SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended: June 30, 1997 Commission File Number
1-9853
EMC CORPORATION
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2680009
- --------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
organization or incorporation) Identification Number)
171 South Street
Hopkinton, Massachusetts 01748-9103
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(Address of principal executive offices, including zip code)
(508) 435-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES X NO ________
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Common Stock, par value $.01 per share 246,712,315
- -------------------------------------- ------------------------------
Class Outstanding as of June 30, 1997
<PAGE>
Page No.
Part I - Financial Information
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income
for the Three and Six Months Ended
June 30, 1997 and June 29, 1996 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997
and June 29, 1996 5
Notes to Interim Consolidated Financial Statements 6-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-16
Part II - Other Information 17
Signatures 20
Exhibit Index 21
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $759,126 $496,377
Short-term investments 409,424 230,981
Trade and notes receivable less allowance for
doubtful accounts of $7,612 and $7,368 in 1997
and 1996, respectively 701,608 627,409
Inventories 446,985 336,581
Deferred income taxes 38,957 43,421
Other assets 28,567 19,367
Total current assets 2,384,667 1,754,136
Long-term investments 145,038 113,500
Notes receivable, net 24,316 20,013
Property, plant and equipment, net 318,769 276,387
Deferred income taxes 13,468 16,664
Intangible and other assets, net 155,367 112,846
Total assets $3,041,625$2,293,546
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term
obligations $8,218 $7,058
Accounts payable 154,880 172,871
Accrued expenses 115,442 122,562
Income taxes payable 122,973 104,899
Deferred revenue 7,013 10,112
Total current liabilities 408,526 417,502
Deferred revenue 1,206 2,019
Deferred income taxes 39,985 46,002
Long-term obligations:
3 1/4% convertible subordinated notes
due 2002 517,500 ---
4 1/4% convertible subordinated notes
due 2001 --- 142,720
Notes payable and other noncurrent
liabilities 39,723 48,514
Total liabilities 1,006,940 656,757
Commitments and contingencies
Stockholders' equity:
Series Preferred Stock, par value $.01;
authorized 25,000,000 --- ---
shares, none outstanding
Common Stock, par value $.01; authorized 750,000,000
shares; issued 246,712,315 and 238,239,672 shares,
in 1997 and 1996, respectively 2,467 2,382
Additional paid-in capital 622,022 463,687
Deferred compensation (5,437) (7,027)
Retained earnings 1,412,495 1,172,828
Cumulative translation adjustment 3,138 4,919
Total stockholders' equity 2,034,685 1,636,789
Total liabilities and
stockholders' equity $3,041,625$2,293,546
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 29, June 30, June 29,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Net sales $694,511 $533,235 $1,295,411 $1,042,419
Service and rental 18,950 11,782 36,487 24,085
713,461 545,017 1,331,898 1,066,504
Costs and expenses:
Cost of sales and service 384,545 304,941 720,530 598,105
Research and development 53,446 39,632 101,537 74,950
Selling, general and
administrative 114,640 87,159 212,264 168,922
Operating income 160,830 113,285 297,567 224,527
Investment income 17,412 8,041 29,096 14,366
Interest expense (4,640) (2,997) (6,042) (6,056)
Other income / (expense), net (369) (210) 1,728 (3)
Income before taxes 173,233 118,119 322,349 232,834
Income tax provision 44,434 31,065 82,682 61,235
Net income $128,799 $87,054 $239,667 $171,599
Net income per weighted average share,
primary $0.50 $0.36 $0.94 $0.70
Net income per weighted average share,
fully diluted $0.50 $0.36 $0.93 $0.70
Weighted average number of common
shares outstanding, primary 263,950 248,517 259,413 248,569
Weighted average number of common
shares outstanding, fully
diluted 264,039 248,574 259,612 248,621
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
For the Six Months Ended
June 30, June 29,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $239,667 $171,599
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 59,635 36,275
Deferred income taxes, net 1,643 12,703
Net loss on disposal of property
and equipment 366 290
Tax benefit from stock options
exercised 5,740 ---
Changes in assets and liabilities:
Trade and notes receivable (78,258) 24,995
Inventories (110,227) 47,685
Other assets (49,207) (21,444)
Accounts payable (18,097) 6,416
Accrued expenses (7,000) (15,380)
Income taxes payable 18,203 (11,225)
Deferred revenue (3,927) 4,863
Net cash provided by operating
activities 58,538 256,777
Cash flows from investing activities
Additions to property, plant and
equipment (82,289) (56,319)
Purchase of patents --- (6,333)
Proceeds from disposal of property and
equipment 313 826
Capitalized software development costs (12,400) (12,493)
Maturities/(purchases) of short-term and
long-term investments, net (209,981) (60,271)
Net cash used by investing
activities (304,357) (134,590)
Cash flows from financing activities:
Issuance of common stock 11,998 11,269
Repurchase of shares for treasury --- (16,370)
Redemption of 4 1/4% notes due 2001 (65) ---
Issuance of 3 1/4% notes due 2002, net of
issuance costs 506,671 ---
Payment of long-term and short-term
obligations (9,050) (444)
Issuance of long-term and short-term
obligations 1,419 3,142
Net cash provided (used) by financing
activities 510,973 (2,403)
Effect of exchange rate changes on cash (2,405) 750
Net increase in cash and cash equivalents 265,154 119,784
Cash and cash equivalents at beginning
of period 496,377 379,628
Cash and cash equivalents at end of
period $759,126 $500,162
Non-cash activity:
Conversion of 4 1/4% notes to common stock,
net of issuance costs $140,682 $100
Patents acquired by notes and other
payables --- $37,416
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<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 a wide range of storage-
related hardware and software products and related services for the
Enterprise Storage market. Enterprise Storage provides shared
storage of information from all types of computers, including both
mainframe and open systems computers. EMC's products are sold as
storage solutions for customers utilizing a variety of computer
system platforms, including, but not limited to, International
Business Machines Corporation ("IBM") and IBM-compatible mainframe,
Unisys Corporation, Compagnie des Machines Bull S.A., Hewlett-
Packard Company ("HP"), NCR Corporation, Sequent Computer Systems,
Inc., and Siemens Nixdorf Informationssysteme AG.
Accounting
The accompanying consolidated financial statements are unaudited
and have been prepared in accordance with generally accepted
accounting principles. These statements include the accounts of
EMC and its subsidiaries. Certain information and footnote
disclosures normally included in the Company's annual consolidated
financial statements have been condensed or omitted. The interim
consolidated financial statements, in the opinion of management,
reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair statement of the results for the
interim periods ended June 30, 1997 and June 29, 1996.
Certain prior year amounts have been reclassified to conform with
the 1997 presentation.
The results of operations for the interim periods are not
necessarily indicative of the results of operations to be expected
for the entire fiscal year. It is suggested that these interim
consolidated financial statements be read in conjunction with the
audited consolidated financial statements for the year ended
December 31, 1996, which are contained in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange
Commission on February 27, 1997.
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
2. Inventory
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
<S> <C> <C>
Inventories consist of: (in thousands)
Purchased parts $23,425 $ 16,610
Work-in-process 269,262 210,445
Finished goods 154,298 109,526
$446,985 $336,581
</TABLE>
3. Long-Term Obligations
In March 1997, the Company sold in a private placement under
Rule 144A of the Securities Act of 1933, as amended (the
"Securities Act"), $517.5 million of 31/4% convertible
subordinated notes due 2002 (the "31/4% Notes"). The 31/4% Notes
are generally convertible into shares of common stock of the
Company at a conversion price of $45.31 per share, subject to
adjustment in certain events. Interest is payable semiannually
and the 31/4% Notes are redeemable at the option of the Company
at set redemption prices (which range from 100.65% to 101.30% of
principal), plus accrued interest, commencing March 15, 2000.
The Company has filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission under the Securities Act,
which became effective on June 26, 1997, permitting the resale,
on a registered basis, of the Notes and of the shares of common
stock issuable upon conversion of the Notes from time to time by
the securityholders named or to be named therein.
4. Net Income Per Share
Net income per share was computed on the basis of weighted
average common and dilutive common equivalent shares outstanding.
Primary and fully diluted weighted average shares outstanding
used in the per share computations reflect the dilutive effects
of the 31/4% Notes for the three and six months ended June 30,
1997, and of the 41/4% convertible subordinated notes due 2001
(the "41/4% Notes") for the six months ended June 30, 1997 and
for the three and six months ended June 29, 1996. The dilutive
effects of outstanding stock options are reflected in all
periods presented.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" which is effective for fiscal years ending
after December 15, 1997. This Statement replaces the
presentation of primary earnings per share ("EPS") with a
presentation of basic EPS, which excludes dilutive securities.
It also requires a reconciliation of the basic EPS to diluted EPS
and dual presentation on the face of the income statement.
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Pro forma net income per share for the three and six months ended
June 30, 1997 and June 29, 1996, respectively, as computed under
the new standard is as follows:
For the three months ended
June 30, 1997 June 29, 1996
Net income per weighted average
share, basic $0.52 $0.38
Net income per weighted average
share, diluted $0.50 $0.36
For the six months ended
June 30, 1997 June 29, 1996
Net income per weighted average
share, basic $0.97 $0.74
Net income per weighted average
share, diluted $0.94 $0.70
5. Common Stock
At the Annual Meeting of the Company on May 7, 1997, the
stockholders approved an amendment to the Company's Articles of
Organization to increase the number of shares of authorized common
stock to 750,000,000.
6. Litigation
The Company is a party to 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.
7. Derivatives
Financial Reporting Release No. 48, issued by the Securities and
Exchange Commission, requires enhanced disclosures regarding
accounting policies for and market risks inherent in derivatives
and other financial instruments. Note M of the notes to the
financial statements contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 describes the
Company's use of derivatives and its related accounting policy.
There have been no significant changes to the policy set forth in
Note M through June 30, 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - Second Quarter of 1997 compared to Second
Quarter of 1996 (in thousands)
- -------------------------------------------------------------------
Revenues
The Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the risk
factors set forth on page 16 and in EMC's other filings at the U.S.
Securities and Exchange Commission.
Total revenues for the second quarter ended June 30, 1997 were
$713,461 compared to $545,017 for the second quarter of 1996, an
increase of $168,444 or 31%.
The increase in revenues was due primarily to the continued strong
demand for the Company's Symmetrix series of products, particularly
the Symmetrix 3000 series of products for the open systems market.
In January 1997, EMC announced six new Symmetrix products, which
represented 85% of Symmetrix product revenues for the second
quarter ended June 30, 1997. These new products address the
growing demand for Enterprise Storage.
Revenues from products sold directly and through original equipment
manufacturers ("OEM's") and resellers into the mainframe storage
market, which include Symmetrix products operating primarily in the
Multiple Virtual Storage ("MVS") environment, were $310,963 in the
second quarter of 1997, compared to $309,494 in the second quarter
of 1996. The marginal increase of $1,469 compared to the overall
revenue growth rate reflects the continuing market transition from
proprietary mainframe storage to products operating in an open
systems environment.
Revenues from products sold directly and through OEM's and
resellers into the open systems storage market, which include the
Symmetrix products operating in an open systems environment and
other products, were $333,264 in the second quarter of 1997,
compared to $169,582 in the second quarter of 1996, an increase of
$163,682 or 97%. This was the first quarter in which open systems
revenue levels exceeded mainframe revenue levels. The Company
expects further growth in the open systems revenue levels and
revenue as a percentage of total revenue in this market throughout
1997. (See, however, "Factors that May Affect Future Results.")
Revenues from products sold by McDATA Corporation, a wholly-owned
subsidiary of EMC ("McDATA"), which include the ESCON Director
series of products, were $49,551 in the second quarter of 1997,
compared to $45,980 in the second quarter of 1996, an increase of
$3,571 or 8%.
<PAGE>
Revenues from all other products, which include the midrange series
of products, were $733 in the second quarter of 1997, compared to
$8,179 in the second quarter of 1996, a decrease of $7,446 or 91%.
The decrease is primarily attributable to the declines in midrange
revenues, which declines are expected to continue. Midrange
revenue levels are not expected to be material in the remainder of
1997 and thereafter.
Software revenues were $40,838 and $14,885 in the second quarters
of 1997 and 1996, respectively. Software revenues are included in
the product revenues for the respective mainframe and open systems
markets.
Revenues from service and rental income were $18,950 in the second
quarter of 1997, compared to $11,782 in the second quarter of 1996,
an increase of $7,168 or 61%, due to a broadening base of customers
under service agreements.
In October 1995, the Company entered into a reseller agreement with
HP under which HP markets and resells the Symmetrix 3000 series of
systems worldwide for connection to HP's 9000 series computers.
This agreement was expanded to enable HP to also market and resell
this family of systems for connection to HP's 3000 series
computers. The current agreement extends through August 1998.
Revenues for the second quarter of 1997 and 1996 under this
agreement were $118,597 and $66,719, or 17% and 12% of total
revenues, respectively.
Revenues on sales into the North American markets were $400,512 in
the second quarter of 1997 compared to $327,185 in the second
quarter of 1996, an increase of $73,327, or 22%. This increase was
due primarily to increased revenue levels from sales of the
Symmetrix series of products in the open systems storage market.
Revenues on sales into all markets outside North America were
$312,949 or 44% of total revenues in the second quarter of 1997
compared to $217,832 or 40% of total revenues for the second
quarter of 1996. The Company expects further increases in
international sales as a percentage of total revenues throughout
1997. (See, however, "Factors that May Affect Future Results.")
Revenues on sales into the markets of Europe, Africa and the Middle
East were $238,841 in the second quarter of 1997 compared to
$166,034 in the second quarter of 1996, an increase of $72,807, or
44%, due primarily to increased revenue levels from sales of the
Symmetrix series of products in the open systems storage market.
Revenues on sales into the markets of the Asia Pacific region were
$68,176 in the second quarter of 1997 compared to $48,110 in the
second quarter of 1996, an increase of $20,066, or 42%, due to
increased revenue levels from sales of the Symmetrix series of
products, primarily in the open systems storage market.
Revenues on sales into the markets of South America were $5,932 in
the second quarter of 1997 compared to $3,688 in the second quarter
of 1996, an increase of $2,244 or 61%.
<PAGE>
Gross Margins
Gross margins increased to 46.1% of revenues in the second quarter
of 1997, compared to 44.0% of revenues in the second quarter of
1996. This increase is primarily attributable to increasing sales
of software which have a greater gross margin than hardware sales.
Other factors impacting gross margins to a lesser extent in the
second quarter include the rates of component cost declines and
price declines which were about equal, and revenues attributable to
new Symmetrix products. The Company currently believes that price
declines will continue in the mainframe and open systems
environments.
Research and Development
Research and development ("R&D") expenses were $53,446 and $39,632
in the second quarters of 1997 and 1996, respectively, an increase
of $13,814, or 35%. R&D expenses were 7.5% and 7.3% of revenues in
the second quarters of 1997 and 1996, respectively. The increase
was partially due to the cost of additional technical staff,
particularly to support development of products for the Enterprise
Storage market, and is also attributable to expenses associated
with computer equipment acquired to facilitate this development.
The Company expects to continue to spend substantial amounts for
R&D for the balance of 1997 and thereafter.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $114,640
and $87,159 in the second quarters of 1997 and 1996, respectively,
an increase of $27,481 or 32%. SG&A expenses were 16.1% and 16.0%
of revenues in the second quarters of 1997 and 1996, respectively.
The dollar increase is due primarily to costs associated with
additional worldwide sales and support personnel and their related
overhead costs. These costs are attributable to the Company's
increased revenue levels and the Company's initiatives to expand
sales of its Enterprise Storage products. The Company has expanded
its international direct sales force, as well as its OEM, reseller,
alliance and partnership programs with applications, systems and
database vendors. SG&A expenses are expected to increase in dollar
terms for the balance of 1997 and thereafter.
Investment Income and Interest Expense
Investment income was $17,412 in the second quarter of 1997
compared with $8,041 in the same period a year ago. Interest
income was earned from investments in cash equivalents, and short
and long-term investments. Investment income increased in 1997
primarily due to higher cash and investment balances which were
derived from operations and the 31/4% Notes that were issued in
March of 1997.
<PAGE>
Interest expense increased by $1,643 to $4,640 in the second
quarter of 1997 from $2,997 in the second quarter of 1996. The
increase is attributable to the issuance of the 31/4% Notes in
March of 1997.
Provision for Income Taxes
The provision for income taxes was $44,434 and $31,065 in the
second quarters of 1997 and 1996, respectively, which resulted in
an effective tax rate of 25.6% in the second quarter of 1997 and
26.3% in the second quarter of 1996. The decrease in the effective
tax rate is mainly attributable to the realization of benefits
associated with the continued progress on the Company's various tax
strategies. The Company provides for income taxes based upon its
estimate of full year earnings on a country-by-country basis.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - First Six Months of 1997 compared to First
Six Months of 1996 (in thousands)
- -------------------------------------------------------------------
Revenues
The Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the risk
factors set forth on page 16 and in EMC's other filings at the U.S.
Securities and Exchange Commission.
Total revenues for the six months ended June 30, 1997 were
$1,331,898 compared to $1,066,504 for the first six months of 1996,
an increase of $265,394 or 25%.
The increase in revenues was due primarily to the continued strong
demand for the Company's Symmetrix series of products, particularly
the Symmetrix 3000 series of products for the open systems market.
In January 1997, EMC announced six new Symmetrix products, which
represented 77% of the first six months Symmetrix product revenues.
These new products address the growing need for Enterprise Storage.
Revenues from products sold directly and through OEM's and
resellers into the mainframe storage market, which include
Symmetrix products operating primarily in the MVS environment, were
$590,929 in the first six months of 1997, compared to $618,649 in
the first six months of 1996, a decrease of $27,720 or 4%. The
trend in the mainframe revenue levels reflects a continuing market
transition from proprietary mainframe storage to products operating
in an open systems environment.
Revenues from products sold directly and through OEM's and
resellers into the open systems storage market, which include the
Symmetrix products operating in an open systems environment and
other products, were $607,702 in the first six months of 1997,
compared to $316,289 in the first six months of 1996, an increase
of $291,413 or 92%. The Company expects further growth in the open
systems revenue levels and revenue as a percentage of total revenue
in this market throughout 1997. (See, however, "Factors that May
Affect Future Results.")
Revenues from products sold by McDATA, which include the ESCON
Director series of products, were $93,083 in the first six months
of 1997, compared to $85,276 in the first six months of 1996, an
increase of $7,807 or 9%.
<PAGE>
Revenues from all other products, which include the midrange series
of products, were $3,697 in the first six months of 1997, compared
to $22,205 in the first six months of 1996, a decrease of $18,508
or 83%. The decrease is primarily attributable to the declines in
midrange revenues, which declines are expected to continue.
Midrange revenue levels are not expected to be material in the
remainder of 1997 and thereafter.
Software revenues were $67,370 and $26,633 in the first six months
of 1997 and 1996, respectively. Software revenues are included in
the product revenues for the respective mainframe and open systems
markets.
Revenues from service and rental income were $36,487 in the first
six months of 1997, compared to $24,085 in the first six months of
1996, an increase of $12,402 or 51%, due to a broadening base of
customers under service agreements.
In October 1995, the Company entered into a reseller agreement with
HP under which HP markets and resells the Symmetrix 3000 series of
systems worldwide for connection to HP's 9000 series computers.
This agreement was expanded to enable HP to also market and resell
this family of systems for connection to HP's 3000 series
computers. The current agreement extends through August 1998.
Revenues for the first six months of 1997 and 1996 under this
agreement were $226,114 and $113,316, or 17% and 11% of total
revenues, respectively.
Revenues on sales into the North American markets were $762,158 in
the first six months of 1997 compared to $634,802 in the first six
months of 1996, an increase of $127,356, or 20%. This increase was
due primarily to increased revenue levels from sales of the
Symmetrix series of products in the open systems storage market.
Revenues on sales into all markets outside North America were
$569,740 or 43% of total revenues in the first six months of 1997
compared to $431,702 or 40% of total revenues for the first six
months of 1996. The Company expects further increases in
international sales as a percentage of total revenues throughout
1997. (See, however, "Factors that May Affect Future Results.")
Revenues on sales into the markets of Europe, Africa and the Middle
East were $435,056 in the first six months of 1997 compared to
$329,259 in the first six months of 1996, an increase of $105,797,
or 32%, due primarily to increased revenue levels from sales of the
Symmetrix series of products in the open systems storage market.
Revenues on sales into the markets of the Asia Pacific region were
$127,101 in the first six months of 1997 compared to $96,227 in the
first six months of 1996, an increase of $30,874, or 32%, due to
increased revenue levels from sales of the Symmetrix series of
products, primarily in the open systems storage market.
Revenues on sales into the markets of South America were $7,583 in
the first six months of 1997 compared to $6,216 in the first six
months of 1996, a increase of $1,367 or 22%.
<PAGE>
Gross Margins
Gross margins increased to 45.9% of revenues in the first six
months of 1997, compared to 43.9% of revenues in the first six
months of 1996. This increase is primarily attributable to
increasing sales of software which have a greater gross margin than
hardware sales. Other factors impacting gross margins to a lesser
extent in the second quarter include the rates of component cost
declines and price declines which were about equal, and revenues
attributable to new Symmetrix products. The Company currently
believes that price declines will continue in the mainframe and
open systems environments.
Research and Development
R&D expenses were $101,537 and $74,950 in the first six months of
1997 and 1996, respectively, an increase of $26,587, or 35%. R&D
expenses were 7.6% and 7.0% of revenues in the first six months of
1997 and 1996, respectively. The increase was partially due to the
cost of additional technical staff, particularly to support
development of products for the Enterprise Storage market, and is
also attributable to expenses associated with computer equipment
acquired to facilitate this development. The Company expects to
continue to spend substantial amounts for R&D for the balance of
1997 and thereafter.
Selling, General and Administrative
SG&A expenses were $212,264 and $168,922 in the first six months of
1997 and 1996, respectively, an increase of $43,342 or 26%. SG&A
expenses were 15.9% and 15.8% of revenues in the first six months
of 1997 and 1996, respectively. The dollar increase is due
primarily to costs associated with additional worldwide sales and
support personnel and their related overhead costs. These costs
are attributable to the Company's increased revenue levels and the
Company's initiatives to expand sales of its Enterprise Storage
products. The Company has expanded its international direct sales
force, as well as its OEM, reseller, alliance and partnership
programs with applications, systems and database vendors. SG&A
expenses are expected to increase in dollar terms for the balance
of 1997 and thereafter.
Investment Income and Interest Expense
Investment income was $29,096 in the first six months of 1997
compared with $14,366 in the same period a year ago. Interest
income was earned from investments in cash equivalents, and short
and long-term investments. Investment income increased in 1997
primarily due to higher cash and investment balances which were
derived from operations and the 31/4% Notes that were issued in
March of 1997.
Interest expense for the six months ended June 30, 1997 and June
29, 1996 relates primarily to the 31/4% Notes and 41/4% Notes,
respectively.
<PAGE>
Provision for Income Taxes
The provision for income taxes was $82,682 and $61,235 in the first
six months of 1997 and 1996, respectively, which resulted in an
effective tax rate of 25.6% in the first six months of 1997 and
26.3% in the first six months of 1996. The decrease in the
effective tax rate is mainly attributable to the realization of
benefits associated with the continued progress on the Company's
various tax strategies. The Company provides for income taxes
based upon its estimate of full year earnings on a country-by-
country basis.
FINANCIAL CONDITION
Cash and cash equivalents and short and long-term investments were
$1,313,588 and $840,858 at June 30, 1997 and December 31, 1996,
respectively, an increase of $472,730.
Cash provided by operating activities for the first six months of
1997 was $58,538, generated primarily from net income and offset by
an increase in working capital, primarily driven by an increase in
inventory related to the transition to the new Symmetrix products.
Cash used by investing activities was $304,357, principally for the
purchase of short and long-term investments and additions to
property, plant and equipment. Cash provided by financing
activities was $510,973, principally from the issuance of the 31/4%
Notes in March of 1997.
At June 30, 1997, the Company had available for use its credit line
of $50 million. The Company may elect to borrow at any time.
Based on its current operating and capital expenditure forecasts,
the Company believes funds currently available, funds generated
from operations and its available line of credit will be adequate
to finance its operations, as well as potential acquisitions.
Financial Reporting Release No. 48, issued by the Securities and
Exchange Commission, requires enhanced disclosures regarding
accounting policies for and market risks inherent in derivatives
and other financial instruments. Note M of the notes to the
financial statements contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 describes the
Company's use of derivatives and its related accounting policy.
There have been no significant changes to the policy set forth in
Note M through June 30, 1997.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q contains forward-looking
statements as defined under the Federal Securities Laws. Actual
results could differ materially from those projected in the forward-
looking statements as a result of certain risk factors, including
but not limited to: (i) a failure by any supplier of high density
DRAMs, disk drives or other components to meet EMC's requirements
for an extended period of time; (ii) the transition to new
products; (iii) the historic and recurring "hockey stick" pattern
of the Company's sales by which a disproportionate percentage of a
quarter's total sales occur in the last month and weeks and days of
each quarter; (iv) the "hockey stick" pattern of the Company's
sales, making it extremely difficult to predict near-term demand
and adjust production capacity accordingly; (v) competitive
factors, including but not limited to pricing pressures, in the
computer storage market; (vi) fluctuating currency exchange
rates; (vii) the relative and varying rates of product price and
component cost declines; (viii) termination of the agreements with
certain of the Company's OEM's or resellers; (ix) other one-time
events and other important factors disclosed previously and from
time to time in EMC's other filings at the U.S. Securities and
Exchange Commission.
<PAGE>
PART II.
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on May 7, 1997. There
was no solicitation in opposition to the management's nominees as
listed in the Company's proxy statement and all such nominees were
elected as Class I directors for a three-year term. In addition,
the stockholders approved amendments to the Company's Articles of
Organization to increase the number of shares of authorized common
stock, $.01 par value, to 750,000,000 shares and to increase the
number of shares available for grant under the Company's 1993 Stock
Option Plan to 14,000,000 shares. The results of the votes for
each of these proposals were as follows:
<TABLE>
<CAPTION>
1. Election of Class I Directors:
For Withheld
<S> <C> <C>
Richard J. Egan 216,675,329 3,889,171
John F. Cunningham 217,442,237 3,122,263
In addition to these directors, the Company's other incumbent
directors (John R. Egan, Michael J. Cronin, Maureen E. Egan, W.
Paul Fitzgerald, Joseph F. Oliveri and Michael C. Ruettgers) had
terms that continued after the 1997 Annual Meeting.
2. To amend the Company's Articles of Organization:
For: 206,706,502
Against: 13,259,781
Abstain: 594,497
Broker Non-Votes: 3,720
3. To amend the Company's 1993 Stock Option Plan:
For: 183,432,945
Against: 36,174,846
Abstain: 952,989
Broker Non-Votes: 3,720
</TABLE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
11.1 Computation of Primary and Fully Diluted Net
Income Per Share(filed herewith).
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company for the quarter
ended June 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EMC CORPORATION
Date: August 12, 1997 By: /s/ Colin G. Patteson
Colin G. Patteson
Senior Vice President, Chief
Administrative Officer and Treasurer
(Principal Financial Officer)
By: /s/ William J. Teuber, Jr.
William J. Teuber, Jr.
Vice President and Chief Financial
Officer (Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit 11.1 Computation of Primary and Fully Diluted Net Income
Per Share
Exhibit 27 Financial Data Schedule
<PAGE>
<TABLE>
Exhibit 11.1 Computation of Primary and Fully Diluted Net
Income Per Share (unaudited)
(Amounts in thousands except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 29, June 30, June 29,
1997 1996 1997 1996
Primary
<S> <C> <C> <C> <C>
Net income $128,799 $87,054 $239,667 $171,599
Add back interest
expense 4,205 2,438 5,092 4,878
on convertible notes
Less tax effect on
interest (1,682) (975) (2,037) (1,951)
expense on convertible
notes
Net income for purposes
of calculating primary $131,322 $88,517 $242,722 $174,526
net income per share
Weighted average shares
outstanding during the 246,238,335 231,702,179 246,018,384 231,177,705
period
Common equivalent shares 17,711,405 16,814,653 13,394,664 17,391,703
Common and common
equivalent shares
outstanding for purpose 263,949,740 248,516,832 259,413,048 248,569,408
of calculating primary
net income per share
Primary net income per $0.50 $0.36 $0.94 $0.70
share (Note 4)
Fully Diluted
Net income $128,799 $87,054 $239,667 $171,599
Add back interest
expense on 4,205 2,438 5,092 4,878
convertible notes
Less tax effect on
interest expense on (1,682) (975) (2,037) (1,951)
convertible notes
Net income for purpose
of calculating fully $131,322 $88,517 $242,722 $174,526
diluted net income per
share
Common and common
equivalent shares
outstanding for purpose 263,949,740 248,516,832 259,413,048 248,569,408
of calculating primary
net income per share
Incremental shares to 89,659 57,210 198,914 51,239
reflect full dilution
Total shares for purpose
of calculating fully 264,039,399 248,574,042 259,611,962 248,620,647
diluted net income per
share
Fully diluted net income $0.50 $0.36 $0.93 $0.70
per share (Note 4)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
EMC Corporation financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 759,126
<SECURITIES> 409,424
<RECEIVABLES> 701,608
<ALLOWANCES> 7,612
<INVENTORY> 446,985
<CURRENT-ASSETS> 2,384,667
<PP&E> 318,769
<DEPRECIATION> 59,635
<TOTAL-ASSETS> 3,041,625
<CURRENT-LIABILITIES> 408,526
<BONDS> 517,500
<COMMON> 2,467
0
0
<OTHER-SE> 2,032,218
<TOTAL-LIABILITY-AND-EQUITY> 3,041,625
<SALES> 1,295,411
<TOTAL-REVENUES> 1,331,898
<CGS> 720,530
<TOTAL-COSTS> 1,034,331
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,042
<INCOME-PRETAX> 322,349
<INCOME-TAX> 82,682
<INCOME-CONTINUING> 239,667
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 239,667
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.93
</TABLE>
