value as
established at the beginning of each quarter by the Board of Directors.
On July 23, 1992, the Board of Directors indefinitely suspended further
purchases under the Employee Stock Purchase Plans.
Stock Option Plans
McDATA has three stock option plans, the 1990 Class A Stock Option Plan
(Class A Plan), the 1990 Class B Stock Option Plan (Class B Plan) and the
Director's Stock Option Plan (Director Plan).
The Class A Plan, adopted by shareholder vote on November 16, 1990, provides
for the grant of either incentive or non-qualified stock options to employees
for the purchase of Class A common stock. The Class B Plan, adopted by
shareholder vote on November 16, 1990, provides for the grant of either
incentive or non- qualified stock options to employees for the purchase of
Class B common stock. The Director Plan, adopted on January 26, 1989 and
amended on October 28, 1993, provides for the grant of options to non-employee,
non-investor directors for the purchase of Class B common stock. Options
granted under the Class A and Class B plans generally become exercisable over a
four-year period with one-fourth exercisable on each annual anniversary of the
grant date and expire ten years from the date of grant. Options under the
Director Plan become exercisable over a three-year period with one-third
exercisable on each annual anniversary of the grant date and expire ten years
from the date of grant. All options are granted at a price which approximates
market value as established at the beginning of each quarter by the Board of
Directors.
On July 23, 1992, the Board of Directors agreed to give participants in each
of the three stock option plans the opportunity to exchange their original
options for new options at the then-current market value of $1.00 per share. As
a condition of such exchanges, participants waived all rights under prior
agreements, including the right to exercise options vested at the time of
exchange. Participants exchanged options to purchase 290,619 shares of Class A
common stock and options to purchase 111,997 shares of Class B common stock
under the offer.
F-12
<PAGE>
MCDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following summarizes option transactions under all plans:
<TABLE>
<CAPTION>
CLASS A PLAN CLASS B PLAN DIRECTOR PLAN
---------------------- ---------------------- --------------------- TOTAL
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE SHARES
COVERED OPTION COVERED OPTION COVERED OPTION COVERED
BY OPTIONS PRICE BY OPTIONS PRICE BY OPTIONS PRICE BY OPTIONS
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
December 27, 1991...... 420,438 $2.35-4.36 119,083 $3.90-8.00 45,000 $3.90-4.50 584,521
Granted................. 449,432 1.00-4.50 220,070 1.00-4.50 669,502
Exercised............... (5,722) 2.35-8.00 (400) 3.90 (6,122)
Forfeited or expired.... (421,799) 2.35-8.00 (120,606) 3.90-8.00 (542,405)
--------- ---------- --------- ---------- ------- ---------- ---------
Outstanding at
December 25, 1992...... 442,349 1.00-4.15 218,147 1.00-3.90 45,000 1.00 705,496
Granted................. 40,000 1.00 14,320 1.00 15,000 1.00 69,320
Exercised...............
Forfeited or expired.... (17,887) 1.00-4.15 (40,194) 1.00-4.50 (25,000) 1.00 (83,081)
--------- ---------- --------- ---------- ------- ---------- ---------
Outstanding at
December 31, 1993...... 464,462 1.00 192,273 1.00-3.90 35,000 1.00 691,735
Granted................. 57,250 1.00-2.00 15,460 1.00-2.00 72,710
Exercised............... (375) 1.00 (1,540) 1.00 (1,915)
Forfeited or expired.... (48,472) 1.00 (90,063) 1.00 (138,535)
--------- ---------- --------- ---------- ------- ---------- ---------
Outstanding at
December 30, 1994...... 472,865 $1.00-2.00 116,130 $1.00-3.90 35,000 $ 1.00 623,995
========= ========== ========= ========== ======= ========== =========
Exercisable at
December 30, 1994...... 241,815 52,698 28,333 322,846
Authorized.............. 3,000,000 1,273,497 100,000 4,373,497
Cumulative options
exercised.............. 1,823,871 2,930 1,826,801
Available for grant at
December 30, 1994...... 703,264 1,154,437 65,000 1,922,701
</TABLE>
NOTE 8--OPERATING LEASE COMMITMENTS
McDATA had various operating leases in effect at December 30, 1994, for
certain buildings, office space and machinery and equipment. Future minimum
lease payments under all non-cancelable operating leases with terms of one year
or more are as follows:
<TABLE>
<CAPTION>
(THOUSANDS)
<S> <C>
1995........................................................... $2,069
1996........................................................... 1,911
1997........................................................... 1,896
1998........................................................... 952
-------
$6,828
=======
</TABLE>
Rent expense for fiscal years 1994, 1993 and 1992 was $1,653,000, $2,086,000
and $2,180,000, respectively.
F-13
<PAGE>
MCDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 30, DECEMBER 31, DECEMBER 25,
1994 1993 1992
------------ ------------ ------------
(THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................. $ 134 $(178) $(1,701)
Foreign............................. (4) 27 26
State............................... -- 1 (549)
------- ----- -------
Total current..................... 130 (150) (2,224)
Deferred:
Federal............................. (3,455) 1,559
State............................... (407)
------- ----- -------
$(3,732) $(150) $ (665)
======= ===== =======
</TABLE>
The total income tax expense (benefit) differs from the amount computed using
the federal income tax rate of 35% for tax years ended December 30, 1994 and
December 31, 1993 and 34% for tax year ended December 25, 1992 for the
following reasons:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 30, DECEMBER 31, DECEMBER 25,
1994 1993 1992
------------ ------------ ------------
(THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense (benefit),
at statutory rate................... $ 2,127 $(2,357) $(1,789)
State taxes, net..................... 90 (490) (362)
R & D credit, net.................... (330) (470) (230)
Benefit of net operating loss
carrybacks at higher rates.......... -- -- (72)
Foreign sales corporation benefits... (137) (270) (92)
Change in deferred tax asset valua-
tion allowance...................... (5,452) 3,463 1,989
Other................................ (30) (26) (109)
------- ------- -------
$(3,732) $ (150) $ (665)
======= ======= =======
</TABLE>
F-14
<PAGE>
MCDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Deferred income taxes reflect the tax effect of temporary differences between
the amount of assets and liabilities for financial reporting purposes and
income tax purposes. The tax effects of each type of temporary difference that
give rise to a significant portion of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 30, DECEMBER 31, DECEMBER 25,
1994 1993 1992
------------ ------------ ------------
(THOUSANDS)
<S> <C> <C> <C>
Inventory reserves and costs......... $ 764 $ 954 $ 903
Reserve for bad debts................ 118 245 208
Expenses reported on a modified-cash
basis............................... 372 867 659
Warranty and upgrade reserves........ 128 154 181
State income taxes................... 407 490 --
Research and development credits..... 1,203 873 403
Net operating loss carryforwards..... 814 2,087 65
Minimum tax credits.................. 173 94 79
Other................................ 280 88 (109)
------ ------- -------
4,259 5,852 2,389
Valuation allowance for deferred tax
assets.............................. (5,452) (1,989)
------ ------- -------
$4,259 $ 400 $ 400
====== ======= =======
</TABLE>
The net change in the valuation allowance for deferred income tax assets was
a decrease of $5,452,000 in 1994 and an increase of $3,463,000 in 1993. McDATA
evaluated a variety of factors in determining whether a valuation allowance
should be recorded against deferred income tax assets pursuant to SFAS No. 109,
including the number of years McDATA's operating losses and tax credits can be
carried forward, the existence of taxable temporary differences, McDATA's
earnings history and McDATA's near-term earnings expectations. These factors
were used to determine whether it is more likely than not that the deferred tax
assets will be actually realized.
At December 30, 1994, McDATA has research and development along with
alternative minimum tax credit carryforwards of $1,203,000 and $173,000,
respectively, for federal income tax purposes. The research and development
credits will expire in 2007 and 2008. The alternative minimum tax credit can be
carried forward indefinitely. At December 30, 1994, McDATA has federal net
operating loss carryforwards of $2,327,000, which expire in 2007 and 2008.
F-15
<PAGE>
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, 1994 and January 1, 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, 1994 and January 1, 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 30, 1995
F-16
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1,
1994 1994
------------ ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 240,506 $345,300
Trade and notes receivable less allowance for
doubtful accounts of $6,272 and $5,262 in 1994 and
1993, respectively.................................. 361,191 157,225
Inventories.......................................... 251,096 118,263
Deferred income taxes................................ 40,754 24,199
Other assets......................................... 8,258 5,023
---------- --------
Total current assets............................... 901,805 650,010
Long-term investments, at amortized cost............... 175,631 50,392
Notes receivable, net.................................. 38,945 21,808
Property, plant and equipment, net..................... 173,016 96,480
Deferred income taxes.................................. 4,473 2,761
Other assets, net...................................... 23,630 8,195
---------- --------
Total assets....................................... $1,317,500 $829,646
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations............. $ 9,502 $ 1,262
Accounts payable..................................... 122,264 44,179
Accrued expenses..................................... 106,107 59,755
Income taxes payable................................. 55,521 20,892
Deferred revenue..................................... 8,070 7,046
---------- --------
Total current liabilities.......................... 301,464 133,134
Deferred revenue....................................... 2,289 3,389
Long-term obligations:
4 1/4% Convertible Subordinated Notes due 2001....... 229,598 200,000
6 1/4% Convertible Sub Debentures due 2002........... 39,536 59,260
Notes payable........................................ 16,771 14,013
Capital lease obligations............................ 201 756
---------- --------
Total liabilities.................................. 589,859 410,552
Commitments and contingencies (Notes I and K)
Stockholders' equity:
Series Preferred Stock, par value $.01; authorized
25,000,000 shares................................... -- --
Common Stock, par value $.01; authorized 330,000,000
shares; issued 201,738,042 and 189,936,120 shares in
1994 and 1993, respectively......................... 2,017 1,899
Additional paid-in capital........................... 281,625 226,668
Deferred compensation................................ (2,607) (3,552)
Retained earnings.................................... 443,713 193,045
Cumulative translation adjustment.................... 3,716 1,537
Treasury stock, at cost, 2,627,467 and 2,607,996
shares, in 1994 and 1993, respectively ............. (823) (503)
---------- --------
Total stockholders' equity......................... 727,641 419,094
---------- --------
Total liabilities and stockholders' equity......... $1,317,500 $829,646
========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-17
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1994 1994 1993
------------ ---------- ----------
<S> <C> <C> <C>
Revenues:
Net sales................................. $1,343,065 $757,793 $365,298
Service and rental income................. 34,427 24,828 20,408
---------- -------- --------
1,377,492 782,621 385,706
Costs and expenses:
Cost of sales and service................. 660,034 380,755 207,279
Research and development.................. 117,922 58,977 33,591
Selling, general and administrative....... 249,004 162,461 96,261
---------- -------- --------
1,026,960 602,193 337,131
Operating income............................ 350,532 180,428 48,575
Investment income........................... 21,619 7,988 3,830
Interest expense............................ (15,311) (6,043) (4,865)
Other expense, net.......................... (1,456) (2,717) (4,465)
Income before income taxes.................. 355,384 179,656 43,075
Provision for income taxes.................. 104,716 52,534 13,567
---------- -------- --------
Net income.................................. $ 250,668 $127,122 $ 29,508
========== ======== ========
Net income per weighted average common share
(primary).................................. $ 1.18 $ 0.65 $ 0.17
========== ======== ========
Net income per weighted average common share
(fully diluted)............................ $ 1.10 $ 0.60 $ 0.16
========== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-18
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------
DECEMBER 31, JANUARY 1, JANUARY 2,
1994 1994 1993
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 250,668 $127,122 $ 29,508
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 32,728 21,741 18,289
Deferred income taxes..................... (18,267) (21,172) (10,492)
Loss on disposal of property and
equipment................................ 262 2,324 2,232
Tax benefit from stock options exercised.. 26,698 8,776 --
Changes in assets and liabilities:
Trade and notes receivable................ (221,708) (73,252) (29,686)
Inventories............................... (133,159) (60,937) (26,312)
Other assets.............................. (19,526) 4,381 (2,997)
Accounts payable.......................... 78,698 16,500 13,709
Accrued expenses.......................... 46,448 28,893 11,588
Income taxes payable...................... 34,629 3,520 10,356
Deferred revenue.......................... (65) (1,100) 8,936
--------- -------- --------
Net cash provided by operating
activities.............................. 77,406 56,796 25,131
--------- -------- --------
Cash flows from investing activities:
Additions to property and equipment........ (108,968) (51,303) (30,021)
Proceeds from sale of property and
equipment................................. 445 574 1,280
Purchase of long-term investments, net..... (125,239) (29,100) (12,594)
--------- -------- --------
Net cash used by investing activities.... (233,762) (79,829) (41,335)
--------- -------- --------
Cash flows from financing activities:
Issuance of common stock, net of issuance
costs..................................... 9,596 112,451 4,765
Purchase of treasury stock................. (320) -- --
Issuance of 6 1/4% Convertible Subordinated
Debentures due 2002, net of issuance
costs..................................... -- -- 58,208
Issuance of 4 1/4% Convertible Subordinated
Notes due 2001, net of issuance costs..... 29,350 194,987 --
Payment of long-term and short-term
obligations............................... (1,272) (2,430) (6,397)
Issuance of long-term and short-term
obligations............................... 11,715 -- 2,004
--------- -------- --------
Net cash provided by financing activities. 49,069 305,008 58,580
--------- -------- --------
Effect of exchange rate changes on cash..... 2,493 1,222 (2,679)
Net (decrease)/increase in cash and cash
equivalents................................ (107,287) 281,975 42,376
Cash and cash equivalents at beginning of
year....................................... 345,300 62,103 22,406
--------- -------- --------
Cash and cash equivalents at end of year.... $ 240,506 $345,300 $ 62,103
========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-19
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
----------------------------------------------------------------------------------------------
CUMULA- TOTAL
COMMON ADDITIONAL DEFERRED TIVE TREASURY STOCK-
COMMON STOCK PAR PAID-IN COMPEN- RETAINED TRANS- STOCK TREASURY HOLDERS'
STOCK SHARES VALUE CAPITAL SATION EARNINGS LATION ADJ. SHARES STOCK COST EQUITY
------------ --------- ---------- -------- -------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance 12/28/91........ 162,836,276 $1,628 $ 96,600 -- $ 36,415 $ 869 2,607,996 $(503) $135,009
----------- ------ -------- ------- -------- ------- --------- ----- --------
Exercise of stock op-
tions.................. 3,668,992 37 4,304 -- -- -- -- -- 4,341
Issuance of Stock op-
tions.................. -- -- 4,969 (4,969) -- -- -- -- --
Amortization of deferred
compensation........... -- -- -- 424 -- -- -- -- 424
Cumulative translation
adjustment............. -- -- -- -- -- (1,016) -- -- (1,016)
Net income.............. -- -- -- -- 29,508 -- -- -- 29,508
----------- ------ -------- ------- -------- ------- --------- ----- --------
Balance 1/2/93.......... 166,505,268 1,665 105,873 (4,545) 65,923 (147) 2,607,996 (503) 168,266
----------- ------ -------- ------- -------- ------- --------- ----- --------
Exercise of stock op-
tions.................. 5,839,240 58 11,424 -- -- -- -- -- 11,482
Tax benefit from
disqualifying
disposition of stock
options................ -- -- 8,776 -- -- -- -- -- 8,776
Issuance of common stock
pursuant to stock
offering............... 17,350,000 174 99,857 -- -- -- -- -- 100,031
Issuance of common stock
pursuant to bond
conversions............ 241,612 2 738 -- -- -- -- -- 740
Amortization of deferred
compensation........... -- -- -- 993 -- -- -- -- 993
Cumulative translation
adjustment............. -- -- -- -- -- 1,684 -- -- 1,684
Net income.............. -- -- -- -- 127,122 -- -- -- 127,122
----------- ------ -------- ------- -------- ------- --------- ----- --------
Balance 1/1/94.......... 189,936,120 1,899 226,668 (3,552) 193,045 1,537 2,607,996 (503) 419,094
----------- ------ -------- ------- -------- ------- --------- ----- --------
Exercise of stock op-
tions.................. 5,361,342 54 8,548 -- -- -- -- -- 8,602
Tax benefit from
disqualifying
disposition of stock
options and
nonqualifying stock
options exercised...... -- -- 26,698 -- -- -- -- -- 26,698
Issuance of stock op-
tions.................. -- -- 49 (49) -- -- -- -- --
Issuance of common stock
pursuant to bond and
note conversions....... 6,440,580 64 19,662 -- -- -- -- -- 19,726
Amortization of deferred
compensation .......... -- -- -- 994 -- -- -- -- 994
Purchase of treasury
stock.................. -- -- -- -- -- -- 19,471 (320) (320)
Cumulative translation
adjustment............. -- -- -- -- -- 2,179 -- -- 2,179
Net income.............. -- -- -- -- 250,668 -- -- -- 250,668
----------- ------ -------- ------- -------- ------- --------- ----- --------
Balance 12/31/94........ 201,738,042 $2,017 $281,625 $(2,607) $443,713 $ 3,716 2,627,467 $(823) $727,641
=========== ====== ======== ======= ======== ======= ========= ===== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-20
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. COMPANY
EMC Corporation and its subsidiaries ("EMC" or the "Company") design,
manufacture, market and support high performance storage products and provide
related services for mainframe and midrange computer systems manufactured
primarily by International Business Machines Corporation ("IBM"), Unisys
Corporation ("Unisys") and Compagnie des Machines Bull S.A. ("Bull"). In
addition, the Company recently announced a family of products aimed at the open
systems storage marketplace.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Certain prior year amounts in the financial statements have been reclassified
to conform with the 1994 presentation. The Company's fiscal year ends on the
Saturday closest to December 31. Fiscal 1992 was a 53 week year and fiscal 1994
and 1993 were 52 week years.
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.
Acquisitions
The Company formed a joint venture, EMC Japan K.K. ("EMC Japan"), with a
Japanese distributor in January 1994 in which the Company's interest was 60%.
In December 1994, the Company purchased an additional 35% of this venture from
the Japanese distributor, resulting in goodwill of $8,971,000, which was
included in other assets, non-current (net of $150,000 of accumulated
amortization), at December 31, 1994 and is being amortized over five years.
The Company acquired a 93% interest in Copernique S.A. ("Copernique") in the
first quarter of 1994. Copernique specializes in high performance data
management hardware and software systems.
During the first quarter of 1994, the Company acquired certain assets of
Colorado-based Array Technology Corporation ("Array"), which specializes in
RAID ("Redundant Arrays of Independent Disks") technology. Other assets, non-
current at December 31, 1994 includes patents acquired in the purchase of Array
of $7,272,000, net of $1,212,000 of accumulated amortization. These assets are
being amortized over their estimated useful life of five years.
Proforma presentations have not been included as the 1994 acquisitions were
not material to the results of operations of the Company.
In August 1993, EMC exchanged 9,443,996 shares of EMC common stock, $.01 par
value (the "Common Stock") for all of the outstanding stock and stock options
of Epoch Systems, Inc. ("Epoch") and Magna Computer Corp. ("Magna"). These
business combinations were accounted for as poolings of interests. Accordingly,
all financial information has been restated as if the transactions occurred at
the beginning of the first period presented. Epoch was in the business of high
performance client/server data management software. Magna was in the business
of IBM compatible AS/400 tape products.
Revenue Recognition
The Company recognizes revenue from sales when products are shipped provided
there are no remaining significant vendor obligations and the resulting
receivable is deemed collectible by management. Revenue
F-21
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
from rentals is recorded over the life of the lease. Revenue from sales-type
leases is recognized at the net present value of expected future payments, and
the resulting discount is accreted to investment income over the collection
period. Revenue from service contracts is recognized over the life of the
contracts.
Foreign Currency Translation
The functional currency of sales operations in Europe, Japan and Australia is
the local currency. Assets and liabilities of these operations are translated
into U.S. dollars at the exchange rates in effect at the balance sheet date and
income and expense items are translated at average rates for the period. The
Company's operations in Ireland, Israel and Hong Kong are generally dependent
on the U.S. dollar. The assets and liabilities of these operations are
translated into U.S. dollars at exchange rates in effect at the balance sheet
date except for inventories and property and equipment which are translated at
historical exchange rates. Income and expense items are translated at average
rates for the period except for cost of sales and depreciation which are
translated at historical exchange rates.
Consolidated transaction losses included in other expense, net amounted to
$1,072,000 in 1994, $1,838,000 in 1993 and $1,093,000 in 1992. Accumulated net
translation adjustments of $3,716,000 and $1,537,000 are included in
stockholders' equity at December 31, 1994 and January 1, 1994, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include $134,954,000 and $310,723,000 of temporary
cash investments at December 31, 1994 and January 1, 1994, respectively.
Temporary cash investments consist primarily of money market funds and
commercial paper stated at cost plus accrued interest which approximates
market. Short term investments which have a maturity when acquired of ninety
days or less are considered cash equivalents.
Long-Term Investments
The Company adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities" in 1994. The adoption of SFAS 115 had no cumulative effect on net
income.
Long-term investments at amortized cost, consisting primarily of intermediate
term debt instruments, amounted to $175,631,000 and $50,392,000 in 1994 and
1993, with fair values of $173,245,000 and $50,042,000, respectively. The
Company classifies its long-term investments as held to maturity. The 1994
balances consisted of:
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
------------ ------------
<S> <C> <C>
Corporate.......................................... $113,866,000 $112,649,000
Foreign............................................ 49,950,000 49,667,000
U.S. Government.................................... 11,815,000 10,929,000
------------ ------------
Total............................................ $175,631,000 $173,245,000
============ ============
</TABLE>
F-22
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net unrealized loss of $2,386,000 at December 31, 1994 consisted of gross
unrealized gains of $444,000 and gross unrealized losses of $2,830,000. The
contractual maturities of debt securities held at December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
------------ ------------
<S> <C> <C>
Due within one year............................... $ 45,014,000 $ 44,080,000
Due after one year through five years............. 128,879,000 127,409,000
Due after ten years............................... 1,738,000 1,756,000
------------ ------------
Total........................................... $175,631,000 173,245,000
============ ============
</TABLE>
Investment income consists principally of interest and dividend income,
including interest on notes receivable from sales-type leases.
STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1, JANUARY 2,
1994 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Cash paid during the years ended for:
Income taxes........................ $76,539,000 $59,739,000 $13,474,000
Interest............................ 10,854,000 6,486,000 3,797,000
</TABLE>
Inventories
Inventories are stated at the lower of cost (first in, first out) or market.
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:
<TABLE>
<S> <C>
Furniture and fixtures...................................... 7 years
Equipment................................................... 3-7 years
Vehicles.................................................... 5 years
Improvements................................................ 5 years
Buildings................................................... 25-31 1/2 years
</TABLE>
Customer service spare parts inventory is included in equipment and
depreciated over three years.
When assets are retired or disposed of, the cost and accumulated depreciation
thereon are removed from the accounts and the related gains or losses are
included in operations.
Warranty and Research and Development
The Company accounts for warranty expense on an accrual basis. Research and
development costs are expensed as incurred.
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 C).
F-23
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Tax credits are generally recognized as reductions of income tax provisions
in the year in which the credits arise. Since 1989, the Company has not
provided for the U.S. income tax liability on earnings of its foreign
subsidiaries, except for Puerto Rico, as these earnings are considered to be
permanently reinvested. Taxes for the Company's foreign subsidiaries are
provided for at applicable statutory rates. The Company is currently undergoing
an examination of its 1991, 1992 and 1993 tax returns by the Internal Revenue
Service.
Net Income Per Share
Net income per share was computed on the basis of weighted average common and
dilutive common equivalent shares outstanding. Primary and fully diluted
weighted average shares outstanding and earnings used in per share computations
for 1994 and 1993 reflect the dilutive effects of the Notes. Fully diluted
weighted average shares outstanding and earnings used in per share computations
for 1994, 1993 and 1992 reflect the dilutive effects of the Debentures. Net
income for computation of earnings per share includes an add back of
$7,620,000, $2,496,000 and $1,768,000 for fully diluted and $5,855,000,
$224,000 and $0 for primary, in 1994, 1993 and 1992, respectively, representing
interest expense, net of its tax effect. Primary weighted average shares for
net income per share computations amounted to 218,045,666, 196,486,160 and
171,951,696 in 1994, 1993 and 1992, respectively. Fully diluted weighted
average shares were 234,254,640, 217,224,726 and 190,547,980 in 1994, 1993 and
1992, respectively. These calculations of weighted average shares have been
restated to reflect all stock splits to date (see Note J).
C. INCOME TAXES
Provision for income taxes consists of:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ -----------
<S> <C> <C> <C>
Federal and State
Current........................... $108,459,000 $ 69,176,000 $16,791,000
Deferred.......................... (18,421,000) (21,830,000) (5,863,000)
------------ ------------ -----------
90,038,000 47,346,000 10,928,000
Foreign
Current........................... 14,524,000 4,530,000 3,155,000
Deferred.......................... 154,000 658,000 (516,000)
------------ ------------ -----------
14,678,000 5,188,000 2,639,000
------------ ------------ -----------
Total provision for income taxes.... $104,716,000 $ 52,534,000 $13,567,000
============ ============ ===========
</TABLE>
At December 31, 1994 and January 1, 1994, net undistributed earnings of
foreign subsidiaries approximated $220,598,000 and $71,606,000, respectively.
Income before income taxes for foreign operations amounted to approximately
$152,363,000 in 1994, $49,392,000 in 1993 and $12,353,000 in 1992. The
components of the deferred tax provision are:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ -----------
<S> <C> <C> <C>
Unrepatriated earnings.............. $ 1,025,000 $ (5,772,000) 926,000
Sales-type leases................... (447,000) (434,000) (129,000)
Intercompany profit elimination..... 1,211,000 2,457,000 (1,831,000)
Accounts receivable related items... (4,297,000) (7,972,000) (389,000)
Inventory related items............. (10,740,000) (5,973,000) (1,369,000)
Depreciation and amortization....... (3,225,000) (377,000) (931,000)
Deferred revenue.................... 393,000 (374,000) (2,317,000)
Warranty reserve.................... (1,261,000) (1,378,000) (262,000)
Health insurance reserve............ (633,000) (868,000) (145,000)
Other............................... (293,000) (481,000) 68,000
------------ ------------ -----------
$(18,267,000) $(21,172,000) $(6,379,000)
============ ============ ===========
</TABLE>
F-24
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the Company's income tax provision to the statutory
federal tax rate is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate................................. 35.0% 35.0% 34.0%
State taxes, net of federal tax benefits................... 2.6 3.1 3.9
Puerto Rico tax benefits................................... (.6) (.9) (2.2)
Ireland tax benefits....................................... (6.6) (6.4) (.6)
Net operating losses not benefited......................... .6 .6 2.0
Tax credits................................................ (.7) (1.3) (.6)
Utilization of foreign net operating loss carryforwards.... (.9) (.7) (5.4)
Foreign Sales Corporation tax benefits..................... (.1) -- --
Other...................................................... .2 (.2) .4
---- ---- ----
29.5% 29.2% 31.5%
==== ==== ====
</TABLE>
The Company's Puerto Rico operation enjoys a ten year exemption, expiring in
1995, on up to 90% of EMC Caribe's income as determined under Federal tax laws.
EMC Caribe ceased manufacturing operations in February 1994. The Company's
manufacturing facility in Ireland enjoys a 10% tax rate on income from
manufacturing operations until the year 2000. The impact of these benefits on
the Company's earnings per share was $0.10 for the year ended December 31,
1994, $0.06 for the year ended January 1, 1994 and $0.01 for the year ended
January 2, 1993.
The Company increased its domestic deferred tax asset in 1993 as a result of
U.S. legislation enacted during 1993 increasing the federal corporate tax rate
from 34% to 35%. The components of the current and non-current deferred tax
assets and liabilities as of December 31, 1994 and January 1, 1994 were as
follows:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Current Deferred Tax Assets/(Liabilities)
Sales Reserve.................................. $ 13,062,000 $ 9,644,000
Warranty Reserve............................... 3,788,000 2,527,000
Inventory Reserve.............................. 18,457,000 8,625,000
Other Reserves................................. 5,107,000 2,805,000
Other Assets................................... 2,219,000 2,393,000
Puerto Rico Tollgate Tax....................... (1,879,000) (854,000)
Valuation reserve.............................. -- (941,000)
------------ ------------
Total Current Deferred Tax
Assets/(Liabilities)........................ $ 40,754,000 $ 24,199,000
============ ============
Non-Current Deferred Tax Assets/(Liabilities)
Deferred Revenue............................... 1,198,000 1,787,000
Other Reserves................................. 492,000 524,000
Other Assets................................... 358,000 450,000
Depreciation................................... 2,425,000 --
Domestic NOL Carryforward...................... 5,474,000 4,928,000
Foreign NOL Carryforward....................... 6,076,000 4,355,000
Research and Development Credit Carryforward... 1,144,000 1,151,000
Valuation Reserve.............................. (12,694,000) (10,434,000)
------------ ------------
Total Non-Current Deferred Tax
Assets/(Liabilities)........................ $ 4,473,000 $ 2,761,000
============ ============
</TABLE>
F-25
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Due to the uncertainty surrounding the realization of certain favorable tax
attributes in future tax returns, the Company has placed a valuation reserve
against these otherwise recognizable deferred tax assets. The valuation reserve
has increased as a result of an increase in the foreign net operating losses.
The Company has net operating loss carryforwards as of December 31, 1994
which are summarized as follows:
<TABLE>
<CAPTION>
CARRYFORWARD PERIOD
APPROXIMATE VALUE DURING WHICH LOSSES
COUNTRY IN U.S. DOLLARS WILL EXPIRE
------- ----------------- -------------------
<S> <C> <C>
Belgium................................ $ 612,000 Indefinite
France................................. 17,718,000 5 years/1996-1998
Hong Kong.............................. 402,000 Indefinite
Japan.................................. 256,000 5 years/1999
United States.......................... 13,771,000 15 years/2002-2020
</TABLE>
The U.S. losses relate to pre-acquisition losses of Epoch and Magna. The
losses in France relate to Copernique, a majority owned subsidiary of EMC;
approximately $12,172,000 are pre-acquisition losses and $5,546,000 are losses
generated in 1994.
D. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1,
1994 1994
------------ ------------
<S> <C> <C>
Purchased parts.................................... $ 8,946,000 $ 16,860,000
Work-in-process.................................... 133,116,000 41,997,000
Finished goods..................................... 109,034,000 59,406,000
------------ ------------
$251,096,000 $118,263,000
============ ============
</TABLE>
E. NOTES RECEIVABLE
Notes receivable are primarily from sales-type leases of equipment and are
stated net of interest discounts of approximately $8,719,000 and $4,753,000 and
net of allowance for doubtful accounts of $258,000 and $491,000 at December 31,
1994 and January 1, 1994, respectively. Implicit interest rates range from 8%
to 12%.
The payment schedule for such notes at December 31, 1994 is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR NOTES RECEIVABLE
----------- ----------------
<S> <C>
1995........................................................ $18,703,000
1996........................................................ 18,240,000
1997........................................................ 15,063,000
1998........................................................ 7,014,000
1999........................................................ 3,323,000
Thereafter.................................................. 217,000
Face value.................................................. 62,560,000
Less amounts representing interest.......................... 8,719,000
Present value............................................... 53,841,000
Less allowance for doubtful accounts........................ 258,000
-----------
53,583,000
Current portion............................................. 14,638,000
-----------
Long-term portion........................................... $38,945,000
===========
</TABLE>
F-26
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1,
1994 1994
------------ ------------
<S> <C> <C>
Furniture and fixtures........................... $ 5,989,000 $ 4,278,000
Equipment........................................ 190,160,000 102,670,000
Vehicles......................................... 1,010,000 923,000
Buildings and improvements....................... 44,664,000 29,864,000
Land............................................. 1,870,000 1,870,000
Construction in progress......................... 9,712,000 4,891,000
------------ ------------
253,405,000 144,496,000
Accumulated depreciation and amortization........ (80,389,000) (48,016,000)
------------ ------------
$173,016,000 $ 96,480,000
============ ============
</TABLE>
G. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1,
1994 1994
------------ -----------
<S> <C> <C>
Salaries and benefits............................... $ 54,159,000 $17,881,000
Warranty............................................ 15,535,000 16,112,000
Other............................................... 36,413,000 25,762,000
------------ -----------
$106,107,000 $59,755,000
============ ===========
</TABLE>
H. EMPLOYEE COMPENSATION PLANS
In 1983, the Company initiated a profit-sharing plan (the "1983 Plan") for
employees, whose eligibility to participate is based on certain service
requirements. Contributions are made at the discretion of the Board of
Directors.
No profit-sharing contributions were made in 1994 or 1993. During December
1992 the Company made a profit-sharing contribution to active employees who
were employed by the Company on or before January 1, 1992, whose compensation
was less than $60,000 for 1992 and who did not participate in any bonus or
incentive program. The amount of the contribution was $248,000.
In July 1985, the Company supplemented the 1983 Plan with a deferred
compensation program for certain employees. Under the program, which is
qualified under Section 401(k) of federal tax laws, the Company has provided a
matching contribution, as described below.
Effective January 1, 1993, the Company introduced a new matching formula for
the 1983 Plan. The Company intends, at the end of each calendar quarter, to
make a contribution that matches 100% of the employee's contribution up to a
maximum of 2% of the employee's quarterly compensation. Additionally, provided
that certain quarterly profit goals are attained, the Company in succeeding
quarters, will provide an additional matching contribution of 1% of the
employee's quarterly compensation up to a maximum quarterly matching
contribution not to exceed 5% of compensation. However, the Company's matching
contribution per participant has a quarterly limit of $500. The Company's
contribution amounted to approximately $2,277,000 in 1994 and $1,463,000 in
1993, pursuant to the previous formula. The Company's contribution in 1992
amounted to approximately $889,000.
F-27
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1994, the Epoch Systems, Inc. and Magna Computer Corporation retirement
savings plans were merged into the EMC Corporation Retirement Savings and
Profit Sharing Plan.
The Company does not offer a postretirement or postemployment benefit plan.
I. LEASE COMMITMENTS AND LONG-TERM OBLIGATIONS
Lease Commitments
The Company had $1,878,000 and $4,153,000 of equipment leased under capital
leases with accumulated amortization of $1,066,000 and $1,975,000 at December
31, 1994 and January 1, 1994, respectively.
The Company leases office and warehouse facilities under various operating
leases. Facilities rent expense amounted to $10,277,000, $6,050,000 and
$4,404,000 in 1994, 1993 and 1992, respectively. The Company's commitments
under its capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- -------- -----------
<S> <C> <C>
1995................................................... $608,000 $18,587,000
1996................................................... 179,000 15,098,000
1997................................................... -- 6,112,000
1998................................................... -- 2,592,000
1999................................................... -- 1,629,000
Thereafter............................................. -- 7,522,000
-------- -----------
Total minimum lease payments........................... 787,000 $51,540,000
Less amounts representing interest..................... 71,000
Present value of net minimum lease payments............ 716,000
Current portion........................................ 515,000
--------
Long-term portion...................................... $201,000
========
</TABLE>
Current Obligations and Lines of Credit
The Company has two lines of credit providing a maximum of $50,000,000 and
$15,000,000, respectively, at LIBOR plus 45 basis points and 62.5 basis points,
respectively. At December 31, 1994 and January 1, 1994, there were no
borrowings outstanding against these credit lines. The Company must maintain
certain minimum financial ratios including a minimum level of working capital
and tangible net worth under each line of credit. At December 31, 1994,
$8,427,000 was borrowed against the Company's overdraft facility at 6.4%.
Long-Term Obligations
In December 1993, the Company issued $200,000,000 of 4 1/4% convertible
subordinated notes due 2001 (the "Notes"). In January 1994, the Company issued
an additional $29,600,000 in Notes in accordance with overallotment provisions
of the offering. The Notes are generally convertible into shares of Common
Stock of the Company at a conversion price of $19.84 per share, subject to
adjustment in certain events. During 1994, $2,000 of Notes were converted.
Interest is payable semiannually and the Notes are redeemable at the option of
the Company at set redemption prices, plus accrued interest, commencing January
1, 1997. Redemption prices range from 100.61% to 102.43% of principal.
F-28
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In March 1992, the Company issued $60,000,000 of 6 1/4% convertible
subordinated debentures due 2002 (the "Debentures"), of which $19,724,000 and
$740,000 were converted during 1994 and 1993, respectively. The Debentures are
generally convertible at any time prior to maturity into shares of Common Stock
of the Company at a conversion price of $3.063 per share, subject to adjustment
in certain events. Interest is payable semiannually. The Debentures are
redeemable at the option of the Company at set redemption prices which range
from 100.63% to 104.38% of principal. The Company intends to redeem the
Debentures on April 1, 1995, unless the holders choose to convert on or prior
to such date.
The Company has a $14,000,000 mortgage collateralized by the Company's
facility at 171 South Street, Hopkinton, Massachusetts. The mortgage rate is
10.5% and is payable in monthly installments, calculated on a 30 year
amortization schedule, with a lump sum payment of approximately $12,835,000 due
on April 1, 1999.
Payments remaining on this mortgage note and other miscellaneous notes
(excluding the debt of EMC Ireland) are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT PAYABLE
----------- --------------
<S> <C>
1995.......................................................... $ 3,198,000
1996.......................................................... 1,537,000
1997.......................................................... 1,537,000
1998.......................................................... 1,537,000
1999.......................................................... 13,296,000
Total minimum payments........................................ 21,105,000
Less amounts representing interest............................ 5,971,000
Present value of net payments................................. 15,134,000
Current portion............................................... 425,000
Long-term portion............................................. $14,709,000
</TABLE>
In 1989, EMC purchased its premises in Ireland from the Industrial
Development Authority (IDA) of Ireland which granted the Company a total of
$790,000 towards the purchase price and for improvements to the premises.
During 1994, the Company was granted an additional $1,650,000 from the IDA. The
grants are included in long-term obligations and are amortized over periods of
25 years for funds used in building improvements and seven years for funds used
to purchase equipment. Remaining unamortized grants at December 31, 1994 are
$2,197,000, of which $135,000 is current and $2,062,000 is long-term.
J. COMMON STOCK, PREFERRED STOCK AND STOCK OPTIONS
Common Stock
At the Annual Meetings of the Company in 1993 and 1992, the stockholders
approved amendments to the Company's Articles of Organization to increase the
number of shares of authorized Common Stock. The current authorization is
330,000,000 shares.
The following stock splits were effected in the form of stock dividends in
the following amounts and at the following dates: a three-for-two stock split
effective November 24, 1992, for stockholders of record on November 9, 1992, a
two-for-one stock split effective June 8, 1993, for stockholders of record on
May 24, 1993, and a two-for-one stock split effective December 10, 1993, for
stockholders of record on November 26, 1993.
All share and per share data have been restated to reflect these splits.
F-29
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Preferred Stock
At the Special Meeting of Stockholders of the Company on November 17, 1993,
the stockholders approved an amendment to the Company's Articles of
Organization to authorize a new class of capital stock consisting of 25,000,000
shares of Series Preferred Stock, $.01 par value, which 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, except as
may be required by applicable law or stock exchange rules.
Stock Options
The Board of Directors and stockholders adopted the EMC Corporation 1993
Stock Option Plan (the "1993 Plan") to provide qualified incentive stock
options and nonqualified stock options to key employees. A total of 6,000,000
shares of Common Stock have been reserved for issuance under this Plan.
Under the terms of the 1993 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, 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 general,
options become exercisable in equal annual installments over the first five
years after the date of grant. As of December 31, 1994, options exercisable
approximated 73,600. Shares available for future options as of December 31,
1994 amounted to 3,062,140. Activity under the 1993 Plan for the two years
ended December 31, 1994 is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE
---------------- --------------
<S> <C> <C>
Granted...................................... 852,000 $ 17.63
Canceled..................................... -0- N/A
Exercised.................................... -0- N/A
Balance at January 1, 1994................... 852,000 $ 17.63
Granted...................................... 2,647,260 9.94-20.88
Canceled..................................... (561,400) 17.50-19.88
Exercised.................................... (16,800) 17.63
Balance at December 31, 1994................. 2,921,060 $ 9.94-20.88
</TABLE>
The Board of Directors and stockholders adopted the 1985 Stock Option Plan
(the "1985 Plan") to provide qualified incentive stock options and nonqualified
stock options to key employees. At the Annual Meeting of the Company on May 13,
1992, the stockholders approved an amendment to the 1985 Plan to increase the
number of shares available for grant to 36,000,000 from 27,000,000.
F-30
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of 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, 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") no less than par value which is
$.01 per share, and in the case of employees subject to Section 16, no less
than 50% of the fair market value at the time of grant. In general, options
become exercisable in equal annual installments over the first five years after
the date of grant. As of December 31, 1994, options exercisable approximated
1,957,632. Shares available for future options as of December 31, 1994 amounted
to 330,148. However, no incentive stock option may be granted under the 1985
Plan after May 16, 1995, but options theretofore granted may extend beyond that
date. Activity under the 1985 Plan for the three years ended December 31, 1994
is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
Balance at December 28, 1991........................... 15,232,512 $ .06- 2.17
Granted.............................................. 8,595,600 1.42- 3.71
Canceled............................................. (948,900) .58- 3.71
Exercised............................................ (2,838,072) .58- 1.98
Balance at January 2, 1993............................. 20,041,140 .06- 3.71
Granted.............................................. 3,537,200 6.47-17.63
Canceled............................................. (331,000) .58-12.44
Exercised............................................ (5,448,069) .06- 3.71
Balance at January 1, 1994............................. 17,799,271 .06-17.63
Granted.............................................. -0- N/A
Canceled............................................. (329,800) .75-17.63
Exercised............................................ (4,877,324) .06-17.63
Balance at December 31, 1994........................... 12,592,147 $ .58-17.63
</TABLE>
In 1994, an employee of the Company was granted non-qualified options to
purchase 5,000 shares of Common Stock under the Company's 1993 Stock Option
Plan at $9.94 per share, representing 50% of the per share fair market value at
the date of the grant. On July 17, 1992, certain executive officers of the
Company were granted non-qualified options to purchase an aggregate of
3,900,000 shares of Common Stock under the Company's 1985 Stock Option Plan at
per share prices ranging from $1.43 to $2.43. These prices represent 50% to 85%
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 charged
to earnings over the five year vesting period of the options.
Generally, when shares acquired pursuant to the exercise of incentive stock
options are sold within one year of exercise or within two years from the date
of grant, the Company derives a tax deduction measured by the amount that the
market value exceeds the option price at the date the options are exercised.
On January 31, 1989, the Board of Directors adopted the 1989 Employee Stock
Purchase Plan (the "1989 Plan") which was approved and adopted by the
stockholders of the Company on May 10, 1989. Under the 1989 Plan, eligible
employees of the Company are given the option to purchase shares of Common
Stock at 85% of fair market value by means of payroll deductions. At the Annual
Meeting of the Company on May 12, 1993 the stockholders approved an amendment
to the 1989 Plan to increase the number of shares available from 2,700,000 to
3,900,000. Options are granted twice yearly, on January 1 and July 1, and are
exercisable on the succeeding June 30 or December 31. The purchase price for
shares is the lower of 85% of the fair market value of the stock at the time of
grant or 85% of said value at the time of exercise. In 1994, 387,218
F-31
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
shares were exercised at $11.48 per share. In 1993, 190,492 shares were
exercised at $5.05 per share and 152,679 shares were exercised at $9.19 per
share. In 1992, 292,088 shares were exercised at $1.47 per share, 290,436
shares were exercised at $1.79 per share and 248,396 shares were exercised at
$2.55 per share.
At the Annual Meeting of the Company on May 12, 1992, the stockholders
adopted the 1992 EMC Corporation Stock Option Plan for Directors (the
"Directors Plan").
A total of 1,800,000 shares of Common Stock have been reserved for issuance
under the Directors Plan which is administered by the Executive Stock Option
and Compensation Committee (the "Committee") of the Board of Directors. The
exercise price for each option granted under the Directors Plan will be at a
price per share determined by the Committee at the time the option is granted,
which price shall not be less than 50% of the fair market value per share of
Common Stock on the date of grant. Options will be exercisable in increments of
20% for the shares covered thereby on each of the first through fifth
anniversaries of the grant.
On May 12, 1993, a director was granted options to purchase 160,000 shares of
Common Stock at a per share price of $8.25, which represents 100% of the per
share fair market value at the date of grant. On May 12, 1992, a director was
granted options to purchase 240,000 shares of Common Stock at a per share price
of $1.26, which represents 50% of the per share fair market value at the date
of grant. The discount from fair market value has been recorded as deferred
compensation and is being amortized to earnings over the five year vesting
period of the options. In 1994, options to purchase 32,000 shares and 48,000
shares were exercised at $8.25 and $1.26, respectively. In 1993, options to
purchase 48,000 shares were exercised at $1.26 per share. All stock option
plans and the employee stock purchase plan are administered by the Committee.
K. LITIGATION
On June 10, 1993, Storage Technology Corporation ("STK") filed suit against
EMC in the United States District Court for the District of Colorado alleging
that EMC is infringing three patents. In the complaint, STK seeks injunctive
relief, unspecified damages, including treble damages, plus attorney's fees and
costs. On July 20, 1993, EMC answered the complaint, denied STK's allegations
and counterclaimed. In the counterclaims, EMC seeks unspecified damages,
attorney's fees, costs and interest. In a court hearing on October 12, 1994,
STK's claims on two of the three patents were dismissed with prejudice.
Discovery on the sole remaining patent in the matter is currently in process.
The originally scheduled trial date of October 24, 1994 has been postponed.
On September 23, 1994, EMC filed suit against STK in the United States
District Court for Delaware alleging that STK is infringing one EMC patent. In
the complaint, EMC seeks injunctive relief and unspecified damages, including
treble damages, plus attorney's fees and costs. On October 12, 1994, STK
answered the complaint, denied any infringement and counterclaimed. STK has
subsequently filed an additional counterclaim. EMC has denied STK's
allegations. Discovery on this case is currently in process. A trial is
currently scheduled in March 1996.
The Company is a party to other litigation which it considers routine and
incidental to its business. Management does not expect the results of any of
these actions to have a material adverse effect on the Company's business or
financial condition.
L. OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Off-Balance-Sheet Risk
The Company enters into forward exchange and foreign currency option
contracts to hedge foreign currency transactions on a continuing basis for
periods consistent with its committed exposures. The
F-32
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company does not engage in currency speculation. The Company's foreign exchange
contracts do not subject the Company to risk due to exchange rate movements
because gains and losses on these contracts offset losses and gains on the
assets, liabilities and transactions being hedged. The foreign currency options
are exercisable at the Company's discretion and therefore do not subject the
Company to risk due to exchange rate movement. The maximum amount of foreign
currency contracts outstanding during 1994 and 1993 was $96,479,000 and
$53,390,000, respectively. At December 31, 1994 and January 1, 1994, the
Company had $89,691,000 and $50,354,000 of foreign exchange contracts
outstanding, respectively, and $10,000,000 of foreign currency options at
December 31, 1994.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of temporary cash investments, long-term
investments and trade and notes receivables. The Company places its temporary
cash investments and long-term investments in investment grade instruments and
limits the amount of investment with any one financial institution.
The credit risk associated with trade receivables is minimal due to the large
number of customers and their broad dispersion over many different industries
and geographic areas. During 1994 and 1993, no single customer accounted for
greater than 10% of the Company's revenues.
M. SEGMENT INFORMATION
The Company is active in one business segment: designing, manufacturing and
marketing high performance storage products. Information by geographic area is
presented below with revenue derived from exports shown in their area of
origin. Sales and marketing operations outside the United States are primarily
conducted through sales subsidiaries and branches located principally in Europe
and Asia and by direct sales from the parent corporation or its Irish
manufacturing subsidiary. The United States market amounted to greater than 95%
of the Company's sales, income and identifiable assets in the North/South
America segment.
F-33
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intercompany transfers between geographic areas are accounted for at prices
which are designed to be representative of unaffiliated party transactions.
<TABLE>
<CAPTION>
EUROPE,
NORTH/SOUTH MIDDLE EAST, ASIA CONSOLIDATED
AMERICA AFRICA PACIFIC ELIMINATION TOTAL
------------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1994
Sales................... $ 871,048,000 $449,467,000 $56,977,000 -- $1,377,492,000
Transfers between areas. 123,587,000 61,577,000 110,000 (185,274,000) --
Total sales............. 994,635,000 511,044,000 57,087,000 (185,274,000) 1,377,492,000
Income (loss) from oper-
ations................. 155,544,000 196,658,000 (97,000) (1,573,000) 350,532,000
Identifiable assets at
year end............... 1,230,883,000 171,233,000 36,437,000 (121,053,000) 1,317,500,000
1993
Sales................... $ 526,771,000 $251,363,000 $ 4,487,000 -- $ 782,621,000
Transfers between areas. 100,237,000 83,726,000 -- (183,963,000) --
Total sales............. 627,008,000 335,089,000 4,487,000 (183,963,000) 782,621,000
Income (loss) from oper-
ations................. 107,512,000 70,324,000 (990,000) 3,582,000 180,428,000
Identifiable assets at
year end............... 684,576,000 192,682,000 2,383,000 (49,995,000) 829,646,000
1992
Sales................... $ 263,465,000 $111,117,000 $11,124,000 -- $ 385,706,000
Transfers between areas. 83,813,000 36,303,000 -- (120,116,000) --
Total sales............. 347,278,000 147,420,000 11,124,000 (120,116,000) 385,706,000
Income from operations.. 34,915,000 25,008,000 1,255,000 (12,603,000) 48,575,000
Identifiable assets at
year end............... 252,308,000 98,232,000 4,309,000 (16,069,000) 338,780,000
</TABLE>
N. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR 1994 Q1 1994 Q2 1994 Q3 1994 Q4 1994
- ---------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales, service and rental............... $267,058 $308,116 $371,582 $430,736
Gross profit................................ 142,651 161,733 195,249 217,825
Net income.................................. 48,840 54,569 69,395 77,864
Net income per share, (fully diluted)....... $ 0.22 $ 0.24 $ 0.30 $ 0.34
<CAPTION>
FISCAL YEAR 1993 Q1 1993 Q2 1993 Q3 1993 Q4 1993
- ---------------- -------- -------- -------- --------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Net sales, service and rental............... $138,773 $179,542 $215,747 $248,559
Gross profit................................ 66,480 88,996 113,723 132,667
Net income.................................. 14,913 26,888 38,487 46,834
Net income per share, (fully diluted)....... $ 0.08 $ 0.13 $ 0.18 $ 0.21
</TABLE>
Earnings per share data has been adjusted to reflect all prior stock splits
and poolings of interests.
F-34
<PAGE>
EMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 208,997 $ 240,506
Trade and notes receivable less allowance for doubt-
ful accounts of $7,244 and $6,272, respectively..... 527,209 361,191
Inventories.......................................... 350,189 251,096
Deferred income taxes................................ 42,551 40,754
Other assets......................................... 10,912 8,258
---------- ----------
Total current assets............................... 1,139,858 901,805
Long-term investments.................................. 149,548 175,631
Notes receivable, net.................................. 32,338 38,945
Property, plant and equipment, net..................... 199,070 173,016
Deferred income taxes.................................. 5,268 4,473
Other assets, net...................................... 45,780 23,630
---------- ----------
Total assets....................................... $1,571,862 $1,317,500
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations............. $ 718 $ 9,502
Accounts payable..................................... 87,218 122,264
Accrued expenses..................................... 110,794 106,107
Income taxes payable................................. 101,145 55,521
Deferred revenue..................................... 8,250 8,070
---------- ----------
Total current liabilities.......................... 308,125 301,464
Deferred revenue....................................... 7,827 2,289
Long-term obligations:
4 1/4% convertible subordinated notes due 2001....... 229,598 229,598
6 1/4% convertible subordinated debentures due 2002.. -- 39,536
Notes payable and capital lease obligations.......... 17,140 16,972
---------- ----------
Total liabilities.................................. 562,690 589,859
---------- ----------
Stockholders' equity:
Series Preferred Stock, par value $.01; authorized
25,000,000 shares................................... -- --
Common Stock, par value $.01; authorized 500,000,000
shares; issued 218,662,073 and 201,738,042, in 1995
and 1994, respectively.............................. 2,187 2,017
Additional paid-in capital........................... 333,006 281,625
Deferred compensation................................ (1,846) (2,607)
Retained earnings.................................... 672,420 443,713
Cumulative translation adjustment.................... 4,643 3,716
Treasury stock, at cost, 2,646,453 and 2,627,467
shares, respectively................................ (1,238) (823)
---------- ----------
Total stockholders' equity......................... 1,009,172 727,641
---------- ----------
Total liabilities and stockholders' equity......... $1,571,862 $1,317,500
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-35
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- --------------------
SEPT. 30, OCT. 1, SEPT. 30, OCT. 1,
1995 1994 1995 1994
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Revenues:
Net sales.......................... $423,393 $363,748 $1,257,643 $921,608
Service and rental................. 9,323 7,834 30,938 25,148
-------- -------- ---------- --------
432,716 371,582 1,288,581 946,756
Costs and expenses:
Cost of sales and service.......... 222,603 176,333 641,423 447,123
Research and development........... 38,566 32,407 117,138 81,000
Selling, general and administra-
tive.............................. 75,289 63,940 219,415 175,269
-------- -------- ---------- --------
Operating income..................... 96,258 98,902 310,605 243,364
Investment income.................... 4,803 5,619 16,770 15,549
Interest expense..................... (3,066) (3,652) (9,598) (11,247)
Other income/(expense), net.......... (167) (1,832) 732 (1,950)
-------- -------- ---------- --------
Income before taxes.................. 97,828 99,037 318,509 245,716
Income tax provision................. 26,903 29,642 89,802 72,912
-------- -------- ---------- --------
Net income........................... $ 70,925 $ 69,395 $ 228,707 $172,804
======== ======== ========== ========
Net income per weighted average
share, primary...................... $ 0.31 $ 0.32 $ 1.01 $ 0.82
======== ======== ========== ========
Net income per weighted average
share, fully diluted................ $ 0.31 $ 0.30 $ 1.00 $ 0.76
======== ======== ========== ========
Weighted average number of common
shares outstanding, primary......... 234,730 218,331 230,228 216,558
======== ======== ========== ========
Weighted average number of common
shares outstanding, fully diluted... 234,730 234,216 234,389 233,753
======== ======== ========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-36
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
---------------------------
SEPT. 30, OCT. 1,
1995 1994
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 228,707 $ 172,804
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Depreciation and amortization.................... 38,924 22,556
Deferred income taxes............................ (2,592) (13,989)
Minority interest in consolidated subsidiaries... -- 852
Changes in assets and liabilities:
Trade and notes receivable...................... (159,326) (143,469)
Inventories..................................... (98,708) (121,188)
Other assets.................................... (28,721) (12,253)
Accounts payable................................ (35,120) 70,902
Accrued expenses................................ 4,815 32,888
Income taxes payable............................ 45,624 22,959
Deferred revenue................................ 5,729 (92)
------------ ------------
Net cash provided/(used) by operating
activities.................................... (668) 31,970
------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment........ (61,560) (71,358)
Net loss on disposal of property and equipment.... 449 70
Proceeds from sales of property and equipment..... -- 445
Net maturity/(purchase) of long-term investments.. 26,083 (117,586)
------------ ------------
Net cash used by investing activities.......... (35,028) (188,429)
------------ ------------
Cash flows from financing activities:
Issuance of common stock.......................... 12,776 10,391
Purchase of treasury stock........................ (415) (149)
Issuance of 4 1/4% convertible subordinated notes
due 2001, net of issuance costs.................. -- 29,350
Payment of long-term and short-term obligations... (9,161) (1,159)
Issuance of long-term and short-term obligations.. 545 2,988
------------ ------------
Net cash provided by financing activities........ 3,745 41,421
------------ ------------
Effect of exchange rate changes on cash............ 442 1,990
Net decrease in cash and cash equivalents.......... (31,951) (115,038)
Cash and cash equivalents at beginning of period... 240,506 345,300
------------ ------------
Cash and cash equivalents at end of period......... $ 208,997 $ 232,252
============ ============
Non-Cash Activity--Conversions of Debentures....... 39,536 13,436
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-37
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Company
EMC Corporation ("EMC" or the "Company") designs, manufactures, markets and
supports high performance storage products and provides related services for
mainframe and midrange computer systems manufactured primarily by International
Business Machines Corporation ("IBM"). The Company also designs, manufactures,
markets and supports a family of products aimed at the open systems storage
marketplace.
Accounting
The accompanying consolidated financial statements are unaudited and have
been prepared in accordance with generally accepted accounting principles.
These statements include the accounts of EMC and its subsidiaries. Certain
information and footnote disclosures normally included in the Company's annual
consolidated financial statements have been condensed or omitted. The interim
consolidated financial statements, in the opinion of management, reflect all
adjustments (consisting only of normal recurring accruals) necessary for a fair
statement of the results for the interim periods ended September 30, 1995 and
October 1, 1994.
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, 1994, which are contained in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March
29, 1995.
2. INVENTORY
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------ -----------------
<S> <C> <C>
Inventories consist of:
Purchased parts....................... $ 10,802,000 $ 8,946,000
Work-in-process....................... 167,379,000 133,116,000
Finished goods........................ 172,008,000 109,034,000
------------ ------------
$350,189,000 $251,096,000
============ ============
</TABLE>
3. CONVERTIBLE SUBORDINATED DEBENTURES
In March 1992, the Company issued $60,000,000 of 6 1/4% convertible
subordinated debentures due 2002 (the "Debentures"). The Debentures were
generally convertible at the option of the holder at any time prior to maturity
into shares of Common Stock of the Company at a conversion price of $3.063 per
share, subject to adjustment in certain events. In February 1995, the Company
notified holders of the Debentures that the Company intended to redeem the
Debentures on April 1, 1995, unless the holders chose to convert on or prior to
such date. The Company redeemed $1,000 of the Debentures on April 1, 1995. All
other Debentures were converted on or prior to that date.
4. NET INCOME PER SHARE
Net income per share was computed on the basis of weighted average common and
dilutive common equivalent shares outstanding. Weighted average shares
outstanding and earnings used in primary per share computations for the three
and nine months ended September 30, 1995 and October 1, 1994, and used in
F-38
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
fully diluted per share computations for the third quarter of 1995, reflect the
dilutive effects of the 4 1/4% convertible subordinated notes due 2001 (the
"Notes") and outstanding stock options. Weighted average shares outstanding and
earnings used in fully diluted per share computations for the nine months ended
September 30, 1995 and the three and nine months ended October 1, 1994, reflect
the dilutive effects of the Debentures, in addition to the dilutive effect of
the Notes and outstanding stock options.
5. LITIGATION
On June 10, 1993, Storage Technology Corporation ("STK") filed suit against
EMC in the United States District Court for the District of Colorado alleging
that EMC is infringing three patents. In the complaint, STK seeks injunctive
relief, unspecified damages, including treble damages, plus attorney's fees and
costs. On July 20, 1993, EMC answered the complaint, denied STK's allegations
and counterclaimed. In the counterclaims, EMC seeks unspecified damages,
attorney's fees, costs and interest. In a court hearing on October 12, 1994,
STK's claims on two of the three patents were dismissed with prejudice.
On September 23, 1994, EMC filed suit against STK in the United States
District Court for Delaware alleging that STK is infringing one EMC patent. In
the complaint, EMC seeks injunctive relief and unspecified damages, including
treble damages, plus attorney's fees and costs. On October 12, 1994, STK
answered the complaint, denied any infringement and counterclaimed. STK has
subsequently filed an additional counterclaim. EMC has denied STK's
allegations. A trial is set for March 1996.
The Company is a party to other litigation which it considers routine and
incidental to its business. Management does not expect the results of any of
these actions to have a material adverse effect on the Company's business or
financial condition.
6. SUBSEQUENT EVENT
In October 1995, the Company announced an agreement to acquire McDATA
Corporation, a leader in data network switching solutions, in a stock
transaction which is currently valued at approximately $235,000,000. The
Company intends to account for the transaction as a pooling of interests.
F-39
<PAGE>
ANNEX A
CONFORMED COPY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 25, 1995
BY AND AMONG
EMC CORPORATION,
EMC MERGER CORPORATION 1995
AND
MCDATA CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
TABLE OF DEFINED TERMS................................................... iv
ARTICLE I THE MERGER................................................. A- 1
Section 1.1 The Merger................................................. A- 1
Section 1.2 Consummation of the Merger................................. A- 1
Section 1.3 Effects of the Merger...................................... A- 1
Section 1.4 Certificate of Incorporation of the Surviving Corporation.. A- 1
Section 1.5 By-Laws of the Surviving Corporation....................... A- 1
Section 1.6 Directors and Officers of the Surviving Corporation........ A- 2
Section 1.7 Closing.................................................... A- 2
ARTICLE II DETERMINATION OF EXCHANGE RATIO AND CONVERSION AND EXCHANGE
OF SECURITIES............................................. A- 2
Section 2.1 Determination of Exchange Ratio............................ A- 2
Section 2.2 Conversion of Capital Stock................................ A- 3
Section 2.3 Exchange of Certificates................................... A- 3
Section 2.4 Dissenting Shares.......................................... A- 5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF McDATA................... A- 6
Section 3.1 Organization of McDATA..................................... A- 6
Section 3.2 McDATA Capital Structure................................... A- 6
Section 3.3 Authority; No Conflict; Required Filings and Consents...... A- 7
Section 3.4 Financial Statements....................................... A- 8
Section 3.5 No Undisclosed Liabilities................................. A- 9
Section 3.6 Accounts Receivable........................................ A- 9
Section 3.7 Inventory.................................................. A- 9
Section 3.8 Absence of Certain Changes or Events....................... A- 9
Section 3.9 Properties; Encumbrances................................... A-10
Section 3.10 Plant and Equipment........................................ A-10
Section 3.11 Bank Accounts.............................................. A-10
Section 3.12 Taxes...................................................... A-10
Section 3.13 Intellectual Property...................................... A-11
Section 3.14 Contracts and Commitments.................................. A-12
Section 3.15 Customers and Suppliers.................................... A-13
Section 3.16 Orders, Commitments and Returns............................ A-13
Section 3.17 Insurance.................................................. A-13
Section 3.18 Labor Difficulties......................................... A-13
Section 3.19 Litigation................................................. A-13
Section 3.20 Products Liability......................................... A-13
Section 3.21 Environmental Matters...................................... A-14
Section 3.22 Employee Benefit Plans..................................... A-14
Section 3.23 Personnel.................................................. A-15
Section 3.24 Agreements in Full Force and Effect........................ A-16
Section 3.25 Compliance with Laws....................................... A-16
Section 3.26 Pooling of Interests....................................... A-16
Section 3.27 Insider Interests.......................................... A-16
Section 3.28 Registration Statement: Consent Solicitation/Prospectus.... A-16
Section 3.29 No Existing Discussions.................................... A-16
Section 3.30 Opinion of Financial Advisor............................... A-16
Section 3.31 Brokers and Finders........................................ A-16
Section 3.32 Disclosure................................................. A-17
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF EMC AND SUB............... A-17
Section 4.1 Organization of EMC and Sub................................. A-17
Section 4.2 Capital Structure of EMC and Sub............................ A-17
Section 4.3 Authority; No Conflict; Required Filings and Consents....... A-17
Section 4.4 SEC Filings; Financial Statements........................... A-18
Section 4.5 Absence of Certain Changes or Events........................ A-19
Section 4.6 Registration Statement; Consent Solicitation/Prospectus..... A-19
Section 4.7 Litigation.................................................. A-19
Section 4.8 Brokers and Finders......................................... A-19
ARTICLE V CONDUCT OF BUSINESS......................................... A-19
Section 5.1 Covenants of McDATA......................................... A-19
Section 5.2 Cooperation................................................. A-21
ARTICLE VI ADDITIONAL AGREEMENTS....................................... A-21
Section 6.1 No Solicitation............................................. A-21
Section 6.2 Consent Solicitation/Prospectus; Registration Statement..... A-22
Section 6.3 Letter of McDATA's Accountants.............................. A-22
Section 6.4 Access to Information....................................... A-22
Section 6.5 Supplements to McDATA Disclosure Schedules.................. A-23
Section 6.6 Approval of Stockholders.................................... A-23
Section 6.7 Legal Conditions to Merger.................................. A-23
Section 6.8 Public Disclosure........................................... A-23
Section 6.9 Tax-Free Organization....................................... A-23
Section 6.10 Pooling Accounting.......................................... A-23
Section 6.11 Affiliate Agreements........................................ A-23
Section 6.12 NYSE Listing................................................ A-24
Section 6.13 McDATA Stock Option Plans................................... A-24
Section 6.14 Consents.................................................... A-25
Section 6.15 Additional Agreements; Reasonable Best Efforts.............. A-25
ARTICLE VII CONDITIONS TO MERGER........................................ A-25
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger.. A-25
Section 7.2 Additional Conditions to Obligations of EMC and Sub......... A-25
Section 7.3 Additional Conditions to Obligations of McDATA.............. A-27
ARTICLE VIII SURVIVAL AND INDEMNIFICATION................................ A-27
Section 8.1 Survival.................................................... A-27
Section 8.2 Indemnification by the McDATA Stockholders.................. A-27
Section 8.3 Indemnification by EMC...................................... A-28
Section 8.4 Procedures Relating to Indemnification...................... A-28
ARTICLE IX TERMINATION; FEES AND EXPENSES.............................. A-29
Section 9.1 Termination................................................. A-29
Section 9.2 Effect of Termination....................................... A-30
Section 9.3 Fees and Expenses........................................... A-30
ARTICLE X MISCELLANEOUS............................................... A-31
Section 10.1 Amendment................................................... A-31
Section 10.2 Extension; Waiver........................................... A-31
Section 10.3 Notices..................................................... A-32
Section 10.4 Interpretation.............................................. A-32
Section 10.5 Counterparts................................................ A-32
</TABLE>
ii
<PAGE>
<TABLE>
<C> <S> <C>
Section 10.6 Entire Agreement; No Third Party Beneficiaries.............. A-33
Section 10.7 Governing Law............................................... A-33
Section 10.8 Severability................................................ A-33
Section 10.9 Assignment.................................................. A-33
Exhibit A Computation of Net Quick Assets
Exhibit B Exchange and Escrow Agreement
Exhibit C Opinion of McDATA's Counsel
Exhibit D Opinion of EMC's Counsel
</TABLE>
iii
<PAGE>
TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
CROSS REFERENCE
TERMS IN AGREEMENT
----- ---------------
<S> <C>
Acquisition Proposal............................................ Section 6.1(a)
Acquisition Transaction......................................... Section 9.3(f)
Agreement....................................................... Preamble
Certificate of Merger........................................... Section 1.2
Certificate..................................................... Section 2.3(b)
Certificates.................................................... Section 2.3(b)
Claim........................................................... Section 8.4(a)
Closing......................................................... Section 1.7
Closing Average................................................. Section 2.1(b)
Closing Date.................................................... Section 1.7
Code............................................................ Preamble
Confidentiality Agreement....................................... Section 6.4
Consent Solicitation/Prospectus................................. Section 3.28
Conversion...................................................... Section 3.3(b)
Conversion Proposal............................................. Section 3.3(b)
Conversion Vote................................................. Section 3.3(b)
DGCL............................................................ Section 1.1
Dissenting Shares............................................... Section 2.4(a)
Effective Time.................................................. Section 1.2
EMC............................................................. Preamble
EMC Common Stock................................................ Section 1.7
EMC Material Adverse Effect Qualifier........................... Section 7.3(a)
EMC Minimum..................................................... Section 8.3(b)
EMC SEC Reports................................................. Section 4.4(a)
Environmental Claim............................................. Section 3.21(d)
Environmental Laws.............................................. Section 3.21(e)
ERISA........................................................... Section 3.22(a)
ERISA Affiliate................................................. Section 3.22(a)
Escrow Shares................................................... Section 2.1(b)
Exchange Act.................................................... Section 3.25(b)
Exchange and Escrow Agent....................................... Section 2.3(a)
Exchange and Escrow Agreement................................... Section 2.3(a)
Exchange Fund................................................... Section 2.3(a)
Exchange Ratio.................................................. Section 2.1(b)
Fixed Shares.................................................... Section 2.1(b)
Fixed Shares Certificate........................................ Section 2.3(a)
Governmental Entity............................................. Section 3.3(d)
HSR Act......................................................... Section 3.3(d)
Indemnified Party............................................... Section 8.4(a)
Indemnifying Party.............................................. Section 8.4(a)
IRS............................................................. Section 3.12(e)
Loss............................................................ Section 8.2(a)
Losses.......................................................... Section 8.2(a)
Material Adverse Effect......................................... Section 3.1
Materials of Environmental Concern.............................. Section 3.21(f)
McDATA.......................................................... Preamble
McDATA Affiliate................................................ Section 6.11(a)
McDATA Affiliates............................................... Section 6.11(a)
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
CROSS REFERENCE
TERMS IN AGREEMENT
----- ---------------
<S> <C>
McDATA Affiliate Agreement...................................... Section 6.11(a)
McDATA Affiliate Agreements..................................... Section 6.11(a)
McDATA Balance Sheet............................................ Section 3.4(a)
McDATA Bylaws................................................... Section 3.3(c)
McDATA Certificate of Incorporation............................. Section 3.3(c)
McDATA Class A Common Stock..................................... Section 2.1(a)
McDATA Class B Common Stock..................................... Section 2.1(a)
McDATA Closing Balance Sheet.................................... Exhibit A
McDATA Closing Certificate...................................... Section 2.1(a)
McDATA Disclosure Letter........................................ Article III
McDATA Employee Plans........................................... Section 3.22(a)
McDATA Financial Statements..................................... Section 3.4(a)
McDATA Intellectual Property Rights............................. Section 3.13(a)
McDATA Material Adverse Effect Qualifier........................ Section 7.2(a)
McDATA Minimum.................................................. Section 8.2(b)
McDATA Representative........................................... Section 8.2(c)
McDATA Series A Preferred Stock................................. Section 2.1(a)
McDATA Series B Preferred Stock................................. Section 2.1(a)
McDATA Stockholder.............................................. Section 2.1(a)
McDATA Stockholders............................................. Section 2.1(a)
McDATA Stock Option............................................. Section 2.2(d)
McDATA Stock Options............................................ Section 2.2(d)
McDATA Stock Option Plans....................................... Section 2.2(d)
McDATA Third Party Intellectual Property Rights................. Section 3.13(a)
Merger.......................................................... Preamble
Merger Consideration............................................ Section 2.2(c)
Merger Proposal................................................. Section 3.3(b)
Merger Shares................................................... Section 2.1(b)
Merger Vote..................................................... Section 3.3(b)
Net Quick Assets Amount......................................... Section 2.1(a)
NYSE............................................................ Section 2.1(b)
Registration Statement.......................................... Section 3.28
SEC............................................................. Section 3.3(d)
Section 9.1(i) Termination Period............................... Section 9.1(i)
Securities Act.................................................. Section 3.3(d)
Sub............................................................. Preamble
Sub By-laws..................................................... Section 1.5
Sub Certificate of Incorporation................................ Section 1.4
Sub Common Stock................................................ Section 2.2(a)
Subsidiary...................................................... Section 2.2(b)
Superior Proposal............................................... Section 6.1(a)
Surviving Corporation........................................... Section 1.1
Taxes........................................................... Section 3.12(j)
Tax Return...................................................... Section 3.12(j)
Third Party..................................................... Section 9.3(f)
Third Party Claim............................................... Section 8.4(b)
Warrants........................................................ Section 2.1(a)
WSJ............................................................. Section 2.1(b)
</TABLE>
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger, dated as of October 25, 1995 (this
"Agreement"), by and among EMC Corporation, a Massachusetts corporation
("EMC"), EMC Merger Corporation 1995, a Delaware corporation and a wholly owned
subsidiary of EMC ("Sub"), and McDATA Corporation, a Delaware corporation
("McDATA").
Whereas, the Boards of Directors of EMC, Sub and McDATA deem it advisable and
in the best interests of each corporation and its respective stockholders that
EMC and McDATA combine in order to advance the long-term business interests of
EMC and McDATA;
Whereas, the strategic combination of EMC and McDATA shall be effected by the
terms of this Agreement through a transaction in which Sub shall merge with and
into McDATA, McDATA shall become a wholly owned subsidiary of EMC and the
stockholders of McDATA shall become stockholders of EMC (the "Merger");
Whereas, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
Whereas, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling of interests.
Now, Therefore, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
ARTICLE I
The Merger
Section 1.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.2), Sub shall merge
with and into McDATA in accordance with the General Corporation Law of the
State of Delaware (the "DGCL"), and the separate corporate existence of Sub
shall thereupon cease and McDATA shall continue as the Surviving Corporation.
McDATA, in its capacity as the corporation surviving the Merger, is sometimes
hereinafter referred to as the "Surviving Corporation."
Section 1.2 Consummation of the Merger. In order to effectuate the Merger, on
the Closing Date (as defined in Section 1.7), McDATA shall cause a certificate
of merger (the "Certificate of Merger") to be filed with the Secretary of State
of Delaware, in such form as required by, and executed in accordance with, the
DGCL. The Merger shall be effective as of the time of filing of the Certificate
of Merger (the "Effective Time").
Section 1.3 Effects of the Merger. The Merger shall have the effects provided
for in Section 259 of the DGCL.
Section 1.4 Certificate of Incorporation of the Surviving Corporation. At and
after the Effective Time, the Certificate of Incorporation of Sub, as in effect
immediately prior to the Effective Time (the "Sub Certificate of
Incorporation"), shall be the Certificate of Incorporation of the Surviving
Corporation, until amended in accordance with the DGCL, except that the name of
the Surviving Corporation shall be McDATA Corporation.
Section 1.5 By-Laws of the Surviving Corporation. At and after the Effective
Time, the By-laws of Sub (the "Sub By-laws"), as in effect immediately prior to
the Effective Time, shall be the By-laws of the Surviving Corporation, until
amended in accordance with the DGCL.
A-1
<PAGE>
Section 1.6 Directors and Officers of the Surviving Corporation. The
directors and officers of the Surviving Corporation shall be determined by EMC,
each to hold office in accordance with the Certificate of Incorporation and By-
laws of the Surviving Corporation.
Section 1.7 Closing. Subject to Section 9.1, the closing of the Merger (the
"Closing") shall take place at 10:00 a.m., E.S.T., on the later of (a) November
30, 1995 or (b) the first business day after satisfaction of the latest to
occur of the conditions set forth in Section 7.1 (provided that the other
closing conditions set forth in Article VII have been met or waived as provided
in Article VII at or prior to the Closing), at the offices of Ireland,
Stapleton, Pryor & Pascoe, P.C., Suite 2600, 1675 Broadway, Denver, Colorado
80202, or on such other date, or at such other time or place, as is agreed to
in writing by EMC and McDATA; provided, however, that EMC may by notice to
McDATA extend the Closing for up to 90 days from the later of the dates
specified in clause (a) or (b) if EMC determines in the good faith judgment of
EMC's general counsel that the issuance of shares of common stock, $.01 par
value per share, of EMC ("EMC Common Stock") in the Merger would require
disclosure of material information which EMC has a bona fide business purpose
for preserving as confidential. The date on which the Closing shall occur is
referred to herein as the "Closing Date."
ARTICLE II
DETERMINATION OF EXCHANGE RATIO AND
CONVERSION AND EXCHANGE OF SECURITIES
Section 2.1 Determination of Exchange Ratio.
(a) At the Closing, McDATA shall deliver to EMC a certificate, in form and
substance satisfactory to EMC and signed by its Chief Executive Officer and
Chief Financial Officer (the "McDATA Closing Certificate"), certifying (i) the
amount of net quick assets of McDATA as of the Closing Date computed in
accordance with Exhibit A hereto (the "Net Quick Assets Amount") and that such
Net Quick Assets Amount was computed in accordance with Exhibit A, (ii) that
all outstanding shares of (x) Series A Convertible Preferred Stock, par value
$0.001 per share, of McDATA ("McDATA Series A Preferred Stock"), (y) Series B
Convertible Preferred Stock, par value $0.001 per share, of McDATA ("McDATA
Series B Preferred Stock") and (z) Class B Common Stock, par value $0.001 per
share, of McDATA ("McDATA Class B Common Stock") have been converted into
shares of Class A Common Stock, par value $0.001 per share, of McDATA ("McDATA
Class A Common Stock"), (iii) that all outstanding warrants (the "Warrants") to
purchase McDATA Class A Common Stock granted under a Warrant Agreement dated as
of April 28, 1993 between McDATA and the entities listed on Schedule 1 thereto
have been exercised (or if not exercised, shall not be exercised prior to
Effective Time), (iv) the number of outstanding shares of McDATA Class A Common
Stock, as of the Closing Date, and (v) by reference to a schedule to the McDATA
Closing Certificate, a list of all the holders of shares of McDATA Class A
Common Stock as such names appear on the stock transfer books of McDATA
(individually, a "McDATA Stockholder" and collectively, the "McDATA
Stockholders"), the number of shares of McDATA Class A Common Stock held by
each such holder and the ownership interest percentage of each such holder
determined by dividing the number of shares of McDATA Class A Common Stock held
by such holder by the number of outstanding shares of McDATA Class A Common
Stock, in each case, as of the Closing Date.
(b) The aggregate number of shares of EMC Common Stock to be issued in the
Merger shall be the sum of (i) $180,000,000 divided by the average (the
"Closing Average") of the closing prices of EMC Common Stock on the New York
Stock Exchange (the "NYSE") composite tape as reported in The Wall Street
Journal (the "WSJ") on each of the ten trading days immediately preceding the
Closing Date and (ii) the Net Quick Assets Amount divided by the Closing
Average (such sum expressed as a number of shares of EMC Common Stock being
hereinafter referred to as the "Merger Shares"). The number of Merger Shares to
be issued in the Merger in exchange for each share of McDATA Class A Common
Stock shall be the result of dividing (i) the aggregate number of Merger Shares
(90% of such aggregate number of Merger Shares being hereinafter
A-2
<PAGE>
referred to as the "Fixed Shares" and the remaining 10% of such aggregate
number of Merger Shares being hereinafter referred to as the "Escrow Shares")
by (ii) the number of shares of McDATA Class A Common Stock outstanding on the
Closing Date as reflected on the McDATA Closing Certificate (such result
expressed as a ratio of the number of shares of EMC Common Stock to be issued
in the Merger for each then outstanding share of McDATA Class A Common Stock
(and representing a pro rata portion of Fixed Shares and Escrow Shares based on
the portion the total of each of such Fixed Shares and Escrow Shares to be
issued in the Merger shall represent of the total number of shares of EMC
Common Stock to be issued in the Merger) is hereinafter referred to as the
"Exchange Ratio").
Section 2.2 Conversion of Capital Stock. As of the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any shares of
McDATA Class A Common Stock or capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of Common
Stock, par value $.01 per share ("Sub Common Stock"), of Sub shall be
converted into and become one fully paid and nonassessable share of Common
Stock, par value $.01 per share, of the Surviving Corporation.
(b) Cancellation of Treasury Stock and EMC-Owned Stock. All shares of
McDATA Class A Common Stock that are owned by McDATA as treasury stock and
any shares of McDATA Class A Common Stock owned by EMC, Sub or any other
wholly owned Subsidiary (as defined below) of EMC shall be cancelled and
retired and shall cease to exist and no stock of EMC or other consideration
shall be delivered in exchange therefor. As used in this Agreement, the
word "Subsidiary" means, with respect to any party, any corporation or
other organization, whether incorporated or unincorporated, of which (i)
such party or any other Subsidiary of such party is a general partner
(excluding partnerships, the general partnership interests of which held by
such party or any Subsidiary of such party do not have a majority of the
voting interest in such partnership) or (ii) at least a majority of the
securities or other interests having by their terms ordinary voting power
to elect a majority of the Board of Directors or others performing similar
functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such party or by any one or
more of its Subsidiaries, or by such party and one or more of its
Subsidiaries.
(c) McDATA Common Stock. Subject to Sections 2.3 and 2.4, each issued and
outstanding share of McDATA Class A Common Stock (other than shares of
McDATA Class A Common Stock cancelled in accordance with Section 2.2(b) and
any Dissenting Shares (as defined in Section 2.4)) shall be converted into
the right to receive a number of fully paid and nonassessable shares of EMC
Common Stock equal to the Exchange Ratio. All such shares of McDATA Class A
Common Stock, when so converted, shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and each
holder of a certificate representing any such shares shall cease to have
any rights with respect thereto, except the right to receive the shares of
EMC Common Stock pursuant to this Section 2.2(c), any cash in lieu of
fractional shares payable pursuant to Section 2.3(d) and any dividends or
other distributions payable pursuant to Section 2.3(c), all to be issued or
paid in consideration therefor upon the surrender of such certificate in
accordance with Section 2.3 (collectively, the "Merger Consideration").
(d) McDATA Stock Options. All options to purchase McDATA Class A Common
Stock or McDATA Class B Common Stock (individually a "McDATA Stock Option"
and collectively the "McDATA Stock Options") granted under the 1988
Incentive Stock Option Plan, the 1990 Class B Stock Option Plan or the
Director's Stock Option Plan (collectively, the "McDATA Stock Option
Plans"), which are outstanding and not exercisable as of the Effective
Time, will be assumed by EMC in accordance with Section 6.13.
Section 2.3 Exchange of Certificates.
(a) Exchange Agent. At the Closing, EMC and the McDATA Representative (as
defined in Section 8.2(c)) shall enter into an Exchange and Escrow Agreement
substantially in the form of Exhibit B
A-3
<PAGE>
hereto (the "Exchange and Escrow Agreement") with a bank or trust company
mutually acceptable to EMC and McDATA (the "Exchange and Escrow Agent"). As of
the Effective Time, EMC shall deposit with the Exchange and Escrow Agent
pursuant to the Exchange and Escrow Agreement, for the benefit of the holders
of shares of McDATA Class A Common Stock, for exchange in accordance with this
Section 2.3 and the Exchange and Escrow Agreement through the Exchange and
Escrow Agent, certificates representing the shares of EMC Common Stock issuable
pursuant to Section 2.2(c) in exchange for outstanding shares of McDATA Class A
Common Stock. EMC shall deposit with the Exchange and Escrow Agent (i) for each
McDATA Stockholder, one certificate representing the number of whole Fixed
Shares issuable to such holder pursuant to Section 2.2(c) (a "Fixed Shares
Certificate"); and (ii) for all McDATA Stockholders, one certificate
representing the aggregate number of whole Escrow Shares. From time to time,
EMC shall make available to the Exchange and Escrow Agent sufficient cash to
make all cash payments in lieu of fractional shares pursuant to Section 2.3(d).
All deposits with the Exchange and Escrow Agent pursuant to this Section 2.3(a)
together with any dividends or distributions with respect to shares of EMC
Common Stock as contemplated by Section 2.3(c) are referred to herein as the
"Exchange Fund."
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange and Escrow Agent shall mail to each holder of
record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of McDATA Class A Common Stock
(individually, a "Certificate" and collectively, the "Certificates") whose
shares were converted pursuant to Section 2.2(c) into the right to receive
shares of EMC Common Stock (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange and Escrow
Agent and shall be in such form and have such other provisions as EMC and
McDATA may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of EMC Common Stock. Upon surrender of a Certificate for cancellation to the
Exchange and Escrow Agent, together with such letter of transmittal, duly
executed, the holder of such Certificate shall be entitled to receive in
exchange therefor (i) promptly upon surrender of such Certificate, such
holder's Fixed Shares Certificate, cash in lieu of any fractional share of EMC
Common Stock payable pursuant to Section 2.3(d) with respect to Fixed Shares
issuable to such holder pursuant to Section 2.2(c) and any dividends or other
distributions payable pursuant to Section 2.3(c) with respect to Fixed Shares
issuable to such holder pursuant to Section 2.2(c) and (ii) at the time and
subject to the terms and conditions of the Exchange and Escrow Agreement, a
certificate representing the number of whole Escrow Shares issuable to such
holder pursuant to this Agreement and the Exchange and Escrow Agreement, cash
in lieu of any fractional share of EMC Common Stock payable pursuant to Section
2.3(d) with respect to such Escrow Shares and any dividends or other
distributions payable pursuant to Section 2.3(c) with respect to such Escrow
Shares, and the Certificate so surrendered shall immediately be cancelled.
Until surrendered as contemplated by this Section 2.3(b), each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the certificate representing shares of EMC
Common Stock, cash in lieu of any fractional share of EMC Common Stock payable
pursuant to Section 2.3(d) and any dividends or other distributions payable
pursuant to Section 2.3(c).
If any certificate representing shares of EMC Common Stock is to be issued in
a name other than that in which the Certificate surrendered in exchange
therefor is registered or any payment pursuant to Sections 2.3(c) or 2.3(d) is
to be paid other than to the registered holder of the Certificate so
surrendered, it shall be a condition of such exchange or payment, as the case
may be, that the Certificate so surrendered shall be properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange or payment, as the case may be, shall pay any transfer or other taxes
required by reason of the issuance of certificates for such shares of EMC
Common Stock in a name other than that of, or payment to a person other than,
as the case may be, the registered holder of the Certificate so surrendered.
In the event any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Certificate
to be lost, stolen or destroyed and if, after consulting with the McDATA
Representative, EMC shall reasonably conclude that such affidavit does not
adequately protect
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EMC or the Surviving Corporation, upon the posting by such person of a bond in
such amount as EMC or the Surviving Corporation may reasonably direct as
indemnity against any claim that may be made against either of them with
respect to such Certificate, the Exchange and Escrow Agent will issue, as
provided in this Section 2.3(b), in respect of such lost, stolen or destroyed
Certificate the number of whole shares of EMC Common Stock to which such person
has a right to receive pursuant to Section 2.2(c), cash in lieu of any
fractional share of EMC Common Stock payable pursuant to Section 2.3(d) and any
dividends or other distributions payable pursuant to Section 2.3(c).
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to EMC
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of EMC
Common Stock represented thereby until the holder of record of such Certificate
surrenders such Certificate, provided that there shall be paid to the record
holder of the certificates representing whole shares of EMC Common Stock issued
in exchange therefor, without interest, (i) at the time such holder receives
such certificate, the amount of any dividends or other distributions with a
record date after the Effective Time and a payment date prior to such time
previously paid with respect to the whole shares of EMC Common Stock
represented by such certificate and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time and a payment date subsequent to such time payable with respect
to such whole shares of EMC Common Stock represented by such certificate.
(d) No Fractional Shares. Notwithstanding any other provision of this
Agreement, no certificate or scrip representing fractional shares of EMC Common
Stock shall be issued upon the surrender for exchange of Certificates, no
dividend or other distribution with respect to EMC Common Stock shall relate to
any fractional shares of EMC Common Stock and such fractional share interests
shall not entitle the owner thereof to vote or to any rights of a stockholder
of EMC. In lieu of any such fractional shares, each holder of shares of McDATA
Class A Common Stock exchanged pursuant to the Merger who would otherwise have
been entitled to receive a fraction of a share of EMC Common Stock (after
taking into account all Certificates delivered by such holder) shall be paid an
amount in cash, without interest, equal to such fractional part of a share of
EMC Common Stock multiplied by the Closing Average.
(e) Termination of Exchange Fund. Upon the expiration of the term of the
Exchange and Escrow Agreement, any portion of the Exchange Fund which remains
undistributed to the stockholders of McDATA on the first anniversary of the
Effective Time shall be delivered to EMC, upon demand, and any McDATA
Stockholders who have not previously complied with this Section 2.3 shall
thereafter look only to EMC for payment of their claim for EMC Common Stock,
any cash in lieu of fractional shares of EMC Common Stock and any dividends or
distributions with respect to EMC Common Stock.
(f) Closing of Stock Transfer Books. The stock transfer books of McDATA shall
be closed as of the close of business on the first business day immediately
preceding the Closing Date, and thereafter there shall be no further
registration of transfers on the stock transfer books of McDATA or the
Surviving Corporation of the shares of McDATA Class A Common Stock which were
outstanding immediately prior to such time. If, after such time, Certificates
are presented to the Surviving Corporation for any reason, they shall be
cancelled and exchanged as provided in this Section 2.3.
(g) No Liability. Neither EMC nor McDATA shall be liable to any holder of
shares of McDATA Class A Common Stock or EMC Common Stock, as the case may be,
for such shares (or dividends or distributions with respect thereto) delivered
to a public official pursuant to any applicable abandoned property, escheat or
similar law.
Section 2.4 Dissenting Shares.
(a) Notwithstanding any other provision of this Agreement to the contrary,
shares of McDATA Class A Common Stock that are outstanding immediately prior to
the Effective Time and which are held by
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McDATA Stockholders who shall have not voted in favor of the Merger or
consented thereto in writing and who shall have demanded properly in writing
appraisal for such shares in accordance with Section 262 of the DGCL and who
shall not have withdrawn such demand or otherwise have forfeited appraisal
rights (collectively, the "Dissenting Shares") shall not be converted into or
represent the right to receive the Merger Consideration. Such McDATA
Stockholders shall be entitled to receive payment of the appraised value of
such shares of McDATA Class A Common Stock held by them in accordance with the
provisions of such Section 262, except that all Dissenting Shares held by
McDATA Stockholders who shall have failed to perfect or who effectively shall
have withdrawn or lost their rights to appraisal of such shares of McDATA Class
A Common Stock under such Section 262 shall thereupon be deemed to have been
converted into and to have become exchangeable, as of the Effective Time, for
the right to receive, without interest, the Merger Consideration upon
surrender, in the manner provided in Section 2.3 of the certificate or
certificates which immediately prior to the Effective Time represented such
shares of McDATA Class A Common Stock.
(b) McDATA shall give EMC (i) prompt notice of any demands for appraisal
received by McDATA, withdrawals of such demands, and any other instruments
served pursuant to the DGCL and received by McDATA and (ii) the opportunity to
direct all negotiations and proceedings with respect to demands for appraisal
under the DGCL. McDATA shall not, except with the prior written consent of EMC,
make any payment with respect to any demands for appraisal, or offer to settle,
or settle, any such demands.
ARTICLE III
Representations and Warranties of McData
McDATA represents and warrants to EMC and Sub that the statements contained
in this Article III are true and correct, except as set forth in the disclosure
letter delivered by McDATA to EMC on or before the date of this Agreement (the
"McDATA Disclosure Letter"). The McDATA Disclosure Letter shall be arranged in
sections corresponding to the numbered and lettered sections contained in this
Article III and the disclosure in any section shall qualify only the
corresponding section in this Article III.
Section 3.1 Organization of McDATA. Each of McDATA and its Subsidiaries is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, has all requisite corporate
power to own, lease and operate its property and to carry on its business as
now being conducted and as proposed to be conducted and is duly qualified or
licensed to do business and is in good standing as a foreign corporation in
each jurisdiction in which the failure to be so qualified or licensed would, in
the aggregate, have or result in a material adverse effect on the prospects,
business, assets (including intangible assets), properties, liabilities,
results of operations or condition (financial or otherwise) ("Material Adverse
Effect") of McDATA (taken separately) or McDATA and its Subsidiaries (taken as
a whole). Neither McDATA nor any of its Subsidiaries directly or indirectly
owns any equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for any equity or similar interest in, any
corporation, partnership, joint venture or other business association or
entity.
Section 3.2 McDATA Capital Structure.
(a) The authorized capital stock of McDATA consists (i) of 11,500,000 shares
of Common Stock, par value $0.001 per share, of which 10,000,000 are designated
as McDATA Class A Common Stock and 1,500,000 are designated as McDATA Class B
Common Stock, and (ii) 5,000,000 shares of Preferred Stock, par value $0.001
per share, of which 27,520 are designated McDATA Series A Preferred Stock and
1,121,425 are designated McDATA Series B Preferred Stock. As of the date of
this Agreement, (i) 3,154,936 shares of McDATA Class A Common Stock are issued
and outstanding, all of which are validly issued, fully paid and nonassessable,
and 82,782 shares of McDATA Class A Common Stock are held in the treasury of
McDATA or by Subsidiaries of McDATA; (ii) 268,145, 27,520 and 1,121,425 shares
of McDATA Class A Common Stock are reserved for future issuance upon conversion
of the McDATA Class B Common Stock, McDATA
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Series A Preferred Stock and McDATA Series B Preferred Stock, respectively;
(iii) 169,163 shares of McDATA Class A Common Stock are reserved for future
issuance pursuant to stock options granted and outstanding under the McDATA
Stock Option Plans; (iv) 986 shares of McDATA Class A Common Stock are reserved
for future issuance pursuant to the Warrants; (v) 203,140 shares of McDATA
Class B Common Stock are issued and outstanding, all of which are validly
issued, fully paid and nonassessable, and 17,473 shares of McDATA Class B
Common Stock are held in the treasury of McDATA or by Subsidiaries of McDATA;
(vi) 56,599 shares of McDATA Class B Common Stock are reserved for future
issuance pursuant to stock options granted and outstanding under the McDATA
Stock Option Plans; (vii) 27,520 shares of McDATA Series A Preferred Stock are
issued and outstanding, all of which are validly issued, fully paid and
nonassessable, and no shares of McDATA Series A Preferred Stock are held in the
treasury of McDATA or by Subsidiaries of McDATA; and (viii) 1,121,425 shares of
McDATA Series B Preferred Stock are issued and outstanding, all of which are
validly issued, fully paid and nonassessable, and no shares of McDATA Series B
Preferred Stock are held in the treasury of McDATA or by any Subsidiary of
McDATA. All shares of McDATA Class A Common Stock or Class B Common Stock
subject to issuance as specified above, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
shall be duly authorized, validly issued, fully paid and nonassessable. All of
the outstanding shares of capital stock of each of McDATA's Subsidiaries are
duly authorized, validly issued, fully paid and nonassessable and all such
shares (other than directors' qualifying shares in the case of foreign
Subsidiaries) are owned by McDATA or a Subsidiary of McDATA free and clear of
all security interests, liens, claims, pledges, agreements, limitations in
McDATA's voting rights, charges or other encumbrances of any nature.
(b) Except as set forth in Section 3.2(a), there are no equity securities of
any class of McDATA or any security exchangeable into or exercisable for such
equity securities, issued, reserved for issuance or outstanding. Except as set
forth in Section 3.2(a), there are no options, warrants, calls, rights,
commitments or agreements of any character to which McDATA or any of its
Subsidiaries is a party, or by which McDATA or any of its Subsidiaries is
bound, obligating McDATA or any of its Subsidiaries to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock of
McDATA or any of its Subsidiaries or obligating McDATA or any of its
Subsidiaries to grant, extend or accelerate the vesting of or enter into any
such option, warrant, call, right, commitment or agreement. There are no voting
trusts, proxies or other agreements or understandings with respect to the
shares of capital stock of McDATA. There are no obligations, contingent or
otherwise, of McDATA or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of McDATA or any of its
Subsidiaries or to provide funds to or make any investment (in the form of a
loan, capital contribution or otherwise) in any such Subsidiary or any other
entity.
(c) As of the date of this Agreement, (i) the amount of accrued and unpaid
dividends with respect to all outstanding shares of McDATA Series A Preferred
Stock equals $1,078.80, (ii) the amount of accrued and unpaid dividends with
respect to all outstanding shares of McDATA Series B Preferred Stock equals
$50,722.90 and (iii) there are no accrued and unpaid dividends with respect to
any outstanding shares of McDATA Class A Common Stock or McDATA Class B Common
Stock.
Section 3.3 Authority; No Conflict; Required Filings and Consents.
(a) McDATA has all requisite corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated by this Agreement.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of McDATA, subject only to the approvals of
McDATA's stockholders specified in Section 3.3(b). This Agreement has been duly
executed and delivered by McDATA and constitutes a valid and binding obligation
of McDATA, enforceable in accordance with its terms.
(b) The affirmative vote of the (i) holders of a majority of the outstanding
shares of McDATA Class A Common Stock, voting as a separate class, (ii) holders
of a majority of the outstanding shares of McDATA Class B Common Stock, voting
as a separate class, and (iii) holders of 66 2/3% of the outstanding shares of
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McDATA Series A Preferred Stock and McDATA Series B Preferred Stock, voting
together as a single class, are the only votes (collectively, the "Merger
Vote") of the holders of any class or series of McDATA's capital stock
necessary to approve this Agreement and the Merger. The affirmative vote of the
holders of 66 2/3% of the outstanding shares of McDATA Series A Preferred Stock
and McDATA Series B Preferred Stock, voting together as a single class (the
"Conversion Vote"), are the only votes required to automatically convert all
outstanding shares of McDATA Series A Preferred Stock, McDATA Series B
Preferred Stock and McDATA Class B Common Stock into McDATA Class A Common
Stock (the "Conversion"). The Board of Directors of McDATA (at a meeting duly
called and held) has unanimously (w) approved this Agreement, the Merger and
the transactions contemplated hereby (the "Merger Proposal"), (x) approved the
conversion of all the outstanding shares of McDATA Series A Preferred Stock and
McDATA Series B Preferred Stock into McDATA Class A Common Stock (the
"Conversion Proposal"), (y) determined that the Merger Proposal and the
Conversion Proposal are fair to and in the best interests of the holders of
capital stock of McDATA and (z) determined to recommend the Merger Proposal and
the Conversion Proposal to the holders of McDATA capital stock entitled to vote
for such approval and adoption.
(c) The execution and delivery of this Agreement by McDATA does not, and the
consummation of the transactions contemplated by this Agreement will not, (i)
conflict with, or result in any violation or breach of any provision of the
Amended and Restated Certificate of Incorporation ("McDATA Certificate of
Incorporation"), or the Bylaws (the "McDATA Bylaws"), of McDATA, (ii) result in
any violation or breach of, or constitute (with or without notice or lapse of
time, or both) a default (or give rise to a right of termination, cancellation
or acceleration of any obligation or loss of any benefit) under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
contract or other agreement, instrument or obligation to which McDATA or any of
its Subsidiaries is a party or by which any of them or any of their properties
or assets may be bound, or (iii) conflict or violate any permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to McDATA or any of its Subsidiaries or any of its or
their properties or assets, except in the case of (ii) and (iii) for any such
violations, breaches, defaults, terminations, cancellations, accelerations or
conflicts which would not, in the aggregate, have a Material Adverse Effect on
McDATA (taken separately) or McDATA and its Subsidiaries (taken as a whole) or
impair the ability of McDATA to consummate the transactions contemplated by
this Agreement.
(d) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity"), is
required by or with respect to McDATA or any of its Subsidiaries in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (i) the filing of the pre-merger
notification report under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended ("HSR Act"), (ii) the filing of a Registration Statement on
Form S-4 with the Securities and Exchange Commission ("SEC") in accordance with
the Securities Act of 1933, as amended (the "Securities Act"), (iii) the filing
of the Certificate of Merger with the Delaware Secretary of State, (iv) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable state securities laws and (v) such
other consents, authorizations, filings, approvals and registrations which, if
not obtained or made, would not, in the aggregate, have a Material Adverse
Effect on McDATA (taken separately) or McDATA and its Subsidiaries (taken as a
whole) or impair the ability of McDATA to consummate the transactions
contemplated by this Agreement.
Section 3.4 Financial Statements.
(a) McDATA has heretofore delivered or made available to EMC: (i)
consolidated balance sheets of McDATA as at December 30, 1994, December 31,
1993, December 25, 1992 and consolidated statements of operations, cash flows
and changes in common stock and other stockholders' equity for each of the
years then ended, audited by Price Waterhouse LLP, independent certified public
accountants whose audit reports thereon are included therein; and (ii) an
unaudited consolidated statement of financial position as at
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September 29, 1995 (the "McDATA Balance Sheet") and an unaudited statement of
operations for the nine month period then ended (collectively, the "McDATA
Financial Statements").
(b) Each of the McDATA Financial Statements (including, in each case, any
related notes), complied, as of their respective dates, in all material
respects with all applicable accounting requirements with respect thereto, was
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods involved and fairly presented the
consolidated financial position of McDATA and its Subsidiaries as at the
respective dates and the consolidated results of its operations and cash flows
for the periods indicated, except that the McDATA Balance Sheet and interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount.
(c) The McDATA Closing Balance Sheet (as defined in Exhibit A hereto) shall
comply, as of the date thereof, in all material respects with all applicable
accounting requirements with respect thereto, shall be prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved and with the McDATA Financial Statements and
fairly present the consolidated financial position of McDATA and its
Subsidiaries as at the date thereof, except that the McDATA Closing Balance
Sheet and interim financial statements shall be subject to normal and recurring
year-end adjustments which were not or are not expected to be material in
amount. The net quick assets of McDATA as of the Closing Date computed in
accordance with Exhibit A hereto shall not be less than the Net Quick Assets
Amount.
Section 3.5 No Undisclosed Liabilities. McDATA and its Subsidiaries do not
have any liabilities or obligations (whether accrued, contingent, due or to
become due or whether or not required to be reflected in financial statements
in accordance with generally accepted accounting principles) other than (i)
liabilities reflected in the McDATA Balance Sheet or (ii) normal or recurring
liabilities incurred since September 29, 1995 in the ordinary course of
business consistent with past practices. McDATA does not have any liability or
obligation with respect to the dividend that McDATA gave notice of its intent
to declare and pay by notice dated September 7, 1995 and no holder of any
capital stock of McDATA has any right to cause McDATA to declare or pay (or
otherwise with respect to) such dividend.
Section 3.6 Accounts Receivable. All accounts receivable of McDATA, whether
reflected in the McDATA Balance Sheet or otherwise, represent sales actually
made in the ordinary course of business, and are current and collectible net of
any reserves shown on the McDATA Balance Sheet (which reserves were calculated
consistent with past practices).
Section 3.7 Inventory. All of the inventories of McDATA are of a quality
usable and salable in the ordinary course of business and have been valued in
accordance with generally accepted accounting principles consistent with past
practice, except for items of obsolete materials and materials of below-
standard quality, all of which have been written off or written down to fair
market value consistent with past practices. All inventories not written off
have been priced at the lower of cost or market using average cost and the
specific identification method determined in the ordinary course of business
consistent with past practices. All work in process and finished goods
inventory is free of any material defect or other deficiency.
Section 3.8 Absence of Certain Changes or Events. Since the date of the
McDATA Balance Sheet, McDATA and its Subsidiaries have conducted their
businesses only in the ordinary course and in a manner consistent with past
practices and, since such date, there has not been: (i) any material adverse
change in the prospects, business assets (including intangible assets),
properties, liabilities, results of operations or condition (financial or
otherwise) of McDATA (taken separately) or McDATA and any of its Subsidiaries
(taken as a whole); or (ii) any action or event that would have required the
consent of EMC pursuant to Section 5.1 had such action or event occurred after
the date of this Agreement.
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Section 3.9 Properties; Encumbrances. McDATA and each of its Subsidiaries
have good, valid and marketable title to, or a valid leasehold interest in, all
the properties and assets which it purports to own or lease (real, personal and
mixed, tangible and intangible), including, without limitation, all the
properties and assets reflected in the McDATA Balance Sheet (except for
personal property sold since the date of the McDATA Balance Sheet in the
ordinary course of business and consistent with past practices). All properties
and assets reflected in the McDATA Balance Sheet are free and clear of all
title defects or objections, liens, claims, charges, security interests or
other encumbrances of any nature whatsoever, except for liens reflected on the
McDATA Balance Sheet and liens for current taxes not yet due and other liens
that do not materially detract from the value or impair the use of the property
or assets subject thereto.
Section 3.10 Plant and Equipment. The plant and structures, to McDATA's
knowledge, and test equipment of McDATA are structurally sound with no material
defects and are in good operating condition and repair and are adequate for the
uses to which they are being put; and none of such plants or structures, to
McDATA's knowledge, or equipment are in need of maintenance and repairs except
for ordinary, routine maintenance and repairs which are not material in nature
or cost. McDATA has not received notification that it is in violation of any
applicable building, zoning, anti-pollution, health or other law, ordinance or
regulation in respect of its plants or structures or their operations and no
such violation exists.
Section 3.11 Bank Accounts. Section 3.11 of the McDATA Disclosure Letter sets
forth the names and locations of all banks, trust companies, savings and loan
associations and other financial institutions at which McDATA maintains safe
deposit boxes or accounts of any nature and the names of all persons authorized
to draw thereon, make withdrawals therefrom or have access thereto.
Section 3.12 Taxes.
(a) McDATA and each of its Subsidiaries have filed all federal, and all
state, local, foreign and provincial Tax Returns (as defined herein) required
to have been filed on or prior to the date hereof, or appropriate extensions
therefor have been properly obtained, and such Tax Returns are true, correct
and complete, except to the extent that any failure to be true, correct and
complete would not, individually or in the aggregate, have a Material Adverse
Effect on McDATA (taken separately) or McDATA and its Subsidiaries (taken as a
whole).
(b) All Taxes (as defined herein) shown to be due on such Tax Returns have
been timely paid or such Taxes are being contested in good faith and in a
timely manner, and McDATA and each of its Subsidiaries have complied with all
rules and regulations relating to the withholding of Taxes, except to the
extent that any failure to comply with such rules and regulations would not,
individually or in the aggregate, have a Material Adverse Effect on McDATA
(taken separately) or McDATA and its Subsidiaries (taken as a whole).
(c) There are no material liens for Taxes on the assets of McDATA or any of
its Subsidiaries except for statutory liens for current Taxes not yet due.
(d) Neither McDATA nor any of its Subsidiaries has waived any statute of
limitations in respect of its Taxes.
(e) Any Tax Returns relating to federal and state income Taxes have not been
examined by the Internal Revenue Service ("IRS") or the appropriate state
taxing authority or the period for assessment of the Taxes in respect of which
such Tax Returns were required to be filed has expired.
(f) No issues that have been raised by the relevant taxing authority in
connection with the examination of such Tax Returns are currently pending.
(g) All deficiencies asserted or assessments made as a result of any
examination of such Tax Returns by any taxing authority (i) have been paid in
full or (ii) are being contested timely, properly and in good faith. The
charges, accruals and reserves on the books of McDATA and its Subsidiaries in
respect of Taxes have been established and maintained (in accordance with
generally accepted accounting principles).
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(h) Neither McDATA nor any of its Subsidiaries is a party to any agreement,
contract or arrangement that could result, separately, or in the aggregate, in
the payment of any "excess parachute payments" within Section 280G of the Code.
(i) Neither McDATA nor any of its Subsidiaries is required to include in
income any adjustment pursuant to Section 481(a) of the Code by reason of a
voluntary change in accounting method (nor has any taxing authority proposed
any such adjustment or change in accounting method).
(j) For purposes of this Agreement: (i) "Taxes" means any federal, state,
local, foreign or provincial income, gross receipts, property, sales, use,
license, excise, franchise, employment, payroll, withholding, alternative or
added minimum, ad valorem, transfer or excise tax, or any other tax, custom,
duty, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or penalty, imposed by any governmental
entity; and (ii) "Tax Return" means any return, report or similar statement
(including any attached schedules) required to be filed with respect to any
Tax, including any information return, claim for refund, amended return or
declaration of estimated Tax.
Section 3.13 Intellectual Property.
(a) McDATA and its Subsidiaries own, or have a valid license to use or
otherwise possess legally enforceable rights to use, all patents and
applications for patents, trademarks, trade names, service marks, copyrights,
maskworks, schematics, technology, know-how, trade secrets, computer software
programs or applications and tangible or intangible proprietary information or
material that are necessary to conduct the businesses of McDATA or any of its
Subsidiaries as currently conducted (collectively, the "McDATA Intellectual
Property Rights"), except for such McDATA Intellectual Property Rights the
absence of which would not have a Material Adverse Effect on McDATA (taken
separately) or McDATA and its Subsidiaries (taken as a whole). Section 3.13 of
the McDATA Disclosure Letter lists (i) all patents and patent applications and
all trademarks, registered copyrights, computer software programs, maskworks,
trade names and service marks, which are material to the businesses of McDATA
or any of its Subsidiaries and are McDATA Intellectual Property Rights,
including all registrations and applications for registrations thereof and the
jurisdictions in which each such McDATA Intellectual Property Right has been
issued or registered or in which any such application for such issuance and
registration has been filed, (ii) all material licenses, sublicenses and other
agreements as to which McDATA or any of its Subsidiaries is a party and
pursuant to which any person is authorized to use any McDATA Intellectual
Property Rights and (iii) all material licenses, sublicenses and other
agreements as to which McDATA or any of its Subsidiaries is a party and
pursuant to which McDATA or any of its Subsidiaries is authorized to use any
third party patents, trademarks, service marks, copyrights (including
software), trade secrets, technology or know-how ("McDATA Third Party
Intellectual Property Rights") which are material to the business of McDATA or
any of its Subsidiaries.
(b) McDATA is not, nor will it be as a result of the execution and delivery
of this Agreement or the performance of its obligations under this Agreement,
in breach of any license, sublicense or other agreement relating to the McDATA
Intellectual Property Rights or McDATA Third Party Intellectual Property
Rights, the breach of which would have a Material Adverse Effect on McDATA
(taken separately) or McDATA and its Subsidiaries (taken as a whole).
(c) All patents and all trademark, service mark and copyright registrations
held by McDATA are, to McDATA's knowledge, valid and are subsisting, in full
force and effect and have been duly maintained. McDATA (i) is not, and has not
been, a party to any suit, action or proceeding which involves a claim of
infringement, invalidity, misuse or abandonment of any patents, trademarks,
service marks, copyrights (including computer software programs) or violation
of any trade secret or other proprietary right of any third party, and does not
otherwise have knowledge of any such claim; (ii) has no knowledge that the
manufacturing, marketing, licensing, sale, distribution or use of its products
or services infringes or violates any patent, trademark, service mark,
copyright, trade secret or other proprietary right of any third party,
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which such violation or infringement would have a Material Adverse Effect on
McDATA (taken separately) or McDATA and its Subsidiaries (taken as a whole);
and (iii) has no knowledge that any third party is violating or infringing any
McDATA Intellectual Property Rights, which such violation or infringement would
have a Material Adverse Effect on McDATA (taken separately) or McDATA and its
Subsidiaries (taken as a whole).
Section 3.14 Contracts and Commitments. Section 3.14 of the McDATA
Disclosure Letter contains a list of all material agreements, contracts, leases
or other commitments in effect to which McDATA or any of its Subsidiaries is a
party, copies of each of which have been delivered to or have been made
available to EMC prior to the date of this Agreement. Except as set forth in
Section 3.14 of the McDATA Disclosure Letter:
(a) All such agreements, contracts, leases and commitments are in full
force and effect and are valid, binding and enforceable in accordance with
their respective terms;
(b) No purchase contracts of McDATA or any of its Subsidiaries continue
for a period of more than 12 months or are in excess of the normal,
ordinary and usual requirements of McDATA's business or require payment of
more than $250,000;
(c) There are no outstanding sales contracts of McDATA or any of its
Subsidiaries which continue for a period of more than 12 months or would
have resulted in any material loss to McDATA or any of its Subsidiaries
upon completion or performance thereof if McDATA or any of its Subsidiaries
had remained a stand-alone entity, after allowance for direct or indirect
distribution expenses, nor are there any outstanding contracts or bids
quoting prices or terms which would have resulted in an operating loss for
the contract if McDATA or any of its Subsidiaries had remained a stand-
alone entity, nor are there any outstanding proposals of McDATA or any of
its Subsidiaries which, if accepted by the recipient thereof, would
constitute a binding contract as to McDATA or any of its Subsidiaries;
(d) McDATA or any of its Subsidiaries has no outstanding contracts with
officers, employees, agents, consultants, advisors, salespeople, sales
representatives, distributors or dealers that are not cancelable by it on
notice of not longer than 30 days and without liability, penalty or premium
or that provide for the payment of any bonus or commission based on sales
or earnings;
(e) McDATA or any of its Subsidiaries has no employment agreement, or any
other agreement that contains any severance or termination pay liabilities
or obligations;
(f) McDATA or any of its Subsidiaries is not in default under or in
violation of, nor is there any basis for any valid claim of default under
or in violation of, any material agreement, contract, lease or commitment
to which it is a party or by which it is bound;
(g) McDATA or any of its Subsidiaries has no officer, director or
employee to whom it is paying compensation at an annual rate, excluding
commissions, of more than $85,000;
(h) McDATA or any of its Subsidiaries is not restricted by any agreement,
contract or commitment from carrying on its business anywhere in the world;
(i) McDATA or any of its Subsidiaries does not have any debt obligation
for borrowed money, including guarantees of or agreements to acquire any
such debt obligation of others;
(j) McDATA or any of its Subsidiaries does not have any outstanding loan
to any person, other than travel advances to employees in the ordinary
course of business consistent with past practices; and
(k) McDATA or any of its Subsidiaries does not have any power of attorney
outstanding or any obligations or liabilities (whether absolute, accrued,
contingent or otherwise), as guarantor, surety, co-signer, endorser, co-
maker, indemnitor or otherwise in respect of the obligation of any person,
corporation, partnership, joint venture, association, organization or other
entity.
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Section 3.15 Customers and Suppliers. Sections 3.15(a) and (b) of the McDATA
Disclosure Letter respectively set forth (a) the largest customer of McDATA and
its Subsidiaries in terms of sales during the fiscal year ended December 30,
1994, showing the approximate total sales by McDATA and its Subsidiaries to
such customer during the fiscal year ended December 30, 1994 (and no other
customer of McDATA and its Subsidiaries will account for more than 2% of their
sales during the 1995 fiscal year); and (b) a list of the five largest
suppliers of McDATA in terms of purchases during the fiscal year ended December
30, 1994, showing the approximate total purchases by McDATA from each supplier
during the fiscal year ended December 30, 1994 (and no other supplier of McDATA
and its Subsidiaries accounted for more than 2% of their purchases during such
fiscal year). Since December 30, 1994, there has not been any material adverse
change in the business relationship of McDATA with the customer or any supplier
named in Sections 3.15(a) and 3.15(b) of the McDATA Disclosure Letter.
Section 3.16 Orders, Commitments and Returns. Section 3.16(a) of the McDATA
Disclosure Letter sets forth the aggregate amounts of all accepted and unfilled
orders entered into by McDATA or any of its Subsidiaries as of October 13,
1995, all of which orders have been made in the ordinary course of business.
Section 3.16(b) of the McDATA Disclosure Letter sets forth as of October 13,
1995 each claim against McDATA or any of its Subsidiaries to return in excess
of an aggregate of $10,000 of its product by reason of alleged overshipments,
defective merchandise or otherwise or by reason of an understanding that such
product would be returnable.
Section 3.17 Insurance. Section 3.17 of the McDATA Disclosure Letter contains
an accurate and complete list of all policies of fire, liability, workers'
compensation and other forms of insurance, including, but not limited to, all
group insurance programs in effect for employees of McDATA or any of its
Subsidiaries, owned or held by McDATA or any of its Subsidiaries. All such
policies are in full force and effect, all premiums with respect thereto
covering all periods up to and including the date of the Closing have been paid
and no notice of cancellation or termination has been received with respect to
any such policy. Such policies (i) are sufficient for compliance with all
requirements of law and of all agreements to which McDATA or any of its
Subsidiaries is a party; (ii) are valid, outstanding and enforceable policies;
(iii) provide insurance coverage for the assets and operations of McDATA or any
of its Subsidiaries in scope and amount customary and reasonable for the
business in which it is engaged; (iv) will remain in full force and effect
through the respective dates set forth in Section 3.17 of the McDATA Disclosure
Letter without the payment of additional premiums; and (v) will not in any way
be affected by or terminate or lapse by reason of, the transactions
contemplated by this Agreement. Since December 30, 1994, neither McDATA nor any
of its Subsidiaries has been refused any insurance with respect to its assets
or operations, nor has its coverage been limited, by any insurance carrier to
which it has applied for any such insurance or with which it has carried
insurance.
Section 3.18 Labor Difficulties. None of the employees of McDATA or any of
its Subsidiaries are represented by a union. McDATA believes it (i) is in
compliance with all applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours and (ii) is
not engaged in any unfair labor practice.
Section 3.19 Litigation. There is no action, suit or proceeding, claim,
arbitration or investigation pending or, to the best knowledge of McDATA,
threatened against McDATA or any of its Subsidiaries which would have or result
in a Material Adverse Effect on McDATA (taken separately) or McDATA and its
Subsidiaries (taken as a whole) or impair the ability of McDATA to consummate
the transactions contemplated by this Agreement.
Section 3.20 Products Liability. There is no action, suit, claim, inquiry,
proceeding or investigation by or before any court or governmental or other
regulatory or administrative agency or commission pending or, to McDATA's best
knowledge, threatened against or involving McDATA or any of its Subsidiaries
relating to any product alleged to have been developed or marketed by McDATA or
any of its Subsidiaries
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and alleged to have been defective, or improperly designed or manufactured,
nor, to McDATA's best knowledge, is there any valid basis for any such action,
proceeding or investigation.
Section 3.21 Environmental Matters.
(a) McDATA and its Subsidiaries are in full compliance with all applicable
Environmental Laws (as defined below); neither McDATA nor any of its
Subsidiaries have received any communication (written or oral), whether from a
governmental authority, citizens group, employee or otherwise, that alleges
that McDATA or any of its Subsidiaries are not in such full compliance; and, to
McDATA's best knowledge, there are no circumstances that may prevent or
interfere with such full compliance in the future.
(b) There is no Environmental Claim (as defined below), pending or threatened
against McDATA or any of its Subsidiaries or, to McDATA's best knowledge,
against any person or entity whose liability for any Environmental Claim McDATA
or any of its Subsidiaries have or may have retained or assumed either
contractually or by operation of law.
(c) There are no past or present actions, activities, circumstances,
conditions, events or incidents, including the release, emission, discharge or
disposal of any Material of Environmental Concern (as defined below), that
could form the basis of any Environmental Claim against McDATA or any of its
Subsidiaries or, to McDATA's best knowledge, against any person or entity whose
liability for any Environmental Claim McDATA or any of its Subsidiaries have or
may have retained or assumed either contractually or by operation of law.
(d) "Environmental Claim" means any notice (written or oral) by any person or
entity alleging potential liability arising out of, based on or resulting from
(i) the presence, or release into the environment, of any Material of
Environmental Concern at any location, whether or not owned by McDATA or any of
its Subsidiaries or (ii) circumstances forming the basis of any violation, or
alleged violation, of any Environmental Law.
(e) "Environmental Laws" means all federal, state, local and foreign laws and
regulations relating to pollution or protection of human health or the
environment including laws and regulations relating to emissions, discharges,
releases or threatened releases of Materials of Environmental Concern, or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Materials of
Environmental Concern.
(f) "Materials of Environmental Concern" means chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products.
Section 3.22 Employee Benefit Plans.
(a) McDATA has set forth in Section 3.22(a) of the McDATA Disclosure Letter
all employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) and all bonus,
stock option, stock appreciation right, restricted stock, stock purchase,
incentive, deferred compensation, supplemental retirement, severance and other
similar employee benefit plans, and all unexpired employment or severance
agreements, written or otherwise, for the benefit of, or relating to, any
current or former employee of McDATA or any trade or business (whether or not
incorporated) which is under common control with McDATA (an "ERISA Affiliate")
within the meaning of section 414 of the Code, or any Subsidiary of McDATA
(together, the "McDATA Employee Plans").
(b) With respect to each McDATA Employee Plan, McDATA has made available to
EMC a true and correct copy of (i) the most recent annual report (Form 5500)
filed with the IRS, (ii) such McDATA Employee Plan and the most recent summary
plan description thereof, (iii) each trust agreement and group annuity
contract, if any, relating to such McDATA Employee Plan and (iv) the most
recent actuarial report or valuation relating to a McDATA Employee Plan subject
to Title IV of ERISA.
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(c) With respect to the McDATA Employee Plans, individually and in the
aggregate, no event has occurred, and to the best knowledge of McDATA, there
exists no condition or set of circumstances in connection with which McDATA
could be subject to any liability that would have a Material Adverse Effect on
McDATA (taken separately) or McDATA and its Subsidiaries (taken as a whole)
under ERISA, the Code or any other applicable law (including the law of
contracts) and that is not properly accounted for on the McDATA Balance Sheet.
(d) With respect to each of the McDATA Employee Plans that is subject to
Title IV of ERISA, the present value of accrued benefits under such plan, based
upon the actuarial assumptions used for funding purposes in the most recent
actuarial report prepared by such plan's actuary with respect to such plan, did
not, as of its latest valuation date, exceed the then current value of the
assets of such plan allocable to such accrued benefits.
(e) Full payment has been made, or will be made in accordance with section
404(a)(6) of the Code, of all amounts that McDATA, any Subsidiary of McDATA or
any ERISA Affiliate is required to pay under the terms of each of the McDATA
Employee Plans and section 412 of the Code, and McDATA will pay or cause to be
paid all such amounts properly accrued through the Closing Date with respect to
the current plan year thereof on or prior to the Closing Date or all such
amounts will be properly recorded on the McDATA Balance Sheet; and none of the
McDATA Employee Plans or any trust established thereunder has incurred any
"accumulated funding deficiency" (as defined in section 302 of ERISA and
section 412 of the Code), whether or not waived, as of the last day of most
recent fiscal year of each of the McDATA Employee Plans ended prior to the date
of this Agreement.
(f) None of the McDATA Employee Plans is a "multiemployer pension plan," as
such term is defined in section 3(37) of ERISA.
(g) Each of McDATA Employee Plans that is intended to be "qualified" within
the meaning of section 401(a) of the Code is so qualified.
(h) Neither McDATA nor any of its Subsidiaries is a party to any oral or
written (i) agreement with any officer or other key employee of McDATA or any
of its Subsidiaries, the benefits of which are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction involving
McDATA of the nature contemplated by this Agreement, (ii) agreement with any
officer of McDATA providing any term of employment or compensation guarantee or
(iii) agreement or plan, including any stock option plan, stock appreciation
right plan, restricted stock plan or stock purchase plan, any of the benefits
of which will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on
the basis of any of the transactions contemplated by this Agreement.
Section 3.23 Personnel.
(a) Section 3.23(a) of the McDATA Disclosure Letter sets forth a true and
complete list of:
(i) the names and current salaries of all directors and elected and
appointed officers of McDATA, the number of shares of McDATA Class A Common
Stock, McDATA Class B Common Stock, McDATA Series A Preferred Stock or
McDATA Series B Preferred Stock owned beneficially or of record, or both,
by each such person and the family relationships, if any, among such
persons; and
(ii) the wage rates for nonsalaried and nonexecutive salaried employees
of McDATA, by classification.
(b) Section 3.23(b) of the McDATA Disclosure Letter sets forth a summary of
McDATA's policy concerning pay raises for officers and other employees of
McDATA.
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Section 3.24 Agreements in Full Force and Effect. Except as disclosed in
Section 3.24 of the McDATA Disclosure Letter, no contracts, agreements, leases,
commitments, policies or licenses referred to in the McDATA Disclosure Letter
have been abandoned or terminated by McDATA, and true copies thereof have been
delivered to or have been made available to EMC prior to the date of this
Agreement.
Section 3.25 Compliance with Laws.
(a) McDATA and each of its Subsidiaries has complied with, is not in
violation of, and has not received any notices of violation with respect to,
any federal, state, local or foreign statute, law or regulation with respect to
the conduct of its business, or the ownership or operation of its business,
except for failures to comply or violations which would not in the aggregate
have or result in a Material Adverse Effect on McDATA (taken separately) or
McDATA and its Subsidiaries (taken as a whole).
(b) None of McDATA's equity securities have been or have been required to be
registered under the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
Section 3.26 Pooling of Interests. To its best knowledge, neither McDATA nor
any McDATA Affiliate (as defined in Section 6.11) has, through the date of this
Agreement, taken or agreed to take any action which would prevent EMC from
accounting for the business combination to be effected by the Merger as a
pooling of interests.
Section 3.27 Insider Interests. No officer or director of McDATA has any
material interest in any property, real or personal, tangible or intangible,
including without limitation, inventions, copyrights, trademarks or trade
names, used in or pertaining to the businesses of McDATA or any of its
Subsidiaries.
Section 3.28 Registration Statement: Consent Solicitation/Prospectus. The
information supplied by McDATA for inclusion in the registration statement on
Form S-4 pursuant to which shares of EMC Common Stock issued in the Merger will
be registered with the SEC (the "Registration Statement"), shall not at the
time the Registration Statement is declared effective by the SEC contain any
untrue statement of a material fact or omit to state any material fact required
to be stated in the Registration Statement or necessary in order to make the
statements in the Registration Statement, in light of the circumstances under
which they were made, not misleading. The information supplied by McDATA for
inclusion in the Consent Solicitation/Prospectus (the "Consent
Solicitation/Prospectus") to be sent to the stockholders of McDATA in
connection with the solicitation of consents to approve and adopt the Merger
Proposal and the Conversion Proposal shall not, on the date the Consent
Solicitation/Prospectus is first mailed to stockholders of McDATA or at the
Effective Time, contain any statement which, at such time and in light of the
circumstances under which it is made, is false or misleading with respect to
any material fact, or omit to state any material fact necessary in order to
make the statements made in the Consent Solicitation/Prospectus not false or
misleading or necessary to correct any statement in any earlier communication
with respect to the solicitation of consents which has become false or
misleading.
Section 3.29 No Existing Discussions. As of the date hereof, McDATA is not
engaged, directly or indirectly, in any discussions or negotiations with any
other party with respect to an Acquisition Proposal (as defined in Section
6.1(a)) or Acquisition Transaction (as defined in Section 9.3(f)).
Section 3.30 Opinion of Financial Advisor. The financial advisor of McDATA,
Montgomery Securities, has delivered to McDATA an opinion dated the date of
this Agreement to the effect that as of the date of this Agreement, the Merger
Consideration is fair, from a financial point of view, to the stockholders of
McDATA. McDATA has provided a true and correct copy of such opinion to EMC.
Section 3.31 Brokers and Finders. No broker, finder or investment banker
(other than Montgomery Securities, whose brokerage, finder's or other fee will
be paid by McDATA) is entitled to any brokerage,
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finder's or other fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of McDATA or
any of its Subsidiaries.
Section 3.32 Disclosure. No representations or warranties by McDATA in this
Agreement and no statement contained in any document (including, without
limitation, the McDATA Financial Statements and the McDATA Disclosure Letter)
or certificate furnished or to be furnished by McDATA to EMC or any of its
representatives pursuant to the provisions hereof, contains or will contain
any untrue statement of material fact or omits or will omit to state any
material fact necessary, in light of the circumstances under which it was
made, in order to make the statements herein or therein not misleading.
ARTICLE IV
Representations and Warranties of EMC and Sub
EMC and Sub represent and warrant to McDATA as follows:
Section 4.1 Organization of EMC and Sub. Each of EMC and Sub is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, has all requisite corporate
power to own, lease and operate its property and to carry on its business as
now being conducted, and is duly qualified or licensed to do business and is
in good standing as a foreign corporation in each jurisdiction in which the
failure to be so qualified or licensed would have or result in a Material
Adverse Effect on EMC and its Subsidiaries (taken as a whole).
Section 4.2 Capital Structure of EMC and Sub.
(a) The authorized capital stock of EMC consists of 500,000,000 shares of
Common Stock, $.01 par value per share, and 25,000,000 shares of Preferred
Stock, $.01 par value per share. As of October 1, 1995: (i) 216,015,620 shares
of EMC Common Stock were issued and outstanding, all of which are validly
issued, fully paid and nonassessable; (ii) 2,646,453 shares of EMC Common
Stock were held in the treasury of EMC or by Subsidiaries of EMC; (iii)
17,353,406 shares of EMC Common Stock were reserved for future issuance
pursuant to stock options granted and outstanding under EMC's 1985 and 1993
Stock Option Plans; (iv) 1,640,000 shares of EMC Common Stock were reserved
for future issuance pursuant to stock options granted and outstanding under
EMC's 1992 Stock Option Plan for Directors; and (v) 952,083 shares of EMC
Common Stock were reserved for issuance pursuant to rights granted under EMC's
1989 Employee Stock Purchase Plan. No material change in such capitalization
has occurred between October 1, 1995 and the date of this Agreement. All
shares of EMC Common Stock subject to issuance as specified above, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, shall be duly authorized, validly issued, fully paid
and nonassessable.
(b) All of the shares of EMC Common Stock to be issued in the Merger have
been duly authorized by all necessary corporate action and, will be, when
issued in accordance with this Agreement, duly authorized, validly issued,
fully paid and nonassessable.
(c) The authorized capital stock of Sub consists of 1,000 shares of Sub
Common Stock, of which 10 shares are issued and outstanding, all of which are
validly issued, fully paid and nonassessable.
Section 4.3 Authority; No Conflict; Required Filings and Consents.
(a) Each of EMC and Sub has all requisite corporate power and authority to
enter into this Agreement (and, in the case of EMC, the Exchange and Escrow
Agreement) and to consummate the transactions contemplated by this Agreement
or the Exchange and Escrow Agreement. The execution and delivery of this
Agreement (and, in the case of EMC, the Exchange and Escrow Agreement) and the
consummation of the
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transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of EMC and Sub. This Agreement has been
duly executed and delivered by EMC and Sub and constitutes (and, the Exchange
and Escrow Agreement when executed and delivered by EMC will constitute) the
valid and binding obligation of EMC and Sub, enforceable in accordance with
their respective terms.
(b) The execution and delivery of this Agreement by EMC and Sub does not
(and, in the case of EMC, the execution and delivery of the Exchange and Escrow
Agreement will not), and the consummation of the transactions contemplated by
this Agreement and the Exchange and Escrow Agreement will not, (i) conflict
with, or result in any violation or breach of any provision of the Restated
Articles of Organization, as amended, of EMC, the Sub Certificate of
Incorporation, the Amended and Restated Bylaws of EMC or the Sub By-laws, (ii)
result in any violation or breach of, or constitute (with or without notice or
lapse of time, or both) a default (or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any benefit) under
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, contract or other agreement, instrument or obligation to
which EMC is a party or by which EMC or any of its properties or assets may be
bound, or (iii) conflict or violate any permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to EMC or any of its properties or assets, except in the case of (ii) and (iii)
for any such violations, breaches, defaults, terminations, cancellations,
accelerations or conflicts which would not, in the aggregate, have or result in
a Material Adverse Effect on EMC (taken separately) or EMC and its Subsidiaries
(taken as a whole) or impair the ability of EMC to consummate the transactions
contemplated by this Agreement or the Exchange and Escrow Agreement.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity, is required by or with
respect to EMC or Sub in connection with the execution and delivery of this
Agreement or the Exchange and Escrow Agreement or the consummation of the
transactions contemplated hereby or thereby, except for (i) the filing of the
pre-merger notification report under the HSR Act, (ii) the filing of the
Registration Statement with the SEC in accordance with the Securities Act,
(iii) the filing of the Certificate of Merger with the Delaware Secretary of
State, (iv) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable state securities
laws and (v) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not, in the aggregate, have
or result in a Material Adverse Effect on EMC and its Subsidiaries (taken as a
whole) or impair the ability of EMC or Sub to consummate the transactions
contemplated by this Agreement or the Exchange and Escrow Agreement.
Section 4.4 SEC Filings; Financial Statements.
(a) EMC has timely filed and made available to McDATA all forms, reports and
documents required to be filed by EMC with the SEC since January 1, 1994
(collectively, the "EMC SEC Reports"). The EMC SEC Reports (i) at the time
filed, complied in all material respects with the applicable requirements of
the Securities Act and the Exchange Act, as the case may be, and (ii) did not
at the time they were filed (or if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated in such EMC SEC Reports or necessary in order to make the statements in
such EMC SEC Reports, in the light of the circumstances under which they were
made, not misleading.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the EMC SEC Reports, including any EMC SEC
Reports filed after the date of this Agreement until the Closing, complied, as
of their respective dates, in all material respects with all applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, was prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods involved and
fairly presented the consolidated financial position of EMC and its
Subsidiaries as at the respective dates and the consolidated results of its
operations and cash flows for the periods indicated, except
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that the unaudited interim financial statements were or are subject to normal
and recurring year-end adjustments which were not or are not expected to be
material in amount.
Section 4.5 Absence of Certain Changes or Events. Except as disclosed in the
EMC SEC Reports, since the date of EMC's unaudited balance sheet as of July 1,
1995, EMC has conducted its business only in the ordinary course and in a
manner consistent with past practices and, since such date, there has not been
any material adverse change in the prospects, business, assets (including
intangible assets), properties, liabilities, results of operations or condition
(financial or otherwise) of EMC (taken separately) or EMC and its Subsidiaries
(taken as a whole).
Section 4.6 Registration Statement; Consent Solicitation/Prospectus. The
information supplied by EMC for inclusion in the Registration Statement shall
not at the time the Registration Statement is declared effective by the SEC
contain any untrue statement of a material fact or omit to state any material
fact required to be stated in the Registration Statement or necessary in order
to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading. The information
supplied by EMC for inclusion in the Consent Solicitation/Prospectus shall not,
on the date the Consent Solicitation/Prospectus is first mailed to stockholders
of McDATA in connection with the solicitation of consents to approve and adopt
the Merger Proposal and the Conversion Proposal or at the Effective Time,
contain any statement which, at such time and in light of the circumstances
under which it is made, is false or misleading with respect to any material
fact, or omit to state any material fact necessary in order to make the
statements made in the Information Consent/Prospectus not false or misleading
or necessary to correct any statement in any earlier communication with respect
to the solicitation of consents which has become false or misleading.
Section 4.7 Litigation. Except as described in the EMC SEC Reports, there is
no action, suit or proceeding, claim, arbitration or investigation pending or,
to the best of EMC's knowledge, threatened against EMC or any of its
Subsidiaries which would, in the aggregate, have a Material Adverse Effect on
EMC (taken separately) or EMC and its Subsidiaries (taken as a whole) or impair
the ability of EMC or Sub to consummate the transactions contemplated by this
Agreement.
Section 4.8 Brokers and Finders. No broker, finder or investment banker
(other than Broadview Associates, whose brokerage, finder's or other fee will
be paid by EMC) is entitled to any brokerage, finder's or other fee or
commission in connection with the transactions contemplated hereby based upon
arrangements made by or on behalf of EMC.
ARTICLE V
Conduct of Business
Section 5.1 Covenants of McDATA. During the period from the date of this
Agreement and continuing until the earlier of the termination of the Agreement
or the Effective Time, McDATA agrees as to itself and its Subsidiaries (except
to the extent that EMC shall otherwise consent in writing), to carry on its
business in the usual, regular and ordinary course in substantially the same
manner as previously conducted, to pay its debts and taxes when due subject to
good faith disputes over such debts or taxes, to pay or perform other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practices and policies to preserve
intact its present business organization, keep available the services of its
present officers and key employees and preserve its relationships with
customers, suppliers, distributors, licensors, licensees and others having
business dealings with it, to the end that its goodwill and ongoing businesses
shall be unimpaired at the Effective Time. Except as expressly contemplated by
this Agreement, subject to Section 6.1, McDATA shall not (and shall not permit
any of its Subsidiaries to), without the prior written consent of EMC:
(a) Accelerate, amend or change the period of exercisability of options
or restricted stock granted under any employee stock plan or authorize cash
payments in exchange for any options granted under
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any of such plans except as required by the terms of such plans or any
related agreements in effect as of the date of this Agreement;
(b) Transfer or license to any person or entity or otherwise extend,
amend or modify any rights to the McDATA Intellectual Property Rights,
other than in the ordinary course of business consistent with past
practices;
(c) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or redeem or
otherwise acquire, directly or indirectly, any shares of its capital stock,
other than cash dividends on the McDATA Series A Preferred Stock or McDATA
Series B Preferred Stock in accordance with the terms thereof as in effect
on the date hereof;
(d) Issue, deliver or sell or authorize or propose the issuance, delivery
or sale of any shares of its capital stock or securities convertible into
shares of its capital stock, or subscriptions, rights, warrants or options
to acquire, or other agreements or commitments of any character obligating
it to issue, any such shares or convertible securities, other than the
issuance of shares of McDATA Class A Common Stock or McDATA Class B Common
Stock issuable upon the exercise of the McDATA Stock Options or the
Warrants outstanding on the date hereof;
(e) Merge or consolidate with another corporation, partnership or other
business organization, or acquire or purchase an equity interest in or a
substantial portion of the assets of another corporation, partnership or
other business organization or otherwise acquire any assets outside the
ordinary course of business consistent with past practices or otherwise
enter into any material contract, commitment or transaction outside the
ordinary course of business consistent with past practices;
(f) Sell, lease, license, waive, release, transfer, encumber or otherwise
dispose of any of its properties or assets, except in the ordinary course
of business consistent with past practices;
(g) (i) Incur, assume or prepay any indebtedness or any other liabilities
other than in the ordinary course of business consistent with past
practices; (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the
obligations of any other person other than a Subsidiary of McDATA in the
ordinary course of business and consistent with past practices; (iii) make
any loans, advances (other than travel advances consistent with McDATA
policy) or capital contributions to, or investments in, any other person,
other than to Subsidiaries of McDATA consistent with past practices; (iv)
authorize or make capital expenditures in excess of the amounts currently
budgeted therefor; or (v) permit any insurance policy naming McDATA or any
Subsidiary of McDATA as a beneficiary or a loss payee to be cancelled or
terminated other than in the ordinary course of business consistent with
past practices;
(h) (i) Increase in any manner the compensation or fringe benefits of, or
pay any bonus to, any director, officer or employee, except for (x) normal
increases in salaried compensation in the ordinary course of business
consistent with past practices and (y) bonuses payable, in the ordinary
course of business consistent with past practice as adjusted for an interim
payment, pursuant to the discretionary profit sharing cash bonus and
incentive cash bonus arrangements in effect on the date hereof disclosed in
Section 3.22(a) of the McDATA Disclosure Letter; (ii) grant any severance
or termination pay to, or enter into any employment or severance agreement,
with any director, officer or employee, except in the ordinary course of
business consistent with past practices, (iii) enter into any collective
bargaining agreement or (iv) establish, adopt, enter into or amend any
bonus, profit sharing, thrift, compensation, stock option, restricted
stock, pension, retirement, deferred compensation, employment, termination,
severance or other plan, trust, fund, policy or arrangement for the benefit
of any directors, officers or employees;
(i) Take any action with respect to, or make any material change in its
accounting or tax policies or procedures in effect at December 30, 1994,
except as may be required by changes in generally accepted accounting
principles upon the advice of its independent accountants;
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(j) Revalue any of its assets, including writing down the value of
inventory or writing off notes or accounts receivable, other than
revaluations in the ordinary course of business consistent with past
practices not exceeding $50,000 in the aggregate;
(k) Amend or propose to amend the McDATA Certificate of Incorporation or
McDATA Bylaws (or comparable organizational documents of its Subsidiaries);
(l) Permit the amount of its consolidated inventories to be reduced by
more than $500,000 from the amount thereof on the McDATA Balance Sheet or
permit any reduction in consolidated inventories which would jeopardize
shipments to any customer; or
(m) Enter into any contract, agreement, commitment or arrangement with
respect to any of the actions described in Sections (a) through (l) above,
or any action which would be reasonably likely to make any of McDATA's
representations or warranties contained in this Agreement untrue or
incorrect in any material respect as of the date of this Agreement or the
Closing Date.
Section 5.2 Cooperation. Subject to compliance with applicable law, from the
date hereof until the Effective Time, (a) each of McDATA and EMC shall confer
on a regular and frequent basis with one or more representatives of the other
party to report operational matters of materiality and the general status of
ongoing operations and (b) each of EMC and McDATA shall promptly provide the
other party or its counsel with copies of all filings made by such party with
any Governmental Entity in connection with this Agreement, the Merger and the
transactions contemplated hereby and thereby.
ARTICLE VI
Additional Agreements
Section 6.1 No Solicitation.
(a) McDATA and each of its Subsidiaries and affiliates shall not, directly or
indirectly, through any officer, director, employee, representative or agent of
McDATA or any of its Subsidiaries (and it shall use reasonable efforts to cause
such officers, directors, employees, representatives and agents not to,
directly or indirectly), (i) solicit, initiate, facilitate or encourage any
inquiries or proposals that constitute, or could reasonably be expected to lead
to, a proposal or offer for a merger, consolidation, business combination, sale
of substantial assets, sale of shares of capital stock or similar transactions
involving McDATA or any of its Subsidiaries, other than the transactions
contemplated by this Agreement (any of the foregoing inquiries or proposals
being referred to in this Agreement as an "Acquisition Proposal"), (ii) engage
in negotiations or discussions concerning, or provide any non-public
information to any person or entity relating to, any Acquisition Proposal, or
(iii) agree to, approve or recommend any Acquisition Proposal; provided,
however, that nothing contained in this Agreement shall prevent McDATA or its
Board of Directors from furnishing non-public information to, or entering into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide written Acquisition Proposal by such person or entity or
recommending an unsolicited bona fide written Acquisition Proposal to the
stockholders of McDATA, if and only to the extent that the Board of Directors
of McDATA determines in good faith by a majority vote, (x) after consultation
with its financial advisor, that such Acquisition Proposal would, if
consummated, result in a transaction more favorable to the stockholders of
McDATA from a financial point of view than the transaction contemplated by this
Agreement (any such more favorable Acquisition Proposal being referred to in
this Agreement as a "Superior Proposal") and (y) based on the written opinion
of outside legal counsel, that failing to take such action would result in a
breach of its fiduciary duties to stockholders under applicable law.
(b) McDATA shall notify EMC immediately (and no later than 24 hours) after
receipt by McDATA (or its advisors) of any Acquisition Proposal or any request
for non-public information in connection with an Acquisition Proposal or for
access to the properties, books or records of McDATA or any of its Subsidiaries
by any person or entity that informs McDATA that it is considering making, or
has made, an Acquisition
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Proposal. Such notice to EMC shall be made orally and in writing and shall
indicate in reasonable detail the identity of the offeror and the terms and
conditions of such proposal, inquiry or contact. McDATA shall keep EMC informed
of all material developments and the status of any Acquisition Proposal, any
negotiations or discussions with respect to any Acquisition Proposal or any
request for non-public information in connection with any Acquisition Proposal
or for access to the properties, books or records of McDATA or any of its
Subsidiaries by any person or entity that is considering making, or has made,
an Acquisition Proposal. McDATA shall provide EMC with copies of all documents
received from or delivered or sent to any person or entity that is considering
making or has made, an Acquisition Proposal.
Section 6.2 Consent Solicitation/Prospectus; Registration Statement.
(a) As promptly as practical after the execution of this Agreement, McDATA
and EMC shall prepare and EMC shall file with the SEC the Registration
Statement and the Consent Solicitation/Prospectus to be included therein as a
prospectus. McDATA and EMC shall use all reasonable efforts to cause the
Registration Statement to become effective as soon after such filing as
practicable. The Consent Solicitation/Prospectus shall include the
recommendation of the Board of Directors of McDATA in favor of the Merger
Proposal and the Conversion Proposal; provided, that the Board of Directors of
McDATA may withdraw such recommendation if such Board of Directors believes in
good faith that a Superior Proposal has been made and shall have determined in
good faith, after consultation with its outside legal counsel, that the
withdrawal of such recommendation is necessary for such Board of Directors to
comply with its fiduciary duties under applicable law. McDATA shall furnish EMC
with all information concerning McDATA and the holders of its capital stock and
shall take such other action as EMC may reasonably request in connection with
the Registration Statement and the issuance of the shares of EMC Common Stock.
If at any time prior to the Effective Time any event or circumstance relating
to McDATA, EMC or any of their respective Subsidiaries, affiliates, officers or
directors should be discovered by such party which should be set forth in an
amendment or a supplement to the Registration Statement or Consent
Solicitation/Prospectus, such party shall promptly inform the other thereof and
take appropriate action in respect thereof.
(b) McDATA and EMC shall make any necessary filings with respect to the
Merger under the Securities Act and the Exchange Act and the rules and
regulations thereunder and EMC shall use its reasonable best efforts to take
any action required to be taken under state securities or "blue sky" laws in
connection with the issuance of the shares of EMC Common Stock in the Merger.
Section 6.3 Letters of McDATA's Accountants. McDATA shall use all reasonable
efforts to cause to be delivered to EMC (a) a letter of Price Waterhouse LLP,
McDATA's independent auditors, dated a date within two business days before the
date on which the Registration Statement shall become effective and addressed
to EMC, in form reasonably satisfactory to EMC and customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement and (b) the
letters of Price Waterhouse LLP referred to in Section 7.2(e).
Section 6.4 Access to Information. Upon reasonable notice, during normal
business hours during the period prior to the Effective Time, McDATA shall (and
shall cause its Subsidiaries to) (a) afford to the officers, directors,
employees, accountants, counsel and other representatives of EMC, reasonable
access to all its properties, plants, personnel, books, contracts, commitments
and records (other than privileged documents) and (b) all other information
concerning its business, properties and personnel as EMC may reasonably request
during such period. During such period, EMC will hold any such information
which is non-public in confidence in accordance with the Confidentiality
Agreement, dated June 15, 1995 (the "Confidentiality Agreement"), between EMC
and McDATA. No information or knowledge obtained in any investigation pursuant
to this Section 6.4 shall affect or be deemed to modify any representation or
warranty contained in this Agreement or the conditions to the obligations or
the parties to consummate the Merger. If, in any investigation pursuant to this
Section 6.4, EMC obtains knowledge or information that McDATA has breached any
of its representations or warranties in this Agreement, EMC shall inform McDATA
of such breach and McDATA shall have whatever rights to cure such breach as are
provided for in this Agreement.
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Section 6.5 Supplements to McDATA Disclosure Letter. From time to time prior
to the Closing, McDATA shall give prompt notice to EMC and thereafter promptly
supplement or amend the McDATA Disclosure Letter with respect to any matter
hereafter arising which, if existing or occurring at the date of this
Agreement, would have been required to be set forth or described in the McDATA
Disclosure Letter. No supplement or amendment of the McDATA Disclosure Letter
made pursuant to this Section 6.5 shall be deemed to cure any breach of any
representation or warranty made in this Agreement unless EMC specifically
agrees thereto in writing.
Section 6.6 Approval of Stockholders. McDATA shall, subject to and in
accordance with the McDATA Certificate of Incorporation, McDATA Bylaws and the
DGCL, as promptly as practicable following the date of this Agreement, (i)
submit the Conversion Proposal to the holders of all outstanding shares of
McDATA Series A Preferred Stock and McDATA Series B Preferred Stock by written
consent in lieu of a meeting for approval of the Conversion Proposal, (ii)
submit the Merger Proposal to the holders of all outstanding shares of McDATA
Class A Common Stock, McDATA Class B Common Stock, McDATA Series A Preferred
Stock and McDATA Series B Preferred Stock by written consent in lieu of a
meeting for approval and adoption of the Merger Proposal and (iii) use all
efforts to obtain the necessary approval for the Conversion Proposal and the
Merger Proposal. McDATA shall promptly notify EMC upon obtaining the requisite
Conversion Vote or Merger Vote.
Section 6.7 Legal Conditions to Merger. Each of EMC and, subject to Section
6.1, McDATA will take all reasonable actions necessary to comply promptly with
all legal requirements which may be imposed on itself with respect to the
Merger (which actions shall include, without limitation, furnishing all
information required under the HSR Act and in connection with approvals of or
filings with any other Governmental Entity) and will promptly cooperate with
and furnish information to each other in connection with any such requirements
imposed upon any of them or any of their Subsidiaries in connection with the
Merger. Each of EMC and McDATA will, and will cause its Subsidiaries to, take
all reasonable actions necessary to obtain (and will cooperate with each other
in obtaining) any consent, authorization, order or approval of, or any
exemption by, any Governmental Entity required to be obtained or made by EMC,
McDATA or any of their Subsidiaries in connection with the Merger or the taking
of any action contemplated thereby or by this Agreement.
Section 6.8 Public Disclosure. EMC and McDATA shall consult with each other
before issuing any press release or otherwise making any public statement with
respect to the Merger or this Agreement and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by law.
Section 6.9 Tax-Free Organization. EMC and McDATA shall each use its
reasonable best efforts to cause the Merger to be treated as a reorganization
within the meaning of Section 368(a) of the Code. Neither EMC nor McDATA shall
knowingly take any action, or knowingly fail to take any action, that would be
reasonably likely to jeopardize the qualification of the Merger as a
reorganization with the meaning of Section 368(a) of the Code.
Section 6.10 Pooling Accounting. EMC and McDATA shall each use its reasonable
best efforts to cause the business combination to be effected by the Merger to
be accounted for as a pooling of interests for accounting purposes. Neither EMC
nor McDATA shall knowingly take any action, or knowingly fail to take any
action, that would be reasonably likely to jeopardize the treatment of the
Merger as a pooling of interests for accounting purposes.
Section 6.11 Affiliate Agreements.
(a) As soon as practicable after the date hereof (and not later than five
business days after the date hereof), McDATA shall deliver to EMC a letter
identifying all persons who are "affiliates" of McDATA for purposes of Rule 145
under the Securities Act (each a "McDATA Affiliate" and, collectively the
"McDATA
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Affiliates"). McDATA shall use its reasonable best efforts to cause each McDATA
Affiliate to deliver to EMC as soon as practicable after the fifth business day
after the date hereof (and not later than the date of the mailing of the
Consent Solicitation/Prospectus) a written "affiliates" agreement, in form and
substance satisfactory to EMC (each a "McDATA Affiliate Agreement" and,
collectively, the "McDATA Affiliate Agreements"). The McDATA Affiliate
Agreements shall provide, among other things, the following:
(i) that such person shall not take any action which could jeopardize the
treatment of the Merger as a pooling of interests for accounting purposes
(including that (i) such person has not or, as applicable, shall not sell,
transfer or otherwise dispose of any shares of McDATA Class A Common Stock
or any other shares of capital stock of McDATA at any time during the
thirty (30) day period on or prior to the Closing Date and (ii) such person
shall not sell, transfer or otherwise dispose of any shares of EMC Common
Stock (whether or not received in the Merger) or any other shares of
capital stock of EMC until after such time as results covering at least
thirty (30) days of the combined operations of EMC and McDATA have been
published by EMC, in the form of a quarterly earnings report, an effective
registration statement filed with the SEC, a report to the SEC on Form 10-
K, 10-Q or 8-K or any other public filing or announcement which includes
such combined results of operations; and
(ii) that such person shall dispose of EMC Common Stock to be received by
such person in the Merger only pursuant to an effective registration
statement under the Securities Act or in accordance with the provisions of
paragraph (d) of Rule 145 thereunder, if applicable, or pursuant to an
available exemption from registration under the Securities Act.
(b) If any affiliate of McDATA refuses to provide a McDATA Affiliate
Agreement, EMC may place appropriate legends on the certificates evidencing the
shares of EMC Common Stock to be received by such McDATA Affiliate pursuant to
the terms of this Agreement and to issue appropriate stop transfer instructions
to the transfer agent for shares of EMC Common Stock to the effect that the
shares of EMC Common Stock received by such McDATA Affiliate pursuant to this
Agreement only may be sold, transferred or otherwise conveyed (i) pursuant to
an effective registration statement under the Securities Act, (ii) in
compliance with Rule 145 promulgated under the Securities Act or (iii) pursuant
to another exemption under the Securities Act.
Section 6.12 NYSE Listing. EMC shall use its reasonable best efforts to have
authorized for listing on the NYSE, upon official notice of issuance, the
shares of EMC Common Stock to be issued in the Merger prior to the Closing
Date.
Section 6.13 McDATA Stock Option Plans. Each McDATA Stock Option which is
outstanding and not exercisable as of the Effective Time shall be deemed to
constitute, as of the Effective Time, an option to acquire, on the same terms
and conditions as were applicable to such McDATA Stock Option prior to the
Effective Time, the same number of shares of EMC Common Stock (rounded to the
nearest whole number) as the holder of such McDATA Stock Option would have been
entitled to receive pursuant to the Merger had such holder exercised such
option in full immediately prior to the Effective Time (and, in the case of
McDATA Stock Options exercisable for McDATA Class B Common Stock, had such
McDATA Class B Common Stock been converted into McDATA Class A Common Stock
immediately prior to the Effective Time), at a price per share (rounded up to
the nearest whole cent) equal to (i) the aggregate exercise price for the
shares of McDATA Class A Common Stock or McDATA Class B Common Stock otherwise
purchasable pursuant to such McDATA Stock Option divided by (ii) the number of
full shares of EMC Common Stock deemed purchasable pursuant to such McDATA
Stock Option in accordance with the foregoing. As soon as practicable after the
Effective Time, EMC shall deliver to the participants in the McDATA Stock
Option Plans an appropriate notice setting forth such participant's rights
pursuant thereto and the McDATA Stock Options which were outstanding and not
exercisable as of the Effective Time shall continue in effect on the same terms
and conditions (subject to the adjustments required by this Section 6.13 after
giving effect to the Merger). McDATA shall use its reasonable efforts to cause
holders of McDATA Stock Options which will be outstanding and exercisable as of
the Effective Time to exercise such McDATA Stock Options prior to the Effective
Time.
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Section 6.14 Consents. Each of EMC and McDATA shall use all reasonable best
efforts to obtain all necessary consents, waivers and approvals under any of
EMC's or McDATA's material agreements, contracts, licenses, leases or
commitments in connection with the Merger.
Section 6.15 Additional Agreements; Reasonable Best Efforts. Subject to the
terms and conditions of this Agreement, each of the parties agrees to use all
reasonable best efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of either of
Sub or McDATA, the proper officers and directors of each party to this
Agreement shall take all such necessary action.
ARTICLE VII
Conditions of Merger
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction prior to the Closing Date of the following
conditions:
(a) Stockholder Approvals. The Conversion Proposal shall have been
approved and adopted by the requisite Conversion Vote and the Merger
Proposal shall have been approved and adopted by the requisite Merger Vote.
(b) HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(c) Approvals. Other than the filing provided for by Section 1.2, all
consents, approvals, orders or authorizations of, or registrations,
declarations or filings with, or expirations of waiting periods imposed by,
any Governmental Entity the failure of which to obtain would be reasonably
likely to have a Material Adverse Effect on EMC and its Subsidiaries or
McDATA and its Subsidiaries, in each case taken as a whole, shall have been
filed, occurred or been obtained.
(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order.
(e) No Injunctions or Restraints; Illegality. No order, ruling or
injunction issued by any court of competent jurisdiction or other
Governmental Entity restraining, enjoining or otherwise prohibiting the
consummation of the Merger or limiting or restricting EMC's conduct or
operation of the business of EMC after the Merger shall have been issued
and then be in effect (provided, that EMC and McDATA shall use their
reasonable best efforts to have any such order, ruling or injunction
vacated or lifted); nor shall there be any statute, rule or regulation
enacted, enforced or deemed applicable to the Merger which makes the
consummation of the Merger illegal.
(f) NYSE Listing. The shares of EMC Common Stock to be issued in the
Merger shall have been authorized for listing on the NYSE, upon official
notice of issuance.
(g) Exchange and Escrow Agreement. EMC, the McDATA Representative and the
Exchange and Escrow Agent shall have executed and delivered the Exchange
and Escrow Agreement.
Section 7.2 Additional Conditions to Obligations of EMC and Sub. The
obligations of EMC and Sub to effect the Merger are subject to the satisfaction
of each of the following conditions, any of which may be waived in writing
exclusively by EMC and Sub:
(a) Representations and Warranties. The representations and warranties of
McDATA set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and
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(except to the extent such representations and warranties speak as of an
earlier date) as of the Closing Date as though made on and as of the
Closing Date, except for changes contemplated by this Agreement; and EMC
shall have received a certificate signed on behalf of McDATA by the chief
executive officer and the chief financial officer of McDATA to such effect.
For purposes of this Section 7.2(a), representations and warranties of
McDATA shall be deemed true and correct in all material respects if any
breaches of such representations and warranties do not, in the aggregate,
have a "Material Adverse Effect on McDATA (taken separately) or McDATA and
its Subsidiaries (taken as a whole)" (the preceding quote referred to
herein as the "McDATA Material Adverse Effect Qualifier"); it being
understood that a breach of any representation or warranty that is already
qualified by such McDATA Material Adverse Effect Qualifier, by itself,
shall be deemed a failure to satisfy the condition set forth in this
Section 7.2(a).
(b) Performance of Obligations of McDATA. McDATA shall have performed in
all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date; and EMC shall have received
a certificate signed on behalf of McDATA by the chief executive officer and
the chief financial officer of McDATA to such effect.
(c) Opinions. McDATA shall have delivered to EMC the opinion of Ireland,
Stapleton, Pryor & Pascoe, P.C., dated the Closing Date, covering the
matters set forth on Exhibit C hereto. EMC shall have received a written
opinion from Skadden, Arps, Slate, Meagher & Flom, counsel to EMC, to the
effect that the Merger will be treated for Federal income tax purposes as a
tax-free reorganization within the meaning of Section 368(a) of the Code.
In rendering such opinion, Skadden, Arps, Slate, Meagher & Flom may receive
and rely upon representations contained in any certificate of EMC, Sub,
McDATA and others, as it deems appropriate.
(d) Blue Sky Laws. EMC shall have received all state securities or "blue
sky" permits and other authorizations necessary to issue shares of EMC
Common Stock pursuant to the Merger.
(e) Letters of Accountants. EMC shall have received a letter of Price
Waterhouse LLP, McDATA's independent auditors, dated the Closing Date,
updating the letter referred to in Section 6.3. EMC shall have received
letters from Coopers & Lybrand L.L.P., EMC's independent auditors, dated a
date within two business days of the Consent Solicitation/Prospectus and
within two business days of the Closing Date and addressed to EMC, stating
that the business combination to be effected by the Merger will qualify as
a pooling of interests transaction under generally accepted accounting
principles. McDATA shall have received (and delivered to EMC copies of)
letters from Price Waterhouse, LLP, McDATA's independent auditors, dated a
date within two business days of the Consent Solicitation/Prospectus and
within two business days of the Closing Date and addressed to McDATA,
stating that neither McDATA nor any of its Subsidiaries has taken or agreed
to any action that (without giving effect to the Merger Agreement, the
transactions contemplated thereby, or any action taken or agreed to be
taken by EMC or any of its Subsidiaries) would prevent EMC from accounting
for the business combination to be effected by the Merger as a pooling of
interests transaction under generally accepted accounting principles.
(f) McDATA Affiliate Agreements. EMC shall have received a duly executed
McDATA Affiliate Agreement from each of the McDATA Affiliates.
(g) Other. McDATA shall not have declared, set aside or paid any amount
with respect to the dividend that McDATA gave notice of its intent to
declare and pay by notice dated September 7, 1995 and no stockholder of
McDATA shall have asserted or claimed any right to cause McDATA to declare,
set aside or pay any such amount, which assertion or claim EMC determines,
in good faith, after consultation with Coopers & Lybrand L.L.P., is
reasonably likely to prevent the Merger from being accounted for as a
pooling of interests. The employees of McDATA specified in a letter from
EMC to McDATA, dated as of the date hereof, shall have entered into a
standard form EMC key employee agreement.
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Section 7.3 Additional Conditions to Obligations of McDATA. The obligation of
McDATA to effect the Merger is subject to the satisfaction of each of the
following conditions, any of which may be waived, in writing, exclusively by
McDATA:
(a) Representations and Warranties. The representations and warranties of
EMC and Sub set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and (except to the
extent such representations speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date, except for changes
contemplated by this Agreement; and McDATA shall have received a
certificate signed on behalf of EMC by the chief executive officer and the
chief financial officer of EMC to such effect. For purposes of this Section
7.3(a), representations and warranties of EMC and Sub shall be deemed true
and correct in all material respects if any breaches of such
representations and warranties do not, in the aggregate, have a "Material
Adverse Effect on EMC (taken as a whole)" (the preceding quote referred to
herein as the "EMC Material Adverse Effect Qualifier"); it being understood
that a breach of any representation or warranty that is already qualified
by such EMC Material Adverse Effect Qualifier, by itself, shall be deemed a
failure to satisfy the condition set forth in this Section 7.3(a).
(b) Performance of Obligations of EMC and Sub. EMC and Sub shall have
performed in all material respects all obligations required to be performed
by them under this Agreement at or prior to the Closing Date, and McDATA
shall have received a certificate signed on behalf of EMC by the chief
executive officer and the chief financial officer of EMC to such effect.
(c) Opinions. EMC shall have delivered to McDATA the opinion of EMC's
Vice President and General Counsel (or other counsel reasonably acceptable
to McDATA), dated the Closing Date, covering the matters set forth on
Exhibit D hereto. McDATA shall have received a written opinion from
Ireland, Stapleton, Pryor & Pascoe, P.C., counsel to McDATA, to the effect
that the Merger will be treated for Federal income tax purposes as a tax-
free reorganization within the meaning of Section 368(a) of the Code. In
rendering such opinion, Ireland, Stapleton, Pryor & Pascoe, P.C. may
receive and rely upon representations contained in any certificate of
McDATA, Sub, EMC and others, as it deems appropriate.
ARTICLE VIII
Survival and Indemnification
Section 8.1 Survival.
(a) The respective representations and warranties of McDATA, EMC and Sub
contained in this Agreement shall survive the Closing for a period of one year
and shall terminate and be of no further force or effect as of the date one
year after the Effective Time.
(b) The respective covenants and agreements of McDATA, EMC and Sub contained
in this Agreement shall survive the Closing and shall be fully effective and
enforceable for the periods therein indicated or where not indicated, forever.
(c) Neither EMC nor the McDATA Stockholders shall be entitled to any
indemnification under Section 8.2 or 8.3, respectively, with respect to any
breach of a representation or warranty, covenant or agreement after the
termination thereof pursuant to Sections 8.1(a) or (b), except for claims
previously asserted pursuant to Section 8.4(a).
Section 8.2 Indemnification by the McDATA Stockholders.
(a) The McDATA Stockholders shall indemnify EMC and its affiliates and their
respective officers, directors, employees and agents against and hold them
harmless from any loss, liability, damage, demand, claim, cost, suit, action or
cause of action, judgment, award, assessment, interest, penalty or expense
(including, without limitation, reasonable expenses of investigation and
reasonable attorneys' and consultants'
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fees) (any of the foregoing being hereinafter referred to individually as a
"Loss" and collectively, as "Losses") suffered or incurred by any such
indemnified person for or on account of or arising from or in connection with
(i) any breach of any representation or warranty of McDATA contained in this
Agreement or (ii) any breach of any covenant or agreement of McDATA contained
in this Agreement.
(b) No indemnification for any Loss shall be made by the McDATA Stockholders
pursuant to Section 8.2(a) until the aggregate amount of all Losses suffered or
incurred by EMC or any of its affiliates or their respective officers,
directors, employees or agents first exceeds $1,000,000 (the "McDATA Minimum"),
in which event the McDATA Stockholders shall be liable for the aggregate amount
of such Losses, which amount shall include the McDATA Minimum; provided,
however, that indemnification for any Loss suffered or incurred by EMC or any
of its affiliates or their respective officers, directors, employees or agents
for or on account of or arising from or in connection with any breach of the
representations and warranties of McDATA contained in the second sentence of
Section 3.4(c) or the second sentence of Section 3.5 shall not be subject to
the McDATA Minimum and amounts paid with respect to any such Loss shall not
count towards satisfaction of the McDATA Minimum; provided further, however,
that the sole and exclusive source from which EMC or any of its affiliates or
their respective officers, directors, employees or agents may seek
indemnification pursuant to Section 8.2(a) shall be the Escrow Shares pursuant
to the Exchange and Escrow Agreement.
(c) Approval of the Merger Proposal and Conversion Proposal by the McDATA
Stockholders shall constitute such stockholders' express (i) assumption of
their respective obligations pursuant to this Article VIII and (ii) the
appointment of John F. McDonnell to act as their representative (the "McDATA
Representative") pursuant to the terms and conditions set forth in this
Agreement and the Exchange and Escrow Agreement.
Section 8.3 Indemnification by EMC.
(a) EMC shall indemnify the McDATA Stockholders and hold them harmless from,
any Losses suffered or incurred by any such indemnified person for or on
account of or arising from or in connection with (i) any breach of any
representation or warranty of EMC or Sub contained in this Agreement or the
Exchange and Escrow Agreement or (ii) any breach of any covenant or agreement
of EMC or Sub contained in this Agreement or the Exchange and Escrow Agreement.
(b) No indemnification for any Loss shall be made by EMC pursuant to Section
8.3(a) until the aggregate amount of all Losses suffered or incurred by the
McDATA Stockholders first exceeds $1,000,000 (the "EMC Minimum"), in which
event EMC shall be liable for the aggregate amount of such Losses, which amount
shall include the EMC Minimum; provided, however, that the indemnification
obligation of EMC with respect to such Losses pursuant to Section 8.3(a) shall
not exceed an amount equal to the product of aggregate number of Escrow Shares
times the Closing Average.
Section 8.4 Procedures Relating to Indemnification.
(a) An indemnified person under Sections 8.2 or 8.3 (the "Indemnified Party")
shall give prompt written notice to an indemnifying party (the "Indemnifying
Party") of any Loss in respect of which such Indemnifying Party has a duty to
indemnify such Indemnified Party under Sections 8.2 or 8.3 (a "Claim"),
specifying in reasonable detail the nature of the Loss for which
indemnification is sought, the section or sections of this Agreement or the
Exchange and Escrow Agreement to which the Claim relates and the amount of the
Loss involved (or, if not then determinable, a reasonable good faith estimate
of the amount of the Loss involved), except that any delay or failure so to
notify the Indemnifying Party shall only relieve the Indemnifying Party of its
obligations hereunder to the extent, if at all, that it is prejudiced by reason
of such delay or failure. For purposes of this Section 8.4, the Indemnified
Party under Section 8.3 and the Indemnifying Party under Section 8.2 shall mean
the McDATA Representative.
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(b) If a Claim results from any claim, suit, action or cause of action
brought or asserted by a third party (a "Third Party Claim"), the Indemnifying
Party shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to the Indemnified Party and the payment of all
expenses. The Indemnified Party shall have the right to employ separate counsel
in such Third Party Claim and participate in such defense thereof, but the fees
and expenses of such counsel shall be at the expense of the Indemnified Party.
If the Indemnifying Party fails to assume the defense of any Third Party Claim
within 10 days after notice thereof, the Indemnified Party shall have the right
to undertake the defense, compromise or settlement of such Third Party Claim
for the account of the Indemnifying Party, subject to the right of the
Indemnifying Party to assume the defense of such Third Party Claim with counsel
reasonably satisfactory to the Indemnified Party at any time prior to the
compromise, settlement or final determination thereof (except that the McDATA
Representative shall not have the right to assume the defense of any Third
Party Claim the defense of which is not assumed within 10 days after notice
thereof). Anything in this Section 8.4 to the contrary notwithstanding, the
Indemnifying Party shall not, without the Indemnified Party's prior written
consent, settle or compromise any Third Party Claim or consent to the entry of
any judgment with respect to any Third Party Claim which would have an adverse
effect on the Indemnified Party. The Indemnifying Party may, without the
Indemnified Party's prior written consent, compromise or settle any such Third
Party Claim or consent to entry of any judgment with respect to any Third Party
Claim which requires solely money damages paid by the Indemnifying Party, and
which includes as an unconditional term thereof the release by the claimant or
the plaintiff of the Indemnified Party from all liability in respect of such
Third Party Claim.
(c) With respect to any Claim other than a Third Party Claim, the
Indemnifying Party shall have ten days from receipt of notice from the
Indemnified Party of such Claim within which to respond thereto. If the
Indemnified Party does not respond within such ten-day period, the Indemnifying
Party shall be deemed to have accepted responsibility to make payment and shall
have no further right to contest the validity of such Claim. If the
Indemnifying Party notifies the Indemnified Party within such ten-day period
that it rejects such Claim in whole or in part, the Indemnified Party shall be
free to pursue such remedies as may be available to the Indemnified Party under
applicable law.
ARTICLE IX
Termination; Fees and Expenses
Section 9.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, (with respect to Sections 9.1(b) through 9.1(i), by
written notice by the terminating party to the other party) whether before or
after approval of the matters presented in connection with the Merger by the
stockholders of McDATA:
(a) by mutual written consent of EMC and McDATA;
(b) by either EMC or McDATA if the Merger shall not have been consummated
by June 30, 1996 (provided that (i) the right to terminate this Agreement
under this Section 9.1(b) shall not be available to any party whose failure
to fulfill any obligation under this Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date and
(ii) if such date occurs while EMC has extended the Closing pursuant to the
proviso in Section 1.7, then such date shall be automatically extended
until the first business day immediately following the date to which EMC
has so extended the Closing);
(c) by either EMC or McDATA if a court of competent jurisdiction or other
Governmental Entity shall have issued a nonappealable final order, ruling
or injunction or taken any other action, in each case having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger
(provided that the party seeking to terminate pursuant to this Section
9.1(c) shall have complied with its obligations under Section 6.7 and used
its reasonable best efforts to have any such order, ruling, injunction or
other action vacated or lifted);
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(d) by EMC or McDATA, if the requisite vote of the stockholders of McDATA
in favor of the Merger Proposal or the Conversion Proposal shall not have
been obtained;
(e) by EMC, if (i) the Board of Directors of McDATA shall have withdrawn
or modified its recommendation of the Merger Proposal or the Conversion
Proposal in a manner adverse to EMC or shall have resolved to do any of the
foregoing, (ii) the Board of Directors of McDATA shall have recommended to
the stockholders of McDATA an Acquisition Transaction (as defined in
Section 9.3(f)) or (iii) McDATA or the Board of Directors of McDATA takes
any action prohibited by Section 6.1;
(f) by EMC or McDATA, if there has been a breach of any representation,
warranty, covenant or agreement on the part of the other party set forth in
this Agreement, which breach shall not have been cured, in the case of a
representation or warranty, prior to the Closing (and which breach would
result in the condition to Closing in Sections 7.2(a) or 7.3(a), as the
case may be, not being satisfied as of the Closing) or, in the case of a
covenant or agreement, within 10 business days following receipt by the
breaching party of written notice of such breach from the other party;
(g) by McDATA if EMC enters into (or discloses to McDATA an intention to
enter into) a definitive agreement to merge or consolidate with another
corporation, partnership or other business organization or acquire an
equity interest in or assets of another corporation, partnership or other
business organization pursuant to which EMC would issue a number of shares
of EMC Common Stock (or securities convertible into a number of shares of
EMC Common Stock) in excess of 20% of the number of shares of EMC Common
Stock outstanding prior to such merger (or cash or other consideration
having a value in excess of the market value of 20% of the number of shares
of EMC Common Stock outstanding prior to such merger, consolidation or
acquisition), consolidation or acquisition and the Board of Directors of
McDATA determines in good faith by majority vote that, in light of such
merger, consolidation or acquisition, the Merger is no longer in the best
interest of McDATA and its stockholders;
(h) by EMC if EMC determines in good faith that consummation of the
Merger will result in a material adverse change in the business
relationship of McDATA with the customer listed on Section 3.15(a) of the
McDATA Disclosure Letter; or
(i) by McDATA if the Merger shall not have been consummated by February
28, 1996 (provided, that McDATA's right to terminate this Agreement under
this Section 9.1(i), (i) shall not be available to McDATA if McDATA's
failure to fulfill any obligation under this Agreement, or the
nonsatisfaction of any of the conditions in Sections 7.1(a), (b), (c), (d),
(e) or (f), has been the cause of or resulted in the failure of the Merger
to occur on or before such date, (ii) shall expire, and be of no further
force or effect, if not exercised by 5:00 p.m. on the fifth business day
after the later of (x) February 28, 1996 or (y) the date all of the
conditions in Sections 7.1(a), (b), (c), (d), (e) or (f) are satisfied (the
period from February 28, 1996 through 5:00 p.m. on the fifth business day
after the later of (x) or (y) being hereinafter referred to as the "Section
9.1(i) Termination Period") and (iii) shall be exercisable during the
Section 9.1(i) Termination Period notwithstanding any extension of the
Closing by EMC pursuant to the proviso in Section 1.7).
Section 9.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 9.1, this Agreement shall immediately become
void and there shall be no liability or obligation on the part of EMC, McDATA,
Sub or their respective officers, directors, stockholders or affiliates, except
(a) as set forth in Section 9.3 and (b) to the extent that such termination
results from the willful breach by a party of any of its representations,
warranties or covenants set forth in this Agreement and the termination fee
payable with respect to such termination for such wilful breach, if any,
pursuant to Sections 9.3(b), (c) or (d), as the case may be, shall not have
been paid in accordance with Section 9.3(e); provided, that Section 9.3 shall
remain in full force and effect and survive any termination of this Agreement.
Section 9.3 Fees and Expenses.
(a) Except as set forth in this Section 9.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby
(including attorneys' and accountants' fees) shall be
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paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that EMC and McDATA shall share equally all
fees and expenses, other than attorneys' or accountants' fees, incurred in
relation to the printing and filing of the Registration Statement (including
financial statements and exhibits) and any amendments or supplements thereto.
(b) McDATA shall pay EMC (as liquidated damages) a termination fee of
$5,000,000 upon the termination of this Agreement (i) by EMC or McDATA pursuant
to Section 9.1(d) or (ii) by EMC pursuant to Sections 9.1(e) or (f).
(c) EMC shall pay McDATA (as liquidated damages) a termination fee of
$5,000,000 upon the termination of this Agreement by McDATA pursuant to Section
9.1(f).
(d) If (i) EMC or McDATA shall have terminated this Agreement pursuant to
Section 9.1(d) or (ii) EMC shall have terminated this Agreement pursuant to
Sections 9.1(e) or (f) and, prior to or within six months after any such
termination, McDATA or any of its Subsidiaries shall have, directly or
indirectly, entered into a definitive agreement for, or shall have consummated,
an Acquisition Transaction, then, in any such case, McDATA shall pay EMC (as
liquidated damages) a termination fee of $10,000,000, less any amounts paid by
McDATA to EMC pursuant to Section 9.3(b).
(e) The fees, if applicable, payable pursuant to Sections 9.3(b), (c) or (d)
shall be paid within five business days after the first to occur of the events
described in Sections 9.3(b), (c) or (d); provided, that in no event (i) shall
McDATA be required to pay the fees to EMC pursuant to Sections 9.3(b) or (d)
if, immediately prior to the termination of this Agreement, EMC was in material
breach of its obligations under this Agreement or (ii) shall EMC be required to
pay the fee to McDATA pursuant to Section 9.3(c) if, immediately prior to the
termination of this Agreement, McDATA was in material breach of its obligations
under this Agreement.
(f) As used in this Agreement, "Acquisition Transaction" means either (i) a
transaction or a merger or other business combination involving McDATA pursuant
to which any person (or group of persons) other than EMC or its affiliates (a
"Third Party"), acquires 50% or more of the outstanding equity securities of
McDATA or the entity surviving such merger or business combination, (ii) any
other transaction pursuant to which any Third Party acquires control of assets
(including for this purpose the outstanding equity securities of Subsidiaries
of McDATA) of McDATA having a fair market value (as determined by the Board of
Directors of EMC, in good faith) equal to 50% or more of the fair market value
of all the assets of McDATA, and its Subsidiaries, taken as a whole,
immediately prior to such transaction or (iii) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
ARTICLE X
Miscellaneous
Section 10.1 Amendment. This Agreement may be amended by the parties hereto,
by action taken or authorized by their respective Boards of Directors, at any
time before or after approval of the Merger Proposal or the Conversion Proposal
by the stockholders of McDATA, but, after any such approval, no amendment shall
be made which by law requires further approval by such stockholders without
such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 10.2 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto,
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(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto or (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
Section 10.3 Notices. All notices and other communications hereunder shall be
in writing and shall be delivered personally or by next-day courier or
telecopied with confirmation of receipt to the parties at the addresses
specified below (or at such other address for a party as shall be specified by
like notice). Any such notice or other communication shall be effective upon
receipt, if personally delivered or telecopied, or one day after delivery to a
courier for next-day delivery.
(a)if to EMC or Sub, to
EMC Corporation
171 South Street
Hopkinton, MA 01748-9103
Attention: Edward L. Breslow
Telecopy: (508) 497-8712
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
One Beacon Street
Boston, MA 02108
Attention: David T. Brewster
Telecopy: (617) 573-4822
(b)if to McDATA, to
McDATA Corporation
310 Interlocken Parkway
Broomfield, CO 80021-3464
Attention: John F. McDonnell
Telecopy: (303) 460-4472
with a copy to:
Ireland, Stapleton, Pryor & Pascoe, P.C.
Suite 2600
1675 Broadway
Denver, CO 80202
Attention: John G. Lewis
Telecopy: (303) 623-2062
Section 10.4 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement they shall be deemed to be
followed by the words "without limitation." As used in this Agreement, the term
"affiliate(s)" shall have the meaning set forth in Rule 12b-2 of the Exchange
Act.
Section 10.5 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
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Section 10.6 Entire Agreement; No Third Party Beneficiaries. This Agreement
(including the documents and the instruments referred to herein, including the
Confidentiality Agreement) (a) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof, and (b) except as provided
in Sections 8.2 and 8.3, is not intended to confer upon any person other than
the parties hereto any rights or remedies hereunder.
Section 10.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware without regard to any
applicable conflicts of law.
Section 10.8 Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of
the remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall only
apply as to such party in the specific jurisdiction where such judgment shall
be made.
Section 10.9 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
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In Witness Whereof, EMC, Sub and McDATA have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
EMC Corporation
/s/ Michael C. Ruettgers
By___________________________________
Name: Michael C. Ruettgers
Title: President and Chief
Executive Officer
EMC Merger Corporation 1995
/s/ Paul T. Dacier
By___________________________________
Name: Paul T. Dacier
Title: Vice President
McDATA Corporation
/s/ John F. McDonnell
By___________________________________
Name: John F. McDonnell
Title: Chief Executive Officer and
President
The undersigned agrees, as the McDATA Representative, to be bound by Article
VIII and, insofar as applicable to Article VIII, by Article X.
/s/ John F. McDonnell
_____________________________________
Name: John F. McDonnell
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ANNEX B
October 25, 1995
Members of the Board of Directors
McDATA Corporation
310 Interlocken Parkway
Broomfield, CO 80021-3464
Gentlemen:
We understand that McDATA Corporation, a Delaware corporation (the
"Company"), EMC Corporation, a Massachusetts corporation ("Acquiror"), and EMC
Merger Corporation 1995, a Delaware corporation and wholly-owned subsidiary of
Acquiror ("Sub"), propose to enter into an Agreement and Plan of Merger dated
as of October 25, 1995 (the "Merger Agreement"), pursuant to which Sub will be
merged with and into the Company, which will be the surviving entity (the
"Merger"). Pursuant to the Merger, as more fully described in the Merger
Agreement, we understand that the outstanding shares of the common stock of the
Company, $.001 par value per share (the "Company Common Stock"), not held as
treasury stock by the Company or owned directly or indirectly by Acquiror, will
be converted into an aggregate number of shares of the common stock of
Acquiror, $.01 par value per share (the "Acquiror Common Stock"), equal to the
quotient of (i) $180,000,000 plus the Net Quick Assets Amount (as defined in
the Merger Agreement) divided by (ii) the average per share closing price of
the Acquiror Common Stock as reported on the New York Stock Exchange over the
ten (10) trading days immediately preceding the closing date of the Merger (the
"Consideration"). Up to ten percent (10%) of the Consideration is subject to
cancellation to cover potential indemnification claims of Acquiror under the
Merger Agreement for breaches of the representations, warranties and covenants
of the Company contained therein ("Indemnification Claims").
You have asked for our opinion as to whether the Consideration to be received
by the stockholders of the Company pursuant to the Merger is fair to such
stockholders from a financial point of view, as of the date hereof.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to Acquiror,
and certain financial and other data with respect to the Company provided to us
by its management, including the consolidated financial statements for recent
years and interim periods to July 1, 1995, in the case of Acquiror, and
September 29, 1995, in the case of the Company, and certain other relevant
financial and operating data relating to Acquiror and the Company made
available to us from published sources, in the case of Acquiror, and from the
internal records of the Company and Acquiror; (ii) reviewed a draft dated
October 20, 1995 of the Merger Agreement provided to us by the Company; (iii)
reviewed certain historical market prices and trading volumes of the Acquiror
Common Stock as reported on the New York Stock Exchange; (iv) compared the
Company and Acquiror from a financial point of view with certain other
companies in the networking and storage computer industries that we deemed to
be relevant; (v) considered the financial terms, to the extent publicly
available, of selected recent business combinations of companies in the
networking and storage computer industries that we deemed to be comparable, in
whole or in part, to the Merger; (vi) reviewed and discussed with
representatives of the management of the Company and Acquiror certain
information of a business and financial nature regarding the Company and
Acquiror, furnished to us by them, including financial forecasts and related
assumptions of the Company and Acquiror; (vii) made inquiries regarding and
discussed the Merger and the draft of the Merger Agreement and other matters
related thereto with the Company's counsel; and (viii) performed such other
analyses and examinations as we have deemed appropriate.
<PAGE>
In connection with our review, we have assumed and relied upon the accuracy
and completeness of the foregoing information and we have not assumed any
responsibility for independent verification of such information. With respect
to the financial forecasts for the Company and Acquiror provided to us by their
respective managements, we have assumed for purposes of our opinion that the
forecasts have been reasonably prepared on bases reflecting the best available
estimates and judgments of their respective managements at the time of
preparation as to the future financial performance of the Company and Acquiror
and that they provide a reasonable basis upon which we can form our opinion.
With respect to the forecasts for the Company provided to us by its management,
for purposes of our analyses, we have projected future financial performance of
the Company for a period of two years beyond its management's forecast period.
In preparing such projections, we have used assumptions more conservative than
those used by the Company's management in preparing its projections. We have
discussed the adjusted forecasts and related assumptions with management of the
Company and they have acknowledged our use of such adjusted forecasts and
assumptions in arriving at our opinion. We have also assumed that there have
been no material changes in the Company's or Acquiror's assets, financial
condition, results of operations, business or prospects since the respective
dates of their last financial statements made available to us and that there
will be no Indemnification Claims. We have relied on advice of counsel and
independent accountants to the Company as to all legal and financial reporting
matters with respect to the Company, the Merger and the draft of the Merger
Agreement. We have assumed that the Merger will be consummated in a manner that
complies in all respects with the applicable provisions of the Securities Act
of 1933, as amended (the "Securities Act"), the Securities Exchange Act of
1934, as amended, and all other applicable federal and state statutes, rules
and regulations. In addition, we have not assumed responsibility for making an
independent evaluation, appraisal or physical inspection of the assets or
individual properties of the Company or Acquiror, nor have we been furnished
with any such appraisals. Finally, our opinion is based on economic, monetary
and market and other conditions as in effect on, and the information made
available to us as of, the date hereof.
We have further assumed, with your consent, that the Merger will be
consummated in accordance with the terms described in the draft of the Merger
Agreement without any amendments thereto, and without wavier by the Company or
Acquiror of any of the conditions to their respective obligations thereunder.
In the ordinary course of our business, we actively trade the equity
securities of Acquiror for our own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
Based upon the foregoing and in reliance thereon, it is our opinion that the
Consideration to be received by the stockholders of the Company pursuant to the
Merger is fair to such stockholders from a financial point of view, as of the
date hereof.
This opinion is furnished pursuant to our engagement letter, dated February
14, 1995. This opinion is addressed to the Board of Directors of the Company
only and is not intended to be and shall not be deemed to be a recommendation
to any stockholder as to how such stockholder should vote with respect to the
Merger. This opinion may not be used or referred to by the Company, or quoted
or disclosed to any person in any manner, without our prior written consent. In
furnishing this opinion, we do not admit that we are experts within the meaning
of the term "experts" as used in the Securities Act and the rules and
regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act.
Very truly yours,
Montgomery Securities
B-2
<PAGE>
ANNEX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S)228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S)(S)251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsections (f) or (g) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S)251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under (S)253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
C-1
<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S)228 or 253
of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and
shall include in such notice a copy of this section. The notice shall be
sent by certified or registered mail, return receipt requested, addressed
to the stockholder at his address as it appears on the records of the
corporation. Any stockholder entitled to appraisal rights may, within 20
days after the date of mailing of the notice, demand in writing from the
surviving or resulting corporation the appraisal of his shares. Such demand
will be sufficient if it reasonably informs the corporation of the identity
of the stockholder and that the stockholder intends thereby to demand the
appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such written
statement shall be mailed to the stockholder within 10 days after his written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the
C-2
<PAGE>
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If the
petition shall be filed by the surviving or resulting corporation, the petition
shall be accompanied by such a duly verified list. The Register in Chancery, if
so ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by l or more
publications at least l week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a
C-3
<PAGE>
written withdrawal of his demand for an appraisal and an acceptance of the
merger or consolidation, either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of this section or
thereafter with the written approval of the corporation, then the right of such
stockholder to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 79, L.
'95, eff. 7-1-95.)
C-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 9 of the Amended and Restated Bylaws of the Registrant,
the Registrant shall, to the extent legally permissible, indemnify each of its
directors and officers (including persons who were at its request as directors,
officers or trustees of another organization or in any capacity with respect to
any employee benefit plan) against all liabilities and expenses, including
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees, reasonably incurred by him in connection with the
defense or disposition of any action, suit or other proceeding, whether civil or
criminal, in which he may be involved or with which he may be threatened, while
in office or thereafter, by reason of his being or having been such a director
or officer, except with respect to any matter as to which he shall have been
adjudicated in any proceeding not to have acted in good faith in the reasonable
belief that his action was in the best interests of the Registrant (any person
serving another organization in one or more of the indicated capacities at the
request of the Registrant who shall have acted in good faith in the reasonable
belief that his action was in the best interests of such other organization to
be deemed as having acted in such manner with respect to the Registrant) or, to
the extent that such matter relates to service with respect to any employee
benefit plan, in the best interests of the participants or beneficiaries of such
employee benefit plan; provided, however, that as to any matter disposed of by a
compromise payment by such director or officer, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other expenses
shall be provided unless such compromise shall be approved as in the best
interests of the Registrant, after notice that it involves such indemnification:
(a) by a disinterested majority of the directors then in office; or (b) by a
majority of the disinterested directors then in office, provided that there has
been obtained an opinion in writing of independent legal counsel to the effect
that such director or officer appears to have acted in good faith in the
reasonable belief that his action was in the best interests of the Registrant;
or (c) by the holders of a majority of the outstanding stock at the time
entitled to vote for directors, voting as a single class, exclusive of any stock
owned by any interested director or officer. Expenses, including counsel fees,
reasonably incurred by any director or officer in connection with the defense or
disposition of any such action, suit or other proceeding may be paid from time
to time by the Registrant in advance of the final disposition thereof upon
receipt of an undertaking by such director or officer to repay the amounts so
paid to the Registrant if it is ultimately determined that indemnification for
such expenses is not authorized under Section 9. The right of indemnification
provided by Section 9 shall not be exclusive of or affect any other rights to
which any director or officer may be entitled. As used in Section 9, the terms
"director" and "officer" include their respective heirs, executors and
administrators, and an "interested" director or officer is one against whom in
such capacity the proceedings in question or another proceeding on the same or
similar grounds is then pending. Nothing contained in Section 9 shall affect any
rights to indemnification to which corporate personnel other than directors and
officers may be entitled by contract or otherwise under law.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
2.1 -- Agreement and Plan of Merger dated as of October 25, 1995 by and
among EMC Corporation, EMC Merger Corporation 1995 and McDATA
Corporation*
3.1 -- Restated Articles of Organization of EMC, incorporated by reference
to EMC's Registration Statement on Form S-1 (No. 33-3656)
3.2 -- Articles of Amendment dated February 26, 1986, incorporated by
reference to EMC's Registration Statement on Form S-1 (No. 33-3656)
3.3 -- Articles of Amendment dated April 2, 1986, incorporated by reference
to EMC's Registration Statement on Form S-1 (No. 33-3656)
3.4 -- Articles of Amendment dated May 13, 1987, incorporated by reference
to EMC's Registration Statement on Form S-1 (No. 33-17218)
3.5 -- Articles of Amendment dated June 19, 1992, incorporated by reference
to Annual Report on Form 10-K of EMC Corporation dated February 12,
1993
3.6 -- Articles of Amendment dated May 12, 1993, incorporated by reference
to EMC's Registration Statement on Form S-1 (No. 33-67224)
3.7 -- Articles of Amendment dated November 17, 1993, incorporated by
reference to Current Report on Form 8-K of EMC Corporation filed
November 19, 1993
3.8 -- Articles of Amendment dated May 10, 1995, incorporated by
reference to Current Report on Form 8-K of EMC Corporation filed
May 26, 1995
3.9 -- Amended and Restated Bylaws of EMC Corporation, incorporated by
reference to Quarterly Report on Form 10-Q of EMC Corporation for
period ended July 1, 1995
4.1 -- Form of Stock Certificate, incorporated by reference to Annual
Report on Form 10-K of EMC Corporation filed March 31, 1988
4.2 -- Indenture, dated as of December 17, 1993 between EMC Corporation and
State Street Bank and Trust Company, Trustee, incorporated by
reference to Current Report on Form 8-K of EMC Corporation filed
December 29, 1993
4.3 -- Form of 4 1/4% Convertible Subordinated Notes due 2001, incorporated
by reference to EMC's Registration Statement on Form S-3 (No.
33-71916)
5.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom regarding legality
of securities being registered
8.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom as to Tax Matters
8.2 -- Opinion of Ireland Stapleton, Pryor & Pascoe, P.C. as to Tax Matters
10.1 -- EMC Corporation 1985 Stock Option Plan, as amended, incorporated by
reference to Annual Report on Form 10-K of EMC Corporation filed
February 12, 1993
10.2 -- EMC Corporation 1989 Employee Stock Purchase Plan, as amended,
incorporated by reference to Annual Report on Form 10-K of EMC
Corporation for the fiscal year ended December 31, 1994
10.3 -- EMC Corporation 1992 Stock Option Plan for Directors, as amended,
incorporated by reference to Annual Report on Form 10-K of EMC
Corporation for the fiscal year ended December 31, 1994
10.4 -- EMC Corporation 1993 Stock Option Plan, as amended, incorporated by
reference to Annual Report on Form 10-K of EMC Corporation for the
fiscal year ended December 31, 1994
10.5 -- EMC Corporation Profit-Sharing Plan, incorporated by reference to
EMC's Registration Statement on Form S-1 (No. 33-3656)
10.6 -- Mortgage Agreement with and Note Payable to John Hancock Mutual Life
Insurance Company, incorporated by reference to EMC's Registration
Statement on Form S-1 (No. 33-3656)
11.1 -- Computation of net income (loss) per share, incorporated by
reference to Quarterly Report on Form 10-Q of EMC Corporation
for period ended September 30, 1995 and the Annual Report on Form
10-K of EMC Corporation for the fiscal year ended December 31, 1994
22.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Price Waterhouse LLP
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Skadden, Arps, Slate, Meagher & Flom (included in
Exhibits 5.1 and 8.1)
23.4 -- Consent of Ireland Stapleton, Pryor & Pascoe, P.C. (included in
Exhibit 8.2)
24.1 -- Power of Attorney (See page II-4)*
99.1 -- Opinion of Montgomery Securities
II-2
<PAGE>
99.2 -- Form of Consent*
99.3 -- Consent of Montgomery Securities*
- --------------------
* Previously filed
(B) FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants on Financial Statement Schedule
Schedule VIII - Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes that
such reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may
be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(2) That every prospectus (i) that is filed pursuant to
paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to this Registration Statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such post-
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-4 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Town of Hopkinton, The Commonwealth of
Massachusetts on November 28, 1995.
EMC CORPORATION
By:/s/ Richard J. Egan
-------------------------------------
Richard J. Egan
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on November 28, 1995 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<C> <S> <C>
* Chairman of the Board (Principal November 28, 1995
- --------------------------- Executive Officer) and Director
Richard J. Egan
* President, Chief Executive November 28, 1995
- --------------------------- Officer and Director
Michael C. Ruettgers
* Executive Vice President, Sales November 28, 1995
- --------------------------- and Marketing Director
John R. Egan
* Vice President and Chief November 28, 1995
- --------------------------- Financial Officer (Principal
Colin G. Patteson Financial Officer)
* Vice President and Controller November 28, 1995
- --------------------------- (Principal Accounting Officer)
William J. Teuber
* Director November 28, 1995
- ---------------------------
Michael J. Cronin
* Director November 28, 1995
- ---------------------------
John F. Cunningham
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* Director November 28, 1995
- ---------------------------
W. Paul Fitzgerald
* Director November 28, 1995
- ---------------------------
Joseph F. Oliveri
* Director November 28, 1995
- ---------------------------
Maureen E. Egan
</TABLE>
* By: /s/ Paul T. Dacier
---------------------
Paul T. Dacier,
as attorney-in-fact
for each of the
persons indicated
II-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors of EMC Corporation
In connection with our audits of the consolidated financial statements of EMC
Corporation as of December 31, 1994 and January 1, 1994 and for each of the
three years in the period ended December 31, 1994, which financial statements
and report are included herein, we have also audited the related financial
statement schedule included herein.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 30, 1995
S-1
<PAGE>
EMC CORPORATION AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions Period
- ----------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts $5,262,000 $2,223,000 $(1,213,000) $6,272,000
Year ended January 1, 1994
Allowance for doubtful accounts $2,915,000 $2,699,000 $ (352,000) $5,262,000
Year ended January 2, 1993
Allowance for doubtful accounts $2,892,000 $ 488,000 $ (465,000) $2,915,000
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description Page
- ----------- ----------- ----
2.1 -- Agreement and Plan of Merger dated as of October
25, 1995 by and among EMC Corporation, EMC Merger
Corporation 1995 and McDATA Corporation*
3.1 -- Restated Articles of Organization of EMC,
incorporated by reference to EMC's Registration
Statement on Form S-1 (No. 33-3656)
3.2 -- Articles of Amendment dated February 26, 1986,
incorporated by reference to EMC's Registration
Statement on Form S-1 (No. 33-3656)
3.3 -- Articles of Amendment dated April 2, 1986,
incorporated by reference to EMC's Registration
Statement on Form S-1 (No. 33-3656)
3.4 -- Articles of Amendment dated May 13, 1987,
incorporated by reference to EMC's Registration
Statement Form S-1 (No. 33-17218)
3.5 -- Articles of Amendment dated June 19, 1992,
incorporated by reference to Annual Report on Form
10-K of EMC Corporation dated February 12, 1993
3.6 -- Articles of Amendment dated May 12, 1993, incorporated
by reference to EMC's Registration Statement on Form
S-1 (No. 33-67224)
3.7 -- Articles of Amendment dated November 17, 1993,
incorporated by reference to Current Report on Form 8-K
of EMC Corporation filed November 19, 1993
3.8 -- Articles of Amendment dated May 10, 1995, incorporated by
reference to Current Report on Form 8-K of EMC
Corporation filed May 26, 1995
3.9 -- Amended and Restated Bylaws of EMC Corporation,
incorporated by reference to Quarterly Report on Form 10-Q
of EMC Corporation for period ended July 1, 1995
4.1 -- Form of Stock Certificate, incorporated by reference to
Annual Report on Form 10-K of EMC Corporation filed
March 31, 1988
4.2 -- Indenture, dated as of December 17, 1993 between EMC
Corporation and State Street Bank and Trust Company,
Trustee, incorporated by reference to Current Report on
Form 8-K of EMC Corporation filed December 29, 1993
4.3 -- Form of 4 1/4% Convertible Subordinated Notes due 2001,
incorporated by reference to EMC's Registration Statement
on Form S-3 (No. 33-71916)
5.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom regarding legality
of securities being registered
8.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom as to Tax Matters
8.2 -- Opinion of Ireland Stapleton, Pryor & Pascoe, P.C. as to Tax
Matters
10.1 -- EMC Corporation 1985 Stock Option Plan, as amended,
incorporated by reference to Annual Report on Form
10-K of EMC Corporation filed February 12, 1993
10.2 -- EMC Corporation 1989 Employee Stock Purchase Plan, as
amended, incorporated by reference to Annual Report on
Form 10-K of EMC Corporation for the fiscal year ended
December 31, 1994
10.3 -- EMC Corporation 1992 Stock Option Plan for Directors, as
amended, incorporated by reference to Annual Report on
Form 10-K of EMC Corporation for the fiscal year ended
December 31, 1994
10.4 -- EMC Corporation 1993 Stock Option Plan, as amended,
incorporated by reference to Annual Report on Form
10-K of EMC Corporation for the fiscal year ended
December 31, 1994
10.5 -- EMC Corporation Profit-Sharing Plan, incorporated by
reference to EMC's Registration Statement on Form S-1
(No. 33-3656)
10.6 -- Mortgage Agreement with and Note Payable to John
Hancock Mutual Life Insurance Company, incorporated
by reference to EMC's Registration Statement on
Form S-1 (No. 33-3656)
11.1 -- Computation of net income (loss) per share,
incorporated by reference to Quarterly Report on
Form 10-Q of EMC Corporation for period ended September 30,
1995 and the Annual Report on Form 10-K of EMC
Corporation for the fiscal year ended December 31, 1994
22.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Price Waterhouse LLP
<PAGE>
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Skadden, Arps, Slate, Meagher & Flom (included
in Exhibits 5.1 and 8.1)
23.4 -- Consent of Ireland Stapleton, Pryor & Pascoe, P.C.
(included in Exhibit 8.2)
24.1 -- Power of Attorney (See page II-4)*
99.1 -- Opinion of Montgomery Securities
99.2 -- Form of Consent*
99.3 -- Consent of Montgomery Securities*
- --------------------
* Previously filed
<PAGE>
EXHIBIT 5.1
November 28, 1995
EMC Corporation
171 South Street
Hopkinton, Massachusetts 01748
Re: Registration of up to 17,500,000 Shares of the
Common Stock of EMC Corporation
-------------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to EMC Corporation, a Massachusetts
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-4 (33-63993), as filed by the Company with
the Securities and Exchange Commission (the "Commission") on November 3, 1995
and Amendment No. 1 thereto filed with the Commission on the date hereof
(as so amended, the "Registration Statement"). The Registration Statement
relates to the registration by the Company under the Securities Act of 1933, as
amended (the "1933 Act"), of up to 17,500,000 shares (the "Shares") of common
stock, $.01 par value per share, of the Company (the "Common Stock").
In this connection, we have examined and are familiar with originals
or copies, certified or otherwise identified to our satisfaction, of the
Registration Statement; the Restated Articles of Organization of the Company,
as amended, and the Amended and Restated Bylaws of the Company, each as in
effect on the date hereof; certain resolutions adopted by the Board of
Directors of the Company relating to the preparation and filing of the
Registration Statement, the issuance of the Shares by the Company and certain
related matters; the Agreement and Plan of Merger dated as of October 25, 1995
(the "Merger Agreement") by and among the Company, EMC Merger Corporation 1995,
a Delaware corporation and a wholly owned subsidiary of the Company, and McDATA
Corporation, a Delaware corporation; certain other agreements, certificates of
public officials, certificates of officers or representatives of the Company and
others; a form of specimen certificate for the Common Stock; and such other
documents, certificates and records as we have deemed necessary or appropriate
as a basis for the opinion set forth herein. In our examination, we have assumed
the genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified, conformed or
photostatic copies and the authenticity of the originals of such copies. As to
any facts material to the opinion expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and others.
Members of our firm are admitted to the Bar of the Commonwealth of
Massachusetts, and we express no opinion as to the laws of any other
jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that when
(i) issued in accordance with the Merger Agreement and the resolutions of the
Board of Directors of the Company relating thereto and (ii) certificates
representing the Shares in the form of the specimen certificate for the Common
Stock examined by us have been manually signed by an authorized officer of the
transfer agent and registrar for the Common Stock and registered by such
transfer agent and registrar, the Shares will be validly issued, fully paid and
nonassessable.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Consent Solicitation/Prospectus filed as part of the
Registration Statement. In giving such consent, we do not thereby admit that
we are in the category of persons whose consent is required under Section 7 of
the 1933 Act or the rules and regulations of the Commission promulgated
thereunder.
This opinion is furnished by us, as your counsel, in connection with
the filing of the Registration Statement and, except as provided in the
immediately preceding paragraph, is not to be used, circulated, quoted for any
other purpose or otherwise referred to or relied upon by any other person
without our express written permission.
Very truly yours,
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
<PAGE>
EXHIBIT 8.1
November 28, 1995
EMC Corporation
171 South Street
Hopkinton, Massachusetts 01748
Ladies and Gentlemen:
You have requested our opinion regarding the discussions of the
material U.S. federal income tax consequences under the captions "SUMMARY--The
Merger--Certain Federal Income Tax Consequences" and "THE MERGER--Certain
Federal Income Tax Consequences" in the Consent Solicitation/Prospectus (the
"Consent Solicitation/Prospectus") which will be included in Amendment No. 1
to the Registration Statement on Form S-4 (33-63993) (the "Registration
Statement") filed on the date hereof with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended
(the "Securities Act"). The Consent Solicitation/Prospectus relates to the
proposed merger of EMC Merger Corporation 1995, a wholly owned subsidiary of
EMC Corporation, with and into McDATA Corporation. This opinion is delivered
in accordance with the requirements of Item 601(b)(8) of Regulation S-K under
the Securities Act.
In rendering our opinion, we have reviewed the Consent
Solicitation/Prospectus and such other materials as we have deemed necessary
or appropriate as a basis for our opinion. In addition, we have considered
the applicable provisions of the Internal Revenue Code of 1986, as amended,
Treasury regulations, pertinent judicial authorities, rulings of the Internal
Revenue Service, and such other authorities as we have considered relevant.
Based upon the foregoing, it is our opinion that the statements made
under the captions "SUMMARY--The Merger--Certain Federal Income Tax
Consequences" and "THE MERGER--Certain Federal Income Tax Consequences" in the
Consent Solicitation/Prospectus, to the extent that they constitute matters of
law or legal conclusions, are correct in all material respects. There can be
no assurance that contrary positions may not be asserted by the Internal
Revenue Service.
This opinion is being furnished in connection with the Consent
Solicitation/Prospectus. You may rely upon and refer to the foregoing opinion
in the Consent Solicitation/Prospectus. Any variation or difference in the
facts from those set forth or assumed either herein or in the Consent
Solicitation/Prospectus may affect the conclusions stated herein.
In accordance with the requirements of Item 601(b)(23) of Regulation
S-K under the Securities Act, we hereby consent to the use of our name under
the captions "SUMMARY--The Merger--Certain Federal Income Tax Consequences"
and "THE MERGER--Certain Federal Income Tax Consequences" in the Consent
Solicitation/Prospectus and to the filing of this opinion as an Exhibit to the
Registration Statement. In giving this consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of
the Securities Act or the rules and regulations of the Commission thereunder.
Very truly yours,
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
<PAGE>
EXHIBIT 8.2
November 28, 1995
McDATA Corporation
319 Interlocken Parkway
Broomfield, Colorado 80021
Ladies and Gentlemen:
You have requested our opinion regarding the discussions of the material
U.S. federal income tax consequences under the captions "SUMMARY -- The Merger
-- Certain Federal Income Tax Consequences" and "THE MERGER -- Certain Federal
Income Tax Consequences" in the Consent Solicitation/Prospectus (the "Consent
Solicitation/Prospectus") which will be included in Amendment No. 1 to the
Registration Statement on Form S-4 (33-63993)(the "Registration Statement")
filed on the date hereof with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"). The Consent Solicitation/Prospectus relates to the proposed merger of
EMC Merger Corporation 1995, a wholly owned subsidiary of EMC Corporation,
with and into McDATA Corporation. This opinion is delivered in accordance with
the requirements of Item 601(b)(8) of Regulations S-K under the Securities
Act.
In rendering our opinion, we have reviewed the Consent
Solicitation/Prospectus and such other materials as we have deemed necessary
or appropriate as a basis for our opinion. In addition, we have considered
the applicable provisions of the Internal Revenue Code of 1986, as amended,
Treasury regulations, pertinent judicial authorities, rulings of the Internal
Revenue Service, and such other authorities as we have considered relevant.
Based upon the foregoing, it is our opinion that the statements made
under the captions "SUMMARY -- The Merger -- Certain Federal Income Tax
Consequences" and "THE MERGER --Certain Federal Income Tax Consequences" in
the Consent Solicitation/Prospectus, to the extent that they constitute
matters of law or legal conclusions, are correct in all material respects.
There can be no assurance that contrary positions may not be asserted by the
Internal Revenue Service.
This opinion is being furnished in connection with the Consent
Solicitation/Prospectus. You may rely upon and refer to the foregoing opinion
in the Consent Solicitation/Prospectus. Any variations or difference in the
facts from those set forth or assumed either herein or in the Consent
Solicitation/Prospectus may affect the conclusions stated herein.
In accordance with the requirements of Item 601(b)(23) of Regulation S-K
under the Securities Act, we hereby consent to the use of our name under the
captions "SUMMARY -- The Merger --Certain Federal Income Tax Consequences"
and "THE MERGER -- Certain Federal Income Tax Consequences" in the Consent
Solicitation/Prospectus and to the filing of this opinion as an Exhibit to the
Registration Statement. In giving this consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of
the Securities Act or the rules and regulations of the Commission thereunder.
Very truly yours,
IRELAND, STAPLETON, PRYOR & PASCOE, P.C.
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF REGISTRANT
The following is a list of EMC's consolidated subsidiaries as of October 31,
1995. EMC owns, directly or indirectly, 100% of the voting securities of each
subsidiary, unless noted otherwise and except for directors' qualifying
shares.
Copernique S.A.
France
EMC Asset Acquisition Corporation
Delaware
EMC (Benelux) B.V.
Holland
EMC Caribe, Inc.
Delaware
EMC Computer Storage Systems (Israel) Ltd.
Israel
EMC Computer Systems AG
Switzerland
EMC Computer Systems California, Inc.
Delaware
EMC Computer Systems (F.E.) Limited
Hong Kong
EMC Computer Systems France Sarl
France
EMC Computer Systems Italy SPA
Italy
EMC Computer Systems (South Asia) Pte. Ltd.
Singapore
EMC Computer Systems (U.K.) Limited
<PAGE>
United Kingdom
EMC Computer Systems (S.A.)(Pty) Ltd.
South Africa
EMC Computer-Systems Deutschland GmbH
Germany
EMC Computer-Systems Ireland Limited
Ireland
EMC Computer-Systems Svenska AB
Sweden
EMC Foreign Sales Corporation (F.S.C.)
Barbados
EMC International Holdings, Inc.
Delaware
EMC Japan K.K./1/
Japan
EMC Merger Corporation 1995
Delaware
EMC Securities Corporation
Massachusetts
EMC System Peripherals Canada, Inc.
Canada
Epoch, Inc.
Delaware
Hankook EMC Computer Systems Chusik
Hosea
- --------------
/1/ Majority owned by EMC Corporation, the remainder owned by CLC Corporation.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Consent Solicitation/Prospectus
constituting part of the Registration Statement on Form S-4 (33-63993) of EMC
Corporation of our report dated April 19, 1995 relating to the consolidated
financial statements of McDATA Corporation, which appears in such Consent
Solicitation/Prospectus. We also consent to the reference to us under the
heading "Experts" in such Consent Solicitation/Prospectus.
PRICE WATERHOUSE LLP
Boulder, Colorado
November 27, 1995
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4
(33-63993) of our reports dated January 30, 1995, on our audits of the
financial statements and financial statement schedule of EMC Corporation. We
also consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Boston, MA
November 28, 1995
<PAGE>
EXHIBIT 99.1
October 25, 1995
Members of the Board of Directors
McDATA Corporation
310 Interlocken Parkway
Broomfield, CO 80021-3464
Gentlemen:
We understand that McDATA Corporation, a Delaware corporation (the
"Company"), EMC Corporation, a Massachusetts corporation ("Acquiror"), and EMC
Merger Corporation 1995, a Delaware corporation and wholly-owned subsidiary of
Acquiror ("Sub"), propose to enter into an Agreement and Plan of Merger dated
as of October 25, 1995 (the "Merger Agreement"), pursuant to which Sub will be
merged with and into the Company, which will be the surviving entity (the
"Merger"). Pursuant to the Merger, as more fully described in the Merger
Agreement, we understand that the outstanding shares of the common stock of
the Company, $.001 par value per share (the "Company Common Stock"), not held
as treasury stock by the Company or owned directly or indirectly by Acquiror,
will be converted into an aggregate number of shares of the common stock of
Acquiror, $.01 par value per share (the "Acquiror Common Stock"), equal to the
quotient of (i) $180,000,000 plus the Net Quick Assets Amount (as defined in
the Merger Agreement) divided by (ii) the average per share closing price of
the Acquiror Common Stock as reported on the New York Stock Exchange over the
ten (10) trading days immediately preceding the closing date of the Merger
(the "Consideration"). Up to ten percent (10%) of the Consideration is
subject to cancellation to cover potential indemnification claims of Acquiror
under the Merger Agreement for breaches of the representations, warranties and
covenants of the Company contained therein ("Indemnification Claims").
You have asked for our opinion as to whether the Consideration to be
received by the stockholders of the Company pursuant to the Merger is fair to
such stockholders from a financial point of view, as of the date hereof.
In connection with our opinion, we have, among other things: (i)
reviewed certain publicly available financial and other data with respect to
Acquiror, and certain financial and other data with respect to the Company
provided to us by its management, including the consolidated financial
statements for recent years and interim periods to July 1, 1995, in the case
of Acquiror, and September 29, 1995, in the case of the Company, and certain
other relevant financial and operating data relating to Acquiror and the
Company made available to us from published sources, in the case of Acquiror,
and from the internal records of the Company and Acquiror; (ii) reviewed a
draft dated October 20, 1995 of the Merger Agreement provided to us by the
Company; (iii) reviewed certain historical market prices and trading volumes
of the Acquiror Common Stock as reported on the New York Stock Exchange; (iv)
compared the Company and Acquiror from a financial point of view with certain
other companies in the networking and storage computer industries that we
deemed to be relevant; (v) considered the financial terms, to the extent
publicly available, of selected recent business combinations of companies in
the networking and storage computer industries that we deemed to be
comparable, in whole or in part, to the Merger; (vi) reviewed and discussed
with representatives of the management of the Company and Acquiror certain
information of a business and financial nature regarding the Company
<PAGE>
and Acquiror, furnished to us by them, including financial forecasts and
related assumptions of the Company and Acquiror; (vii) made inquiries
regarding and discussed the Merger and the draft of the Merger Agreement and
other matters related thereto with the Company's counsel; and (viii) performed
such other analyses and examinations as we have deemed appropriate.
In connection with our review, we have assumed and relied upon the
accuracy and completeness of the foregoing information and we have not assumed
any responsibility for independent verification of such information. With
respect to the financial forecasts for the Company and Acquiror provided to us
by their respective managements, we have assumed for purposes of our opinion
that the forecasts have been reasonably prepared on bases reflecting the best
available estimates and judgments of their respective managements at the time
of preparation as to the future financial performance of the Company and
Acquiror and that they provide a reasonable basis upon which we can form our
opinion. With respect to the forecasts for the Company provided to us by its
management, for purposes of our analyses, we have projected future financial
performance of the Company for a period of two years beyond its management's
forecast period. In preparing such projections, we have used assumptions more
conservative than those used by the Company's management in preparing its
projections. We have discussed the adjusted forecasts and related assumptions
with management of the Company and they have acknowledged our use of such
adjusted forecasts and assumptions in arriving at our opinion. We have also
assumed that there have been no material changes in the Company's or
Acquiror's assets, financial condition, results of operations, business or
prospects since the respective dates of their last financial statements made
available to us and that there will be no Indemnification Claims. We have
relied on advice of counsel and independent accountants to the Company as to
all legal and financial reporting matters with respect to the Company, the
Merger and the draft of the Merger Agreement. We have assumed that the Merger
will be consummated in a manner that complies in all respects with the
applicable provisions of the Securities Act of 1933, as amended (the
"Securities Act"), the Securities Exchange Act of 1934, as amended, and all
other applicable federal and state statutes, rules and regulations. In
addition, we have not assumed responsibility for making an independent
evaluation, appraisal or physical inspection of the assets or individual
properties of the Company or Acquiror, nor have we been furnished with any
such appraisals. Finally, our opinion is based on economic, monetary and
market and other conditions as in effect on, and the information made
available to us as of, the date hereof.
We have further assumed, with your consent, that the Merger will be
consummated in accordance with the terms described in the draft of the Merger
Agreement without any amendments thereto, and without wavier by the Company or
Acquiror of any of the conditions to their respective obligations thereunder.
In the ordinary course of our business, we actively trade the equity
securities of Acquiror for our own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
Based upon the foregoing and in reliance thereon, it is our opinion that
the Consideration to be received by the stockholders of the Company pursuant
to the Merger is fair to such stockholders from a financial point of view, as
of the date hereof.
This opinion is furnished pursuant to our engagement letter, dated
February 14, 1995. This opinion is addressed to the Board of Directors of the
Company only and is not intended to be and shall not be deemed to be a
recommendation to any stockholder as to how such stockholder should vote with
respect to the Merger. This opinion may not be used or referred to by the
Company, or quoted or
<PAGE>
disclosed to any person in any manner, without our prior written consent. In
furnishing this opinion, we do not admit that we are experts within the
meaning of the term "experts" as used in the Securities Act and the rules and
regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act.
Very truly yours,
MONTGOMERY SECURITIES
