<PAGE>
As filed with the Securities and Exchange Commission on November 3, 1995
Registration No. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
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: [_]
--------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Amount Proposed Maximum Proposed Maximum
Title of Each Class of to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered (1) Per Unit Price (2) Registration Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share 17,500,000 N/A $56,822,000 $19,594
====================================================================================================================
</TABLE>
(1) Based on the estimated maximum number of shares of EMC Common Stock to be
issued in connection with the Merger.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f) of the Securities Act of 1933, as amended, based upon the
book value, as of September 29, 1995, of all shares of McDATA Class A
Common Stock to be acquired by the Registrant in the transactions described
herein.
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>
<PAGE>
<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>
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* Not Applicable
<PAGE>
[LETTERHEAD OF McDATA CORPORATION]
[Date]
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 request for your 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 Corporation
("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
Merger Proposal and the Conversion Proposal had already been approved and the
Merger was being consummated today, subject to certain assumptions, the Exchange
Ratio would be [ ], and accordingly, holders of McDATA Class A Common Stock
would receive [ ] shares of EMC Common Stock for each share of McDATA Class A
Common Stock held by them. The actual Exchange Ratio will be determined at the
closing in accordance with the Merger Agreement and as described in the Consent
Solicitation/Prospectus.
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 (a) holders of at least a majority of the
outstanding shares of McDATA Class A Common Stock, voting as a separate class,
(b) holders of a majority of the outstanding shares of McDATA Class B Common
Stock, voting as a separate class, and (c) 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-
2464, by facsimile to McDATA at (303) 460-4472 or mail it promptly 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 [ ], 1995.
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 [ ], 1995 and 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) receive the requisite vote
by written consent of those stockholders of McDATA entitled to vote on such
matters or (ii) [ ], 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 (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 mail
it promptly in the enclosed postage-paid addressed return envelope.
By Order of the Board of Directors
Dee J. Perry
Secretary
Broomfield, Colorado
[Date]
================================================================================
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. 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 to stockholders of McDATA on or about [ ], 1995.
SEE "RISK FACTORS" ON PAGE 14 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 REP-
RESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------
The date of this Consent Solicitation/Prospectus is , 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 is the
exclusive licensee of the McDATA(R) service mark for consulting services for
data processing and has certain rights in the McDATA(R) trademark for computer
disk drives, terminals and controllers and computer programs used in connection
therewith. 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>
<CAPTION>
<S> <C>
AVAILABLE INFORMATION...................................................... 2
SUMMARY.................................................................... 5
RISK FACTORS............................................................... 14
THE CONSENT SOLICITATION................................................... 15
General.................................................................. 15
Purpose.................................................................. 15
Record Date and Consent Required......................................... 15
Procedure................................................................ 16
Expenses................................................................. 16
THE MERGER................................................................. 17
General.................................................................. 17
Background of the Merger................................................. 17
McDATA's Reasons for the Merger; Recommendation of the McDATA Board...... 19
EMC's Reasons for the Merger............................................. 19
Opinion of Financial Advisor............................................. 20
Interests of Certain Persons in the Merger............................... 22
Certain Federal Income Tax Consequences.................................. 23
Accounting Treatment..................................................... 24
Regulatory Filings and Approvals......................................... 24
Federal Securities Law Consequences...................................... 25
Listing of EMC Common Stock on the NYSE.................................. 25
Appraisal Rights......................................................... 25
THE MERGER AGREEMENT....................................................... 27
Closing; Effective Time.................................................. 27
Form of Merger........................................................... 27
Conversion of Shares..................................................... 27
Exchange of Stock Certificates........................................... 29
Representations and Warranties........................................... 29
Conduct of Business Prior to the Effective Time.......................... 30
No Solicitation.......................................................... 31
Pooling and Reorganization Treatment..................................... 31
Indemnification; Escrow Shares........................................... 31
Conditions............................................................... 32
Stock Option Plans....................................................... 33
Termination; Termination Fees and Expenses............................... 33
Amendment, Extension and Waiver.......................................... 35
Related Matters After the Merger......................................... 35
COMPARATIVE PER SHARE MARKET PRICE DATA.................................... 35
McDATA................................................................... 35
EMC...................................................................... 35
SELECTED CONSOLIDATED FINANCIAL DATA....................................... 36
McDATA................................................................... 36
EMC...................................................................... 37
INFORMATION CONCERNING McDATA.............................................. 39
Business................................................................. 39
McDATA's Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 39
Principal Stockholders................................................... 43
INFORMATION CONCERNING EMC................................................. 44
Business................................................................. 44
Properties............................................................... 50
Legal Proceedings........................................................ 51
EMC's Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 51
Executive Officers and Directors......................................... 57
Executive Compensation................................................... 60
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Principal Stockholders 61
Certain Relationships and Related Transactions........................... 62
Description of EMC Capital Stock......................................... 62
COMPARISON OF STOCKHOLDER RIGHTS........................................... 63
Special Meetings of Stockholders......................................... 64
Inspection Rights........................................................ 64
Action By Consent of Stockholders........................................ 65
Cumulative Voting........................................................ 65
Dividends and Stock Repurchases.......................................... 65
Classification of the Board of Directors................................. 66
Removal of Directors..................................................... 66
Vacancies on the Board of Directors...................................... 66
Exculpation of Directors................................................. 67
Indemnification of Directors, Officers and Others........................ 67
Interested Director Transactions......................................... 68
Liquidation Preferences.................................................. 68
Fundamental Transactions................................................. 69
Amendments to Charter.................................................... 69
Amendments to Bylaws..................................................... 70
Appraisal Rights......................................................... 70
"Anti-Takeover" Statutes................................................. 71
LEGAL MATTERS.............................................................. 72
EXPERTS.................................................................... 72
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.
Unless otherwise defined herein, capitalized terms used in this summary have the
respective meanings ascribed to them elsewhere in this Consent
Solicitation/Prospectus. 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 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 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").
5
<PAGE>
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 (a) 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 (b) 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 (a) holders of a majority
of the outstanding shares of McDATA Class A Common Stock, voting as a separate
class, (b) holders of a majority of outstanding shares of McDATA Class B Common
Stock, voting as a separate class, and (c) 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."
The Merger
Closing; Effective Time
The closing of the transactions contemplated by the Merger Agreement (the
"Closing") shall take place on the later of (a) November 30, 1995 or (b) 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 (the "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."
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.
Conversion of Shares
On the first business day prior to the Closing Date and pursuant to the
Conversion Proposal, the 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 ("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
6
<PAGE>
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.
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. Assuming (i) the number of
shares of McDATA Class A Common Stock outstanding as of the Closing Date is
[ ], which number represents McDATA's estimate of what the aggregate number of
outstanding shares of McDATA Class A Common Stock will be as of the anticipated
Closing Date of [November 30], 1995, (ii) that the Net Quick Assets Amount
equals $[ ], which number represents McDATA's estimate of what the Net Quick
Assets Amount will be as of the anticipated Closing Date of [November 30], 1995,
and (iii) the Closing Average equals $[ ], which number represents 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 date hereof, the Exchange Ratio would equal [ ] and holders of McDATA
Class A Common Stock would receive [ ] shares of EMC Common Stock for each
share of McDATA Class A Common Stock held of record by such stockholder at the
Effective Time. 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 and the actual
Closing Average and may be more or less than [ ]. See "THE MERGER AGREEMENT
- -Conversion of Shares."
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 a bank or trust company mutually acceptable to EMC and
McDATA (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."
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
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.
7
<PAGE>
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
surrendering certificates that prior to the Merger represented McDATA Class A
Common 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 or 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
8
<PAGE>
damages) a termination fee of $10,000,000. See "THE MERGER AGREEMENT -
Termination; Termination Fees and Expenses."
Interests of Certain Persons in the Merger
In considering the recommendation of the McDATA Board with respect to the
Merger, stockholders 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 (the "Code").
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 to 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 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
9
<PAGE>
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.
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 has been 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 was derived from audited financial statements for and
as of such dates not included herein. The consolidated statement of operations
data for McDATA for the six months ended June 30, 1995 and July 1, 1994 and the
consolidated balance sheet data for McDATA as of June 30, 1995 has been 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
consolidated financial statements and notes thereto included elsewhere in this
Consent Solicitation/Prospectus.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
------------------ ------------------------------------------------------
June 30, July 1, Dec. 30, Dec. 31, Dec. 25, Dec. 27, Dec. 28,
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
Historical Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue............................. $70,804 $ 8,142 $43,431 $34,390 $40,234 $50,491 $ 46,396
Operating income (loss)............. 32,573 (4,010) 6,071 (6,931) (5,431) 1,931 (10,167)
Net income (loss)................... 21,780 (4,024) 9,809 (6,584) (4,600) 2,023 (5,785)
Net income (loss)
per common share (1)............... 4.88 (1.49) 2.43 (2.44) (1.77) 0.41 (2.37)
Average number of common
and common equivalent
shares outstanding................. 4,459 2,765 4,031 2,771 2,760 4,914 2,656
<CAPTION>
Historical Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Working capital..................... $39,161 $17,732 $ 5,929 $11,072 $19,044 $17,977
Total assets........................ 55,439 33,432 17,651 24,550 31,054 29,258
Long term obligations and
redeemable preferred
shares
(excluding current
portion).......................... 2,640 2,847 2,828 2,680 4,801 5,113
Stockholders' equity................ 39,805 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 $84,000 for the six-months ended
July 1, 1994, $172,000 for the fiscal year ended December 31, 1993, and
$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 six-months ended June 30, 1995 and for the fiscal year ended
December 30, 1994, and for the fiscal year ended 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.
10
<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
has been 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 was 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 six months ended July 1, 1995 and July 2, 1994 and the consolidated balance
sheet data for EMC as of July 1, 1995 has been 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 six months ended July 1, 1995
with the historical results of McDATA for the six months ended June 30, 1995.
The unaudited pro forma balance sheet data combine EMC's July 1, 1995 balance
sheet with McDATA's June 30, 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 consolidated
financial statements and notes thereto included elsewhere in this Consent
Solicitation/Prospectus.
<TABLE>
<CAPTION>
Pro forma
Six months Six Months Ended Year Ended
---------- -------------------- --------------------------------------------------
July 1, July 1, July 2, Dec. 31, Jan. 1, Jan. 2, Dec. 28, Dec. 29,
1995 1995 1994 1994 1994 1993 1991 1990
---- ---- ---- ---- ---- ---- ---- ----
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 926,669 $ 855,865 $575,174 $1,377,492 $782,621 $385,706 $260,337 $189,734
Operating income........................ 246,920 214,347 144,462 350,532 180,428 48,575 20,378 3,888
Net income.............................. 179,562 157,782 103,409 250,668 127,122 29,508 11,409 3,527
Net income per weighted average common
share (fully diluted)(1)(2)............ $0.73 $0.69 $ 0.46 $1.10 $0.60 $0.16 $0.07 $0.02
Weighted average common shares (fully
diluted)(1)(2)......................... 250,122 234,970 233,207 234,255 217,225 190,548 166,220 158,523
<CAPTION>
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working capital(3)...................... $ 770,608 $ 739,447 $ 600,341 $516,876 $149,335 $ 77,033 $ 81,177
Total assets............................ 1,519,338 1,463,899 1,317,500 829,646 338,780 205,503 167,547
Long-term obligations(4)................ 247,111 246,918 286,106 274,029 76,093 16,165 16,814
Stockholders' equity(3)................. 968,118 $ 933,866 $ 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 shares outstanding reflects an estimated
exchange ratio of 3.398 shares of EMC Common Stock issued for each share of
McDATA Class A Common Stock to consummate the Merger, as if the Merger had
occurred on January 1, 1995.
(3) EMC anticipates that the combined companies will incur merger-related
expenses totalling approximately $8,000,000. 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, but are reflected in the
pro forma balance sheet data.
(4) Excludes current portion of long-term debt.
11
<PAGE>
Comparative Historical And Pro Forma Per Share Data
The following table sets forth (1) historical income per share from
continuing operations and historical book value per share data of EMC; (2)
historical income (loss) per share from continuing operations and historical
book value per share data of McDATA; (3) 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 (4) 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 of 3.398 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 audited consolidated financial statements and the unaudited
interim condensed 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 Forma
Pro Forma Combined
EMC McDATA/(1)(5)/ Combined /(2)/ /(2)(3)(4)/
----- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Income (loss) per share from
continuing operations:
Six months ended
July 1, 1995...................... $0.69 $ 4.88 $0.73 $ 2.48
July 2, 1994...................... 0.46 (1.49) 0.42 1.42
For the year ended
December 31, 1994................. 1.10 2.43 1.08 3.67
January 1, 1994................... 0.60 (2.44) 0.53 1.81
January 2, 1993................... 0.16 (1.77) 0.13 0.44
Book value per share /(4)/:
July 1, 1995...................... $4.35 $13.57 $4.24 $14.40
December 31, 1994................. 3.65 6.45 3.48 11.84
- ----------------------------------------
</TABLE>
(1) For purposes of presentation above, the periods referenced are the fiscal
periods of EMC. The similar periods for McDATA are June 30, 1995 and July
1, 1994, for interim periods and December 30, 1994, December 31, 1993 and
December 25, 1992 for the twelve month periods then ended.
(2) EMC and McDATA anticipate that the combined companies will incur Merger-
related expenses totaling approximately $8 million. Such expenses include
investment advisory fees, legal and accounting expenses 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 as of July 1, 1995 and December 31, 1994.
(3) 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 3.398 shares of EMC Common Stock for each
share of McDATA Class A Common Stock.
(4) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period. EMC pro forma book value per share is computed 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.
(5) Loss per common share is calculated after subtracting from net loss, the
preferred stock dividend requirement of $84,000 for the six-months ended
July 1, 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 six-months ended June 30, 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.
12
<PAGE>
Comparative Per Share Data
EMC Common Stock is listed and traded on the NYSE under the symbol "EMC."
The following table sets forth the closing price per share of EMC Common Stock
as reported on the NYSE and the equivalent per share price (as explained below)
of McDATA Class A Common Stock on October 24, 1995, the business day preceding
public announcement of the Merger, and on November [ ], 1995:
<TABLE>
<CAPTION>
EMC Common Equivalent Per
Stock Share Price
---------- --------------
<S> <C> <C>
October 24, 1995................. $ 13.625 $
November [ ], 1995............... $ $
</TABLE>
The equivalent per share price of a share of McDATA Class A Common Stock
represents the closing price of a share of EMC Common Stock on such date
multiplied by the Exchange Ratio of [ ] shares of EMC Common Stock for each
share of McDATA Class A Common Stock. For purposes of determining the Exchange
Ratio, (i) the number of shares of McDATA Class A Common Stock outstanding was
assumed to be [ ], which number represents McDATA's estimate of what the
aggregate number of outstanding shares of McDATA Class A Common Stock will be as
of the anticipated Closing Date of [November 30], 1995, (ii) the Net Quick
Assets Amount was assumed to equal $[ ], which number represents McDATA's
estimate of what the outstanding Net Quick Assets Amount will be as of the
anticipated Closing Date of [November 30], 1995, and (iii) the Closing Average
was assumed to equal $[ ], which number represents the average of the closing
prices of EMC Common Stock on the NYSE composite tape as reported in The Wall
Street Journal on the ten trading days immediately preceding the date hereof.
Because the actual Exchange Ratio will not be determined until 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 and the actual
Closing Average, and the market price of EMC Common Stock is subject to
fluctuation, the number and market value of the shares of EMC Common Stock that
holders of McDATA Class A Common Stock will receive in the Merger may increase
or decrease prior to the Merger.
McDATA STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE
EMC COMMON STOCK.
13
<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" and
"INFORMATION CONCERNING McDATA."
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.
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."
14
<PAGE>
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.
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 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 to stockholders of McDATA on or about [ ],
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
(a) 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 (b) 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 (a) holders of a majority of outstanding shares of McDATA Class A
Common Stock, voting as a separate class, (b) holders of a majority of
outstanding shares of McDATA Class B Common Stock, voting as a separate class,
and (c) 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
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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 [ ]. Consents delivered by McDATA
stockholders may be revoked at any time on or prior to [ ], 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 [ ] 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 [ ].
Expenses
The expenses incurred in connection with printing and mailing 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 are qualified in their 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 same date, Montgomery sent EMC such confidential
information.
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 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 (a) 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 as-
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sets, for all the outstanding shares of McDATA Capital Stock, (b) 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, (c) EMC and McDATA would be entitled to
termination fees if such transaction were terminated by the other under certain
circumstances, (d) 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 (e) 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
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 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
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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 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 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.
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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 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 (including,
in the case of McDATA, the estimates and judgments of its management relating to
McDATA's relationship with IBM that are reflected in such forecasts) 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
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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 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 EMC'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
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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 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 was being consummated today, the
Consideration would be equal to $[ ] and Montgomery's fee would be equal
to $[ ]. 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 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 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 $814,520 in the
aggregate. In addition, the severance agreements provide
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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, no such person has received notice of termination;
however, McDATA does not know whether any of the 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 Class A Common Stock
who hold their shares of McDATA Class A Common Stock as capital assets. This
summary does not discuss all aspects of income taxation that may be relevant to
a particular holder of McDATA Class A Common Stock in light of such holders'
specific circumstances or to certain types of holders subject to special
treatment under 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
Class A Common 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,
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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 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 has been requested by both parties,
but has not yet been granted. 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.
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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.
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. This Consent Solicitation/Prospectus is
being sent to all holders of record of McDATA Capital Stock at the Record Date
and constitutes notice of the appraisal rights available to such holders under
Section 262. 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
DISSENTERS' 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.
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 this
Consent Solicitation/Prospectus. 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
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.
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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
dissenting 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 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 dissenting stockholder, the court may order that all or a
portion of the expenses incurred by any dissenting 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
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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.
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 (the "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
On the first business day prior to the Closing Date and pursuant to the
Conversion Proposal, the 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
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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 ("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.
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. Assuming (i) the number of shares of McDATA
Class A Common Stock outstanding as of the Closing Date is [ ], which number
represents McDATA's estimate of what the aggregate number of outstanding shares
of McDATA Class A Common Stock will be as of the anticipated Closing Date of
[November 30], 1995, (ii) that the Net Quick Assets Amount equals $[ ],
which number represents McDATA's estimate of what the Net Quick Assets Amount
will be as of the anticipated Closing Date of [November 30], 1995, and (iii) the
Closing Average equals $[ ], which number represents 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
date hereof, the Exchange Ratio would equal [ ] and holders of McDATA Class A
Common Stock would receive [ ] shares of EMC Common Stock for each share of
McDATA Class A Common Stock held of record by such stockholder at the Effective
Time. 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 and the actual Closing Average and
may be more or less than [ ].
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 a bank or trust company mutually acceptable to EMC and
McDATA (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."
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 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
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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 Share
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.
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 certificates that prior to the Merger represented McDATA Class A
Common Stock ("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 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.
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
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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 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.
30
<PAGE>
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 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
31
<PAGE>
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,
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 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.
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.
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<PAGE>
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 1988
Incentive 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 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
33
<PAGE>
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
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.
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.
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<PAGE>
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 Sub Common Stock 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
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.
From February 1993 until January 1995, McDATA did not pay any dividends on
the outstanding McDATA Capital Stock. On January 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 calendar 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 3/16 $ 5 1/8
Second Quarter................................ 11 3/8 5 13/16
Third Quarter................................. 19 10 1/8
Fourth Quarter................................ 19 1/2 14 11/16
1994
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C>
First Quarter................................. 23 15 1/2
Second Quarter................................ 21 1/4 12 1/2
Third Quarter................................. 20 1/4 12 3/4
Fourth Quarter................................ 24 18 1/8
1995
First Quarter................................. 23 1/4 14 3/4
Second Quarter................................ 25 7/8 16 5/8
Third Quarter................................. 27 3/8 17 3/4
Fourth Quarter (through November [ ], 1995)..
</TABLE>
As of October 27, 1995, there were approximately 4,633 record holders of
record of EMC's Common Stock.
EMC has never paid cash dividends on its EMC Common Stock. While subject to
periodic review, the current policy of its Board of Directors is to retain all
earnings to provide funds for EMC's continued growth.
The following table sets forth the closing price per share of EMC Common Stock
as reported on the NYSE and the equivalent per share price (as explained below)
of McDATA Class A Common Stock on October 24, 1995, the business day preceding
public announcement of the Merger, and on November [ ], 1995:
<TABLE>
<CAPTION>
EMC Common Equivalent Per
Stock Share Price
---------- --------------
<S> <C> <C>
October 24, 1995............... $ 13.625 $
November [ ], 1995............ $ $
</TABLE>
The equivalent per share price of a share of McDATA Class A Common Stock
represents the closing price of a share of EMC Common Stock on such date
multiplied by the Exchange Ratio of [ ] shares of EMC Common Stock for each
share of McDATA Class A Common Stock. For purposes of determining the Exchange
Ratio, (i) the number of outstanding shares of McDATA Class A Common Stock was
assumed to be [ ], which number represents McDATA's estimate of what the
aggregate number of outstanding shares of McDATA Class A Common Stock will be as
of the anticipated Closing Date of [November 30], 1995, (ii) the Net Quick
Assets Amount was assumed to equal $[ ], which number represents McDATA's
estimate of what the Net Quick Assets Amount will be as of the anticipated
Closing Date of [November 30], 1995, and (iii) the Closing Average was assumed
to equal $[ ], which number represents the average of the closing prices of EMC
Common Stock on the NYSE composite tape as reported in The Wall Street Journal
on the ten trading days immediately preceding the date hereof.
Because the actual Exchange Ratio will not be determined until the Closing
Date based on the actual number of shares of McDATA Class A Common Stock
outstanding, the actual Net Quick Assets Amount and the actual Closing Average,
and the market price of EMC Common Stock is subject to fluctuation, the number
and market value of the shares of EMC Common Stock that holders of McDATA Class
A Common Stock will receive in the Merger may increase or decrease prior to the
Merger.
McDATA STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE EMC
COMMON STOCK.
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 has been 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
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<PAGE>
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 was derived from audited financial statements for and as of such dates not
included herein. The consolidated statement of operations data for McDATA for
the six months ended June 30, 1995 and July 1, 1994 and the consolidated balance
sheet data for McDATA as of June 30, 1995 has been 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
consolidated financial statements and notes thereto included elsewhere in this
Consent Solicitation/Prospectus.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
------------------ ------------------------------------------------------
June 30, July 1, Dec. 30, Dec. 31, Dec. 25, Dec. 27, Dec. 28,
1995 1994 1994 1993 1992 1991 1990
-------- -------- ----------- --------- --------- -------- ---------
Historical Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.............................. $70,804 $ 8,142 $43,431 $34,390 $40,234 $50,491 $ 46,396
Operating income (loss).............. 32,573 (4,010) 6,071 (6,931) (5,431) 1,931 (10,167)
Net income (loss).................... 21,780 (4,024) 9,809 (6,584) (4,600) 2,023 (5,785)
Net income (loss)
per common share (1)................ 4.88 (1.49) 2.43 (2.44) (1.77) 0.41 (2.37)
Average number of common
and common equivalent
shares outstanding.................. 4,459 2,765 4,031 2,771 2,760 4,914 2,656
<CAPTION>
Historical Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Working capital...................... $39,161 $17,732 $ 5,929 $11,072 $19,044 $17,977
Total assets......................... 55,439 33,432 17,651 24,550 31,054 29,258
Long term obligations and
redeemable preferred shares
(excluding current portion)......... 2,640 2,847 2,828 2,680 4,801 5,113
Stockholders' equity................. 39,805 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 $84,000 for the six-months ended
July 1, 1994, $172,000 for the fiscal year ended December 31, 1993, and
$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 six-months ended June 30, 1995 and for the fiscal year ended
December 30, 1994, and for the fiscal year ended 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.
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
has been 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 was 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 six months ended July 1, 1995 and July 2, 1994 and the consolidated balance
sheet data for EMC as of July 1, 1995 has been derived from the unaudited
consolidated financial
37
<PAGE>
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 consolidated
financial statements and notes thereto included elsewhere in this Consent
Solicitation/Prospectus.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
-------------------- --------------------------------------------------
July 1, July 2, 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................................ $ 855,865 $575,174 $1,377,492 $782,621 $385,706 $260,337 $189,734
Operating income........................ 214,347 144,462 350,532 180,428 48,575 20,378 3,888
Net income.............................. 157,782 103,409 250,668 127,122 29,508 11,409 3,527
Net income per weighted average common
share (fully diluted)(1)............... $0.69 $ 0.46 $1.10 $0.60 $0.16 $0.07 $0.02
Weighted average common shares (fully
diluted)(1)............................ 234,970 233,207 234,255 217,225 190,548 166,220 158,523
Balance Sheet Data:
Working capital......................... $ 739,447 $ 600,341 $516,876 $149,335 $ 77,033 $ 81,177
Total assets............................ 1,463,899 1,317,500 829,646 338,780 205,503 167,547
Long-term obligations(2)................ 246,918 286,106 274,029 76,093 16,165 16,814
Stockholders' equity(2)................. $ 933,866 $ 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.
38
<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
Connectivity (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 is headquartered in Broomfield, Colorado, and employs
approximately 149 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>
Six months ended Year ended
------------------- --------------------------------------
June 30, July 1, December 30, December 31, December 25,
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue by product line:
Controllers........................... 5.2% 76.0% 27.8% 58.6% 76.3%
Director.............................. 89.5 - 62.7 - -
Interoperability...................... - - - 17.4 9.7
Other sales, service and rental....... 5.3 24.0 9.5 24.0 14.0
100.0 100.0 100.0 100.0 100.0
Cost of revenue......................... 43.9 60.4 51.3 55.4 53.2
Research and product development........ 6.9 60.0 23.3 28.5 26.6
Sales, general and administrative....... 3.2 28.9 11.4 36.3 33.7
Operating income (loss)................. 46.0 (49.3) 14.0 (20.2) (13.5)
Interest income (expense), net.......... 0.4 (0.1) 0.0 0.6 0.4
Income (loss) before taxes.............. 46.4 (49.4) 14.0 (19.6) (13.1)
Income tax expense (benefit)............ 15.6 0.0 (8.6) (0.4) (1.7)
Net income (loss)....................... 30.8 (49.4) 22.6 (19.2) (11.4)
</TABLE>
Six Months Ended June 30, 1995 and July 1, 1994
Revenue. Revenue for the six months ended June 30, 1995 were nearly eight
times greater than revenue reported in the first six months of fiscal 1994,
reflecting the introduction of McDATA's Director product in October, 1994.
Revenue from sales of McDATA's other products declined 9%, reflecting the
reduced demand and pricing decreases in the Controller marketplace.
39
<PAGE>
Cost of Revenue. McDATA's cost of revenue as a percentage of revenue
for the six months ended June 30, 1995 was 44%, compared to 60% 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 six months ended June 30, 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 1995 were largely unchanged compared to the
comparable period of 1994. Although McDATA's revenue increased in 1995 from
1994, its revenue growth was predominantly from its OEM customers, consequently,
there was no significant increase 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 six months of
1995, compared to no income tax expense or benefit for the six months ending
July 1, 1994. Under Financial Accounting Standard No. 109, "Accounting for
Income Taxes," a tax valuation allowance was recorded for the six months ended
July 1, 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.
Liquidity and Capital Resources
Working Capital and Cash Flows. Working capital increased 121% from
December 30, 1994 to June 30, 1995, reflecting the substantial income from
operations generated during the first six months of 1995 and the resultant
increase in cash and accounts receivable, offset by investments in property,
plant and equipment of $0.7 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 4.0 as
of June 30, 1995. Accounts receivable increased from $12 million to $20 million
due primarily to increased revenue in the second quarter of 1995 compared to the
fourth quarter of 1994. Inventories at June 30, 1995 decreased 9% from the
balances held at December 30, 1994 due to reduced Director component inventories
resulting from improved manufacturing cycle time.
Available Financing Lines. In June 1995, McDATA entered into a
secured line of credit agreement with a bank. The agreement allows for the
maximum possible borrowings of $7 million. The interest rate applicable for
borrowings under the line is the bank's prime lending rate (9% at June 30,
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 June 30, 1995, McDATA had no outstanding advances
under the agreement and had $7 million of available credit under the agreement.
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 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.
40
<PAGE>
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 revenues
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.
Costs 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 a 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 the balances held at December 31, 1993, due
primarily to materials acquired to meet scheduled shipments of the Director
product.
41
<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
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 receivables and the
purchase of plant and equipment of $1.2 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 held
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.
42
<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 October 23, 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 0.6% 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
43
<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.
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.
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,
44
<PAGE>
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
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
45
<PAGE>
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 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.
46
<PAGE>
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 and Harmonix
series, could have substantial adverse effects on EMC's operations and
ultimately on its financial results.
47
<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 $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
48
<PAGE>
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.
Intercompany transfers between geographic areas are accounted for at prices
which are designed to be representative of unaffiliated party transactions.
49
<PAGE>
<TABLE>
<CAPTION>
North/South Europe
America Middle East Asia Consolidated
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
50
<PAGE>
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.
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
Six Months Ended July 1, 1995 and July 2, 1994
Revenues. Revenues for the six months ended July 1, 1995 were
$855,865,000 compared to $575,174,000 for the first six months of 1994, an
increase of $280,691,000 or 49%. While EMC expects revenue to continue to
increase in all of its markets throughout 1995 as compared to the respective
periods in 1994, such increase may not, on a percentage basis, continue at the
levels experienced in the first six months of 1995.
The increase in revenues was due to continued strong demand for EMC's
series of ICDA based products, which include the Symmetrix series of products in
the mainframe market, the Harmonix series of products in the midrange market,
the Centriplex series of products in the open systems storage market and the
Symmetrix 3000 series of products in the open systems storage market, which was
introduced in April 1995. Revenues from the Symmetrix series of products in the
mainframe market increased by $269,642,000, or 56%, to $747,095,000 in the first
six months of 1995 from $477,453,000 in the first six months of 1994. Revenues
from the Harmonix series of IBM compatible disk products in the midrange market
decreased by $12,712,000, or 24%, to $40,832,000 in the first six months of 1995
from $53,544,000 in the first six months of 1994. Revenues from EMC's products
in the open systems storage market were $25,616,000 in the first six months of
1995, an increase of $14,501,000, or 130%, over the $11,115,000 for the first
six months of 1994.
Revenues on sales and service into the markets of North and South
America increased by $130,978,000, or 35%, to $510,993,000 in the first six
months of 1995 from $380,015,000 in the same period of 1994. This increase was
primarily due to growth in unit sales of the Symmetrix 5000 series of products
in the IBM mainframe storage market.
Revenues on sales and service into the markets of Europe, Africa and
the Middle East increased by $105,109,000, or 64%, to $269,865,000 in the first
six months of 1995 from $164,756,000 in the
51
<PAGE>
same period of 1994, due primarily to growth in unit sales of the Symmetrix 5000
series of products in the IBM and Bull mainframe storage markets.
Revenues on sales and service into the markets in the Asia Pacific
region increased by $44,604,000, or 147%, to $75,007,000 in the first six months
of 1995 from $30,403,000 in the same period of 1994, 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. 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, 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 has experienced delays in deliveries of
high density DRAMs 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 and this could
affect quarterly revenues and earnings.
Cost of Sales and Service. As a percentage of revenues, cost of sales
and service increased to 48.9% in the first six months of 1995 from 47.1% in the
first six months of 1994, primarily due to a change in the mix of products sold
in the first six months of 1995 as compared to the same period in 1994.
Research and Development. Research and development ("R&D") expenses
were $78,572,000 and $48,593,000 in the first six months of 1995 and 1994,
respectively, an increase of $29,979,000, or 62%. R&D expenses were 9.2% and
8.4% of revenues in the first six months of 1995 and 1994, respectively. Dollar
increases in R&D spending reflect additional 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 throughout 1995.
Selling, General and Administrative. Selling, general and
administrative ("SG&A") expenses were $144,126,000 and $111,329,000 in the first
six months of 1995 and 1994, respectively, an increase of $32,797,000 or 29.5%.
SG&A expenses were 16.8% and 19.4% of revenues in the first six 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 EMC's
increased revenue levels and EMC's initiative to expand its open systems storage
group and OEM and international distribution programs. SG&A expenses are
expected to increase throughout 1995 approximately in proportion to growth in
revenues.
Investment Income and Interest Expense. Investment income was
$11,967,000 in the first six months of 1995 compared with $9,930,000 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 1995 primarily due to
increased rates of interest in the first six months of 1995 over the same period
in 1994.
Interest expense decreased slightly in the first six months of 1995
from the first six months of 1994, primarily due to conversions of EMC's 6 1/4%
Convertible Subordinated Debentures due 2002 (the "Debentures").
Provision for Income Taxes. The provision for income taxes was
$62,899,000 and $43,270,000 in the first six months of 1995 and 1994,
respectively, which resulted in an effective tax rate of 28.5% and 29.5%,
respectively. EMC provides for income taxes based upon its estimate of full
year earnings on a country-by-country basis.
52
<PAGE>
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 $221,688,000 and
$240,506,000 at July 1, 1995 and December 31, 1994. In the first six months of
1995, EMC's working capital increased by $139,106,000 from $600,341,000 at
December 31, 1994 to $739,447,000 at July 1, 1995. In the first six months of
1994, EMC's working capital decreased by $26,794,000, from $516,876,000 at
January 1, 1994 to $490,082,000 at July 2, 1994.
In the first six months of 1995, cash and cash equivalents decreased
by $18,818,000. Cash provided by operating activities was $4,512,000 consisting
primarily of net income and increased taxes payable balances, offset by
increased trade and notes receivable, inventory and other asset balances, and
decreased accounts payable balances. Cash used by investing activities was
$23,837,000 caused by additions to property, plant and equipment of $41,926,000,
offset by net maturities of long-term investments of $18,089,000. Cash provided
by financing activities was $591,000 caused primarily by issuances of common
stock of $9,349,000, pursuant to stock option exercises and stock purchase plan
activity, partially offset by payments of long-term obligations of $8,935,000.
At July 1, 1995, the 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 administrative 18.1 20.8 25.0
Operating income 25.4 23.0 12.6
Investment income and interest
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>
53
<PAGE>
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 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 and increase from 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
54
<PAGE>
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 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,
55
<PAGE>
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.
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.
56
<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, Worldwide Sales and
Marketing 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...... 51 Senior Vice President, Marketing
Neal M. Waddington.... 48 Senior Vice President and General Manger, 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.
57
<PAGE>
John R. Egan became Executive Vice President, Sales and Marketing 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 Vice President of Marketing and
in February 1993, he became 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.
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.
58
<PAGE>
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.
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.
59
<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 Executive 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, 1993 160,000 383,116 -- 2,000(2)
Finance and Administration 1992 157,800 287,500 -- 2,000(2)
and Director
John R. Egan.................. 1994 200,000 266,425 -- 2,000(2)
Executive Vice President, 1993 175,000 490,389 -- 2,000(2)
Sales and Marketing 1992 156,500 304,000 1,800,000 2,000(2)
and Director
</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.
60
<PAGE>
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
Beneficially Percent of
Name of Beneficial Owner 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.
(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
61
<PAGE>
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.
Certain Relationships and Related Transactions
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.
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
62
<PAGE>
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 (a) 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; (b)
dilution of the voting power of the EMC Common Stock to the extent that
outstanding EMC Preferred Stock has voting rights; and (c) 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
63
<PAGE>
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, 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
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(a) 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 (b) 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.
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
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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 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, 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: (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 corporation; or (c) by the holders of a
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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 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.
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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 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 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 (x) 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, (y) 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 prior to the effective date of the merger, and (z) 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
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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.
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
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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.
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
71
<PAGE>
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.
72
<PAGE>
INDEX TO FINANCIAL STATEMENTS
McDATA CORPORATION
Consolidated Financial Statements
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets at June 30, 1995 (unaudited), December 31,
1994 and December 31, 1993................................................ F-3
Consolidated Statement of Operations for the six months ended June 30,
1995 and July 1, 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 six months ended June 30,
1995 and July 1, 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 six months ended June 30, 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
EMC CORPORATION
Audited Consolidated Financial Statements
Report of Independent Accountants.......................................... F-18
Consolidated Balance Sheets at December 31, 1994 and January 1, 1994....... F-19
Consolidated Statements of Operations for the years ended December 31,
1994, January 1, 1994 and January 2, 1993................................. F-20
Consolidated Statements of Cash Flows for the years ended December 31,
1994, January 1, 1994 and January 2, 1993................................. F-21
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, January 1, 1994 and January 2, 1993.................... F-22
Notes to Consolidated Financial Statements................................. F-23
Unaudited Consolidated Interim Financial Statements
Consolidated Balance Sheets at July 1, 1995 and December 31, 1994......... F-40
Consolidated Statements of Operations for the three and six months
ended July 1, 1995 and July 2, 1994...................................... F-41
Consolidated Statements of Cash Flows for the six months ended July 1,
1995 and July 2, 1994.................................................... F-42
Notes to Interim Consolidated Financial Statements........................ F-43
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>
June 30, December 30, December 31,
1995 1994 1993
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $24,312 $9,324 $2,802
Accounts receivable, net of allowance for doubtful accounts of
$194 in 1995 (unaudited), $338 in 1994 and $700 in 1993 20,410 12,129 6,273
Inventories, net 4,014 4,389 2,779
Evaluation equipment, net of accumulated depreciation of
$22 in 1995 (unaudited), $21 in 1994 and $50 in 1993 54 21 363
Deferred income tax benefit 3,021 4,259 -
Prepaid expenses 344 224 249
-------------- -------------- --------------
Total current assets 52,155 30,346 12,466
Property and equipment, net of accumulated depreciation 2,659 2,459 2,717
Field spares, net of accumulated depreciation and reserves
of $457 in 1995 (unaudited), $619 in 1994 and $857 in 1993 - - 981
Other assets, net 625 627 1,487
-------------- -------------- --------------
$55,439 $33,432 $17,651
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt - $2,986 -
Accounts payable 3,404 5,109 $2,295
Accrued liabilities 3,137 3,773 3,843
Income tax payable, net 6,453 746 399
-------------- -------------- --------------
Total current liabilities $12,994 $12,614 $6,537
Obligations under capital leases due after one year 193 102 251
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, 132,832, 129,433 and 127,893 shares issued in
1995 (unaudited), 1994 and 1993, respectively; liquidation preference
$445 (unaudited) - - -
Common stock, Class A, $.001 par value; 10,000,000 shares
authorized, 2,900,765, 2,754,300 and 2,745,736 issued in 1995 (unaudited),
1994 and 1993, respectively 3 3 3
Capital-in-excess of par 2,330 2,176 2,165
Retained earnings 37,737 16,041 6,481
Treasury stock, 16,297, 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 (265) (249) (363)
-------------- -------------- --------------
Total Common Stock and Other Stockholders' Equity 39,805 17,971 8,286
-------------- -------------- --------------
$55,439 $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>
Six months ended Year ended
------------------------- -------------------------------------------
June 30, July 1, December 30, December 31, December 25,
1995 1994 1994 1993 1992
------------- ----------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue $70,804 $8,142 $43,431 $34,390 $40,234
Cost of revenue 31,049 4,915 22,260 19,036 21,406
Research and product development costs 4,884 4,882 10,137 9,815 10,718
Sales, general, administrative and other expenses 2,298 2,355 4,963 12,470 13,541
------------- ----------- ------------- ------------- -------------
Income (loss) from operations 32,573 (4,010) 6,071 (6,931) (5,431)
Interest income (expense), net 281 (14) 6 197 166
------------- ----------- ------------- ------------- -------------
Income (loss) before income taxes 32,854 (4,024) 6,077 (6,734) (5,265)
Income tax expense (benefit) 11,074 - (3,732) (150) (665)
------------- ----------- ------------- ------------- -------------
Net income (loss) 21,780 (4,024) 9,809 (6,584) (4,600)
Dividend requirements on mandatorily
redeemable preferred stock 84 84 168 172 285
------------- ----------- ------------- ------------- -------------
Income (loss) available for common stock $21,696 ($4,108) $9,641 ($6,756) ($4,885)
============= =========== ============= ============= =============
Net income (loss) per common share $4.88 ($1.49) $2.43 ($2.44) ($1.77)
============= =========== ============= ============= =============
Weighted average common shares and
equivalents 4,459 2,765 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>
Six months ended Year ended
------------------------- ---------------------------------------
June 30, July 1, December 30, December 31, December 25,
1995 1994 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities: (unaudited)
Net income (loss) $21,780 ($4,024) $9,809 ($6,584) ($4,600)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 729 731 1,532 2,504 2,388
Decrease in short-term investments - 1,700 300
(Gain) loss on disposal of assets 18 (44) 298 299 35
(Increase) decrease in accounts receivable, net (8,281) 3,085 (5,856) 2,096 1,696
(Increase) decrease in inventories, net 375 830 (1,610) 415 1,839
(Increase) decrease in prepaid expenses (120) 26 25 190 25
(Increase) decrease in deferred tax benefit 1,238 2 (4,259) - 1,559
(Increase) decrease in evaluation equipment (33) 305 342 370 (539)
Increase (decrease) in accounts payable (1,706) (978) 2,814 606 (830)
Increase (decrease) in income tax payable 5,708 263 347 (113) 257
Increase (decrease) in accrued liabilities (636) (1,037) (70) 937 42
Stock contribution to Employee Retirement Plan - - - - 95
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operations 19,072 (841) 3,372 2,420 2,267
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (710) (204) (1,434) (1,168) (1,997)
(Increase) decrease in field spares - 905 919 (505) (492)
(Increase) decrease in other assets, net (22) 259 822 (147) (376)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities (732) 960 307 (1,820) (2,865)
------------ ------------ ------------ ------------ ------------
Cash flow from financing activities:
Decrease in obligations under capital leases (122) (103) (187) (113) (28)
Increase (decrease) in short term debt (2,986) 1,378 2,986 (898) -
Redemption of mandatorily redeemable
preferred stock - - - - (1,379)
Issuance of common stock 154 7 11 8 39
Issuance (purchase) of treasury stock, net (16) (3) 33 (34) 1
Dividends paid (382) - - (168) (199)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities (3,352) 1,279 2,843 (1,205) (1,566)
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 14,988 1,398 6,522 (605) (2,164)
Cash and cash equivalents, beginning of period 9,324 2,802 2,802 3,407 5,571
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $24,312 $4,200 $9,324 $2,802 $3,407
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $55 $114 $226 $100 $342
Income taxes paid $4,159 $88 $132 $193 $742
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred $213 $16 $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
Capital in Treasury and other
Common stock 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 - 4,266 shares (unaudited) - - - - (16) (16)
Exercise of stock warrants, Class A -
124,645 shares (unaudited) - - 125 - - 125
Issuance of common stock, Class A -
1,445 shares (unaudited) - - 5 - - 5
Exercise of stock options, Class A-
20,375 shares and Class B - 3,399 shares (unaudited) - - 24 - - 24
Mandatorily redeemable preferred stock
dividends (unaudited) - - - (84) - (84)
Net income (unaudited) - - - 21,780 - 21,780
-------- ------- --------- -------- -------- ----------
Balances at June 30, 1995 (unaudited) $3 $0 $2,330 $37,737 ($265) $39,805
======== ======= ========= ======== ======== ==========
</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
six months ended June 30, 1995, and for the six months ended July 1, 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 six months ended June 30, 1995 and for the six months ended July 1, 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 89% of
consolidated revenue for the six months ended June 30, 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.
F-7
<PAGE>
McDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
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.
F-8
<PAGE>
McDATA CORP0RATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2 - Inventories
Inventories, which include material, labor and factory overhead, consist of the
following (in thousands):
<TABLE>
<CAPTION>
June 30, December 30, December 31,
1995 1994 1993
-------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
Raw materials $2,736 $3,513 $1,504
Work-in-progress 742 666 591
Finished goods 536 210 684
-------------- ------------- -------------
$4,014 $4,389 $2,779
============== ============= =============
</TABLE>
Note 3 - Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
(Thousands)
December 30, December 31,
1994 1993
----------- -----------
<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>
<CAPTION>
<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>
F-9
<PAGE>
McDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 June 30, 1995, McDATA had no
balance due on the line.
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>
F-10
<PAGE>
McDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 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.
F-11
<PAGE>
McDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 ($3.82 liquidation value, for an
aggregate liquidation value of $445,000 at June 30, 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.
F-12
<PAGE>
McDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 Stock
Compensation 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 option 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-13
<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>
F-14
<PAGE>
McDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Note 9 - Income Taxes
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
(Thousands)
Year Ended
--------------------------------------------
December 30, December 31, December 25,
1994 1993 1992
------------ ------------ ------------
<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>
F-15
<PAGE>
McDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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>
(Thousands)
Year Ended
--------------------------------------------
December 30, December 31, December 25,
1994 1993 1992
------------ ------------ ------------
<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
valuation allowance (5,452) 3,463 1,989
Other (30) (26) (109)
------------ ------------ ------------
($3,732) ($150) ($665)
============ ============ ============
</TABLE>
F-16
<PAGE>
McDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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>
(Thousands)
Year Ended
-------------------------------------------
December 30, December 31, December 25,
1994 1993 1992
------------ ------------ ------------
<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-17
<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-18
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share amounts)
<TABLE>
<CAPTION>
December 31, 1994 January 1, 1994
ASSETS
Current Assets:
<S> <C> <C>
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-19
<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-20
<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-21
<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
options 3,668,992 37 4,304 -- -- -- -- -- 4,341
Issuance of stock
options -- -- 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
options 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
options 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
options -- -- 49 (49) -- -- -- -- --
Issuance of common
stock pursuant to bond
and note conversions 6,440,580 64 19,662 -- -- -- -- -- 19,726
Amortization of
deferred compensation -- -- -- 994 -- -- -- -- 994
Purchase of treasury
stock -- -- -- -- -- -- 19,471 (320) (320)
Cumulative translation
adjustment -- -- -- -- -- 2,179 -- -- 2,179
Net income -- -- -- -- 250,668 -- -- -- 250,668
Balance
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-22
<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.
F-23
<PAGE>
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 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.
F-24
<PAGE>
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>
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.
F-25
<PAGE>
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
computed on a straight-line basis over the estimated useful lives of the assets,
as follows:
Furniture and fixtures 7 years
Equipment 3-7 years
Vehicles 5 years
Improvements 5 years
Buildings 25-31 1/2 years
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).
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
F-26
<PAGE>
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-27
<PAGE>
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>
Current Deferred Tax Assets/(Liabilities) 1994 1993
<S> <C> <C>
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-28
<PAGE>
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>
F-29
<PAGE>
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. 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>
F-30
<PAGE>
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.
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
F-31
<PAGE>
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.
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
F-32
<PAGE>
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,
F-33
<PAGE>
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.
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-34
<PAGE>
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
F-35
<PAGE>
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 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.
F-36
<PAGE>
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 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.
Intercompany transfers between geographic areas are accounted for at
prices which are designed to be representative of unaffiliated party
transactions.
F-37
<PAGE>
<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
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>
F-38
<PAGE>
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
Fiscal Year 1993 Q1 1993 Q2 1993 Q3 1993 Q4 1993
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-39
<PAGE>
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share amounts)
<TABLE>
<CAPTION>
July 1, Dec. 31,
ASSETS 1995 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 221,688 $ 240,506
Trade and notes receivable less allowance for
doubtful accounts of $5,920 and $6,272,
respectively 446,310 361,191
Inventories 297,473 251,096
Deferred income taxes 39,201 40,754
Other assets 11,886 8,258
---------- ----------
Total current assets 1,016,558 901,805
Long-term investments 157,542 175,631
Notes receivable, net 48,873 38,945
Property, plant and equipment, net 191,769 173,016
Deferred income taxes 7,256 4,473
Other assets, net 41,901 23,630
---------- ----------
Total assets $1,463,899 $1,317,500
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 764 $ 9,502
Accounts payable 66,351 122,264
Accrued expenses 105,115 106,107
Income taxes payable 95,423 55,521
Deferred revenue 9,458 8,070
Total current liabilities 277,111 301,464
Deferred revenue 6,004 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 17,320 16,972
------- -------
Total liabilities 530,033 589,859
======= =======
Stockholders' equity:
Series Preferred Stock, par value $.01;
authorized 25,000,000 shares -- --
Common Stock, par value $.01; authorized
500,000,000 shares; issued 217,292,192 and
201,738,042, in 1995 and 1994, respectively 2,173 2,017
Additional paid-in capital 329,844 281,625
Deferred compensation (2,097) (2,607)
Retained earnings 601,495 443,713
Cumulative translation adjustment 3,642 3,716
Treasury stock, at cost, 2,644,402 and
2,627,467 shares, respectively (1,191) (823)
---------- ----------
Total stockholders' equity 933,866 727,641
---------- ----------
Total liabilities and stockholders' equity $1,463,899 $1,317,500
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-40
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- ------------------
July 1, July 2, July 1, July 2,
1995 1994 1995 1994
------ ------ ------ -------
<S> <C> <C> <C> <C>
Revenues:
Net sales $423,473 $300,140 $834,250 $557,860
Service and rental 11,794 7,976 21,615 17,314
-------- -------- -------- --------
435,267 308,116 855,865 575,174
Costs and expenses:
Cost of sales and service 213,454 146,383 418,820 270,790
Research and development 41,134 26,245 78,572 48,593
Selling, general and
administrative 73,414 59,725 144,126 111,329
-------- -------- -------- --------
Operating income 107,265 75,763 214,347 144,462
Investment income 5,642 4,951 11,967 9,930
Interest expense (3,044) (3,793) (6,532) (7,595)
Other income/(expense), net 207 490 899 (118)
-------- -------- -------- --------
Income before taxes 110,070 77,411 220,681 146,679
Income tax provision 30,269 22,842 62,899 43,270
-------- -------- -------- --------
Net income $ 79,801 $ 54,569 $157,782 $103,409
======== ======== ======== ========
Net income per weighted average
share, primary $0.35 $0.26 $0.70 $0.49
===== ===== ===== =====
Net income per weighted average
share, fully diluted $0.35 $0.24 $0.69 $0.46
===== ===== ===== =====
Weighted average number of common
shares outstanding, primary 234,494 217,064 227,973 215,640
Weighted average number of common
shares outstanding, fully diluted 235,015 232,966 234,970 233,207
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-41
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
--------------------------
July 1, July 2,
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $157,782 $ 103,409
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 25,952 15,084
Deferred income taxes (1,230) (3,021)
Net loss/(gain) on disposal of property
and equipment 424 (295)
Minority interest in consolidated
subsidiaries -- 932
Changes in assets and liabilities:
Trade and notes receivable (94,944) (94,844)
Inventories (46,427) (64,680)
Other assets (25,099) (12,035)
Accounts payable (55,918) 51,596
Accrued expenses (1,014) 16,540
Income taxes payable 39,896 (6,192)
Deferred revenue 5,090 1,567
-------- ---------
Net cash provided by operating activities 4,512 8,061
-------- ---------
Cash flows from investing activities:
Additions to property and equipment (41,926) (48,742)
Proceeds from sales of property and equipment -- 445
Net maturity/(purchase) of long-term investments 18,089 (122,921)
-------- ---------
Net cash used by investing activities (23,837) (171,218)
-------- ---------
Cash flows from financing activities:
Issuance of common stock 9,349 7,562
Purchase of treasury stock (368) (140)
Issuance of 4 1/4% convertible subordinated
notes due 2001, net of issuance costs -- 29,350
Payment of long-term and short-term obligations (8,935) (895)
Issuance of long-term and short-term obligations 545 1,536
-------- ---------
Net cash provided by financing activities 591 37,413
--- ------
Effect of exchange rate changes on cash (84) 396
Net decrease in cash and cash equivalents (18,734) (125,744)
Cash and cash equivalents at beginning of period 240,506 345,300
-------- ---------
Cash and cash equivalents at end of period $221,688 $ 219,952
======== =========
Non-Cash Activity - Conversions of Debentures 39,536 13,429
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-42
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
Company
- -------
EMC Corporation and its subsidiaries ("EMC" or the "Company") design,
manufacture, market and support high performance storage products and provide
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 July 1, 1995 and July 2,
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>
July 1, 1995 December 31, 1994
------------ -----------------
<S> <C> <C>
Inventories consist of:
Purchased parts $ 7,658,000 $ 8,946,000
Work-in-process 142,999,000 133,116,000
Finished goods 146,816,000 109,034,000
------------ ------------
$297,473,000 $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 six months ended July 1, 1995 and July 2, 1994, and used in fully diluted
per share computations for the second 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 six months ended July 1, 1995
and the three and six months ended July 2, 1994, reflect the dilutive effects of
the Debentures, in addition to the dilutive effect of the Notes and outstanding
stock options.
F-43
<PAGE>
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.
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.
F-44
<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 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-2
Section 1.6 Directors and Officers of the Surviving Corporation......... A-2
Section 1.7 Closing..................................................... A-2
ARTICLE I 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-4
Section 2.4 Dissenting Shares........................................... A-6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF
MCDATA...................................................... A-6
Section 3.1 Organization of McDATA...................................... A-6
Section 3.2 McDATA Capital Structure.................................... A-7
Section 3.3 Authority; No Conflict; Required Filings and Consents....... A-8
Section 3.4 Financial Statements........................................ A-9
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......................... 14
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-14
Section 3.19 Litigation................................................. A-14
Section 3.20 Products Liability......................................... A-14
Section 3.21 Environmental Matters...................................... A-14
Section 3.22 Employee Benefit Plans..................................... A-15
Section 3.23 Personnel.................................................. A-16
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 Interets........................................... A-16
i
<PAGE>
Section 3.28 Registration Statement: Consent Solicitation/Prospectus.... A-17
Section 3.29 No Existing Discussions.................................... A-17
Section 3.30 Opinion of Financial Advisor............................... A-17
Section 3.31 Brokers and Finders........................................ A-17
Section 3.32 Disclosure................................................. A-17
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-18
Section 4.3 Authority; No Conflict; Required Filings and Consents...... A-18
Section 4.4 SEC Filings; Financial Statements.......................... A-19
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-20
Section 4.8 Brokers and Finders........................................ A-20
ARTICLE V CONDUCT OF BUSINESS........................................ A-20
Section 5.1 Covenants of McDATA........................................ A-20
Section 5.2 Cooperation................................................ A-22
ARTICLE VI ADDITIONAL AGREEMENTS...................................... A-22
Section 6.1 No Solicitation............................................ A-22
Section 6.2 Consent Solicitation/Prospectus; Registration Statement.... A-22
Section 6.3 Letter of McDATA's Accountants............................. A-23
Section 6.4 Access to Information...................................... A-23
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-24
Section 6.8 Public Disclosure.......................................... A-24
Section 6.9 Tax-Free Organization...................................... A-24
Section 6.10 Pooling Accounting......................................... A-24
Section 6.11 Affiliate Agreements....................................... A-24
Section 6.12 NYSE Listing............................................... A-25
Section 6.13 McDATA Stock Option Plans.................................. A-25
Section 6.14 Consents................................................... A-25
Section 6.15 Additional Agreements; Reasonable Best Efforts............. A-26
ARTICLE VII CONDITIONS TO MERGER....................................... A-26
Section 7.1 Conditions to Each Party's Obligation to Effect the
Merger.................................................... A-26
Section 7.2 Additional Conditions to Obligations of EMC and Sub........ A-26
Section 7.3 Additional Conditions to Obligations of McDATA............. A-28
ARTICLE VIII SURVIVAL AND INDEMNIFICATION............................... A-28
Section 8.1 Survival................................................... A-28
Section 8.2 Indemnification by the McDATA Stockholders................. A-29
Section 8.3 Indemnification by EMC. ................................... A-29
ii
<PAGE>
Section 8.4 Procedures Relating to Indemnification..................... A-29
ARTICLE IX TERMINATION; FEES AND EXPENSES............................. A-30
Section 9.1 Termination................................................ A-30
Section 9.2 Effect of Termination...................................... A-32
Section 9.3 Fees and Expenses.......................................... A-32
ARTICLE X MISCELLANEOUS.............................................. A-33
Section 10.1 Amendment.................................................. A-33
Section 10.2 Extension; Waiver.......................................... A-33
Section 10.3 Notices.................................................... A-33
Section 10.4 Interpretation............................................. A-34
Section 10.5 Counterparts............................................... A-34
Section 10.6 Entire Agreement; No Third Party Beneficiaries............. A-34
Section 10.7 Governing Law.............................................. A-34
Section 10.8 Severability............................................... A-34
Section 10.9 Assignment................................................. A-34
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
iii
<PAGE>
TABLE OF DEFINED TERMS
Cross Reference
---------------
Terms In Agreement
- ----- ------------
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)
iv
<PAGE>
McDATA........................................................ Preamble
McDATA Affiliate.............................................. Section 6.11(a)
McDATA Affiliates............................................. Section 6.11(a)
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)
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
<PAGE>
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.
Section 1.6 Directors and Officers of the Surviving Corporation. The
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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
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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
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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.
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<PAGE>
(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 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
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<PAGE>
"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 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
A-4
<PAGE>
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 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.
A-5
<PAGE>
(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 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.
A-6
<PAGE>
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
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.
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<PAGE>
Section 3.3 Authority; No Conflict; Required Filings and Consents.
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(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 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
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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 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
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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.
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.
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(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).
(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.
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(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, 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;
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(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.
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
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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 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
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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.
(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.
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(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.
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.
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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, 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).
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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 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.
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(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 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.
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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 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;
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<PAGE>
(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;
(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.
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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 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
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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.
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
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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 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
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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.
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.
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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 TO 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:
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(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 (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
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<PAGE>
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.
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).
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<PAGE>
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 again
st 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' 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
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<PAGE>
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.
(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
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<PAGE>
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);
(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).
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<PAGE>
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 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.
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<PAGE>
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, (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
A-33
<PAGE>
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.
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.
A-34
<PAGE>
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
By/s/ Michael C. Ruettgers
-----------------------------
Name: Michael C. Ruettgers
Title: President and
Chief Executive Officer
EMC MERGER CORPORATION 1995
By/s/ Paul T. Dacier
-----------------------------
Name: Paul T. Dacier
Title: Vice President
MCDATA CORPORATION
By/s/ John F. McDonnell
-----------------------------
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
A-35
<PAGE>
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.
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
<PAGE>
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 (including, in the case
of the Company, the estimates and judgments of its management relating to the
Company's relationship with IBM that are reflected in such forecasts) 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) 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) 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,
<PAGE>
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 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.
C-2
<PAGE>
(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 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-3
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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 of 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 is 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 -- Form of Opinion of Skadden, Arps, Slate, Meagher & Flom regarding
legality of securities being registered
8.1 -- Form of Opinion of Skadden, Arps, Slate, Meagher & Flom as to Tax
Matters
8.2 -- Form of 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 July 1, 1995 and the Annual Report on Form 10-K of
EMC Corporation for the fiscal year ended December 31, 1994
21.1 -- 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
(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 3, 1995.
EMC CORPORATION
By:/s/ Richard J. Egan
-------------------------------------
Richard J. Egan
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated. Each person whose signature appears
below hereby authorizes Paul T. Dacier and William J. Teuber and each of them,
with full power of substitution, to execute in the name and on behalf of such
person any amendment (including any post-effective amendment) to this
Registration Statement and to file the same, with exhibits thereto, and other
documents in connection therewith, making such changes in this Registration
Statement as the person(s) so acting deems appropriate, and appoints each of
such persons, each with full power of substitution, attorney-in-fact to sign
any amendment (including any post-effective amendment) to this Registration
Statement and to file the same, with exhibits thereto, and other documents in
connection therewith.
Signature Title Date
- --------- ----- ----
/s/ Richard J. Egan Chairman of the Board (Principal November 3, 1995
- --------------------------- Executive Officer) and Director
Richard J. Egan
/s/ Michael C. Ruettgers President, Chief Executive November 3, 1995
- --------------------------- Officer and Director
Michael C. Ruettgers
/s/ John R. Egan Executive Vice President, Sales November 3, 1995
- --------------------------- and Marketing Director
John R. Egan
/s/ Colin G. Patteson Vice President and Chief November 3, 1995
- --------------------------- Financial Officer (Principal
Colin G. Patteson Financial Officer)
/s/ William J. Teuber Vice President and Controller November 3, 1995
- --------------------------- (Principal Accounting Officer)
William J. Teuber
/s/ Michael J. Cronin Director November 3, 1995
- ---------------------------
Michael J. Cronin
/s/ John F. Cunningham Director November 3, 1995
- ---------------------------
John F. Cunningham
II-4
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ W. Paul Fitzgerald Director November 3, 1995
- ---------------------------
W. Paul Fitzgerald
/s/ Joseph F. Oliveri Director November 3, 1995
- ---------------------------
Joseph F. Oliveri
/s/ Maureen E. Egan Director November 3, 1995
- ---------------------------
Maureen E. Egan
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 -- Form of Opinion of Skadden, Arps, Slate, Meagher & Flom
regarding legality of securities being registered
8.1 -- Form of Opinion of Skadden, Arps, Slate, Meagher & Flom
as to Tax Matters
8.2 -- Form of 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 July 1,
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
<PAGE>
EXHIBIT 2.1
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 OF DEFINED TERMS....................................................... iv
ARTICLE I THE MERGER.................................................... 1
Section 1.1 The Merger.................................................... 1
Section 1.2 Consummation of the Merger.................................... 1
Section 1.3 Effects of the Merger......................................... 1
Section 1.4 Certificate of Incorporation of the Surviving Corporation..... 1
Section 1.5 By-Laws of the Surviving Corporation.......................... 2
Section 1.6 Directors and Officers of the Surviving Corporation........... 2
Section 1.7 Closing....................................................... 2
ARTICLE II DETERMINATION OF EXCHANGE RATIO AND CONVERSION AND EXCHANGE
OF SECURITIES................................................. 2
Section 2.1 Determination of Exchange Ratio............................... 2
Section 2.2 Conversion of Capital Stock................................... 3
Section 2.3 Exchange of Certificates...................................... 4
Section 2.4 Dissenting Shares............................................. 6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF MCDATA...................... 6
Section 3.1 Organization of McDATA........................................ 6
Section 3.2 McDATA Capital Structure...................................... 7
Section 3.3 Authority; No Conflict; Required Filings and Consents......... 8
Section 3.4 Financial Statements.......................................... 9
Section 3.5 No Undisclosed Liabilities.................................... 9
Section 3.6 Accounts Receivable........................................... 9
Section 3.7 Inventory..................................................... 9
Section 3.8 Absence of Certain Changes or Events.......................... 14
Section 3.9 Properties; Encumbrances...................................... 10
Section 3.10 Plant and Equipment........................................... 10
Section 3.11 Bank Accounts................................................. 10
Section 3.12 Taxes......................................................... 10
Section 3.13 Intellectual Property......................................... 11
Section 3.14 Contracts and Commitments..................................... 12
Section 3.15 Customers and Suppliers....................................... 13
Section 3.16 Orders, Commitments and Returns............................... 13
Section 3.17 Insurance..................................................... 13
Section 3.18 Labor Difficulties............................................ 14
Section 3.19 Litigation.................................................... 14
Section 3.20 Products Liability............................................ 14
Section 3.21 Environmental Matters......................................... 14
Section 3.22 Employee Benefit Plans........................................ 15
Section 3.23 Personnel..................................................... 16
Section 3.24 Agreements in Full Force and Effect........................... 16
Section 3.25 Compliance with Laws.......................................... 16
Section 3.26 Pooling of Interests.......................................... 16
Section 3.27 Insider Interets.............................................. 16
<PAGE>
Section 3.28 Registration Statement: Consent Solicitation/Prospectus...... 17
Section 3.29 No Existing Discussions....................................... 17
Section 3.30 Opinion of Financial Advisor.................................. 17
Section 3.31 Brokers and Finders........................................... 17
Section 3.32 Disclosure.................................................... 17
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF EMC AND SUB................. 17
Section 4.1 Organization of EMC and Sub................................... 17
Section 4.2 Capital Structure of EMC and Sub.............................. 18
Section 4.3 Authority; No Conflict; Required Filings and Consents......... 18
Section 4.4 SEC Filings; Financial Statements............................. 19
Section 4.5 Absence of Certain Changes or Events.......................... 19
Section 4.6 Registration Statement; Consent Solicitation/Prospectus....... 19
Section 4.7 Litigation.................................................... 20
Section 4.8 Brokers and Finders........................................... 20
ARTICLE V CONDUCT OF BUSINESS........................................... 20
Section 5.1 Covenants of McDATA........................................... 20
Section 5.2 Cooperation................................................... 22
ARTICLE VI ADDITIONAL AGREEMENTS......................................... 22
Section 6.1 No Solicitation............................................... 22
Section 6.2 Consent Solicitation/Prospectus;
Registration Statement....................................... 22
Section 6.3 Letter of McDATA's Accountants................................ 23
Section 6.4 Access to Information......................................... 23
Section 6.5 Supplements to McDATA Disclosure Schedules.................... 23
Section 6.6 Approval of Stockholders...................................... 23
Section 6.7 Legal Conditions to Merger.................................... 24
Section 6.8 Public Disclosure............................................. 24
Section 6.9 Tax-Free Organization......................................... 24
Section 6.10 Pooling Accounting............................................ 24
Section 6.11 Affiliate Agreements.......................................... 24
Section 6.12 NYSE Listing.................................................. 25
Section 6.13 McDATA Stock Option Plans..................................... 25
Section 6.14 Consents...................................................... 25
Section 6.15 Additional Agreements; Reasonable Best Efforts................ 26
ARTICLE VII CONDITIONS TO MERGER.......................................... 26
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger.... 26
Section 7.2 Additional Conditions to Obligations of EMC and Sub........... 26
Section 7.3 Additional Conditions to Obligations of McDATA................ 28
ARTICLE VIII SURVIVAL AND INDEMNIFICATION.................................. 28
Section 8.1 Survival...................................................... 28
Section 8.2 Indemnification by the McDATA Stockholders.................... 29
Section 8.3 Indemnification by EMC........................................ 29
ii
<PAGE>
Section 8.4 Procedures Relating to Indemnification........................ 29
ARTICLE IX TERMINATION; FEES AND EXPENSES................................ 30
Section 9.1 Termination................................................... 30
Section 9.2 Effect of Termination......................................... 32
Section 9.3 Fees and Expenses............................................. 32
ARTICLE X MISCELLANEOUS................................................. 33
Section 10.1 Amendment..................................................... 33
Section 10.2 Extension; Waiver............................................. 33
Section 10.3 Notices....................................................... 33
Section 10.4 Interpretation................................................ 34
Section 10.5 Counterparts.................................................. 34
Section 10.6 Entire Agreement; No Third Party Beneficiaries................ 34
Section 10.7 Governing Law................................................. 34
Section 10.8 Severability.................................................. 34
Section 10.9 Assignment.................................................... 34
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
iii
<PAGE>
TABLE OF DEFINED TERMS
Cross Reference
---------------
Terms In Agreement
- ----- ------------
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)
iv
<PAGE>
McDATA.................................... Preamble
McDATA Affiliate.......................... Section 6.11(a)
McDATA Affiliates......................... Section 6.11(a)
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)
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
1
<PAGE>
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.
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.
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(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 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
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"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 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
4
<PAGE>
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 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.
5
<PAGE>
(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 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.
6
<PAGE>
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
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.
7
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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 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
8
<PAGE>
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 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
9
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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.
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.
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(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).
(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.
11
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(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, 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;
12
<PAGE>
(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.
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
13
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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 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
14
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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.
(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.
15
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(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.
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.
16
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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, 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).
17
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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 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.
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(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 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.
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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 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;
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(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;
(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.
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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 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
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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.
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
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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 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
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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.
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.
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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 TO 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:
26
<PAGE>
(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 (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
27
<PAGE>
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.
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).
28
<PAGE>
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' 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
29
<PAGE>
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.
(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
30
<PAGE>
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);
(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).
31
<PAGE>
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 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.
32
<PAGE>
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, (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
33
<PAGE>
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.
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.
34
<PAGE>
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
By/s/ Michael C. Ruettgers
-----------------------------
Name: Michael C. Ruettgers
Title: President and
Chief Executive Officer
EMC MERGER CORPORATION 1995
By/s/ Paul T. Dacier
-----------------------------
Name: Paul T. Dacier
Title: Vice President
MCDATA CORPORATION
By/s/ John F. McDonnell
-----------------------------
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
35
<PAGE>
EXHIBIT 5.1
[Date]
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, which is being filed by the Company with
the Securities and Exchange Commission (the "Commission") on the date hereof
(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
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 opinions 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 opinions 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:
1. The Company has been duly organized and is validly existing as a
corporation in good standing with the Secretary of State under the laws of the
Commonwealth of Massachusetts.
2. Assuming the conformity of the certificates representing the
Shares to the form of the specimen certificate for the Common Stock examined
by us and the due execution and delivery of such certificates, the Shares have
been duly authorized for issuance and, when certificates therefor have been
issued and delivered as contemplated in the Registration Statement, 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,
<PAGE>
EXHIBIT 8.1
[Date]
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 the Registration
Statement on Form S-4 (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,
<PAGE>
EXHIBIT 8.2
[Date]
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 the Registration Statement
on Form S-4 (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,
<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./1/
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
________________
/1/ Majority owned by EMC (Benelux) B.V., the remainder owned by Compagnie des
Machines Bull S.A., and not including certain directors' qualifying shares.
<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./2/
Japan
EMC Merger Corporation 1995
Delaware
EMC Securities Corporation
Massachusetts
EMC System Peripherals Canada, Inc.
Canada
Epoch, Inc.
Delaware
Hankook EMC Computer Systems Chusik
Korea
- --------------
/2/ 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 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 2, 1995
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 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, Massachusetts
November 3, 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 (including, in the case of the Company, the estimates and judgments
of its management relating to the Company's relationship with IBM that are
reflected in such forecasts) 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
<PAGE>
EXHIBIT 99.2
McDATA CORPORATION
CONSENT OF STOCKHOLDER
The undersigned stockholder of McDATA Corporation, a Delaware
corporation ("McDATA"), hereby authorizes and approves, by consent in writing
pursuant to Section 228 of the General Corporation Law of the State of
Delaware (the "DGCL"):
I. with respect to all of the shares of Class A Common Stock, par
value $0.001 per share, of McDATA ("McDATA Class A Common Stock"), Class
B Common Stock, par value $0.001 per share, of McDATA ("McDATA Class B
Common Stock"), Series A Convertible Preferred Stock, par value $0.001
per share, of McDATA ("McDATA Series A Preferred Stock") and Series B
Convertible Preferred Stock, par value $0.001 per share, of McDATA
("McDATA Series B Preferred Stock"), of which the undersigned was the
record holder at the close of business on October 20, 1995 (the "Record
Date"):
A. the Agreement and Plan of Merger dated as of October 25,
1995, (the "Merger Agreement") among McDATA, EMC Corporation, a
Massachusetts corporation ("EMC"), and EMC Merger Corporation 1995,
a Delaware corporation and a wholly-owned subsidiary of EMC ("Sub");
B. the merger of Sub with and into McDATA pursuant to the
Merger Agreement (the "Merger"), resulting in McDATA becoming a
wholly owned subsidiary of EMC; and
C. the waiver of any notices, requirements and waiting
periods called for in McDATA's Amended and Restated Certificate of
Incorporation or in the DGCL, including any requirement that McDATA
may not consummate the Merger before the expiration of any time
period provided therein; and
II. with respect to all of the shares of McDATA Series A Preferred
Stock and McDATA Series B Preferred Stock, of which the undersigned was
the record holder at the close of business on the Record Date, the
conversion of all outstanding shares of McDATA Series A Preferred and
McDATA Series B Preferred into shares of McDATA Class A Common Stock;
all as more fully described in the Consent Solicitation/Prospectus dated
___________, 1995 (the "Consent Solicitation").
The undersigned's approval of the foregoing matters shall constitute
approval of all of the matters contemplated by the Merger Agreement as
described in the Consent Solicitation, including but not limited to the
following:
(i) the assumption by the undersigned of the undersigned's
obligations pursuant to Article VIII of the Merger Agreement relating to the
indemnification by the McDATA stockholders of EMC and its affiliates and their
respective officers, directors, employees and agents (the "Indemnification
Obligations");
<PAGE>
(ii) the appointment of John F. McDonnell to act as the
undersigned's representative ("McDATA Representative") pursuant to the Merger
Agreement and the Exchange and Escrow Agreement (as defined in the Merger
Agreement);
(iii) that the McDATA Representative and his successors will not be
liable to the undersigned for any action taken or omitted to be taken by him
in good faith and believed by him to be authorized by the Merger Agreement or
the Exchange and Escrow Agreement or within the rights or powers conferred
upon him thereunder, nor for any action taken or omitted to be taken by him in
good faith and in accordance with advice of counsel, nor for any mistakes of
fact or error of judgment or for any acts or omissions of any kind unless
caused by his own willful misconduct, gross negligence or bad faith.
By execution hereof, the undersigned acknowledges receipt of the
Consent Solicitation (which includes a copy of the Merger Agreement) and
acknowledges and agrees that as a result of signing this Consent, the
undersigned hereby waives and loses any right to dissent from the proposed
Merger and obtain payment for the undersigned's shares of McDATA capital stock
pursuant to Section 262 of the DGCL.
Effective upon the consummation of the Merger and as a result of the
execution of this Consent, the undersigned hereby waives any rights or claims
(known or unknown) the undersigned may have as a stockholder of McDATA against
McDATA or any of its officers, directors, shareholders, affiliates,
successors, or assigns, including any rights to accrued and unpaid dividends
on McDATA Class A Common Stock or McDATA Class B Common Stock, except for such
rights or claims as are expressly set forth in the Merger Agreement.
This Consent is one of several consents, identical in form to this
Consent, that are being signed by the holders of record on the Record Date of
issued and outstanding shares of capital stock of McDATA, all of which
Consents taken together are intended to constitute action by the stockholders
of McDATA by consent in writing without a meeting pursuant to Section 228 of
the DGCL.
Signature of Stockholder:
Print Name of Stockholder:
Signature if held jointly:
Print name of joint holder:
Dated __________, 1995
Shares beneficially owned:
____________________ shares of Class A Common Stock
____________________ shares of Class B Common Stock
____________________ shares of Series A Preferred Stock
____________________ shares of Series B Preferred Stock
2
<PAGE>
Please sign exactly as name appears on your certificate(s). When shares are
held by joint tenants, both should sign. When signing as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
3
<PAGE>
EXHIBIT 99.3
November 3, 1995
Members of the Board of Directors
McDATA Corporation
310 Interlocken Parkway
Broomfield, Colorado 80021-3464
Gentlemen:
We hereby consent to the use of our opinion letter dated October 25, 1995
to the Board of Directors of McDATA Corporation, attached as Annex B to the
Consent Solicitation/Prospectus which forms part of the Registration Statement
on Form S-4 of EMC Corporation, and to the references therein to our firm and
to such opinion under the headings "SUMMARY--Opinion of Financial Advisor" and
"THE MERGER--Background of the Merger" and "Opinion of Financial Advisor." In
giving such consent, we do not admit and we hereby disclaim (i) that we come
within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended (the "Act"), or the rules and
regulations of the Securities and Exchange Commission thereunder, and (ii)
that we are experts with respect to any part of such Registration Statement
within the meaning of the term "experts" as used in the Act or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
MONTGOMERY SECURITIES
4
