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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-9853
EMC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2680009
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF ORGANIZATION OR INCORPORATION) IDENTIFICATION NUMBER)
35 PARKWOOD DRIVE
HOPKINTON, MASSACHUSETTS 01748
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(508) 435-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
3 1/4% Convertible Subordinated New York Stock Exchange
Notes due 2002
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $15,839,114,391 as of January 31, 1998.
The number of shares of Common Stock, $.01 par value, outstanding as of
January 31, 1998 was 497,058,098.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in response to Part III of Form 10-K is hereby
incorporated by reference to the specified portions of the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 6, 1998.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's prospects are subject to certain uncertainties and risks.
This Annual Report on Form 10-K also contains certain forward-looking
statements within the meaning of the Federal Securities Laws. The Company's
future results may differ materially from its current results and actual
results could differ materially from those projected in the forward-looking
statements as a result of certain risk factors. Readers should pay
particular attention to the considerations described in the section of this
report entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors that May Affect Future Results." Readers
should also carefully review the risk factors described in the other
documents the Company files from time to time with the Securities and
Exchange Commission.
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PART I
ITEM 1. BUSINESS
GENERAL
EMC Corporation and its subsidiaries ("EMC" or the "Company") design,
manufacture, market and support a wide range of storage-related hardware,
software and service products for the open systems, mainframe and network
attached information storage and retrieval system market. EMC introduced its
first Symmetrix Integrated Cached Disk Array ("ICDA") in 1991. Since then, EMC
has become the leading supplier of intelligent information storage and
retrieval technology for enterprise computing environments. These products are
sold as integrated storage solutions for customers utilizing a variety of the
world's most popular computer system platforms, including but not limited to
those shown below. These platforms include those of the Company's resellers
and a variety of other open systems and mainframe platforms.
[GRAPH APPEARS HERE]
[THE GRAPH DEPICTS A PICTURE OF A SYMMETRIX UNIT SURROUNDED BY THE FOLLOWING
PLATFORMS: HP, NCR, SIEMENS, UNISYS, SIEMENS NIXDORF, SUN MICROSYSTEMS, INTEL,
DATA GENERAL, DIGITAL, COMPAQ, IBM, SILICON GRAPHICS, SEQUENT, BULL AND
NETWORKS.]
Large-scale open systems computing environments emerged in the 1990's, and
joined the traditional mainframe computing environments that existed in data
centers. As these disparate systems have grown in number and scope, EMC
believes that companies have been re-evaluating the way they manage, protect
and share their mission-critical information. Rather than placing the
computing platform at the center of their Information Systems ("IS")
environment, customers are focusing on the information and the ability to
access that information, regardless of computing platform. The consolidated
information-centric computing model shown above defines what EMC believes is a
significant growth opportunity, the enterprise storage market. An enterprise
storage system stores and retrieves data from all major computing platforms
and acts as a central information repository.
<PAGE>
The Company's objective is to continue to be the enterprise storage
solutions leader in the Information Technology ("IT") industry. EMC develops
its products by integrating technologically advanced, industry standard
components and devices with Company-designed proprietary hardware and software
technology. The Company differentiates its products by incorporating hardware
and highly functional software features that provide competitive advantage for
EMC customers through high performance, high availability, heterogeneous
connectivity and centralized management.
The customers for the Company's products are located worldwide and represent
a cross section of industries and government agencies that range in size from
FORTUNE 1000 companies to small businesses, and national to local governments.
EMC products continue to be accepted widely by both existing customers and new
accounts, including leading telecommunications and financial institutions
worldwide.
EMC, a Massachusetts corporation, was incorporated in 1979 and has its
corporate headquarters at 35 Parkwood Drive, Hopkinton, Massachusetts.
COMPANY STRATEGIES
During 1997, the Company realigned its business to focus on four major
strategies: 1) Products and Offerings; 2) Markets and Channels; 3) New
Business Development; and 4) Operational Effectiveness and Efficiency. The
Company also implemented a new product branding strategy in 1997 to complement
its industry leadership objectives. This has resulted in the renaming of
several products (noted below) for the purpose of aligning the product name
with its respective value to the customer.
STRATEGY ONE: PRODUCTS AND OFFERINGS
The objective of Strategy One is to identify and deliver superior hardware
and software products and offerings. Its intent is to deliver new and unique
enterprise storage solutions that the Company believes will widen its lead
over its competitors. The Company believes that competitive advantages in its
products directly result from an innovative hardware architecture and highly
functional software technology.
ENTERPRISE STORAGE HARDWARE
- ---------------------------
The Company's common hardware architecture on which its principal products
are based, called MOSAIC:2000, is based upon a modular design and interfaces
that allow new technologies to be incorporated more rapidly than with
traditional architectures. This hardware architecture enables the Company to
deliver advanced technologies to market quickly while maintaining a consistent
platform upon which its customers can expand capacity, performance,
connectivity and intelligent functionality. This architectural hardware design
has enabled the Company to expand its offerings in existing markets and to
enter new, strategic markets quickly with proven storage products and
services.
EMC delivered the first Symmetrix series for the IBM and IBM-compatible
mainframe storage market in 1991. Symmetrix was the first commercially
available intelligent disk storage system for this marketplace that integrated
highly sophisticated controller software with large amounts of cache memory
and arrays of industry standard disk drives. This combination continues to
provide customers with unique advantages and capabilities including: high
performance disk storage; operating system independence for easy integration
into existing computer environments; built-in redundancy and availability
features allowing for higher data availability and continuous operations; and
small footprint and low environmental requirements for low cost of ownership.
Since the introduction of the first Symmetrix model, the Company has
continued to enhance and increase the capabilities of the Symmetrix family.
The Company's current mainframe product offering is the Symmetrix 5000 family.
The Symmetrix 5000 family of products shares a common architecture and
components, with the main differentiator being capacity and host connectivity
capabilities. The Company believes that the Symmetrix 5000 family offers the
highest performance and availability storage in the mainframe market.
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The Company's current open systems product offering is the Symmetrix 3000
family, first introduced in 1995. This family of products brings products
similar to the Company's mainframe offerings to the open systems market. The
Symmetrix 3000 family delivers the performance, capacity, availability and
features of mainframe-class storage to large-scale open database and other
applications such as Data Warehousing and Internet/Intranets.
The Company introduced the latest generation of the Symmetrix 3000 and 5000
families in January 1997. The new generation Symmetrix established new
competitive levels of scalability in the areas of performance, connectivity
and capacity. The Company continues to engage in research and development of
new hardware technology for the enterprise storage market.
ENTERPRISE STORAGE SOFTWARE
- ---------------------------
A major strategic asset of the Company is the highly functional software
utilized to provide primary and extended functionality for the Company's
storage products. These software products are either EMC controller-based or
host-based. Controller-based software resides within the EMC system, while
host-based software resides within the customer's CPU. Extended software
technology is delivered via EMC's Intelligent Storage Architecture ("ISA")
overlay to the MOSAIC:2000 hardware design. The ISA architecture enables an
integration of controller and host-based software products that provide
enterprise wide storage solutions in the areas of information protection,
management and sharing. The Symmetrix 3000 and 5000 families support all of
the Company's enterprise storage software solutions.
Examples of controller-based software are: Symmetrix Remote Data Facility,
EMC TimeFinder, Symmetrix Data Migration Services and Symmetrix Enterprise
Storage Platform. The Company's host-based software products include:
Symmetrix Manager for Open Systems and EMC Data Manager. During 1997, the
Company introduced several new software products and enhancements to existing
products.
EMC continues to engage in research and development of software technology
for the enterprise storage market in the areas of information protection,
management and sharing. The Company believes that its investment in core
technologies related to logical data management will accelerate adoption of
the Company's enterprise storage model and facilitate consolidation and
sharing of customer information.
NETWORK ATTACHED STORAGE
- ------------------------
Network attached storage systems connect directly to local and wide area
networks without the use of a host computer. This enables users on disparate
systems to access and share central information. In 1996, EMC made available
high performance network-attached storage solutions, the EMC Celerra File
Server (formerly Symmetrix Network File Storage) and the EMC Celerra Media
Server (formerly Symmetrix Network Media Storage). These systems combine EMC-
developed proprietary software and network director hardware components with
Symmetrix. EMC is currently engaging in research and development of additional
products and features for the network attached storage market.
ENTERPRISE CONNECTIVITY
- -----------------------
In December 1995, the Company completed the acquisition of McDATA
Corporation ("McDATA"). McDATA's primary product, the ESCON Director, is a
high-speed fiber-optic-based network switch designed to connect computers and
peripherals within data center environments and is marketed by IBM under an
exclusive original equipment manufacturer ("OEM") agreement with McDATA.
In October 1997, the Company reorganized McDATA into a new McDATA
Corporation ("New McDATA") and McDATA Holdings Corporation ("McDATA
Holdings"). New McDATA designs, develops and markets fibre channel solutions
for switched enterprise environments. New McDATA is also currently performing
services under the ESCON OEM Agreement with IBM on behalf of McDATA Holdings.
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STRATEGY TWO: MARKETS AND CHANNELS
Strategy Two is focused on developing and implementing a highly
differentiated corporate identity and implementing marketing and sales
channels to grow the Company's worldwide market leadership. Specific targeted
storage markets include: the open systems market, including UNIX and Windows
NT market segments, the IBM and IBM-compatible mainframe storage market and
the network attached storage market. In addition, the Company has adopted a
multi-channel distribution approach to sell its products in those large
geographic markets of the world which the Company believes have a demand for
its products.
ENTERPRISE STORAGE MARKET
- -------------------------
In 1997, the Company continued to focus on the three core sectors of the
enterprise storage market described below: open systems, mainframe and network
attached storage. As enterprise information continues to consolidate and the
three core sectors converge, in 1998 and thereafter, the Company will focus on
and will modify its business and financial measurement to reflect a newly
emerged enterprise storage market.
OPEN SYSTEMS MARKET
The open systems market continues to demonstrate rapid growth in storage
requirements primarily driven by continued deployment of new client/server
applications. This market is characterized by a broad mix of computing
platforms that offer customers the ability to quickly develop new applications
required for today's highly competitive business environment.
Revenues from the open systems market represented approximately 50%, 33% and
11% of EMC's revenues in 1997, 1996 and 1995, respectively.
MAINFRAME MARKET
The Company's ICDA-based products have achieved a significant presence in
the mainframe storage market. The Company believes that mainframes will
continue to play an important role as enterprise information servers and are a
key element of enterprise computing due to the following factors: recent
emergence of information-centric computing models; the need for customers to
leverage investments in legacy applications, processes and personnel; and new
developments in lower-cost hardware technology. The Company believes this will
increase the need for enterprise storage solutions.
Revenues from the mainframe market represented approximately 41%, 55% and
74% of EMC's revenues in 1997, 1996 and 1995, respectively.
NETWORK ATTACHED STORAGE MARKET
The Company believes that the network attached storage market has high
potential for storage requirements. The proliferation of local and wide-area
networks has resulted in customers' reliance on networks for sharing large
computer files (including image and video). The Company believes this is an
emerging market and the demand for its products will grow as customers realize
the importance of the efficient sharing and delivery of these files.
ENTERPRISE STORAGE SERVICES
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PROFESSIONAL SERVICES
EMC formed its Enterprise Storage Professional Services business in 1997 to
design and deliver world class professional services to its global customer
base. The Company's Professional Services business assists customers in
assessing, designing and implementing enterprise storage solutions customized
to maximize their return on information assets. EMC's methodology provides a
framework for the information storage industry's best practices and
facilitates delivery of three new Professional Services practices including
Enterprise Storage
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Architecture and Design, Enterprise Storage Backup and Restore, and Enterprise
Storage Disaster Recovery and Information Protection. The Company has hired
approximately 100 Professional Services employees to date.
INTERNET SERVICES
During 1997, EMC formed an Internet Services Group which provides a
comprehensive Web Site Management Service utilizing the high availability,
capacity and performance of Symmetrix. Through this service, the Company
develops, implements, maintains and monitors all the technical aspects of a
customer's internet presence, including management of internet-based
electronic commerce and database applications as well as Web and online
advertising. These services are delivered through a new data center at EMC's
main research and development facility in Hopkinton, Massachusetts. The
monthly fee-based services provide companies with internet access, staffing,
information protection, contingency planning and an information repository
based on Symmetrix.
MARKETING AND CUSTOMERS
- -----------------------
EMC markets its products through multiple distribution channels, including
its direct sales force, selected distributors, resellers and OEMs. The Company
has a direct sales presence throughout North America, Europe, South Africa and
the Asia Pacific region and uses distributors as its primary distribution
channel in other areas of the world. Over the past two years, the Company has
expanded its sales and marketing organizations significantly in all major
geographies of the world. In 1997, the Company established a direct sales
presence in Latin America and continued broadening its direct sales presence
worldwide. The Company has dedicated personnel to support the needs of its
customers in the open systems and mainframe markets and also the needs of its
distributor, reseller and OEM customers, both domestically and
internationally.
During 1997, the Company derived 57% of its revenue from North America, 33%
from Europe, the Middle East and Africa, 9% from the Asia Pacific region and
1% from South America.
RESELLER AND OEM CHANNELS
The Company believes its products are well suited for sale by resellers and
OEMs in partnership with the Company and that its revenues from the reseller
and OEM market will continue to increase. In response to anticipated growth,
the Company increased its sales channel capabilities by signing agreements
with a number of Value Added Resellers, Systems Integrators and distributors
during 1997.
The Company's principal reseller and OEM agreements are with Hewlett-Packard
Company ("HP"), Siemens Nixdorf Informationssysteme AG ("SNI"), Unisys
Corporation ("Unisys"), Sequent Computer Systems, Inc. ("Sequent"), NCR
Corporation and Compagnie des Machines Bull S.A. These agreements enable the
reseller or OEM to market and resell certain of the Company's Symmetrix
systems worldwide, subject to certain terms and conditions, for connection to
certain of the reseller or OEM's respective computer platforms.
In January 1997, the Company entered into its reseller agreement with
Sequent under which Sequent markets and resells the Symmetrix 3000 family of
systems worldwide for connection to certain of Sequent's computers. In
February 1997, the Company expanded its agreement with Unisys to enable Unisys
to market and sell EMC's Symmetrix for connection to Unisys' open systems and
mainframe computer platforms. In March 1997, the Company entered into its
worldwide reseller relationship with SNI under which SNI markets and resells
Symmetrix systems for connection to the complete family of SNI servers.
In 1997 and 1996, the Company derived 27% and 19%, respectively, of its
product revenues from reseller and OEM channels.
ALLIANCES
The Company has entered into and intends to continue to enter into alliances
with leading software, relational database and enterprise application
companies, including BMC Software, Inc., Microsoft Corporation,
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SAP AG, Oracle Corporation and other major independent software applications
vendors. EMC's strategy is to work closely with leading software companies to
provide added value to its customers by integrating enterprise storage with
software applications that customers rely on to manage their day to day
business operations.
STRATEGY THREE: NEW BUSINESS DEVELOPMENT
Strategy Three's focus is to develop new business aligned to the enterprise
storage market. This will be accomplished by maintaining a long term view on
the storage industry's potential and continually assessing the market. Key
objectives are to articulate the Company's new business strategic direction,
to identify and close significant business development opportunities (mergers
and acquisitions) and to manage and integrate such new business activities
into EMC.
STRATEGY FOUR: OPERATIONAL EFFECTIVENESS AND EFFICIENCY
Strategy Four provides EMC's business with focused attention on service-
related functions within the Company including Finance, Legal, Human
Resources, Information Systems, Facilities and Business Process Development.
Collectively, these functions provide a flexible infrastructure that supports
EMC's highly evolutionary business model that the Company believes has enabled
its continued financial and operational excellence.
----------------
MANUFACTURING
EMC's products utilize the Company's engineering designs, with industry
standard and semi-custom components and subsystems. EMC's products are
assembled and tested primarily at the Company's facilities in Massachusetts
and Cork, Ireland. Product components manufactured by subcontractors in the
U.S. and Europe are assembled in accordance with production standards and
quality controls established by EMC. The Company is currently constructing a
new, state-of-the-art, 680,000 square foot manufacturing facility in Franklin,
Massachusetts and is doubling the size of its manufacturing facility in Cork,
Ireland, to a total of 450,000 square feet. The Company believes its present
level of manufacturing capacity, along with its current plans for expansion,
will be sufficient to accommodate its requirements.
The Company has implemented a Total Quality Management philosophy to ensure
the quality of its designs, manufacturing process and suppliers. The Company's
manufacturing operations in Massachusetts currently hold an ISO 9001
Certificate of Registration from National Quality Assurance, Ltd. This
internationally recognized endorsement of ongoing quality management
represents the highest level of certification available. The Company's
manufacturing operation in Cork holds ISO 9002 registration.
COMPETITION
In the open systems market, the Company's primary competition is provided by
systems vendors, including IBM, Sun Microsystems, Inc. ("Sun"), and Digital
Equipment Corporation ("DEC") (recently announced to be acquired by Compaq
Computer Corporation). In the mainframe storage market, EMC competes primarily
with systems vendors IBM and Hitachi, Limited ("Hitachi"). In the Company's
opinion, the major competitive advantage of the systems vendors is their
overall market presence and ability to provide integrated CPU, storage and
software packages.
The Company believes that it has a number of competitive advantages over
these companies, especially in the areas of product performance, capacity,
availability, connectivity, manageability, value-added software capabilities,
time to market enhancements and total cost of ownership.
BACKLOG
The Company manufactures its products on the basis of its forecast of near-
term demand and maintains inventory in advance of receipt of firm orders from
customers. Orders are generally shipped by the Company
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shortly after receipt of the order. Customers may reschedule orders with
little or no penalty. For these reasons, the Company's backlog at any
particular time is not meaningful, because it is not necessarily indicative of
future sales levels.
EMPLOYEES
As of January 31, 1998, EMC had approximately 6,400 employees worldwide.
None of the Company's domestic employees is represented by a labor union, and
the Company has never suffered an interruption of business as a result of a
labor dispute. The Company considers its relations with its employees to be
good.
ENVIRONMENT
The Company's manufacturing facilities are subject to numerous laws and
regulations designed to protect the environment, particularly from wastes
generated as a result of assembling certain EMC products. The cost of
compliance with such regulations has not to date involved a significant
expense or had a material effect on the capital expenditures, earnings or
competitive position of the Company.
PATENTS
EMC has been granted and/or owns by assignment over 100 U.S. patents. The
Company also has over 250 patent applications pending in the U.S. relating to
its products for the open systems, mainframe and network attached storage
markets.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company is active in primarily one business segment: designing,
manufacturing and marketing high performance storage products. Sales and
marketing operations outside the U.S. are conducted through sales subsidiaries
and branches located principally in Europe and the Asia Pacific region. The
U.S. market amounted to greater than 95% of the Company's sales, income and
identifiable assets in the North and South America segment in 1997, 1996 and
1995. (See Note O to the Company's Consolidated Financial Statements.)
ITEM 2. PROPERTIES
The Company's operations are conducted at several locations in the United
States and abroad. The following table provides certain information on the
Company's principal offices and manufacturing facilities:
<TABLE>
<CAPTION>
LOCATION USE APPROX. SQ. FT. PROPERTY INTEREST
-------- --- --------------- -----------------
<S> <C> <C> <C>
35 Parkwood Dr. Corporate, Administration 160,000 leased
Hopkinton, MA
42 South St. Customer Demonstration 63,000 owned
Hopkinton, MA Center, Administration
80 South St. Manufacturing 156,000 owned
Hopkinton, MA
171 South St. Marketing, Research and 285,000 owned
Hopkinton, MA Development, Manufacturing
5-9 Technology Dr. Customer Service, Quality, 265,000 leased
Milford, MA Research and Development,
Manufacturing, Administration
Cork, Ireland Manufacturing 200,000 owned
McDATA Corporation Research and Development, 90,000 leased
Manufacturing
</TABLE>
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The Company is currently expanding its facility in Ireland by 250,000 square
feet and constructing a 680,000 square foot building in Franklin,
Massachusetts, both for manufacturing use. The Company recently purchased a
15,000 square foot building at 228 South Street, Hopkinton, Massachusetts
which will be used for administrative purposes. The Company also leases space
for its sales and services offices and certain research and development
facilities worldwide, and owns land in Hopkinton, Massachusetts for possible
expansion purposes.
ITEM 3. LEGAL PROCEEDINGS
On August 20, 1997, TM Patents, L.P. ("TM") filed suit against the Company
in the United States District Court for the Southern District of New York
alleging that the Company is infringing two patents and seeking unspecified
damages. The Company filed a motion to transfer the case to the United States
District Court for the District of Massachusetts and a motion to dismiss the
suit. The Company's motion to transfer was granted with leave for the
plaintiff to replead its suit. In the suit refiled in Massachusetts, TM
alleged infringement only as to one of the two patents originally at issue.
The Company believes TM's claims are without merit.
On December 12, 1997, NewFrame Corporation Ltd. ("NewFrame") filed suit
against the Company in the United States District Court for the District of
Massachusetts. The suit contains a variety of allegations relating to the
Company's use of NewFrame's software developments, including various contract
claims and breach of fiduciary duty, and seeks monetary damages relating
primarily to lost future profits. The Company has filed a motion to dismiss.
The Company believes NewFrame's claims are without merit.
In January 1998, Storage Technology Corporation ("STK") filed suit against
the Company in the United States District Court for the Northern District of
California alleging that the Company is infringing one patent and seeking
unspecified damages. The Company has answered and counterclaimed. The Company
believes STK's claims are without merit.
The Company is a party to other litigation which it considers routine and
incidental to its business. Management does not expect the results of any of
these actions to have a material adverse effect on the Company's business,
results of operation or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year covered by this report.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard J. Egan......... 62 Chairman of the Board and Director
Michael C. Ruettgers.... 55 President, Chief Executive Officer and Director
John R. Egan............ 40 Executive Vice President, Products and Offerings and Director
Robert M. Dutkowsky..... 43 Executive Vice President, Markets and Channels
Paul E. Noble, Jr. ..... 42 Senior Vice President, New Business Development
Colin G. Patteson....... 48 Senior Vice President, Chief Administrative Officer and Treasurer
Paul T. Dacier.......... 40 Vice President and General Counsel
William J. Teuber, Jr... 46 Vice President and Chief Financial Officer
</TABLE>
Richard J. Egan is a founder of the Company and has served as a Director
since the Company's inception in 1979. He was elected Chairman of the Board of
the Company in January 1988. Prior to January 1988, he was also President of
EMC. From 1979 to January 1992, he was Chief Executive Officer of the Company.
He is also a director of Cognition Corporation, a CAD/CAM software supplier,
Boston Edison Company, a public utility, and Shiva Corporation, a provider of
remote access hardware, software and services.
Michael C. Ruettgers served as Executive Vice President, Operations of EMC
from July 1988 to October 1989, when he became President. From October 1989 to
January 1992, Mr. Ruettgers served as Chief Operating Officer of EMC. In
January 1992, he became Chief Executive Officer and in May 1992, he was
elected a Director of the Company. Before joining EMC, he was Chief Operating
Officer at Technical Financial Services, Incorporated, a high technology
consulting company, from February 1987 to July 1988. He is also a director of
Commonwealth Energy System, a public utility, and EG&G Inc., a diversified
technology company.
John R. Egan served in a number of executive positions with the Company
including Executive Vice President, Marketing and Executive Vice President,
International Sales, from October 1986 to January 1992. He was Executive Vice
President, Sales and Marketing of the Company from January 1992 to July 1996.
In May 1997, he rejoined the Company after a leave of absence, as Executive
Vice President, Products and Offerings. He was elected a Director of the
Company in May 1992.
Robert M. Dutkowsky joined EMC in October 1997 as Executive Vice President,
Markets and Channels. Prior to joining EMC, he held several senior level
management positions at IBM, a computer manufacturer, from 1977 to 1997, most
recently as Vice President of Worldwide Sales and Marketing for IBM's RS/6000
business.
Paul E. Noble, Jr. served as Vice President of Customer Service of EMC from
March 1987 through May 1989, and as Vice President of Sales Operations from
June 1989 through May 1992. From June 1992 to January 1998, Mr. Noble was Vice
President and General Manager of OEM Operations, when he became Senior Vice
President, New Business Development of EMC.
Colin G. Patteson served as European Controller of EMC from January 1989 to
March 1991, as Corporate Controller from March 1991 to February 1993 and as
Vice President and Corporate Controller from February 1993 to April 1995. From
April 1995 to February 1997, Mr. Patteson was Vice President, Chief Financial
Officer and Treasurer of EMC, when he became Senior Vice President, Chief
Administrative Officer and Treasurer.
Paul T. Dacier joined EMC in March 1990 as General Counsel and became Vice
President and General Counsel in February 1993. Prior to joining EMC he was
Senior Counsel, Corporate Operations at Apollo Computer Inc., a computer
manufacturer, from January 1987 to January 1990.
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William J. Teuber, Jr. joined EMC in August 1995 as Vice President and
Controller and became Vice President and Chief Financial Officer in February
1997. From 1988 to August 1995, Mr. Teuber was a partner at Coopers & Lybrand
L.L.P., an accounting firm.
----------------
Richard J. Egan, Chairman of the Board and a Director, is the husband of
Maureen E. Egan, a Director of the Company. W. Paul Fitzgerald, a Director of
the Company, is the brother of Maureen E. Egan. John R. Egan, Executive Vice
President, Products and Offerings, and a Director of the Company, is the son
of Richard J. and Maureen E. Egan. Paul E. Noble, Jr., Senior Vice President,
New Business Development of the Company, is the nephew of Richard J. and
Maureen E. Egan and of W. Paul Fitzgerald.
----------------
The President and Treasurer are elected annually to serve until the first
meeting of the Board of Directors following the next annual meeting of
stockholders and until their successors are elected and qualified. The other
executive officers are appointed to serve in such positions and serve at the
pleasure of the Board of Directors.
----------------
EMC/2/, EMC, Symmetrix, ICDA, MOSAIC:2000, TimeFinder and Celerra are
trademarks of EMC Corporation. IBM and ESCON are trademarks of IBM
Corporation. The logos shown on page one are either registered trademarks or
trademarks of their respective owners.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
EMC's common stock, $0.01 par value (the "Common Stock"), began trading on
the over-the-counter market on April 4, 1986 under the NASDAQ symbol EMCS. On
March 22, 1988, the Company's stock began trading on the New York Stock
Exchange under the symbol EMC.
The following stock splits were effected in the form of stock dividends in
the following amounts and at the following dates: a three-for-two stock split
effective November 24, 1992, for stockholders of record on November 9, 1992, a
two-for-one stock split effective June 8, 1993, for stockholders of record on
May 24, 1993, a two-for-one stock split effective December 10, 1993, for
stockholders of record on November 26, 1993, and a two-for-one stock split
effective November 17, 1997, for stockholders of record on October 31, 1997.
The following table sets forth the range of high and low prices on the New
York Stock Exchange for the past two years during the fiscal periods shown,
adjusted to reflect the effect of the November 17, 1997 stock split.
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
----------- ------ ------
<S> <C> <C>
First Quarter............................................. $19.81 $16.06
Second Quarter............................................ 20.31 16.25
Third Quarter............................................. 30.88 19.59
Fourth Quarter............................................ 32.50 23.63
<CAPTION>
FISCAL 1996 HIGH LOW
----------- ------ ------
<S> <C> <C>
First Quarter............................................. $11.00 $ 7.75
Second Quarter............................................ 11.57 9.00
Third Quarter............................................. 11.57 8.50
Fourth Quarter............................................ 17.32 11.00
</TABLE>
As of January 31, 1998, there were approximately 4,530 holders of record of
the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock. While subject
to periodic review, the current policy of its Board of Directors is to retain
all earnings primarily to provide funds for the continued growth of the
Company.
11
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
EMC CORPORATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30, DECEMBER 31, JANUARY 1,
1997 1996 1995 1994 1994
------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues................ $2,937,860 $2,273,652 $1,921,275 $1,377,492 $782,621
Operating income........ 661,912 496,541 435,779 350,532 180,428
Net income.............. 538,528 386,229 326,845 250,668 127,122
Net income per weighted
average share, basic... $ 1.09 $ 0.83 $ 0.73 $ 0.65 $ 0.35
Net income per weighted
average share,
diluted(1)............. $ 1.04 $ 0.79 $ 0.67 $ 0.55 $ 0.30
Weighted average shares,
basic.................. 493,698 463,548 450,629 387,939 360,408
Weighted average shares,
diluted(1)............. 525,500 498,590 496,537 467,177 431,937
BALANCE SHEET DATA:
Working capital......... $2,121,156 $1,336,634 $ 959,595 $ 600,341 $516,876
Total assets............ 3,490,109 2,293,546 1,745,729 1,317,500 829,646
Long-term
obligations(2)......... 558,454 191,234 245,845 286,106 274,029
Stockholders' equity.... $2,376,301 $1,636,789 $1,140,301 $ 727,641 $419,094
</TABLE>
- --------
(1) In addition to common stock equivalents, diluted earnings per share
reflects the dilutive effects of the Company's debt securities as
outstanding for the respective periods reported above. All share and per
share amounts have been restated to reflect the stock split effective
November 17, 1997 for all periods presented.
(2) Excludes current portion of long-term debt.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") should be read in conjunction with "Factors that May
Affect Future Results" beginning on page 17. All dollar amounts in the MD&A
and in Item 7A are in thousands.
The following table presents certain consolidated statement of operations
information stated as a percentage of total revenues.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Mainframe........................... 40.9% 54.9% 74.3%
Open Systems........................ 49.9 33.3 10.6
McDATA.............................. 6.4 8.0 8.3
Other............................... .2 1.4 4.6
----- ----- -----
Net sales........................... 97.4 97.6 97.8
Service and rental income........... 2.6 2.4 2.2
----- ----- -----
TOTAL REVENUE....................... 100.0 100.0 100.0
COST AND EXPENSES
Cost of sales and service........... 53.5 54.9 52.2
Research and development............ 7.5 7.1 8.5
Selling, general and
administrative..................... 16.5 16.2 16.6
----- ----- -----
OPERATING INCOME.................... 22.5 21.8 22.7
Investment income and interest
expense, net....................... 1.9 1.0 0.6
Other income/(expense), net......... -- -- 0.2
----- ----- -----
Income before income taxes.......... 24.4 22.8 23.5
Provision for income taxes.......... 6.1 5.8 6.5
----- ----- -----
NET INCOME.......................... 18.3% 17.0% 17.0%
===== ===== =====
</TABLE>
REVENUES
Total revenues for 1997 were $2,937,860 compared to $2,273,652 for 1996, an
increase of $664,208 or 29%. Total revenues for 1996 compared to $1,921,275
for 1995; an increase of $352,377 or 18%. The increase in revenues was due
primarily to the continued strong demand for the Company's Symmetrix series of
products. These products address the growing demand for enterprise-wide
storage solutions, allowing users to move, store and protect mission critical
information in mainframe, UNIX and Windows NT environments.
Revenues from products sold directly and through OEMs and resellers into the
open systems storage market, which include the Symmetrix products operating in
an open systems environment and other products, were $1,466,706 in 1997,
$757,662 in 1996 and $200,981 in 1995; an increase of $709,044 or 94% from
1996 to 1997, and an increase of $556,681 or 277% from 1995 to 1996. The open
systems market represented 50% of the Company's total revenues in 1997,
compared to 33% in 1996 and 11% in 1995.
Revenues from products sold directly and through OEMs and resellers into the
mainframe storage market, which include Symmetrix products operating primarily
in the Multiple Virtual Storage ("MVS") environment were $1,202,443 in 1997,
$1,248,138 in 1996 and $1,428,379 in 1995; a decrease of $45,695 or 4% from
1996 to 1997, and a decrease of $180,241 or 13% from 1995 to 1996. Mainframe
revenues in 1997 reflect continued market strength in the MVS environment
offset by moderate price declines. The decrease in mainframe revenues in 1996
reflects price erosion for storage-related products in this market partially
offset by increased unit sales.
13
<PAGE>
The Company believes that the distinction between systems operating in an
open systems versus a mainframe environment has become less meaningful as many
systems operate in either environment. Accordingly, the Company will focus on
and will modify its business and financial measurement to reflect the
enterprise storage market. In 1998 and thereafter, the Company will report
hardware and software revenue and discontinue the practice of reporting
revenue for the open systems and mainframe markets.
Revenues from products sold by McDATA, which include the ESCON Director
series of products, were $189,090 in 1997, $180,540 in 1996 and $160,205 in
1995; an increase of $8,550 or 5% from 1996 to 1997, and an increase of
$20,335 or 13% from 1995 to 1996.
Revenues from all other products, which include the midrange series of
products, were $4,407 in 1997, $31,952 in 1996 and $88,650 in 1995; a decrease
of $27,545 or 86% from 1996 to 1997, and a decrease of $56,698 or 64% from
1995 to 1996. These decreases are primarily attributable to the declines in
midrange series revenues. The demand for products in the midrange market is
currently being satisfied by the Company's Symmetrix 3000 series of products.
Software revenues were $176,859 and $76,437 in 1997 and 1996, respectively.
Software revenues are included in the product revenues for the respective open
systems and mainframe markets. Software revenues were not significant in 1995.
The Company expects significant growth in software revenues in 1998.
Revenues from service and rental income were $75,214 in 1997, $55,360 in
1996 and $43,060 in 1995; an increase of $19,854 or 36% from 1996 to 1997, and
an increase of $12,300 or 29% from 1995 to 1996.
Revenues for 1997 under the Company's reseller agreement with HP were
$504,087 or 17% of total revenues. Revenues for 1996 were $287,352 or 13% of
total revenues. Revenues for 1995 were not significant.
Revenues from sales into the markets of North and South America were
$1,706,551 in 1997 compared to $1,346,222 in 1996, an increase of $360,329 or
27%. This increase was primarily due to growth in sales of the Company's
products in the open systems storage market. During 1997, the Company
established a direct sales presence in Latin America. Total revenues for 1996
compare to $1,148,237 in 1995, an increase of $197,985 or 17%. Revenues in
this segment include $24,424 and $15,351 of revenue from South America in 1997
and 1996, respectively. Revenues for 1995 were not significant.
International revenues were $1,255,733 or 43% of total revenues in 1997
compared to $942,781 or 41% of total revenues in 1996 and $773,038 or 40% of
total revenues in 1995. The Company expects further increases in international
sales as a percentage of total revenues during 1998.
Revenues from sales into the markets of Europe, Africa and the Middle East
were $951,831 in 1997 compared to $720,792 in 1996, an increase of $231,039 or
32%. This increase was primarily due to growth in sales of the Symmetrix
series of products in the open systems storage market. Total revenues for 1996
compare to $631,378 in 1995, an increase of $89,414 or 14%. During 1997, the
Company opened a sales office in Austria. During 1996, the Company opened a
sales office in Israel. During 1995, the Company opened sales offices in South
Africa and the Nordic countries.
Revenues from sales into the markets in the Asia Pacific region were
$279,478 in 1997 compared to $206,638 in 1996, an increase of $72,840 or 35%.
This increase is primarily due to growth in sales of the Symmetrix series of
products in the open systems storage market. Total revenues for 1996 compare
to $141,660 in 1995, an increase of $64,978 or 46%. During 1997, the Company
opened a sales office in New Zealand. During 1995, the Company opened sales
offices in Korea and Singapore.
GROSS MARGINS
Gross margins increased to 46.5% in 1997, compared to 45.1% in 1996 and
47.8% in 1995. The increase from 1996 to 1997 was principally due to the
increase in software revenue which has a relatively higher gross
14
<PAGE>
margin. The decrease from 1996 to 1995 was primarily attributable to the
impact of price declines in the mainframe and open systems storage markets
being greater than the impact of cost declines in raw material components.
During the second half of 1996, the rate of price declines moderated which,
together with total revenue growth, increased software revenues and revenues
from new Symmetrix products, resulted in an increased gross margin percentage
for that period as compared to the first half of 1996. In 1995, cost of goods
sold included one-time charges of approximately $31,000, net of tax, relating
to end-of-life products and other inventory. The Company currently believes
that price declines will continue.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $220,884, $161,088 and
$162,611 in 1997, 1996 and 1995, respectively. As a percentage of revenues,
R&D expenses were 7.5%, 7.1% and 8.5% in 1997, 1996 and 1995, respectively.
The increase in R&D spending levels in 1997 over 1996 was partially due to the
cost of additional technical staff to support a variety of projects including
both fibre channel connectivity and enterprise storage software. The increase
is also attributable to the expenses associated with computer equipment
acquired to facilitate this development. The decrease in R&D spending levels
in 1996 over 1995 reflects the consolidation of domestic development efforts
and the capitalization of software development costs primarily related to
specific software products. The decrease was partially offset by the cost of
additional technical staff, especially to support development for products in
the open systems storage market, and depreciation expenses associated with
computer equipment acquired to facilitate development. The Company expects to
continue to spend substantial amounts for R&D in 1998.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses were $484,052,
$367,073 and $320,009 in 1997, 1996 and 1995, respectively. As a percentage of
revenues, SG&A expenses were 16.5%, 16.2% and 16.6% in 1997, 1996 and 1995,
respectively. The dollar increase in 1997 over 1996 is due primarily to costs
associated with additional sales and support personnel and their related
overhead costs, both domestically and internationally, in connection with the
Company's increased revenue levels and the Company's initiative to increase
market share for its enterprise storage products and services. The Company has
expanded the international direct sales force, particularly in the Asia
Pacific region, as well as OEM, alliance and partnership programs with
applications, systems and database vendors. Expenses in 1995 include
approximately $8,000 of costs related to the acquisition of McDATA. SG&A
expenses are expected to increase in dollar terms during 1998.
INVESTMENT INCOME AND INTEREST EXPENSE
Investment income increased to $70,506 in 1997 from $34,476 in 1996 and
$23,620 in 1995. Interest income was earned primarily from investments in cash
equivalents and investments. Investment income increased in 1997 over 1996
primarily due to higher average cash and investment balances generated from
operations and the Company's 3 1/4% Convertible Subordinated Notes due 2002
issued in March of 1997 (the "3 1/4% Notes").
Interest expense increased to $15,463 in 1997, from $11,967 in 1996 and
$12,857 in 1995. The increase in 1997 from 1996 is primarily due to the 3 1/4%
Notes. The decrease in 1996 from 1995 is primarily due to conversions of the 6
1/4% Convertible Subordinated Debentures due 2002 in April 1995. Interest
expense in 1996 was primarily due to the Company's 4 1/4% Convertible
Subordinated Notes due 2001 (the "4 1/4% Notes"), all of which were redeemed
or converted to Common Stock by January 1997.
PROVISION FOR TAXES
The provision for income taxes was $179,509 in 1997, $133,245 in 1996 and
$123,976 in 1995, which resulted in effective tax rates of 25.0%, 25.7% and
27.5% in 1997, 1996 and 1995, respectively. The decrease in the effective tax
rate is mainly attributable to the realization of benefits associated with the
continued progress on the Company's various tax strategies and benefits
related to offshore manufacturing.
15
<PAGE>
FINANCIAL CONDITION
Cash and cash equivalents and short and long-term investments were
$1,650,633 and $840,858 at December 31, 1997 and 1996, respectively, an
increase of $809,775. In 1997, cash and cash equivalents increased by
$458,218.
Cash provided by operating activities was $507,022. This was primarily
generated from net income offset by an increase in working capital, primarily
attributed to an increase in inventory and an increase in accounts receivable,
consistent with the growth of the business. Cash used by investing activities
was $589,235 principally for additions to property, plant and equipment and
the purchase of short and long-term investments. The Company is currently
expanding its facility in Ireland and constructing a facility in Franklin,
Massachusetts, both for manufacturing use. Cash provided by financing
activities was $543,702, principally due to issuance of the 3 1/4% Notes and
proceeds from the exercise of stock options.
The 4 1/4% Notes, issued by EMC in December 1993 and January 1994 in an
amount totaling $230 million, were generally convertible into shares of Common
Stock of the Company at any time prior to the redemption date at a conversion
price of $9.92 per share. On January 2, 1997, the Company paid approximately
sixty-five thousand dollars to redeem the 4 1/4% Notes outstanding and
converted the remainder into Common Stock.
The Company has available for use a credit line of $50,000 and may elect to
borrow at any time. In March 1997, the Company sold $517,500 3 1/4% Notes.
Based on its current operating and capital expenditure forecasts, the Company
believes that the combination of funds currently available, funds generated
from operations and its available line of credit will be adequate to finance
its ongoing operations.
To date, inflation has not had a material impact on the Company's financial
results.
TECHNICAL UPDATE
The Company will adopt Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" in 1998. This Statement establishes standards
for reporting and displaying comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. This Statement requires the classification of items of
comprehensive income by their nature in a financial statement and the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. The Company believes that adoption of this Statement will not have a
material effect on its financial statements.
The Company will also adopt Statement of Financial Accounting Standards No.
131 "Disclosures About Segments of an Enterprise and Related Information" in
1998. This Statement supersedes FASB Statement No. 14, "Financial Reporting
for Segments of a Business Enterprise," but retains the requirement to report
information about major customers. This Statement establishes standards for
reporting information about operating segments in annual financial statements.
Operating segments are defined as components of an enterprise evaluated
regularly by the Company's senior management in deciding how to allocate
resources and in assessing performance. The Company believes that adoption of
this Statement will not significantly change its segment reporting disclosure.
Lastly, the Company will adopt Statement of Position 97-2 "Software Revenue
Recognition" in 1998. This Statement supersedes Statement of Position 91-1 on
software revenue recognition. This Statement establishes revenue recognition
criteria for arrangements to deliver software that do not require significant
production, modification or customization of the software. This Statement also
establishes requirements for recognizing revenue when multiple elements exist
in a software arrangement. The Company believes that adoption of this
Statement will not have a material effect on its financial statements.
16
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's prospects are subject to certain uncertainties and risks. This
Annual Report on Form 10-K also contains certain forward-looking statements
within the meaning of the Federal Securities Laws. The Company's future
results may differ materially from its current results and actual results
could differ materially from those projected in the forward-looking statements
as a result of certain risk factors, including but not limited to those set
forth below, other one-time events and other important factors disclosed
previously and from time to time in EMC's other filings at the Securities and
Exchange Commission.
UNEVEN PATTERN OF QUARTERLY RESULTS
There has been a historic and recurring "hockey stick" pattern of the
Company's quarterly sales, by which a disproportionate percentage of a
quarter's total sales occur in the last month and weeks and days of each
quarter, making prediction of revenues, earnings and working capital for each
financial period especially difficult and uncertain and increasing the risk of
unanticipated variations in quarterly results and financial condition.
This pattern of sales is itself believed to be the result of many factors
including the significant size of EMC's average product price in relation to
its customers' budgets, resulting in long lead times for customers' budgetary
approval, which tends to be given late in a quarter; the tendency of customers
to wait until late in a quarter to commit to purchase in the hope of obtaining
more favorable pricing from one or more competitors seeking their business;
and, at times, seasonal influences, as well as the fourth quarter influence of
customers' spending their remaining capital budget authorization prior to new
budget constraints in the next year's first quarter.
The "hockey stick" pattern of the Company's sales also makes it extremely
difficult to predict near-term demand and adjust manufacturing capacity
accordingly. Substantial variance of orders from the predicted demand may
limit the Company's ability to assemble, test and ship orders received in the
last weeks and days of each quarter, which could adversely affect quarterly
revenues and earnings.
In addition, revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter and the Company's backlog at any particular
time is not necessarily indicative of future sales levels. This is because the
Company manufactures its products on the basis of its forecast of near-term
demand and maintains inventory in advance of receipt of firm orders from
customers; orders are generally shipped by the Company shortly after receipt
of the order; and customers may reschedule orders with little or no penalty.
These are additional factors making the prediction of revenues extremely
difficult. Further, any unexpected decline in revenues without a corresponding
and timely slowdown in expenses could have a material adverse effect on the
Company's business, results of operations or financial condition.
COMPETITION
There is strong competition in the computer storage industry. EMC competes
with many companies, certain of which have substantially greater financial and
technological resources, larger distribution capabilities, earlier access to
customers and greater overall customer loyalty than EMC. In the open systems
market, the Company's primary competition is provided by systems vendors,
including IBM, Sun and DEC. In the mainframe market, EMC competes primarily
with systems vendors IBM and Hitachi. In the Company's opinion, the major
competitive advantage of the systems vendors is their overall market presence
and ability to provide integrated CPU, storage and software packages. The
Company believes that its major independent storage competitors in the open
systems market are Data General Corporation, Symbios Logic, Inc. and MTI
Technology Corporation. EMC's business may be adversely affected by the
announcement or introduction of new products by its competitors, price
reductions of its competitors' equipment or services and the implementation of
certain marketing strategies by its competitors. As a significant number of
EMC's products are designed to be fully compatible with IBM computers and IBM
operating systems, EMC's business could also be adversely affected by
modifications in the design or configuration of IBM computer systems.
17
<PAGE>
PRICING
Competitive pricing pressures exist in the computer storage market, and have
had and may in the future have an adverse effect on the Company's revenues and
earnings. There also has been and may continue to be a willingness on the part
of certain competitors to reduce prices in order to preserve or gain market
share, which cannot be foreseen by the Company. The Company believes that
pricing pressures are likely to continue.
To date, the Company has been able to manage its component and product
design costs. However, there can be no assurance that the Company will be able
to continue to achieve reductions in component and product design costs. The
relative and varying rates of product price and component cost declines could
have an adverse effect on the Company's earnings.
DEPENDENCE ON SUPPLIERS
The Company purchases certain components and products from suppliers who EMC
believes are currently the only suppliers of those components or products that
meet EMC's requirements. Among the most important components that EMC uses are
disk drives and high density memory components ("DRAMs"). The Company
currently purchases disk drives and DRAMs from a small number of qualified
suppliers. A failure by any supplier of disk drives, high density DRAMs or
other components to meet EMC's delivery or quality requirements for an
extended period of time could have a material adverse effect on EMC. The
Company periodically transitions its product line to new disk drive
technologies. These transitions may intensify the above risks. From time to
time, because of high industry demand and/or the inability of certain vendors
to consistently meet on a timely basis the Company's component quality
standards, the Company has experienced delays in deliveries of disk drives and
high density DRAMs needed to satisfy orders for its products. The Company is
currently working with such vendors to proactively maintain and/or improve
component quality standards and also continues to seek alternative sources of
supply. If such shortages and/or performance problems were to intensify, the
Company could lose some time-sensitive customer orders which could adversely
affect quarterly revenues and earnings. The adverse effect of a supplier's
failure to meet EMC's requirements may be intensified by the "hockey stick"
pattern of the Company's sales and the necessity of meeting critical
manufacturing schedules.
NEW PRODUCTS
Technology and user needs change rapidly in the computer storage industry,
which requires ongoing technological development and introduction of new
products. Sales of the Symmetrix series of products constitute the principal
source of revenues for EMC and such sales are expected to continue to be the
principal source of its revenues in the near future. EMC expects competition
in the sale of storage products to increase, and there can be no assurance
that the Symmetrix series of products will continue to achieve market
acceptance. Significant delays in EMC's development of new hardware or
software technologies would be to the advantage of EMC's competitors.
Furthermore, the continued development of new hardware and software
technologies for EMC's future generations of products cannot be assured even
with significant additional investments.
Further risks inherent in new product introductions include the uncertainty
of price-performance relative to products of competitors, competitors'
responses to the introductions, accurate forecasting of customer demand, and
the desire by customers to evaluate new, more expensive products for longer
periods of time. There can be no assurance that the Company will be able to
effectively manage the transitions to new products or new technologies.
CHANGE IN REGULATIONS
The Company's business, results of operations and financial condition could
be adversely affected if laws, regulations or standards relating to the
Company or its products were newly implemented or changed.
18
<PAGE>
MANUFACTURING RISKS
EMC's products operate near the limits of electronic and physical
performance and are designed and manufactured with relatively small
tolerances. If flaws in design, production, assembly or testing occur on the
part of EMC or its suppliers, EMC may experience a rate of failure in its
products that results in substantial repair or replacement costs and potential
damage to EMC's reputation. Continued improvement in manufacturing
capabilities and control of material and manufacturing quality and costs will
be critical factors in the future growth of EMC. EMC frequently revises and
updates manufacturing and test processes to address engineering and component
changes to its products and evaluates the reallocation of manufacturing
resources among its facilities. There can be no assurance that EMC's efforts
to monitor, develop and implement appropriate test and manufacturing processes
for its products, especially the Symmetrix series of products, will be
sufficient to permit EMC to avoid a rate of failure in its products that
results in substantial delays in shipment, significant repair or replacement
costs and potential damage to EMC's reputation, any of which could have a
material adverse effect on EMC's operations and ultimately on its financial
results.
INDIRECT CHANNELS OF DISTRIBUTION
In 1996 and 1997, the Company derived a significant percentage of its
product revenues from reseller and OEM channels. A substantial portion of
these reseller and OEM revenues stems from the Company's reseller agreement
with HP, of which there is no guaranty of renewal. The Company's financial
results could be adversely affected if such contracts were terminated, if the
Company's relationship with such resellers or OEMs were to deteriorate or if
the financial condition of its resellers and OEMs were to weaken. In addition,
as the Company's business grows, the Company may have an increased reliance on
indirect channels of distribution. There can be no assurance that the Company
will be successful in maintaining or expanding these indirect channels of
distribution. If the Company is not successful, the Company may lose certain
sales opportunities. Furthermore, the partial reliance on indirect channels of
distribution may materially reduce the visibility to management of potential
orders.
ALLIANCES
Many of the Company's products are marketed in conjunction with the products
of other vendors, and the Company plans to continue its strategy of developing
key alliances. There can be no assurance that the Company will be successful
in its ongoing strategic partnerships or that the Company will be able to find
further suitable business relationships as it develops new products. Any
failure to continue or expand such relationships could have a material adverse
effect on the Company's business, financial condition and results of
operation.
There can be no assurance that the Company's distributors and strategic
partners, many of which have significantly greater financial and marketing
resources than the Company, will not develop and market products in
competition with the Company in the future, discontinue their relationships
with the Company, or form competing arrangements with the Company's
competitors.
INTERNATIONAL SALES
A substantial portion of the Company's revenues is derived from sales
outside the United States. In addition, a substantial portion of the Company's
products are manufactured outside of the United States. Accordingly, the
Company's future results could be adversely affected by a variety of factors,
including changes in foreign currency exchange rates, changes in a specific
country's or region's political or economic conditions, trade restrictions,
import or export licensing requirements, the overlap of different tax
structures or changes in international tax laws, changes in regulatory
requirements, compliance with a variety of foreign laws and regulations and
longer payment cycles in certain countries.
19
<PAGE>
MANAGEMENT OF GROWTH
The Company has a history of rapid growth. The Company's future operating
results will depend on management's ability to manage growth, including but
not limited to hiring and retaining significant numbers of qualified
employees, forecasting revenues, controlling expenses and managing its assets.
An unexpected decline in the growth rate of revenues without a corresponding
and timely reduction in expense growth or a failure to manage other aspects of
growth could have a material adverse effect on the Company's business, results
of operations or financial condition.
DEPENDENCE UPON KEY PERSONNEL
The Company's continued growth and success depends to a significant extent
on the continued service of senior management and other key employees and the
hiring of new qualified employees. Competition for highly-skilled personnel is
intense in the high technology industry. There can be no assurance that the
Company will be successful in continuously recruiting new personnel or in
retaining existing personnel. The loss of one or more key employees or the
Company's inability to attract additional qualified employees or retain other
employees could have a material adverse effect on the Company's business,
results of operations or financial condition.
ENFORCEMENT OF THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS
The Company generally relies upon patent, copyright, trademark and trade
secret laws and contract rights in the United States and in other countries to
establish and maintain its proprietary rights in its technology and products.
However, there can be no assurance that any of such proprietary rights of the
Company will not be challenged, invalidated or circumvented. In addition, the
laws of certain countries do not protect the Company's proprietary rights to
the same extent as do the laws of the United States. Therefore, there can be
no assurance that the Company will be able to adequately protect its
proprietary technology against unauthorized third party copying or use, which
could adversely affect the Company's competitive position.
Further, there can be no assurance that the Company will be able to obtain
licenses to any technology that it may require to conduct its business or
that, if obtainable, such technology can be licensed at a reasonable cost.
From time to time, the Company receives notices from third parties claiming
infringement by the Company's products of third party patent or other
intellectual property rights. Responding to any such claim, regardless of its
merit, could be time-consuming, result in costly litigation, divert
management's attention and resources and cause the Company to incur
significant expenses. In the event there is a successful claim of infringement
against the Company and the Company fails to develop or license a substitute
technology, the Company's business, results of operations or financial
condition could be materially adversely affected.
RISKS ASSOCIATED WITH FUTURE ACQUISITIONS
As part of its business strategy, the Company may make acquisitions of, or
significant investments in, businesses that offer complementary products,
services and technologies. Any such future acquisitions or investments would
be accompanied by the risks commonly encountered in an acquisition of a
business. Such risks include, among other things, the difficulty of
assimilating the operations and personnel of the acquired business, the
inability of management to maximize the financial and strategic position of
the Company through the successful incorporation of acquired personnel and
customers, the maintenance of uniform standards, controls, procedures and
policies and the impairment of relationships with employees and customers as a
result of any integration of new management personnel. These factors could
have a material adverse effect on the Company's business, results of
operations or financial condition. The Company expects that the consideration
paid for future acquisitions, if any, could be in the form of cash, stock,
rights to purchase stock or a combination thereof. Dilution to existing
stockholders and to earnings per share may result to the extent that shares of
stock or other rights to purchase stock are issued in connection with any such
future acquisitions.
20
<PAGE>
VOLATILITY OF STOCK PRICE
The Company's stock price, like that of other technology companies, is
subject to significant volatility. The announcement of new products, services
or technological innovations by the Company or its competitors, quarterly
variations in the Company's results of operations, changes in revenue or
earnings estimates by the investment community and speculation in the press or
investment community are among the factors affecting the Company's stock
price. In addition, the stock price may be affected by general market
conditions and domestic and international economic factors unrelated to the
Company's performance. Because of these reasons, recent trends should not be
considered reliable indicators of future stock prices or financial results.
YEAR 2000 ISSUES
The Company uses a significant number of computer software programs and
operating systems in its product development, financial business systems and
administrative functions. To the extent these software applications are unable
to appropriately interpret the upcoming calendar year "2000," conversion of
such applications will be necessary. The Company has implemented a program to
determine whether the Company's systems are "Year 2000" compliant, assess the
impact of any non-compliance and make any necessary adjustments. As part of
this program, the Company is in the process of making the necessary
conversions to its internal software. The Company anticipates that its
conversion program will be completed in a timely manner. The Company does not
anticipate that the total cost of such program will have a material adverse
effect on the Company's business, results of operations or financial
condition.
In addition, the Company has contacted its key suppliers and other key third
parties to determine the potential effect of the "Year 2000" issue on such
parties. To the extent such third parties are materially adversely affected by
the "Year 2000" issue, this could disrupt the Company's operations.
There can be no assurance that the conversion of the Company's systems will
be successful or that the Company's key contractors will have successful
conversion programs, and that any such "Year 2000" compliance failures will
not have a material adverse effect on the Company's business, results of
operations or financial condition.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RISK MANAGEMENT
As a multinational corporation, the Company is exposed to changes in foreign
exchange rates. As the Company's international sales grow as a percentage of
total sales, exposure to volatility in exchange rates could have a material
adverse impact on the Company's financial results. The Company's risk from
exchange rate changes is primarily related to non-dollar denominated sales in
Europe and Japan.
The Company uses foreign currency forward and option contracts to manage the
risk of exchange rate fluctuations. The Company uses these derivative
instruments to reduce its foreign exchange risk by essentially creating
offsetting market exposures. The instruments held by the Company are not
leveraged, and are held for purposes other than trading.
The Company uses forward exchange contracts to hedge its net asset (balance
sheet) position, and uses option contracts to hedge a portion of anticipated
but not committed cash flows. The value-at-risk, using the variance/covariance
model, of the combined foreign exchange position represents a potential one-
day loss in earnings estimated to be nine hundred and thirty thousand dollars,
at a 95% confidence level, as of December 31, 1997.
The success of the hedging program depends on forecasts of transaction
activity in the various currencies. To the extent that these forecasts are
over or understated during periods of currency volatility, the Company could
experience unanticipated currency gains or losses.
21
<PAGE>
INTEREST RATE RISK
The Company maintains an investment portfolio consisting of debt securities
of various issuers, types and maturities. These securities are generally
classified as held to maturity, and consequently are recorded on the balance
sheet at amortized cost. A portion of the investments are classified as
available for sale. These securities are recorded on the balance sheet at
market value, with the unrealized gain or loss recorded through the equity
section. These instruments are not leveraged, and are not held for purposes of
trading. Due to the relatively short term average maturity of the investment
portfolio (See Note C to the Company's Consolidated Financial Statements), a
sudden sharp change in interest rates would not have a material adverse effect
on the value of the portfolio.
22
<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, 1997 and December 31, 1996, and the related
consolidated statements of income, cash flows and stockholders' equity and the
financial statement schedule for each of the three years in the period ended
December 31, 1997. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of EMC
Corporation as of December 31, 1997 and December 31, 1996, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 21, 1998
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 954,595 $ 496,377
Short-term investments.............................. 419,262 230,981
Trade and notes receivable less allowance for
doubtful accounts of $6,773 and $7,368, in 1997 and
1996, respectively................................. 788,869 627,409
Inventories......................................... 404,660 336,581
Deferred income taxes............................... 37,095 43,421
Other assets........................................ 22,545 19,367
---------- ----------
Total current assets................................. 2,627,026 1,754,136
Long-term investments................................ 276,776 113,500
Notes receivable, net................................ 20,013 20,013
Property, plant and equipment, net................... 396,511 276,387
Deferred income taxes................................ 14,174 16,664
Intangible and other assets, net..................... 155,609 112,846
---------- ----------
Total assets..................................... $3,490,109 $2,293,546
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations............ $ 7,665 $ 7,058
Accounts payable.................................... 187,117 172,871
Accrued expenses.................................... 151,216 122,562
Income taxes payable................................ 151,088 104,899
Deferred revenue.................................... 8,784 10,112
---------- ----------
Total current liabilities............................ 505,870 417,502
Deferred income taxes................................ 45,353 46,002
Long-term obligations:
4 1/4% convertible subordinated notes due 2001...... -- 142,720
3 1/4% convertible subordinated notes due 2002...... 517,500 --
Notes payable....................................... 40,954 48,514
Other liabilities.................................... 4,131 2,019
---------- ----------
Total liabilities................................ 1,113,808 656,757
---------- ----------
Commitments and contingencies
Stockholders' equity:
Series Preferred Stock, par value $.01; authorized
25,000,000 shares, none outstanding................ -- --
Common Stock, par value $.01; authorized 750,000,000
shares; issued 496,792,608 and 476,479,344, in 1997
and 1996, respectively............................. 4,968 4,765
Additional paid-in capital.......................... 670,297 461,304
Deferred compensation............................... (12,738) (7,027)
Unrealized gain/(loss) on investments............... (9) --
Retained earnings................................... 1,711,356 1,172,828
Cumulative translation adjustment................... 2,427 4,919
---------- ----------
Total stockholders' equity....................... 2,376,301 1,636,789
---------- ----------
Total liabilities and stockholders' equity...... $3,490,109 $2,293,546
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net sales............................ $2,862,646 $2,218,292 $1,878,215
Service and rental................... 75,214 55,360 43,060
---------- ---------- ----------
2,937,860 2,273,652 1,921,275
Costs and expenses:
Cost of sales and service............ 1,571,012 1,248,950 1,002,876
Research and development............. 220,884 161,088 162,611
Selling, general and administrative.. 484,052 367,073 320,009
---------- ---------- ----------
Operating income....................... 661,912 496,541 435,779
Investment income...................... 70,506 34,476 23,620
Interest expense....................... (15,463) (11,967) (12,857)
Other income/(expense), net............ 1,082 424 4,279
---------- ---------- ----------
Income before taxes.................... 718,037 519,474 450,821
Income tax provision................... 179,509 133,245 123,976
---------- ---------- ----------
Net income............................. $ 538,528 $ 386,229 $ 326,845
========== ========== ==========
Net income per weighted average share,
basic................................. $ 1.09 $ .83 $ .73
========== ========== ==========
Net income per weighted average share,
diluted............................... $ 1.04 $ .79 $ .67
========== ========== ==========
Weighted average shares, basic......... 493,698 463,548 450,629
Weighted average shares, diluted....... 525,500 498,590 496,537
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 538,528 $ 386,229 $ 326,845
Adjustments to reconcile net income to
net cash provided/(used) by operating
activities:
Depreciation and amortization.......... 136,257 86,949 53,617
Deferred income taxes.................. 8,167 39,178 (6,587)
Net loss on disposal of property and
equipment............................. 728 1,125 635
Tax benefit from stock options
exercised............................. 18,540 17,746 11,165
Minority interest...................... (337) -- --
Changes in assets and liabilities:
Trade and notes receivable............ (161,066) (69,103) (156,719)
Inventories........................... (68,239) (6,480) (74,351)
Other assets.......................... (52,997) (24,433) (30,984)
Accounts payable...................... 14,382 61,458 (16,061)
Accrued expenses...................... 28,757 (9,955) 22,432
Income taxes payable.................. 46,434 (2,836) 49,275
Deferred revenue...................... (2,132) 3,497 (1,889)
--------- --------- ---------
Net cash provided by operating
activities.......................... 507,022 483,375 177,378
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and
equipment.............................. (210,797) (125,973) (92,200)
Proceeds from sales of property and
equipment.............................. 313 1,441 39
Capitalized software development costs.. (27,185) (24,693) (5,000)
Purchase of patents..................... -- (6,333) --
Maturity of short-term and long-term
investments............................ 534,711 206,061 67,284
Purchase of short-term and long-term
investments............................ (886,277) (425,266) (16,929)
--------- --------- ---------
Net cash used by investing
activities.......................... (589,235) (374,763) (46,806)
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock................ 34,049 33,181 19,438
Purchase of treasury stock.............. -- (27,457) (415)
Redemption of 4 1/4% convertible
subordinated notes due 2001............ (65) -- --
Proceeds from investment in new McDATA.. 10,000 -- --
Issuance of 3 1/4% convertible
subordinated notes due 2002, net of
issuance costs......................... 506,671 -- --
Payment of long-term and short-term
obligations............................ (11,683) (1,295) (10,735)
Issuance of long-term and short-term
obligations............................ 4,730 4,289 545
--------- --------- ---------
Net cash provided by financing
activities.......................... 543,702 8,718 8,833
--------- --------- ---------
Effect of exchange rate changes on cash.. (3,271) (581) (283)
Net increase in cash and cash
equivalents............................. 461,489 117,330 139,405
Cash and cash equivalents at beginning of
period.................................. 496,377 379,628 240,506
--------- --------- ---------
Cash and cash equivalents at end of
period.................................. $ 954,595 $ 496,377 $ 379,628
========= ========= =========
Non-cash activity--conversions of
debentures and notes.................... $ 140,682 $ 85,636 $ 39,535
--patents acquired by notes and
other payables................... -- $ 37,416 --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------------------------------------------
COMMON STOCK UNREALIZED TREASURY STOCK
------------------ ADDITIONAL DEFERRED GAIN/(LOSS) CUMULATIVE ------------------- TOTAL
PAR PAID-IN COMPEN- ON RETAINED TRANSLATION STOCKHOLDERS'
SHARES VALUE CAPITAL SATION INVESTMENTS EARNINGS ADJUSTMENT SHARES COST EQUITY
----------- ------ ---------- -------- ----------- ---------- ----------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
1, 1995........ 403,476,084 $4,035 $279,607 $ (2,607) -- $ 443,713 $ 3,716 5,254,934 $ (823) $ 727,641
Pooling of
interests with
McDATA
Corporation.... 27,134,224 271 1,659 -- -- 16,041 -- -- -- 17,971
----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ----------
Balance as
restated....... 430,610,308 4,306 281,266 (2,607) -- 459,754 3,716 5,254,934 (823) 745,612
----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ----------
Exercise of
stock options.. 8,606,610 86 16,411 -- -- -- -- -- -- 16,497
Tax benefit from
stock options
exercised...... -- -- 11,165 -- -- -- -- -- -- 11,165
Grant of stock
options........ -- -- 545 (545) -- -- -- -- -- --
Issuance of
common stock
pursuant to
bond
conversions.... 25,818,772 258 39,277 -- -- -- -- -- -- 39,535
Amortization of
deferred
compensation... -- -- -- 1,012 -- -- -- -- -- 1,012
Purchase of
treasury
stock.......... -- -- -- -- -- -- -- 37,972 (415) (415)
Cumulative
translation
adjustment..... -- -- -- -- -- -- 50 -- -- 50
Net income...... -- -- -- -- -- 326,845 -- -- -- 326,845
----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ----------
Balance,
December 30,
1995........... 465,035,690 4,650 348,664 (2,140) -- 786,599 3,766 5,292,906 (1,238) 1,140,301
----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ----------
Exercise of
stock options.. 2,685,792 27 2,408 -- -- -- -- (7,892,906) 28,695 31,130
Tax benefit from
stock options
exercised...... -- -- 17,746 -- -- -- -- -- -- 17,746
Grant of stock
options........ -- -- 6,938 (6,938) -- -- -- -- -- --
Issuance of
common stock
pursuant to
bond
conversions.... 8,757,862 88 85,548 -- -- -- -- -- -- 85,636
Amortization of
deferred
compensation... -- -- -- 2,051 -- -- -- -- -- 2,051
Purchase of
treasury
stock.......... -- -- -- -- -- -- -- 2,600,000 (27,457) (27,457)
Cumulative
translation
adjustment..... -- -- -- -- -- -- 1,153 -- -- 1,153
Net income...... -- -- -- -- -- 386,229 -- -- -- 386,229
----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ----------
Balance,
December 31,
1996........... 476,479,344 4,765 461,304 (7,027) -- 1,172,828 4,919 -- -- 1,636,789
----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ----------
Exercise of
stock options.. 5,932,618 59 33,990 -- -- -- -- -- -- 34,049
Tax benefit from
stock options
exercised...... -- -- 18,540 -- -- -- -- -- -- 18,540
Grant of stock
options........ -- -- 9,300 (9,300) -- -- -- -- -- --
Issuance of
common stock
pursuant to
bond
conversions.... 14,380,646 144 140,538 -- -- -- -- -- -- 140,682
Amortization of
deferred
compensation... -- -- -- 3,589 -- -- -- -- -- 3,589
Proceeds in
excess of
minority
interest in new
McDATA......... -- -- 6,625 -- -- -- -- -- -- 6,625
Unrealized
gain/(loss) on
investments.... -- -- -- -- (9) -- -- -- -- (9)
Cumulative
translation
adjustment..... -- -- -- -- -- -- (2,492) -- -- (2,492)
Net income...... -- -- -- -- -- 538,528 -- -- -- 538,528
----------- ------ -------- -------- ------- ---------- ------- ---------- ------- ----------
Balance,
December 31,
1997........... 496,792,608 $4,968 $670,297 $(12,738) $ (9) $1,711,356 $ 2,427 -- -- $2,376,301
=========== ====== ======== ======== ======= ========== ======= ========== ======= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
A. COMPANY
EMC Corporation and its subsidiaries ("EMC" or the "Company") design,
manufacture, market and support a wide range of storage-related hardware and
software products and related services for the enterprise storage market
worldwide. EMC's products provide solutions for a wide range of customer
information storage requirements, from the highest performance mission
critical applications to extremely high capacity business support
applications. EMC's solutions integrate with major open systems operating
systems such as UNIX, Microsoft Corporation's Windows NT and International
Business Machines Corporation's ("IBM") OS400 as well as major mainframe
operating systems such as IBM's MVS. EMC's products are sold as storage
solutions for customers utilizing a variety of computer system platforms
including, but not limited to, IBM and IBM-compatible mainframe, Unisys
Corporation, Compagnie des Machines Bull S.A., Hewlett-Packard Company ("HP"),
NCR Corporation, Sequent Computer Systems, Inc., Siemens Nixdorf
Informationssysteme AG, Silicon Graphics, Inc. and other open systems and
mainframe platforms.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated. The Company treats gains/losses on sales of subsidiary
stock of development stage companies as equity transactions.
Basis of Presentation
On September 23, 1996, EMC elected to change its fiscal year end from a
fiscal basis which would have ended on December 28, 1996 to a calendar year
end basis ending on December 31, 1996. This change was reported on Form 8-K on
October 4, 1996. The effect on the Company's results of operations was not
material.
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
Use of Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
reported amounts of revenues and expenses during the reporting period and the
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
Acquisitions
In December 1995, EMC exchanged 27,134,224 shares of EMC common stock, $.01
par value (the "Common Stock") for all of the outstanding stock and stock
options exercisable as of the closing date of McDATA Corporation ("McDATA"), a
leader in data network switching solutions. The business combination was
accounted for as a pooling of interests. The 1995 financial information has
been restated as if the transaction had occurred as of January 1, 1995.
Separate company results for 1995 before the combination was consummated
were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 6, 1995
-------------------------------
REVENUES NET INCOME
--------------- ---------------
<S> <C> <C>
EMC......................................... $ 1,402,059 $ 197,303
McDATA...................................... 148,253 41,748
--------------- -------------
Total..................................... $ 1,550,312 $ 239,051
=============== =============
</TABLE>
28
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Company has acquired several other companies, which have been accounted
for using the purchase method, and are not significant to its financial
position or results of operations. Under the purchase method, the results of
operations of acquired companies are included prospectively from the date of
acquisition, and the acquisition cost is allocated to the acquirees' assets
and liabilities based upon their fair market values at the date of
acquisition.
At December 31, 1997 and 1996 the net book value of goodwill associated with
acquisitions was $7,830 and $12,870, respectively. Goodwill is being amortized
on a straight line basis over five years and is included in intangible and
other assets, net. Accumulated amortization was $8,234 and $6,996 on December
31, 1997 and 1996, respectively.
Revenue Recognition
The Company generally recognizes revenue from product sales at the time the
products are shipped provided no significant vendor obligations remain and the
resulting receivable is deemed collectible by management. Upon shipment, the
Company provides for estimated product returns and the estimated cost that may
be incurred for product warranties. Revenue from rentals is recorded on a
monthly basis over the life of the contracts. Revenue from sales-type leases
is recognized at the net present value of expected future payments. Service
revenue is recognized over the contractual period or as services are rendered.
Foreign Currency Translation
The local currency is the functional currency of the majority of the
Company's operations. Their assets and liabilities are translated into U.S.
dollars at exchange rates in effect at the balance sheet date and income and
expense items are translated at average rates for the period, except for
inventories and property, plant and equipment which are translated at
historical exchange rates. The Company's operations in Ireland, Israel and
Hong Kong are generally dependent on the U.S. dollar and therefore, their
functional currency is the U.S. dollar. Consolidated foreign currency
transaction results included in other income/(expense), net were gains of
$2,959 in 1997, $1,044 in 1996, and $1,667 in 1995.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with a
remaining maturity of ninety days or less at the time of purchase. These
investments are stated at cost plus accrued interest, which approximates
market. Total cash equivalents were $749,693 and $256,943 at December 31, 1997
and 1996, respectively. Cash equivalents consist primarily of commercial paper
and money market securities.
Investments
The Company's investments are comprised primarily of debt securities which
are classified as either held-to-maturity or available for sale. Investments
with remaining maturities of less than twelve months from the balance sheet
date are classified as short-term investments. Investments with remaining
maturities of more than twelve months from the balance sheet date are
classified as long-term investments.
Statement of Cash Flows Supplemental Information
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cash paid for:
Income taxes.................................... $106,677 $78,651 $70,389
Interest........................................ 15,401 11,428 12,965
</TABLE>
29
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Inventories
Inventories are stated at the lower of cost (first in, first out) or market,
not in excess of net realizable value.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is computed
on a straight-line basis over the estimated useful lives of the assets, as
follows:
<TABLE>
<S> <C>
Furniture and fixtures................................ 7 years
Equipment............................................. 3-10 years
Improvements.......................................... 5-10 years
Buildings............................................. 25-31 1/2 years
</TABLE>
When assets are retired or disposed of, the cost and accumulated
depreciation thereon are removed from the accounts and the related gains or
losses are included in the statement of income.
Capitalized Software Development Costs
Research and development costs are expensed as incurred. Software
development costs incurred subsequent to establishment of technological
feasibility through the general release of the software products are
capitalized. Technological feasibility is demonstrated by the completion of a
detailed program design. Capitalized costs are amortized on a straight-line
basis over two years. Unamortized software development costs were $30,099 and
$22,508 at December 31, 1997 and 1996, respectively, and are included in
intangible and other assets, net. Amortization expense was $19,594 and $7,185
in 1997 and 1996, respectively. No amortization expense was recorded in 1995.
Income Taxes
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse (see Note H). Tax credits are
generally recognized as reductions of income tax provisions in the year in
which the credits arise.
The Company does not provide for U.S. income tax liability on undistributed
earnings of its foreign subsidiaries. All income and tollgate tax obligations
for the Company's former subsidiary in Puerto Rico were settled in 1996. The
earnings of non-U.S. subsidiaries, which reflect full provision for non-U.S.
income taxes, are indefinitely reinvested in non-U.S. operations or will be
remitted substantially free of additional tax. Accordingly, no material
provision has been made for taxes that might be payable upon remittance of
such non-U.S. earnings.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" for the fiscal year ended December 31, 1997. This
Statement replaces the presentation of primary and fully diluted earnings per
share ("EPS") with a presentation of diluted and basic EPS. Diluted EPS
reflects the potential dilution that could occur if stock options were
exercised or debt securities were converted to common stock while basic EPS
excludes dilutive securities. A reconciliation of the basic EPS to diluted EPS
and dual presentation on the face of the statement of income are also
required.
30
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," ("SFAS 123"), issued in 1995, defined a fair value method
of accounting for stock options and other equity instruments. Under the fair
value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which is
usually the vesting period. As provided for in SFAS 123, the Company elected
to apply Accounting Principles Board ("APB") Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation plans. The
required disclosures under SFAS 123 as if the Company had applied the new
method of accounting are included in the footnotes to the financial
statements.
Accounting Pronouncements
The Company will adopt Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" in 1998. This Statement establishes standards
for reporting and displaying comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. This Statement requires the classification of items of
comprehensive income by their nature in a financial statement and the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. The Company believes that adoption of this Statement will not have a
material effect on its financial statements.
The Company will also adopt Statement of Financial Accounting Standards No.
131 "Disclosures About Segments of an Enterprise and Related Information" in
1998. This Statement supersedes FASB Statement No. 14, "Financial Reporting
for Segments of a Business Enterprise," but retains the requirement to report
information about major customers. This Statement establishes standards for
reporting information about operating segments in annual financial statements.
Operating segments are defined as components of an enterprise evaluated
regularly by the Company's senior management in deciding how to allocate
resources and in assessing performance. The Company believes that adoption of
this Statement will not significantly change its segment reporting
disclosures.
Lastly, the Company will adopt Statement of Position 97-2 "Software Revenue
Recognition" in 1998. This Statement supersedes Statement of Position 91-1 on
software revenue recognition. This Statement establishes revenue recognition
criteria for arrangements to deliver software that do not require significant
production, modification or customization of the software. This Statement also
establishes requirements for recognizing revenue when multiple elements exist
in a software arrangement. The Company believes that adoption of this
Statement will not have a material effect on its financial statements.
C. INVESTMENTS
The Company's investment portfolio includes held-to-maturity and available
for sale securities. The following tables summarize the composition of the
Company's held-to-maturity short and long-term investments at December 31,
1997 and 1996, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
<S> <C> <C>
U.S. corporate debt securities............................ $320,264 $320,186
U.S. government and agencies.............................. 124,415 125,040
Foreign debt securities................................... 61,140 61,201
-------- --------
Total................................................... $505,819 $506,427
======== ========
</TABLE>
31
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
<S> <C> <C>
U.S. corporate debt securities............................ $155,375 $155,193
U.S. government and agencies.............................. 100,231 100,418
Foreign debt securities................................... 88,875 89,617
-------- --------
Total................................................... $344,481 $345,228
======== ========
</TABLE>
The contractual maturities of held-to-maturity investments held at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
<S> <C> <C>
Due within one year....................................... $413,278 $413,231
Due after one year through five years..................... 92,541 93,196
-------- --------
Total................................................... $505,819 $506,427
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
<S> <C> <C>
Due within one year....................................... $230,981 $231,276
Due after one year through five years..................... 111,648 112,104
Due after ten years....................................... 1,852 1,848
-------- --------
Total................................................. $344,481 $345,228
======== ========
</TABLE>
The net unrealized gain for held-to-maturity securities of $608 at December
31, 1997 consisted of gross unrealized gains of $928 and gross unrealized
losses of $320. The net unrealized gain of $747 at December 31, 1996 consisted
of gross unrealized gains of $1,240 and gross unrealized losses of $493.
The following tables summarize the composition of the Company's available
for sale short and long-term investments at December 31, 1997. There were no
available for sale securities in 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
<S> <C> <C>
U.S. government and agencies.............................. $140,218 $140,209
U.S. corporate debt securities............................ 30,772 30,772
Asset and mortgage-backed securities...................... 19,238 19,238
-------- --------
Total................................................... $190,228 $190,219
======== ========
</TABLE>
32
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The contractual maturities of available for sale investments held at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
<S> <C> <C>
Due within one year....................................... $ 6,036 $ 6,036
Due after one year through five years..................... 184,192 184,183
-------- --------
Total................................................... $190,228 $190,219
======== ========
</TABLE>
The gross unrealized loss on available for sale securities at December 31,
1997 was nine thousand dollars.
Investment income consists principally of interest income, including
interest on notes receivable from sales-type leases.
D. INVENTORY
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Purchased parts.................................. $ 24,641 $ 16,610
Work-in-process.................................. 240,845 210,445
Finished goods................................... 139,174 109,526
-------- --------
$404,660 $336,581
======== ========
</TABLE>
E. LEASING TRANSACTIONS
Notes receivable are primarily from installment sales of the Company's
products. The payment schedule for such notes at December 31, 1997 is as
follows:
<TABLE>
<S> <C>
1998.............................................................. $12,078
1999.............................................................. 10,555
2000.............................................................. 8,867
2001.............................................................. 803
2002.............................................................. 303
-------
Face value........................................................ 32,606
Less amounts representing interest................................ 2,692
-------
Present value..................................................... 29,914
Current portion................................................... 9,901
-------
Long-term portion................................................. $20,013
=======
</TABLE>
Implicit interest rates range from approximately 8% to 9%.
Actual cash collections may differ from amounts shown on the table due to
customer early buyouts, upgrades and refinancings.
33
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Company may receive proceeds for its sales-type leases through third-
party financing arrangements with various financial institutions on a
nonrecourse basis, which may be either collateralized by a lien on the
equipment, which is returned to the Company at the end of the lease, or title
to the equipment may pass to the funding source at the time of financing.
Residuals values recorded by the Company for equipment under leases at
December 31, 1997 and 1996 were $34,372 and $24,602, respectively, and are
included in intangible and other assets, net.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Furniture and fixtures........................... $ 16,978 $ 11,498
Equipment........................................ 459,756 322,104
Buildings and improvements....................... 121,541 76,427
Land............................................. 15,085 2,964
Construction in progress......................... 38,056 43,988
-------- --------
651,416 456,981
Accumulated depreciation......................... (254,905) (180,594)
-------- --------
$396,511 $276,387
======== ========
</TABLE>
G. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Salaries and benefits........................... $ 76,387 $ 62,617
Warranty........................................ 25,315 20,870
Other........................................... 49,514 39,075
-------- --------
$151,216 $122,562
======== ========
</TABLE>
H. INCOME TAXES
The Company's provision for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal and state
Current..................................... $162,323 $ 88,208 $123,927
Deferred.................................... 7,790 39,394 (5,867)
-------- -------- --------
170,113 127,602 118,060
-------- -------- --------
Foreign
Current..................................... 9,019 5,859 6,636
Deferred.................................... 377 (216) (720)
-------- -------- --------
9,396 5,643 5,916
-------- -------- --------
Total provision for income taxes.............. $179,509 $133,245 $123,976
======== ======== ========
</TABLE>
34
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Net undistributed earnings of foreign subsidiaries at December 31, 1997 and
1996 approximated $805,236 and $545,945, respectively. Based on the Company's
policy of indefinite reinvestment in non-U.S. operations, it is not currently
practicable to determine the tax liability associated with the repatriation of
these earnings. Income before income taxes for foreign operations for 1997,
1996 and 1995 approximated $269,157, $163,177 and $172,933, respectively.
A reconciliation of the Company's income tax provision to the statutory
federal tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Statutory federal tax rate............................. 35.0% 35.0% 35.0%
State taxes, net of federal tax benefits............... 2.6 3.0 3.6
International tax benefits............................. (11.5) (10.8) (8.5)
Tax credits............................................ (.7) (.8) (1.4)
Other.................................................. (.4) (.7) (1.2)
----- ----- ----
25.0% 25.7% 27.5%
===== ===== ====
</TABLE>
The Company's manufacturing facility in Ireland incurs a 10% tax rate on
income from manufacturing operations until the year 2010.
The components of the current and noncurrent deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Current deferred tax assets:
Accounts receivable............................ $ 10,819 $ 11,517
Inventory...................................... 16,166 16,336
Other liabilities.............................. 6,382 7,440
Other assets................................... 3,728 8,128
-------- --------
Total current deferred tax assets.......... $ 37,095 $ 43,421
======== ========
Noncurrent deferred tax assets/(liabilities):
Fixed assets................................... (66) 4,852
Intangible assets.............................. 7,922 4,069
Net operating loss carryforwards............... 6,552 10,933
Research and development credit carryforward... 1,342 1,342
Other.......................................... 3,096 2,830
Valuation reserve.............................. (4,672) (7,362)
-------- --------
Deferred tax assets............................ 14,174 16,664
-------- --------
Deferral of lease revenue...................... (35,565) (37,082)
Software development costs..................... (9,788) (8,920)
-------- --------
Deferred tax liabilities....................... (45,353) (46,002)
-------- --------
Total noncurrent deferred tax liabilities,
net....................................... $(31,179) $(29,338)
======== ========
</TABLE>
The valuation allowance on December 31, 1997 and 1996 provided reserves
against non-U.S. operating loss carryforwards which may expire before the
Company can utilize them. The realization of the remaining deferred tax assets
is more likely than not.
35
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Company has net operating loss carryforwards as of December 31, 1997 of
$10,693 which expire at various dates from 1998 through 2008 and $7,129 which
can be carried forward indefinitely. Of these, $12,999 are non-U.S. and $4,823
are U.S. The U.S. losses relate to the pre-acquisition losses of companies
acquired. The non-U.S. losses primarily relate to a wholly-owned subsidiary in
France.
The examination of the Company's 1992, 1993 and 1994 U.S. income tax returns
by the IRS was completed during 1997. The Company believes adequate accruals
have been provided for all years.
I. EMPLOYEE COMPENSATION PLANS
The Company has established a deferred compensation program for certain
employees which is qualified under Section 401(k) of the federal tax laws.
The Company intends, at the end of each calendar quarter, to make a
contribution that matches 100% of the employee's contribution up to a maximum
of 2% of the employee's quarterly compensation. Additionally, provided that
certain quarterly profit goals are attained, the Company in succeeding
quarters, will provide an additional matching contribution of 1% of the
employee's quarterly compensation up to a maximum quarterly matching
contribution not to exceed 5% of compensation. However, the Company's total
matching contribution per participant has a quarterly limit of $500. The
Company's contribution amounted to approximately $4,990 in 1997, $3,836 in
1996 and $3,124 in 1995, pursuant to this formula.
Costs associated with certain postretirement or postemployment benefit plans
that exist in certain foreign subsidiaries as required by law are not
significant.
J. COMMITMENTS AND LONG-TERM OBLIGATIONS
Operating Lease Commitments
The Company leases office and warehouse facilities under various operating
leases. Facilities rent expense amounted to $14,432, $12,196, and $11,095 in
1997, 1996 and 1995, respectively. The Company's commitments under its
operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR LEASES
----------- ---------
<S> <C>
1998............................................................. $ 48,873
1999............................................................. 24,877
2000............................................................. 11,439
2001............................................................. 8,062
2002............................................................. 7,111
Thereafter....................................................... 9,197
--------
Total minimum lease payments..................................... $109,559
========
</TABLE>
Lines of Credit
EMC has a line of credit providing a maximum of $50,000 at LIBOR plus 30
basis points. At December 31, 1997 and 1996, there were no borrowings
outstanding. The Company must maintain certain minimum financial ratios
including a minimum level of working capital and tangible net worth upon
utilization of the line of credit.
36
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3 1/4% Notes
In March 1997, the Company sold $517,500 of 3 1/4% convertible subordinated
notes due 2002 (the "3 1/4% Notes"). The 3 1/4% Notes are generally
convertible into shares of Common Stock at a conversion price of $22.655 per
share, subject to adjustment in certain events. Interest is payable
semiannually and the 3 1/4% Notes are redeemable at the option of the Company
at set redemption prices (which range from 100.65% to 101.30% of principal),
plus accrued interest, commencing March 15, 2000.
4 1/4% Notes
The 4 1/4% Notes, issued by EMC in December 1993 and January 1994 in an
amount totaling $230 million, were generally convertible into shares of Common
Stock of the Company at any time prior to the redemption date at a conversion
price of $9.92 per share. On January 2, 1997, the Company paid approximately
sixty-five thousand dollars to redeem the 4 1/4% Notes outstanding and
converted the remainder into Common Stock.
Long-Term Obligations
The Company has a $14,000 mortgage collateralized by a U.S. facility. The
mortgage is payable in monthly installments, calculated on a 30-year
amortization schedule at 10.5%, with a lump sum payment of approximately
$12,835 due on April 1, 1999.
IDA Grant
The Industrial Development Authority ("IDA") of Ireland has granted the
Company a total of $5,189 towards the purchase price and improvements to the
Company's facility in Ireland. The grants are included in long-term
obligations and are amortized over the related estimated useful lives of the
assets purchased of twenty-five years for building improvements and seven
years for equipment. Remaining unamortized grants at December 31, 1997 are
$4,230, of which $324 is current and $3,906 is long-term.
Purchase of Patent Portfolio
In February 1996, the Company acquired a patent portfolio valued at $40
million. Payments of $12 million have been made to date with the remainder due
in annual installments over five years. The asset is being amortized over the
remaining estimated useful life of approximately two years and is included in
intangible and other assets, net. Accumulated amortization at December 31,
1997 and 1996 was approximately $16,333 and $7,333, respectively.
Payments remaining on the above commitments and other noncurrent liabilities
(excluding the IDA grant) are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1998.............................................................. $11,491
1999.............................................................. 20,982
2000.............................................................. 7,644
2001.............................................................. 7,583
2002.............................................................. 332
-------
Total minimum payments............................................ 48,032
Less amounts representing interest................................ 3,643
-------
Present value of net payments..................................... 44,389
Current portion................................................... 7,341
-------
Long-term portion................................................. $37,048
=======
</TABLE>
37
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Minority Interest
On October 1, 1997, the Company reorganized McDATA into a new McDATA
Corporation ("New McDATA") and McDATA Holdings Corporation ("McDATA
Holdings"). New McDATA designs, develops and markets fibre channel solutions
for switched enterprise environments. McDATA Holdings, a wholly-owned
subsidiary of EMC, is currently the majority shareholder in New McDATA. New
McDATA is also currently performing services under the ESCON OEM Agreement
with IBM on behalf of McDATA Holdings. The minority interest amounts are
included in other liabilities and other income/(expense), net.
K. STOCKHOLDERS' EQUITY
Stock Split
On October 21, 1997 the Company announced a 2-for-1 stock split in the form
of a 100% stock dividend with a record date of October 31, 1997 and a
distribution date of November 17, 1997. Share and per share amounts have been
restated to reflect the stock split for all periods presented.
Net Income Per Share
Net income for computation of diluted EPS includes an add back of $8,101,
$5,296 and $6,224 in 1997, 1996 and 1995, respectively, representing interest
expense on the Company's convertible debt securities outstanding in each
period, net of its tax effect.
Calculation of per share earnings is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
BASIC:
Net income..................... $ 538,528 $ 386,229 $ 326,845
Weighted average common shares
outstanding................... 493,697,926 463,547,582 450,628,628
Net income per share, basic.... $ 1.09 $ 0.83 $ 0.73
============ ============ ============
DILUTED:
Net income..................... $ 538,528 $ 386,229 $ 326,845
Add back of interest expense on
convertible notes............. 13,502 8,827 10,373
Less tax effect of interest
expense on convertible notes.. (5,401) (3,531) (4,149)
------------ ------------ ------------
Net income for calculating
diluted earnings per share.... $ 546,629 $ 391,525 $ 333,069
Weighted average common shares
outstanding................... 493,697,926 463,547,582 450,628,628
Weighted common stock
equivalents................... 31,801,719 35,042,840 45,908,586
------------ ------------ ------------
Total weighted average shares.. 525,499,645 498,590,422 496,537,214
Net income per share, diluted.. $ 1.04 $ 0.79 $ 0.67
============ ============ ============
</TABLE>
Preferred Stock
The Company's Series Preferred Stock may be issued from time to time in one
or more series, with such terms as the Board of Directors may determine,
without further action by the stockholders of the Company.
38
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Common Stock Repurchase Program
In January 1996, the Company's Board of Directors authorized the repurchase
of up to 30 million shares of the Company's Common Stock over a five year
period. At December 31, 1996, the Company had repurchased 2.6 million shares
of Common Stock for approximately $27,000, all of which has been reissued in
connection with stock option exercises. In November 1996, the Company's Board
of Directors announced the rescission of the program.
Stock Option Plans
The Board of Directors and stockholders adopted the EMC Corporation 1993 and
1985 Stock Option Plans (the "1993 Plan" and the "1985 Plan," respectively) to
provide qualified incentive stock options and nonqualified stock options to
key employees. A total of 28 million and 72 million shares of Common Stock
have been reserved for issuance under the 1993 Plan and the 1985 Plan,
respectively.
Under the terms of the 1993 Plan and the 1985 Plan, the exercise price of
incentive stock options issued must be equal to at least the fair market value
of the Common Stock at the date of grant. In the event that nonqualified stock
options are granted under the 1993 Plan, the exercise price may be less than
the fair market value at the time of grant but not less than par value which
is $.01 per share. In the event that nonqualified stock options are granted
under the 1985 Plan, the exercise price may be less than the fair market value
at the time of grant, but in the case of employees not subject to Section 16
of the Securities Exchange Act of 1934 ("Section 16") not less than par value
which is $.01 per share, and in the case of employees subject to Section 16,
not less than 50% of the fair market value at the time of grant. Since May
1995, no new incentive stock options have been available for grant under the
1985 Plan.
In 1997, options to purchase 500,000 shares at $12.23 and 400,000 shares at
$27.56 were granted to executive officers representing 50% and 90%,
respectively, of the per share fair market value at the date of grant. In
1996, options to purchase 500,000 shares of Common Stock at $4.625 were
granted to an executive officer, representing 50% of the per share fair market
value at the date of grant. In 1994, options to purchase 10,000 shares of
Common Stock at $4.97 were granted to an employee, representing 50% of the per
share fair market value at the date of grant. Discounts from fair market value
have been recorded as deferred compensation and are being amortized over the
five year vesting periods of the options.
The 1992 EMC Corporation Stock Option Plan for Directors (the "Directors
Plan") was adopted by the stockholders in May 1992. A total of 3.6 million
shares of Common Stock have been reserved for issuance under the Directors
Plan. The exercise price for each option granted under the Directors Plan will
be at a price per share determined at the time the option is granted, but not
less than 50% of the per share fair market value of Common Stock at the date
of grant.
In 1997, options to purchase 160,000 shares of Common Stock at $12.23 were
granted to two directors, representing 50% of the per share fair market value
at the date of grant. In 1996, options to purchase one million shares of
Common Stock at $4.625 were granted to a director, representing 50% of the per
share fair market value at the date of grant. In 1995, options to purchase
160,000 shares of Common Stock at $3.405 were granted to two directors,
representing 50% of the per share fair market value at the date of grant.
Discounts from fair market value have been recorded as deferred compensation
and are being amortized over the three year vesting period of the options.
Generally, when shares acquired pursuant to the exercise of incentive stock
options are sold within one year of exercise or within two years from the date
of grant, the Company derives a tax deduction measured by the
39
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
amount that the fair market value exceeds the option price at the date the
options are exercised. When nonqualified stock options are exercised, the
Company derives a tax deduction measured by the amount that the fair market
value exceeds the option price at the date the options are exercised.
As of December 31, 1997, options exercisable under the 1993 Plan, the 1985
Plan and the Directors Plan (the "Plans") approximated 7,402,806 and shares
available for future option grants approximated 8,521,914. Options become
exercisable in equal annual installments over either three or five years after
the date of grant and expire after ten years.
Supplemental Disclosures for Stock-Based Compensation
Activity under the Plans for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
WTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
---------- ---------
<S> <C> <C>
Outstanding, December 31, 1994....................... 31,570,414 $ 3.12
Options Relating to McDATA Merger.................... 986,774 0.43
Granted.............................................. 5,629,006 10.66
Canceled............................................. (2,830,086) 6.27
Exercised............................................ (8,327,414) 1.29
---------- ------
Outstanding, December 30, 1995....................... 27,028,694 4.83
Granted.............................................. 8,427,938 8.64
Canceled............................................. (1,371,122) 8.68
Exercised............................................ (9,220,344) 2.35
---------- ------
Outstanding, December 31, 1996....................... 24,865,166 6.80
Granted.............................................. 8,406,194 23.42
Canceled............................................. (930,650) 9.66
Exercised............................................ (5,329,276) 4.95
---------- ------
Outstanding, December 31, 1997....................... 27,011,434 $12.24
========== ======
</TABLE>
Summarized information about stock options outstanding at December 31, 1997
is as follows:
<TABLE>
<CAPTION>
EXERCISABLE
------------------
WEIGHTED
AVG. WEIGHTED WEIGHTED
NUMBER OF REMAINING AVG. AVG.
RANGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
--------------- ----------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.14- 1.86 3,050,817 4.5 $ 0.92 2,900,426 $ 0.94
3.23- 5.72 2,427,358 7.1 4.21 810,804 4.08
6.21- 9.25 8,636,728 7.5 8.48 2,562,712 8.05
9.31-13.25 5,242,701 7.8 10.99 1,128,864 10.84
17.31-30.63 7,653,830 9.4 24.40 -- --
</TABLE>
Options exercisable at December 31, 1997 and December 31, 1996 were
7,402,806 and 4,559,994, respectively.
40
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The fair value of each option granted during 1997 and 1996 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend yield........................................... none none none
Expected volatility...................................... 45.0% 45.0% 50.0%
Risk-free interest rate.................................. 6.1% 6.5% 6.3%
Expected life............................................ 5.0 5.0 5.0
</TABLE>
Weighted average fair value of options granted at fair market value during:
<TABLE>
<S> <C>
1997................................................................... $11.53
======
1996................................................................... $ 4.58
======
1995................................................................... $ 5.52
======
</TABLE>
Weighted average fair value of options granted below fair market value during:
<TABLE>
<S> <C>
1997................................................................... $16.17
======
1996................................................................... $ 6.32
======
1995................................................................... $ 4.69
======
</TABLE>
Had compensation cost for the Company's 1997, 1996 and 1995 stock option
grants and employee stock purchase plan issuances been determined consistent
with SFAS 123, the Company's net income and net income per share would
approximate the pro forma amounts below:
<TABLE>
<CAPTION>
NET INCOME PER NET INCOME PER
NET INCOME SHARE, DILUTED SHARE, BASIC
---------- -------------- --------------
<S> <C> <C> <C>
As reported:
1997............................ $538,528 $1.04 $1.09
1996............................ $386,229 $0.79 $0.83
1995............................ $326,845 $0.67 $0.73
Pro forma:
1997............................ $520,506 $1.01 $1.05
1996............................ $378,336 $0.77 $0.82
1995............................ $323,200 $0.66 $0.72
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards made prior to
1995. Additional awards in future years are anticipated.
Employee Stock Purchase Plan
In January 1989, the Board of Directors adopted the 1989 Employee Stock
Purchase Plan (the "1989 Plan"). Under the 1989 Plan, eligible employees of
the Company may purchase shares of Common Stock, through payroll deductions,
at the lower of 85% of fair market value of the stock at the time of grant or
85% of fair market value at the time of exercise. A total of 9.8 million
shares have been reserved for issuance under the 1989 Plan. Shares are granted
twice yearly, on January 1 and July 1, and are exercisable on the succeeding
June 30 or December 31. The Company issued 603,342, 1,358,354 and 279,196
shares in 1997, 1996 and 1995, respectively. The weighted average fair values
of options granted under the 1989 Plan during 1997, 1996 and 1995 were $5.15,
$2.32 and $3.27, respectively.
41
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
L. LITIGATION
On August 20, 1997, TM Patents, L.P. ("TM") filed suit against the Company
in the United States District Court for the Southern District of New York
alleging that the Company is infringing two patents and seeking unspecified
damages. The Company filed a motion to transfer the case to the United States
District Court for the District of Massachusetts and a motion to dismiss the
suit. The Company's motion to transfer was granted with leave for the
plaintiff to replead its suit. In the suit refiled in Massachusetts, TM
alleged infringement only as to one of the two patents originally at issue.
The Company believes TM's claims are without merit.
On December 12, 1997, NewFrame Corporation Ltd. ("NewFrame") filed suit
against the Company in the United States District Court for the District of
Massachusetts. The suit contains a variety of allegations relating to the
Company's use of NewFrame's software developments, including various contract
claims and breach of fiduciary duty, and seeks monetary damages relating
primarily to lost future profits. The Company has filed a motion to dismiss.
The Company believes NewFrame's claims are without merit.
In January 1998, Storage Technology Corporation ("STK") filed suit against
the Company in the United States District Court for the Northern District of
California alleging that the Company is infringing one patent and seeking
unspecified damages. The Company has answered and counterclaimed. The Company
believes STK's claims are without merit.
The Company is a party to other litigation which it considers routine and
incidental to its business. Management does not expect the results of any of
these actions to have a material adverse effect on the Company's business,
results of operation or financial condition.
M. FINANCIAL INSTRUMENTS
Off-Balance-Sheet Risk
The Company enters into foreign currency forward and option contracts to
hedge foreign currency cash flows on a continuing basis for periods consistent
with its committed and anticipated exposures. The Company does not engage in
currency speculation. The maximum amount of foreign currency contracts
outstanding during 1997 and 1996 was $531,166 and $257,401, respectively.
The Company uses forward exchange contracts to hedge its net asset (balance
sheet) position and marks these hedges to market to offset gains and losses on
the financial statements resulting from the revaluation of the underlying
assets and liabilities. At December 31, 1997 and 1996, the Company had
$309,970 and $257,401 of forward exchange contracts outstanding, respectively.
The Company uses option contracts to hedge a portion of anticipated but not
committed cash flows. The Company defers the recording of any gain or loss
from these hedges until the underlying transaction has been realized. Deferred
unrealized gains were not material at December 31, 1997. At December 31, 1997,
the Company had $90,000 of foreign currency options outstanding. There were no
outstanding option contracts at December 31, 1996.
Fair Value
The carrying amounts reflected in the consolidated balance sheets for cash
and cash equivalents, investments, accounts receivable, current portion of
long term debt, and accounts payable approximate fair value due to the short
maturities of these instruments.
42
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The carrying and estimated fair values of the 3 1/4% Notes were $517,500 and
$631,350, respectively. The fair value of the 3 1/4% Notes was based on the
closing price as of December 31, 1997.
N. RISKS AND UNCERTAINTIES
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating
results and cause actual results to vary materially from expectations include,
but are not limited to, the uneven pattern of quarterly results, competition,
competitive pricing pressures, dependence on suppliers, new products, changes
in regulations, manufacturing risks, reliance on indirect channels of
distribution, alliances, international sales, management of growth, dependence
upon key personnel, enforcement of the Company's intellectual property rights,
future acquisitions and Year 2000 issues.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments, short and long-term investments and trade and notes receivable.
The Company places its temporary cash investments and short and long-term
investments in investment grade instruments and limits the amount of
investment with any one financial institution. The credit risk associated with
trade receivables is minimal due to the large number of customers and their
broad dispersion over many different industries and geographic areas.
HP represented 17% and 13% of the Company's total revenues in 1997 and 1996,
respectively. During 1995, no single customer accounted for greater than 10%
of the Company's revenues.
O. SEGMENT INFORMATION
The Company is active in primarily one business segment: designing,
manufacturing, marketing and supporting a wide range of storage-related
hardware and software products and related services. Sales and marketing
operations outside the U.S. are conducted through sales subsidiaries and
branches located principally in Europe and the Asia Pacific region. The U.S.
market amounted to greater than 95% of the Company's sales, income and
identifiable assets in the North/South America segment for 1997, 1996 and
1995.
Intercompany transfers between geographic areas are accounted for at prices
which are designed to be representative of unaffiliated party transactions.
43
<PAGE>
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
EUROPE,
NORTH/SOUTH MIDDLE EAST, ASIA CONSOLIDATED
AMERICA AFRICA PACIFIC ELIMINATIONS TOTAL
----------- ------------ -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1997
Sales................... $1,801,770 $ 965,359 $170,731 $ -- $2,937,860
Transfers between
areas.................. 49,494 155,214 -- (204,708) --
---------- ---------- -------- --------- ----------
Total sales............. 1,851,264 1,120,573 170,731 (204,708) 2,937,860
Income (loss) from
operations............. 406,335 266,788 (9,115) (2,096) 661,912
Identifiable assets at
year end............... 2,653,063 977,996 124,075 (265,025) 3,490,109
1996
Sales................... $1,441,935 $ 687,350 $144,367 $ -- $2,273,652
Transfers between
areas.................. 72,813 159,605 -- (232,418) --
---------- ---------- -------- --------- ----------
Total sales............. 1,514,748 846,955 144,367 (232,418) 2,273,652
Income (loss) from
operations............. 334,547 167,964 (3,851) (2,119) 496,541
Identifiable assets at
year end............... 1,749,221 703,929 104,210 (263,814) 2,293,546
1995
Sales................... $1,230,223 $ 567,303 $123,749 $ -- $1,921,275
Transfers between
areas.................. 134,073 141,003 10 (275,086) --
---------- ---------- -------- --------- ----------
Total sales............. 1,364,296 708,306 123,759 (275,086) 1,921,275
Income from operations.. 264,168 176,293 1,805 (6,487) 435,779
Identifiable assets at
year end............... 1,669,928 144,081 77,923 (146,203) 1,745,729
</TABLE>
P. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Q1 1997 Q2 1997 Q3 1997 Q4 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1997
Net sales, service and rental.............. $618,437 $713,461 $732,570 $873,392
Gross profit............................... 282,452 328,916 341,292 414,188
Net income................................. 110,868 128,799 132,622 166,239
Net income per share, (diluted)............ $ 0.22 $ 0.25 $ 0.25 $ 0.32
<CAPTION>
Q1 1996 Q2 1996 Q3 1996 Q4 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1996
Net sales, service and rental.............. $521,487 $545,017 $550,754 $656,394
Gross profit............................... 228,323 240,076 244,316 311,987
Net income................................. 84,545 87,054 90,347 124,283
Net income per share, (diluted)............ $ 0.17 $ 0.18 $ 0.18 $ 0.25
</TABLE>
On September 23, 1996, EMC elected to change its fiscal year end from a
fiscal basis which would have ended on December 28, 1996 to a calendar basis
ending on December 31, 1996. The effect on the Company's results of operations
was not material.
44
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company will furnish to the Securities and Exchange Commission a
definitive Proxy Statement (the "Proxy Statement") not later than 120 days
after the close of the fiscal year ended December 31, 1997. The information
required by this item is incorporated herein by reference to the Proxy
Statement. Also see "Executive Officers of the Registrant" in Part I of this
form.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the Proxy Statement.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)
1. Financial Statements
The financial statements listed in the accompanying Index to Consolidated
Financial Statements and Schedule on page 49 are filed as part of this
report.
2. Schedule
The schedule listed in the accompanying Index to Consolidated Financial
Statements and Schedule on page 49 is filed as part of this report.
3. Exhibits
See Index to Exhibits on page 50 of this report.
The exhibits are filed with or incorporated by reference in this report.
(b) Reports on Form 8-K.
On October 22, 1997, the registrant filed a report (Date of Report: October
22, 1997) on Form 8-K reporting, under Item 5, a 2-for-1 stock split in the
form of a 100% stock dividend with a record date of October 31, 1997, a
broker's cut off date of November 7, 1997 and a distribution date of November
17, 1997.
46
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, EMC CORPORATION HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON MARCH 6, 1998.
EMC CORPORATION
Richard J. Egan
By: _________________________________
RICHARD J. EGAN
CHAIRMAN OF THE BOARD
47
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES ON THE DATE INDICATED AS OF MARCH 6, 1998.
SIGNATURE TITLE
Richard J. Egan Chairman of the Board (Principal
- ------------------------------------- Executive Officer) and Director
RICHARD J. EGAN
Michael C. Ruettgers President and Chief Executive Officer
- ------------------------------------- and Director
MICHAEL C. RUETTGERS
John R. Egan Executive Vice President, Products and
- ------------------------------------- Offerings and Director
JOHN R. EGAN
Colin G. Patteson Senior Vice President, Chief
- ------------------------------------- Administrative Officer and Treasurer
COLIN G. PATTESON (Principal Financial Officer)
William J. Teuber, Jr. Vice President and Chief Financial
- ------------------------------------- Officer (Principal Accounting Officer)
WILLIAM J. TEUBER, JR.
Michael J. Cronin Director
- -------------------------------------
MICHAEL J. CRONIN
John F. Cunningham Director
- -------------------------------------
JOHN F. CUNNINGHAM
Maureen E. Egan Director
- -------------------------------------
MAUREEN E. EGAN
W. Paul Fitzgerald Director
- -------------------------------------
W. PAUL FITZGERALD
Joseph F. Oliveri Director
- -------------------------------------
JOSEPH F. OLIVERI
48
<PAGE>
EMC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS
<TABLE>
<CAPTION>
FORM 10-K
---------
<S> <C>
Report of Independent Accountants.................................... p. 23
Consolidated Balance Sheets at December 31, 1997 and December 31,
1996................................................................ p. 24
Consolidated Statements of Income for the years ended December 31,
1997, December 31, 1996 and December 30, 1995....................... p. 25
Consolidated Statements of Cash Flows for the years ended December
31, 1997, December 31, 1996 and December 30, 1995................... p. 26
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, December 31, 1996 and December 30, 1995.......... p. 27
Notes to Consolidated Financial Statements........................... pp. 28-44
Schedule:
Schedule II--Valuation and Qualifying Accounts..................... p. S-1
</TABLE>
Note: All other financial statement schedules are omitted because they are not
applicable or the required information is included in the financial
statements or notes thereto.
49
<PAGE>
The exhibits listed below are filed with or incorporated by reference in this
report.
<TABLE>
<C> <S>
3.1 Articles of Organization of EMC Corporation./1/
3.2 Articles of Amendment filed February 26, 1986./1/
3.3 Articles of Amendment filed April 2, 1986./1/
3.4 Articles of Amendment filed May 13, 1987./2/
3.5 Articles of Amendment filed June 19, 1992./3/
3.6 Articles of Amendment filed May 12, 1993./4/
3.7 Articles of Amendment filed November 12, 1993./5/
3.8 Articles of Amendment filed May 10, 1995./6/
3.9 Articles of Amendment filed May 7, 1997./7/
3.10 By-laws of EMC Corporation, as amended on July 21, 1995./8/
4.1 Form of Stock Certificate./9/
4.2 Indenture, dated as of March 11, 1997 between EMC Corporation and
State Street Bank and Trust Company, Trustee./10/
4.3 Form of 3 1/4% Convertible Subordinated Note due 2002./10/
10.1 EMC Corporation 1985 Stock Option Plan, as amended./11/
10.2 EMC Corporation 1989 Employee Stock Purchase Plan, as amended (filed
herewith).
10.3 EMC Corporation 1992 Stock Option Plan for Directors, as
amended./11/
10.4 EMC Corporation 1993 Stock Option Plan, as amended (filed herewith).
10.5 McDATA Corporation 1997 Stock Option Plan (filed herewith).
21.1 Subsidiaries of Registrant (filed herewith).
23.1 Consent of Independent Accountants dated March 6, 1998 (filed
herewith).
</TABLE>
- --------
/1/ Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-3656).
/2/ Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-17218).
/3/ Incorporated by reference to the Company's Annual Report on Form 10-K filed
February 12, 1993.
/4/ Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-67224).
/5/ Incorporated by reference to the Company's Current Report on Form 8-K filed
November 19, 1993.
/6/ Incorporated by reference to the Company's Current Report on Form 8-K filed
May 26, 1995.
/7/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed May 14, 1997.
/8/ Incorporated by reference to the Company's Quarterly Report on Form 10-K
filed August 11, 1995.
/9/ Incorporated by reference to the Company's Annual Report on Form 10-K filed
March 31, 1988.
/10/ Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-24901).
/11/ Incorporated by reference to the Company's Annual Report on Form 10-K filed
February 27, 1997.
50
<PAGE>
EMC CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997 Allowance for
doubtful accounts..... $7,368 $1,842 -- $(2,437) $6,773
Year ended December 31,
1996 Allowance for
doubtful accounts..... $7,062 $1,927 -- $(1,621) $7,368
Year ended December 30,
1995 Allowance for
doubtful accounts..... $6,272 $2,435 -- $(1,645) $7,062
</TABLE>
S-1
<PAGE>
Exhibit 10.2
EMC CORPORATION
1989 EMPLOYEE STOCK PURCHASE PLAN, as amended January 21, 1998
Section 1. Purpose of Plan
The EMC Corporation 1989 Employee Stock Purchase Plan (the "Plan") is
intended to provide a method by which eligible employees of EMC Corporation and
its subsidiaries (collectively, the "Company") may use voluntary, systematic
payroll deductions to purchase the Company's common stock, $.01 par value,
("stock") and thereby acquire an interest in the future of the Company. For
purposes of the Plan, a subsidiary is any corporation in which the Company owns,
directly or indirectly, stock possessing 50% or more of the total combined
voting power of all classes of stock unless the Board of Directors of the
Company (the "Board of Directors") determines that employees of a particular
subsidiary shall not be eligible.
Section 2. Options to Purchase Stock
Under the Plan as now amended, no more than 9,800,000 shares are available
for purchase (subject to adjustment as provided in Section 16) pursuant to the
exercise of options ("options") granted under the Plan to employees of the
Company ("employees"). The stock to be delivered upon exercise of options under
the Plan may be either shares of the Company's authorized but unissued stock, or
shares of reacquired stock, as the Board of Directors shall determine.
Section 3. Eligible Employees
Except as otherwise provided in Section 20, each employee who has completed
six months or more of continuous service in the employ of the Company shall be
eligible to participate in the Plan.
Section 4. Method of Participation
The periods January 1 to June 30 and July 1 to December 31 of each year
shall be option periods. Each person who will be an eligible employee on the
first day of any option period may elect to participate in the Plan by executing
and delivering, at least 15 days prior to such day, a payroll deduction
authorization in accordance with Section 5. Such employee shall thereby become
a participant ("participant") on the first day of such option period and shall
remain a participant until his or her participation is terminated as provided in
the Plan.
<PAGE>
Section 5. Payroll Deductions
The payroll deduction authorization shall request withholding, at a rate of
not less than 2% nor more than 10% from the participant's compensation (subject
to a maximum of $2,500 per option period), by means of substantially equal
payroll deductions over the option period; provided, however, that in the event
-------- -------
any amount remaining in a participant's withholding account at the end of an
option period (which would be equal to a fractional share) is rolled over to the
opening balance in a participant's withholding account for the next option
period pursuant to Section 8 below (a "rollover"), such amount will be applied
to the last payroll deduction for the next option period, thereby reducing the
amount of that payroll deduction; further provided that the maximum of $2,500
----------------
per option period shall be reduced by the amount of any rollover. For purposes
of the Plan, "compensation" shall mean all cash compensation paid to the
participant by the Company. A participant may change the withholding rate of
his or her payroll deduction authorization by written notice delivered to the
Company at least 15 days prior to the first day of the option period as to which
the change is to be effective. All amounts withheld in accordance with a
participant's payroll deduction authorization shall be credited to a withholding
account for such participant.
Section 6. Grant of Options
Each person who is a participant on the first day of an option period shall
as of such day be granted an option for such period. Such option shall be for
the number of shares of stock to be determined by dividing (a) the balance in
the participant's withholding account on the last day of the option period by
(b) the purchase price per share of the stock determined under Section 7, and
eliminating any fractional share from the quotient. In the event that the
number of shares then available under the Plan is otherwise insufficient, the
Company shall reduce on a substantially proportionate basis the number of shares
of stock receivable by each participant upon exercise of his or her option for
an option period and shall return the balance in a participant's withholding
account to such participant.
Section 7. Purchase Price
The purchase price of stock issued pursuant to the exercise of an option
shall be 85% of the fair market value of the stock at (a) the time of grant of
the option or (b) the time at which the option is deemed exercised, whichever is
less. Fair market value shall be determined in accordance with the applicable
provisions of the Internal Revenue Code of 1986, as amended or restated from
time to time (the "Code"), or regulations issued thereunder, or, in the absence
of any such provisions or regulations, shall be deemed to be the last sale price
at which the stock is traded on the day in question or the last prior date on
which a trade occurred as reported in The Wall Street Journal; or, if The Wall
----------------------- --------
Street Journal is not published or does not list the stock, then in such other
- --------------
appropriate newspaper of general circulation as the Board of Directors
2
<PAGE>
may prescribe; or, if the last price at which the stock traded is not generally
reported then the mean between the reported bid and asked prices at the close of
the market on the day in question or the last prior date when such prices were
reported.
Section 8. Exercise of Options
If an employee is a participant in the Plan on the last business day of an
option period, he or she shall be deemed to have exercised the option granted to
him or her for that period. Upon such exercise, the Company shall apply the
balance of the participant's withholding account to the purchase of the number
of whole shares of stock determined under Section 6, and as soon as practicable
thereafter shall issue and deliver certificates for said shares to the
participant. The balance, if any, of the participant's withholding account in
excess of the total purchase price of the whole shares so issued shall be
applied to the opening balance in his or her withholding account for the next
option period. No fractional shares shall be issued hereunder.
Notwithstanding anything herein to the contrary, the Company shall not be
obligated to deliver any shares unless and until, in the opinion of the
Company's counsel, all requirements of applicable federal and state laws and
regulations (including any requirements as to legends) have been complied with,
nor, if the outstanding stock is at the time listed on any securities exchange,
unless and until the shares to be delivered have been listed (or authorized to
be added to the list upon official notice of issuance) upon such exchange, nor
unless or until all other legal matters in connection with the issuance and
delivery of shares have been approved by the Company's counsel.
Section 9. Interest
No interest will be payable on withholding accounts.
Section 10. Cancellation and Withdrawal
A participant who holds an option under the Plan may at any time prior to
exercise thereof under Section 8 cancel all (but not less than all) of his or
her option by written notice delivered to the Company. Upon such cancellation,
the balance in his or her withholding account shall be returned to him or her.
A participant may terminate his or her payroll deduction authorization as
of any date by written notice delivered to the Company and shall thereby cease
to be a participant as of such date. Any participant who voluntarily terminates
his or her payroll deduction authorization prior to the last business day of an
option period shall be deemed to have cancelled his or her option.
3
<PAGE>
Section 11. Termination of Employment
Except as otherwise provided in Section 12, upon the termination of a
participant's employment with the Company for any reason whatsoever, he or she
shall cease to be a participant, and any option held by him or her under the
Plan shall be deemed cancelled, the balance of his or her withholding account
shall be returned to him or her, and he or she shall have no further rights
under the Plan. For purposes of this Section 11, a participant's employment
will not be considered terminated in the case of sick leave or other bona fide
leave of absence approved for purposes of this Plan by the Company or a
subsidiary or in the case of a transfer to the employment of a subsidiary or to
the employment of the Company.
Section 12. Death or Retirement of Participant
In the event a participant holds any option hereunder at the time his or
her employment with the Company is terminated (1) by his or her retirement with
the consent of the Company, and such retirement is within three months of the
time such option becomes exercisable, or (2) by his or her death, whenever
occurring, then such participant (or his or her legal representative), may, by a
writing delivered to the Company on or before the date such option is
exercisable, elect either (a) to cancel any such option and receive in cash the
balance in his or her withholding account, or (b) to have the balance in his or
her withholding account applied as of the last day of the option period to the
exercise of his or her option pursuant to Section 8, and have the balance, if
any, in such account in excess of the total purchase price of the whole shares
so issued returned in cash. In the event such participant (or his or her legal
representative) does not file a written election as provided above, any
outstanding option shall be treated as if an election had been filed pursuant to
subparagraph 12(a) above.
Section 13. Participant's Rights Not Transferable, etc.
All participants granted options under the Plan shall have the same rights
and privileges. Each participant's rights and privileges under any option
granted under the Plan shall be exercisable during his or her lifetime only by
him or her, and shall not be sold, pledged, assigned, or otherwise transferred
in any manner whatsoever except by will or the laws of descent and distribution.
In the event any participant violates the terms of this Section, any options
held by him or her may be terminated by the Company and, upon return to the
participant of the balance of his or her withholding account, all his or her
rights under the Plan shall terminate.
4
<PAGE>
Section 14. Employment Rights
Neither the adoption of the Plan nor any of the provisions of the Plan
shall confer upon any participant any right to continued employment with the
Company or a subsidiary or affect in any way the right of the Company to
terminate the employment of such participant at any time.
Section 15. Rights as a Shareholder
A participant shall have the rights of a shareholder only as to stock
actually acquired by him or her under the Plan.
Section 16. Change in Capitalization
In the event of a stock dividend, stock split or combination of shares,
recapitalization, merger in which the Company is the surviving corporation or
other change in the Company's capital stock, the number and kind of shares of
stock or securities of the Company to be subject to the Plan and to options then
outstanding or to be granted hereunder, the maximum number of shares or
securities which may be delivered under the Plan, the option price and other
relevant provisions shall be appropriately adjusted by the Board of Directors,
whose determination shall be binding on all persons. In the event of a
consolidation or merger in which the Company is not the surviving corporation or
in the event of the sale or transfer of substantially all the Company's assets
(other than by the grant of a mortgage or security interest), all outstanding
options shall thereupon terminate, provided that prior to the effective date of
any such merger, consolidation or sale of assets, the Board of Directors shall
either (a) return the balance in all withholding accounts and cancel all
outstanding options, or (b) accelerate the exercise date provided for in Section
8, or (c) if there is a surviving or acquiring corporation, arrange to have that
corporation or an affiliate of that corporation grant to the participants
replacement options having equivalent terms and conditions as determined by the
Board of Directors.
Section 17. Administration of Plan
The Plan will be administered by the Board of Directors. The Board of
Directors will have authority, not inconsistent with the express provisions of
the Plan, to take all action necessary or appropriate hereunder, to interpret
its provisions, and to decide all questions and resolve all disputes which may
arise in connection therewith. Such determinations of the Board of Directors
shall be conclusive and shall bind all parties.
The Board may, in its discretion, delegate its powers with respect to the
Plan to an Employee Benefit Plan Committee or any other committee (the
"Committee"), in which event all references to the Board of Directors hereunder,
including without limitation the references in Section 17, shall be deemed to
refer to the Committee. A
5
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majority of the members of any such Committee shall constitute a quorum, and all
determinations of the Committee shall be made by a majority of its members. Any
determination of the Committee under the Plan may be made without notice or
meeting of the Committee by a writing signed by a majority of the Committee
members.
Section 18. Amendment and Termination of Plan
The Board of Directors may at any time or times amend the Plan or amend any
outstanding option or options for the purpose of satisfying the requirements of
any changes in applicable laws or regulations or for any other purpose which may
at the time be permitted by law, provided that (except to the extent explicitly
required or permitted herein) no such amendment will, without the approval of
the shareholders of the Company, (a) increase the maximum number of shares
available under the Plan, (b) reduce the option price of outstanding options or
reduce the price at which options may be granted, (c) change the conditions for
eligibility under the Plan, or (d) amend the provisions of this Section 18 of
the Plan, and no such amendment will adversely affect the rights of any
participant (without his or her consent) under any option theretofore granted.
The Plan may be terminated at any time by the Board of Directors, but no
such termination shall adversely affect the rights and privileges of holders of
the outstanding options.
Section 19. Approval of Shareholders
The Plan shall be subject to the approval of the shareholders of the
Company, which approval shall be secured within twelve months after the date the
Plan is adopted by the Board of Directors. Notwithstanding any other provisions
of the Plan, no option shall be exercised prior to the date of such approval.
Section 20. Limitations
Notwithstanding any other provision of the Plan:
(a) An employee shall not be eligible to receive an option pursuant to the
Plan if, immediately after the grant of such option to him or her, he or she
would (in accordance with the provisions of Sections 423 and 425(d) of the Code)
own or be deemed to own stock possessing 5% or more of the total combined voting
power or value of all classes of stock of the employer corporation or of its
parent or subsidiary corporation, as defined in Section 425 of the Code.
(b) No employee shall be granted an option under this Plan that would
permit his or her rights to purchase shares of stock under this Plan of the
Company to accrue at a rate which exceeds $25,000 in fair market value of such
stock (determined at the
6
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time the option is granted) for each calendar year during which any such option
granted to such employee is outstanding at any time, as provided in Sections 423
and 425 of the Code.
(c) No employee shall be granted an option under this Plan that would
permit him or her to withhold more than $2,500 in each option period or $5,000
per calendar year, less the amount of any rollover.
(d) No employee whose customary employment is 20 hours or less per week
shall be eligible to participate in the Plan.*
(e) No independent contractor shall be eligible to participate in the
Plan.
*Subsection 20(d) is subject to stockholder approval at the Annual Meeting of
Stockholders to be held on May 6, 1998.
7
<PAGE>
Exhibit 10.4
EMC CORPORATION
1993 STOCK OPTION PLAN, as amended January 21, 1998
1. PURPOSE.
-------
The purpose of the EMC Corporation 1993 Stock Option Plan is to enable EMC
Corporation to provide a special incentive to a limited number of key employees
of the Company and its Subsidiaries, if any, who are in a position to have a
significant effect upon the Company's business and earnings. In order to
accomplish this purpose, the Plan authorizes the grant to such key employees of
options to purchase Common Stock of the Company. Increased ownership of Common
Stock will provide such key employees with an additional incentive to take into
account the long-term interests of the Company.
2. DEFINITIONS.
-----------
As used herein, the following words or terms have the meanings set forth
below. The masculine gender is used throughout the Plan but is intended to
apply to members of both sexes.
2.1 "Board of Directors" means the Board of Directors of the Company.
2.2 "Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor statute.
2.3 "Committee" means the Committee appointed by the Board of Directors to
administer the Plan or the Board of Directors as a whole if no appointment is
made.
2.4 "Common Stock" means the Common Stock of the Company.
2.5 "Company" means EMC Corporation, a corporation established under the
laws of The Commonwealth of Massachusetts.
2.6 "Fair Market Value" in the case of a share of Common Stock on a
particular day, means the fair market value as determined from time to time by
the Board of Directors or, where appropriate, by the Committee, taking into
account all information which the Board of Directors, or the Committee,
considers relevant.
2.7 "Incentive Stock Option" means a stock option that satisfies the
requirements of Section 422 of the Code.
2.8 "Participant" means an individual holding a stock option or stock
options granted to him under the Plan.
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<PAGE>
2.9 "Plan" means the EMC Corporation 1993 Stock Option Plan set forth
herein.
2.10 "Subsidiary" or "Subsidiaries" means a corporation or corporations in
which the Company owns, directly or indirectly, stock possessing 50 percent or
more of the total combined voting power of all classes of stock.
2.11 "Ten Percent Stockholder" means any person who, at the time an option
is granted, owns or is deemed to own stock (as determined in accordance with
Sections 422 and 424 of the Code) possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or its parent
or a subsidiary.
3. ADMINISTRATION.
--------------
3.1 The Plan shall be administered by the Committee and, to the extent
provided herein, the Board of Directors. A majority of the members of the
Committee shall constitute a quorum, and all determinations of the Committee
shall be made by a majority of its members. Any determination of the Committee
under the Plan may be made without notice or meeting of the Committee by a
writing signed by a majority of the Committee members.
3.2 Subject to the provisions set forth herein, each of the Committee and
the Board of Directors shall have full authority to determine the provisions of
options to be granted under the Plan. Subject to the provisions set forth
herein, the Committee shall have full authority to interpret the terms of the
Plan and of options granted under the Plan, to adopt, amend and rescind rules
and guidelines for the administration of the Plan and for its own acts and
proceedings and to decide all questions and settle all controversies and
disputes which may arise in connection with the Plan; provided, however, that
-------- -------
any change to the terms of an option granted hereunder shall be approved by the
Board of Directors to the extent such change would be deemed to be a new option
grant or such terms relate to a subsequent transaction that would not be exempt
from Section 16(b) of the Securities Exchange Act of 1934 in the absence of such
approval.
3.3 The decision of the Committee or the Board of Directors, as
applicable, on any matter as to which the Committee or the Board of Directors,
as applicable, is given authority under subsection 3.2 shall be final and
binding on all persons concerned.
3.4 Nothing in the Plan shall be deemed to give any officer or employee,
or his legal representatives or assigns, any right to participate in the Plan,
except to such
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<PAGE>
extent, if any, as the Committee or the Board, as applicable, may have
determined or approved pursuant to the provisions of the Plan.
4. SHARES SUBJECT TO THE PLAN.
--------------------------
4.1 The maximum number of shares of Common Stock that may be delivered
upon the exercise of options granted under the Plan shall be 31,500,000*,
subject to adjustment in accordance with the provisions of Section 8.
4.2 If any option granted under the Plan terminates without having been
exercised in full (including an option which terminates by agreement between the
Company and the Participant), or if shares of Common Stock are reacquired by the
Company upon the rescission of an exercise of an option, the number of shares of
Common Stock as to which an option has not been exercised prior to termination,
or have been reacquired upon the rescission of an option, shall be available for
future grants within the limits set forth in subsection 4.1.
4.3 Shares of Common Stock delivered upon the exercise of options shall
consist of shares of authorized and unissued Common Stock, except that the Board
of Directors may from time to time in its discretion determine in any case the
shares to be so delivered shall consist of shares of authorized and issued
Common Stock reacquired by the Company and held in its Treasury. No fractional
shares of Common Stock shall be delivered upon the exercise of an option.
5. ELIGIBILITY FOR OPTIONS.
-----------------------
Employees eligible to receive options under the Plan shall be those key
employees of the Company and its Subsidiaries, if any, who, in the opinion of
the Committee, are in a position to have a significant effect upon the Company's
business and earnings. Members of the Board of Directors of the Company or a
Subsidiary who are not employed as regular salaried officers or employees of the
Company or a Subsidiary may not participate in the Plan.
6. GRANT OF OPTIONS.
----------------
6.1 From time to time while the Plan is in effect, each of the Committee
and the Board of Directors may, in its absolute discretion, select from among
the persons eligible to receive options (including persons to whom options were
previously granted) those persons to whom options are to be granted.
*Subject to stockholder approval at the Annual Meeting of Stockholders to
be held on May 6, 1998.
Page 3 of 10
<PAGE>
6.2 Each of the Committee and the Board of Directors shall, in its
absolute discretion, determine the number of shares of Common Stock to be
subject to each option granted by it under the Plan.
6.3 No Incentive Stock Option may be granted under the Plan after May 12,
2003, but options theretofore granted may extend beyond that date.
7. PROVISIONS OF OPTIONS.
---------------------
7.1 Incentive Stock Options or Other Options. Options granted under the
----------------------------------------
Plan may be either Incentive Stock Options or options which do not qualify as
Incentive Stock Options, as the Committee or the Board of Directors shall
determine at the time of each grant of options hereunder.
7.2 Stock Option Certificates or Agreements. Options granted under the
---------------------------------------
Plan shall be evidenced by certificates or agreements in such form as the
Committee shall from time to time approve. Such certificates or agreements
shall comply with the terms and conditions of the Plan and may contain such
other provisions not inconsistent with the terms and conditions of the Plan as
the Committee shall deem advisable. In the case of options intended to qualify
as Incentive Stock Options, the certificates or agreements shall contain such
provisions relating to exercise and other matters as are required of incentive
stock options under the Code.
7.3 Terms and Conditions. All options granted under the Plan shall be
--------------------
subject to the following terms and conditions to the extent applicable and to
such other terms and conditions not inconsistent therewith as the Committee or
the Board of Directors shall determine:
7.3.1 Exercise Price. The exercise price per share of Common Stock
--------------
with respect to each option shall be as determined by the Committee but in
the case of an Incentive Stock Option not less than 100% (110% in the case
of an Incentive Stock Option granted to a Ten Percent Stockholder) of the
Fair Market Value per share at the time the option is granted. In the case
of an option which does not qualify as an Incentive Stock Option, the
exercise price per share of Common Stock shall be not less than par value.
7.3.2 Value of Shares of Common Stock Subject to Incentive Stock
----------------------------------------------------------
Options. Each eligible employee may be granted Incentive Stock Options only
-------
to the extent that, in the aggregate under this Plan and all incentive
stock option plans of the Company and any related corporation, such
Incentive Stock Options do not become exercisable for the first time by
such employee during any calendar year in a manner which would entitle the
employee to purchase more than $100,000 in fair market value (determined at
the time the Incentive Stock Options were granted) of Common Stock in that
year. Any options granted to
Page 4 of 10
<PAGE>
an employee in excess of such amount will be granted as Non-Qualified
Options.
7.3.3 Period of Options. An option shall be exercisable during such
-----------------
period of time as the Committee or Board of Directors may specify (subject
to subsection 7.4 below), but in the case of an Incentive Stock Option not
after the expiration of ten years (five years in the case of an Incentive
Stock Option granted to a Ten Percent Stockholder) from the date the option
is granted.
7.3.4 Exercise of Options.
-------------------
7.3.4.1 Each option shall be made exercisable at such time
or times as the Committee or the Board of Directors shall determine.
In the case of an option made exercisable in installments, the
Committee or the Board of Directors may later determine to accelerate
the time at which one or more of such installments may be exercised.
7.3.4.2 Any exercise of an option shall be in writing
signed by the proper person and delivered or mailed to the General
Counsel of the Company, accompanied by an option exercise notice and
payment in full for the number of shares in respect to which the
option is exercised.
7.3.4.3 In the event an option is exercised by the
executor or administrator of a deceased Participant, or by the person
or persons to whom the option has been transferred by the
Participant's will or the applicable laws of descent and
distribution, the Company shall be under no obligation to deliver
stock thereunder until the Company is satisfied that the person or
persons exercising the option is or are the duly appointed executor
or administrator of the deceased Participant or the person or persons
to whom the option has been transferred by the Participant's will or
by the applicable laws of descent and distribution.
7.3.4.4 The Committee or the Board of Directors may at the
time of grant condition the exercise of an option upon agreement by
the Participant to subject the Common Stock to any restrictions on
transfer or repurchase rights in effect on the date of exercise, upon
representations of continued employment and upon other terms not
inconsistent with this Plan. Any such conditions shall be set forth
in the option certificate or other document evidencing the option.
7.3.4.5 In the case of an option that is not an Incentive
Stock Option, the Committee shall have the right to require that the
individual exercising the option to remit to the Company an amount
sufficient to satisfy any federal, state, or local withholding tax
requirements (or makes other arrangements satisfactory to the Company
with regard to
Page 5 of 10
<PAGE>
such taxes) prior to the delivery of any Common Stock pursuant to the
exercise of the option. In the case of an Incentive Stock Option, if
at the time the Incentive Stock Option is exercised the Committee
determines that under applicable law and regulations the Company
could be liable for the withholding of any federal or state tax with
respect to a disposition of the Common Stock received upon exercise,
the Committee may require as a condition of exercise that the
individual exercising the Incentive Stock Option agree (i) to inform
the Company promptly of any disposition (within the meaning of
Section 422 (a) (1) of the Code and the regulations thereunder) of
Common Stock received upon exercise, and (ii) to give such security
as the Committee deems adequate to meet the potential liability of
the Company for the withholding of tax, and to augment such security
from time to time in any amount reasonably deemed necessary by the
Committee to preserve the adequacy of such security.
7.3.4.6 In the case of an option that is exercised by an
individual that is subject to taxation in a foreign jurisdiction, the
Committee shall have the right to require the individual exercising
the option to remit to the Company an amount sufficient to satisfy
any federal or withholding requirement of that foreign jurisdiction
(or make other arrangements satisfactory to the Company with regard
to such taxes prior to the delivery of any Common Stock pursuant to
the exercise of the option).
7.3.5 Payment for and Delivery of Stock. The shares of stock
---------------------------------
purchased on any exercise of an option granted hereunder shall be paid for
in full in cash or, if permitted by the terms of the option, in shares of
unrestricted Common Stock at the time of such exercise or, if so permitted,
a combination of such cash and Common Stock. A Participant shall not have
the rights of a stockholder with respect to awards under the Plan except as
to stock actually issued to him.
7.3.6 Listing of Stock, Withholding and Other Legal
---------------------------------------------
Requirements. The Company shall not be obligated to deliver any stock
until all federal and state laws and regulations which the Company may deem
applicable have been complied with, nor, in the event the outstanding
Common Stock is at the time listed upon any stock exchange, until the stock
to be delivered has been listed or authorized to be added to the list upon
official notice of issuance to such exchange. In addition, if the shares
of stock subject to any option have not been registered in accordance with
the Securities Act of 1933, as amended, the Company may require the person
or persons who wishes or wish to exercise such option to make such
representation or agreement with respect to the sale of stock acquired on
exercise of the option as will be sufficient, in the opinion of the
Company's counsel, to avoid violation of said Act, and may also require
that the certificates evidencing said stock bear an appropriate restrictive
legend.
Page 6 of 10
<PAGE>
7.3.7 Non-transferability of Options. No option may be
------------------------------
transferred by the Participant otherwise than by will, by the laws of
descent and distribution or pursuant to a qualified domestic relations
order, and during the Participant's lifetime the option may be exercised
only by him or her; provided, however, that the Board of Directors or the
-------- -------
Committee, as applicable, in its discretion, may allow for transferability
of non-qualified stock options by the Participant to "Immediate Family
Members." Immediate Family Members means children, grandchildren, spouse or
common law spouse, siblings or parents of the Participant or to bona fide
trusts, partnerships or other entities controlled by and of which the
beneficiaries are Immediate Family Members of the Participant. Any option
grants that are transferable are further conditioned on the Participant and
Immediate Family Members agreeing to abide by the Company's then current
stock option transfer guidelines.
7.3.8 Death. If a Participant dies at a time when he is
-----
entitled to exercise an Incentive Stock Option, then at any time or times
within three years after his death such Incentive Stock Option may be
exercised, as to all or any of the shares which the Participant was
entitled to purchase thereunder immediately prior to his death, by his
executor or administrator or the person or persons to whom the Incentive
Stock Option is transferred by will or the applicable laws of descent and
distribution, and except as so exercised such Incentive Stock Option shall
expire at the end of such three-year period. In no event, however, may any
Incentive Stock Option granted under the Plan be exercised after the
expiration of ten years (five years in the case of an Incentive Stock
Option granted to a Ten Percent Stockholder) from the date the Incentive
Stock Option was granted.
7.3.9 Termination of Employment. If the employment of a
-------------------------
Participant terminates for any reason other than his death, all options
held by the Participant shall thereupon expire on the date of termination
unless the option by its terms, or the Committee or the Board of Directors
by resolution, shall allow the Participant to exercise any or all of the
options held by him after termination. In the case of an Incentive Stock
Option, the Incentive Stock Option shall in any event expire at the end of
three months after such termination of employment, or after the expiration
of ten years (five years in the case of an Incentive Stock Option granted
to a Ten Percent Stockholder) from the date the Incentive Stock Option was
granted, whichever occurs first. If the Committee or the Board of
Directors so decides, an option may provide that a leave of absence
granted by the Company or Subsidiary is not a termination of employment for
the purpose of this subsection 7.3.9, and in the absence of such a
provision the Committee may in any particular case determine that such a
leave of absence is not a termination of employment for such purpose. The
Page 7 of 10
<PAGE>
Committee shall also determine all other matters relating to continuous
employment.
7.3.10 Cancellation and Rescission of Options. (A) Unless the
--------------------------------------
certificate or agreement evidencing the option specifies otherwise, the
Committee may cancel, rescind, suspend, withhold or otherwise limit or
restrict any unexpired option at any time if the Participant engages in
"Detrimental Activity." As used in this subsection 7.3.10, "Detrimental
Activity" shall include: (i) the rendering of services for any
organization or engaging directly or indirectly in any business which is or
becomes competitive with the Company, or which organization or business, or
the rendering of services to such organization or business, is or becomes
otherwise prejudicial to or in conflict with the interests of the Company;
(ii) the disclosure to anyone outside the Company, or the use in other than
the Company's business, without prior written authorization from the
Company, of any Confidential Information as defined in the Company's Key
Employee Agreement, relating to the business of the Company, acquired by
the Participant either during or after employment with the Company; (iii)
the failure or refusal to disclose promptly and to assign to the Company,
pursuant to the Company's Key Employee Agreement, all right, title and
interest in any invention or idea, patentable or not, made or conceived by
the Participant during employment by the Company, relating in any manner to
the actual or anticipated business, research or development work of the
Company or the failure or refusal to do anything reasonably necessary to
enable the Company to secure a patent where appropriate in the United
States and in other countries; (iv) activity that results in termination of
the Participant's employment for cause; (v) the Participant otherwise fails
to comply with the terms of the certificate or agreement evidencing the
option, the Plan or the Key Employee Agreement; (vi) a violation of any
rules, policies, procedures or guidelines of the Company, including but not
limited to the Company's Business Conduct Guidelines; (vii) any attempt
directly or indirectly to induce any employee of the Company to be employed
or perform services elsewhere or any attempt directly or indirectly to
solicit the trade or business of any current or prospective customer,
supplier or partner of the Company; (viii) the Participant being convicted
of, or entering a guilty plea with respect to a crime, whether or not
connected with the Company; or (ix) any other conduct or act determined to
be injurious, detrimental or prejudicial to any interest of the Company.
(B) Upon exercise of an option, the Participant shall certify, in a manner
acceptable to the Company, that he or she is in compliance with the terms
and conditions of the Plan. In the event a Participant engages in
Detrimental Activity prior to or during the six months after any exercise
of an option, such exercise may be rescinded within two years thereafter.
In the event of any such rescission, the Participant shall pay to the
Company the amount of any gain realized as a result of the rescinded
exercise in such a manner and on such terms and conditions as may be
required, and the Company
Page 8 of 10
<PAGE>
shall be entitled to set-off against the amount of any such gain any amount
owed to the Participant by the Company.
7.4 Authority of the Committee. The Committee shall have the authority,
--------------------------
either generally or in particular instances, to waive compliance by a
Participant with any obligation to be performed by him under an option and to
waive any condition or provision of an option, except that the Committee may not
(i) increase the total number of shares covered by any Incentive Stock Option
(except in accordance with Section 8), (ii) reduce the option price per share of
any Incentive Stock Option (except in accordance with Section 8) or (iii) extend
the term of any Incentive Stock Option to more than ten years, subject, however,
to the provisions of Section 10.
8. CHANGES IN STOCK.
----------------
In the event of a stock dividend, stock split or other change in
corporate structure or capitalization affecting the Common Stock that becomes
effective after the adoption of the Plan by the Board of Directors, the
Committee shall make appropriate adjustments in (i) the number and kind of
shares of stock on which options may thereafter be granted hereunder, (ii) the
number and kind of shares of stock remaining subject to each option outstanding
at the time of such change and (iii) the option price. The Committee's
determination shall be binding on all persons concerned. Subject to any
required action by the stockholders, if the Company shall be the surviving
corporation in any merger or consolidation (other than a merger or consolidation
in which the Company survives but in which a majority of its outstanding shares
are converted into securities of another corporation or are exchanged for other
consideration), any option granted hereunder shall pertain and apply to the
securities which a holder of the number of shares of stock of the Company then
subject to the option would have been entitled to receive, but a dissolution or
liquidation of the Company or a merger or consolidation in which the Company is
not the surviving corporation or in which a majority of its outstanding shares
are so converted or exchanged shall cause every option hereunder to terminate;
provided that if any such dissolution, liquidation, merger or consolidation is
contemplated, the Company shall either arrange for any corporation succeeding to
the business and assets of the Company to issue to the Participants replacement
options (which, in the case of Incentive Stock Options, satisfy, in the
determination of the Committee, the requirements of Section 424 of the Code) on
such corporation's stock which will to the extent possible preserve the value of
the outstanding options or shall make the outstanding options fully exercisable
at least 20 days before the effective date of any such dissolution, liquidation,
merger or consolidation. The existence of the Plan shall not prevent any such
change or other transaction and no Participant thereunder shall have any right
except as herein expressly set forth.
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<PAGE>
9. EMPLOYMENT RIGHTS.
-----------------
Neither the adoption of the Plan nor any grant of options confers upon
any employee of the Company or a Subsidiary any right to continued employment
with the Company or a Subsidiary, as the case may be, nor does it interfere in
any way with the right of the Company or a Subsidiary to terminate the
employment of any of its employees at any time.
10. DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION.
-------------------------------------------------------
The Committee or the Board of Directors may at any time discontinue
granting options under the Plan and, with the consent of the Participant, may at
any time cancel an existing option in whole or in part and grant another option
to the Participant for such number of shares as the Committee or the Board of
Directors specifies. The Board of Directors may at any time or times amend the
Plan for the purpose of satisfying the requirements of any changes in applicable
laws or regulations or for any other purpose which may at the time be permitted
by law or may at any time terminate the Plan as to any further grants of
options, provided that no such amendment shall without the approval of the
stockholders of the Company (a) increase the maximum number of shares available
under the Plan, (b) change the group of employees eligible to receive options
under the Plan, (c) reduce the exercise price of outstanding incentive options
or reduce the price at which incentive options may be granted, (d) extend the
time within which options may be granted, (e) alter the Plan in such a way that
incentive options granted or to be granted hereunder would not be considered
incentive stock options under Section 422 of the Code, or (f) amend the
provisions of this Section 10, and no such amendment shall adversely affect the
rights of any employee (without his consent) under any option previously
granted.
11. EFFECTIVE DATE.
--------------
The Plan became effective immediately upon its approval by the stockholders
of the Company at the Annual Meeting on May 12, 1993.
Page 10 of 10
<PAGE>
Exhibit 10.5
MCDATA CORPORATION
1997 STOCK OPTION PLAN
ADOPTED OCTOBER 1, 1997
1. PURPOSE.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of the Company, and its Affiliates, may be given an
opportunity to purchase stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of the Company or its Affiliates, to
secure and retain the services of new Employees and Directors, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan shall, in
the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either Incentive Stock Options or Nonstatutory Stock Options. All Options shall
be separately designated Incentive Stock Options or Nonstatutory Stock Options
at the time of grant, and in such form as issued pursuant to Section 6, and a
separate certificate or certificates will be issued for shares purchased on
exercise of each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(e) "COMPANY" means McDATA Corporation, a Delaware corporation.
(f) "CONTINUOUS STATUS AS AN EMPLOYEE OR DIRECTOR" means that the service
of an individual to the Company, whether as an Employee or Director, is not
interrupted or terminated.
1
<PAGE>
The Board or the chief executive officer of the Company may determine, in that
party's sole discretion, whether Continuous Status as an Employee or Director
shall be considered interrupted in the case of: (i) any leave of absence
approved by the Board or the chief executive officer of the Company, including
sick leave, military leave, or any other personal leave; or (ii) transfers
between the Company, Affiliates or their successors.
(g) "COVERED EMPLOYEE" means the chief executive officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to stockholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(h) "DIRECTOR" means a member of the Board.
(i) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(k) "FAIR MARKET VALUE" means, as of any date, the value of the Class B
Common Stock of the Company determined as follows:
(1) If the Class B Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Class B Common Stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the greatest
volume of trading in the Company's Class B Common Stock) on the last market
trading day prior to the day of determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable.
(2) In the absence of such markets for the Class B Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
(l) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(m) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange, or designated
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<PAGE>
(or approved for designation) upon notice of issuance as a national market
security on an interdealer quotation system.
(n) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
("Regulation S-K")), does not possess an interest in any other transaction as to
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship as to which disclosure would be required
under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-
employee director" for purposes of Rule 16b-3.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
(p) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "OPTION" means a stock option granted pursuant to the Plan.
(r) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(s) "OPTIONEE" means a person to whom an Option is granted pursuant to the
Plan or, if applicable, such other person who holds an outstanding Option.
(t) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
the Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
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<PAGE>
(u) "PLAN" means this 1997 Stock Option Plan.
(v) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect with respect to the Company at the time discretion is
being exercised regarding the Plan.
(w) "SECURITIES ACT" means the Securities Act of 1933, as amended.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Options; when and how each Option shall be
granted; whether an Option will be an Incentive Stock Option or a Nonstatutory
Stock Option; the provisions of each Option granted (which need not be
identical), including the time or times such Option may be exercised in whole or
in part; and the number of shares for which an Option shall be granted to each
such person.
(2) To construe and interpret the Plan and Options granted under it,
and to establish, amend and revoke rules and regulations for its administration.
The Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan or in any Option Agreement, in a manner and to the
extent it shall deem necessary or expedient to make the Plan fully effective.
(3) To amend the Plan or an Option as provided in Section 12.
(4) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company.
(c) The Board may delegate administration of the Plan to a committee of
the Board composed of not fewer than two (2) members (the "Committee"), all of
the members of which Committee may be, in the discretion of the Board, Non-
Employee Directors and/or Outside Directors. If administration is delegated to
a Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board, including the power to
delegate to a subcommittee of two (2) or more Outside Directors any of the
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<PAGE>
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or such a
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Additionally, prior to the Listing Date, and
notwithstanding anything to the contrary contained herein, the Board may
delegate administration of the Plan to a committee of one or more members of the
Board and the term "Committee" shall apply to any person or persons to whom such
authority has been delegated. Notwithstanding anything in this Section 3 to the
contrary, the Board or the Committee may delegate to a committee of one or more
members of the Board the authority to grant Options to eligible persons who (1)
are not then subject to Section 16 of the Exchange Act and/or (2) are either (i)
not then Covered Employees and are not expected to be Covered Employees at the
time of recognition of income resulting from such Option, or (ii) not persons
with respect to whom the Company wishes to comply with Section 162(m) of the
Code.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to Options shall not
exceed in the aggregate nine million five hundred thousand (9,500,000) shares of
the Company's Class B Common Stock. If any Option shall for any reason expire
or otherwise terminate, in whole or in part, without having been exercised in
full, the stock not purchased under such Option shall revert to and again become
available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees.
Nonstatutory Stock Options may be granted only to Employees or Directors.
(b) No person shall be eligible for the grant of an Incentive Stock Option
if, at the time of grant, such person owns (or is deemed to own pursuant to
Section 424(d) of the Code) stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or of any of
its Affiliates unless the exercise price of such Incentive Stock Option
5
<PAGE>
is at least one hundred ten percent (110%) of the Fair Market Value of such
stock at the date of grant and the Incentive Stock Option is not exercisable
after the expiration of five (5) years from the date of grant.
(c) Subject to the provisions of Section 10 relating to adjustments upon
changes in stock, no person shall be eligible to be granted Options covering
more than two million (2,000,000) shares of the Company's Class B Common Stock
in any calendar year. This subsection 5(c) shall not apply prior to the Listing
Date and, following the Listing Date, shall not apply until (i) the earliest of:
(A) the first material modification of the Plan (including any increase to the
number of shares reserved for issuance under the Plan in accordance with Section
4); (B) the issuance of all of the shares of Class B Common Stock reserved for
issuance under the Plan; (C) the expiration of the Plan; or (D) the first
meeting of stockholders at which directors are to be elected that occurs after
the close of the third calendar year following the calendar year in which
occurred the first registration of an equity security under Section 12 of the
Exchange Act; or (ii) such other date required by Section 162(m) of the Code and
the rules and regulations promulgated thereunder.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten (10)
years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted; the exercise price of
each Nonstatutory Stock Option shall be not less than eighty-five percent (85%)
percent of the Fair Market Value of the stock subject to the Option on the date
the Option is granted. Notwithstanding the foregoing, an Option (whether an
Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an
exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or
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<PAGE>
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other Class B Common Stock of the
Company or (B) in any other form of legal consideration that may be acceptable
to the Board.
(d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Incentive Stock Option
is granted only by such person. A Nonstatutory Stock Option shall only be
transferable with the Optionee upon such terms and conditions as are set forth
in the Option Agreement for such Nonstatutory Stock Option, as the Board or the
Committee shall determine in its discretion, except that each Nonstatutory Stock
Option may be transferred to the spouse, children, lineal ancestors and lineal
descendants of the Optionee (or to a trust created solely for the benefit of the
Optionee and the foregoing persons) or to an organization exempt from taxation
pursuant to Section 501(c)(3) of the Code or to which tax deductible charitable
contributions may be made under Section 170 of the Code (excluding such
organizations classified as private foundations under applicable regulations and
rulings). The person to whom the Option is granted may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionee, shall thereafter be
entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option
shall be allotted in periodic installments (which may, but need not, be equal).
The Option Agreement may provide that from time to time during each of such
installment periods, the Option may become exercisable ("vest") with respect to
some or all of the shares allotted to that period, and may be exercised with
respect to some or all of the shares allotted to such period and/or any prior
period as to which the Option became vested but was not fully exercised. The
Option may be subject to such other terms and conditions on the time or times
when it may be exercised (which may be based on performance or other criteria)
as the Board may deem appropriate. The provisions of
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<PAGE>
this subsection 6(e) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.
(f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or
any person to whom an Option is transferred under subsection 6(d), as a
condition of exercising any such Option, (1) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters, and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of
exercising the Option; and (2) to give written assurances satisfactory to the
Company stating that such person is acquiring the stock subject to the Option
for such person's own account and not with any present intention of selling or
otherwise distributing the stock. The foregoing requirements, and any
assurances given pursuant to such requirements, shall be inoperative if (i) the
issuance of the shares upon the exercise of the Option has been registered under
a then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may require the Optionee to
provide such other representations, written assurances or information which the
Company shall determine is necessary, desirable or appropriate to comply with
applicable securities and other laws as a condition of granting an Option to
such Optionee or permitting the Optionee to exercise such Option. The Company
may, upon advice of counsel to the Company, place legends on stock certificates
issued under the Plan as such counsel deems necessary or appropriate in order to
comply with applicable securities laws, including, but not limited to, legends
restricting the transfer of the stock.
(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR. In the event
an Optionee's Continuous Status as an Employee or Director terminates (other
than upon the Optionee's death or disability), the Optionee may exercise his or
her Option (to the extent that the Optionee was entitled to exercise it as of
the date of termination) but only within such period of time ending on the
earlier of (i) the date three (3) months following the termination of the
Optionee's Continuous Status as an Employee or Director, or such longer or
shorter period specified in the Option Agreement, or (ii) the expiration of the
term of the Option as set forth in
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<PAGE>
the Option Agreement. If, at the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified in the Option Agreement,
the Option shall terminate, and the shares covered by such Option shall revert
to and again become available for issuance under the Plan.
(h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status
as an Employee or Director terminates as a result of the Optionee's disability,
the Optionee may exercise his or her Option (to the extent that the Optionee was
entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination (or such longer or shorter period specified in the
Option Agreement), or (ii) the expiration of the term of the Option as set forth
in the Option Agreement. If, at the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(i) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a period specified in the Option Agreement after the termination of,
the Optionee's Continuous Status as an Employee or Director, the Option may be
exercised (to the extent the Optionee was entitled to exercise the Option as of
the date of death) by the Optionee's estate, by a person who acquired the right
to exercise the Option by bequest or inheritance or by a person designated to
exercise the option upon the Optionee's death pursuant to subsection 6(d), but
only within the period ending on the earlier of (i) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement), or (ii) the expiration of the term of such Option as
set forth in the Option Agreement. If, at the time of death, the Optionee was
not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after death, the Option is not exercised
within the time specified herein, the Option shall terminate, and the
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<PAGE>
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
(j) RIGHT OF REPURCHASE. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to
repurchase all or any part of the vested shares exercised pursuant to the
Option.
(k) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to exercise
a right of first refusal following receipt of notice from the Optionee of the
intent to transfer all or any part of the shares exercised pursuant to the
Option.
(l) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax withholding
obligation relating to the exercise of such Option by any of the following means
or by a combination of such means: (1) tendering a cash payment; (2)
authorizing the Company to withhold shares from the shares of the Class B Common
Stock otherwise issuable to the Optionee as a result of the exercise of the
Option; or (3) delivering to the Company owned and unencumbered shares of the
Class B Common Stock of the Company.
(m) LOCK-UP. In connection with a public offering of the Company's Common
Stock resulting in gross proceeds to the Company and the selling stockholders,
if any, of not less than $30 million (prior to expenses and underwriting
commissions) and at an offering price per share representing a pre-offering
valuation of the Company of at least $500 million, the Company (or a
representative of the underwriters) may require that an Optionee sign a "lock-
up" agreement providing that the Optionee will not sell or otherwise transfer or
dispose of any shares of Class B Common Stock or other securities of the Company
during a period as may be specified by the representative of the underwriters of
Common Stock (or other securities) of the Company and agreed to by EMC
Corporation and the Company, provided that all executive officers and directors
of the Company enter into similar agreements. The Company may impose stop-
transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such period.
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7. COVENANTS OF THE COMPANY.
(a) During the terms of the Options, the Company shall keep available at
all times the number of shares of stock required to satisfy such Options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Options; provided, however,
that this undertaking shall not require the Company to register under the
Securities Act either the Plan, any Option or any stock issued or issuable
pursuant to any such Option. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Options unless and until
such authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
9. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which an
Option may first be exercised or the time during which an Option or any part
thereof will vest pursuant to subsection 6(e), notwithstanding the provisions in
the Option stating the time at which it may first be exercised or the time
during which it will vest.
(b) Neither an Optionee nor any person to whom an Option is transferred
under subsection 6(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares subject to such Option unless and
until such person has satisfied all requirements for exercise of the Option
pursuant to its terms.
(c) Nothing in the Plan or any instrument executed or Option granted
pursuant thereto shall confer upon any Employee, Director or Optionee any right
to continue in the employ of the Company or any Affiliate (or to continue acting
as a Director) or shall affect the right of the Company or any Affiliate to
terminate the employment of any Employee, with or without cause, or to remove
any Director as provided in the Company's By-Laws and the provisions of the
General Corporation Law of the State of Delaware.
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(d) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(e) (1) The Board or the Committee shall have the authority to effect, at
any time and from time to time (i) the repricing of any outstanding Options
under the Plan and/or (ii) with the consent of the affected holders of Options,
the cancellation of any outstanding Options and the grant in substitution
therefor of new Options under the Plan covering the same or different numbers of
shares of Class B Common Stock, but having an exercise price per share not less
than eighty-five percent (85%) of the Fair Market Value (one hundred percent
(100%) of the Fair Market Value in the case of an Incentive Stock Option or, in
the case of a ten percent (10%) stockholder (as defined in subsection 5(b)), in
the case of an Incentive Stock Option, not less than one hundred and ten percent
(110%) of the Fair Market Value) per share of Class B Common Stock on the new
grant date.
(2) Shares subject to an Option canceled under this subsection 9(e)
shall continue to be counted, for the applicable period in which it was granted,
against the maximum award of Options permitted to be granted pursuant to
subsection 5(c) of the Plan. The repricing of an Option under this subsection
9(e), resulting in a reduction of the exercise price, shall be deemed to be a
cancellation of the original Option and the grant of a substitute Option; in the
event of such repricing, both the original and the substituted Options shall be
counted for the applicable period against the maximum awards of Options
permitted to be granted pursuant to subsection 5(c) of the Plan. The provisions
of this subsection 9(e)(2) shall be applicable only to the extent required by
Section 162(m) of the Code.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any Option (through merger, consolidation, reorganization, recapitalization,
stock dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of
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consideration by the Company), the Plan will be appropriately adjusted in the
type(s) and maximum number of securities subject to the Plan pursuant to
subsection 4(a) and the maximum number of securities subject to award to any
person during any calendar year period pursuant to subsection 5(c), and the
outstanding Options will be appropriately adjusted in the type(s) and number of
securities and price per share of stock subject to such outstanding Options.
Such adjustments shall be made by the Board or Committee, the determination of
which shall be final, binding and conclusive. (The conversion of any convertible
securities of the Company shall not be treated as a "transaction not involving
the receipt of consideration by the Company.")
(b) In the event of: (1) a dissolution, liquidation, or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
Class B Common Stock outstanding immediately preceding the merger are converted
by virtue of the merger into other property, whether in the form of securities,
cash or otherwise, then: (i) any surviving or acquiring corporation shall
assume any Options outstanding under the Plan or shall substitute similar
options (including an option to acquire the same consideration paid to the
stockholders in the transaction described in this subsection 10(b)) for those
outstanding under the Plan, or (ii) in the event any surviving or acquiring
corporation refuses to assume such Options or to substitute similar options for
those outstanding under the Plan, (A) with respect to Options held by persons
then performing services as Employees or Director, the vesting of such Options
and the time during which such Options may be exercised shall be accelerated
prior to such event and the Options terminated if not exercised after such
acceleration and at or prior to such event, and (B) with respect to any other
Options outstanding under the Plan, such Options shall be terminated if not
exercised prior to such event.
11. CONVERSION OF INCENTIVE STOCK OPTIONS INTO NONSTATUTORY OPTIONS.
Notwithstanding the foregoing, in the case of an Incentive Stock Option, at
the written request or with the written consent of an Optionee (to the extent
such Optionee's option has not been exercised at such time) the Board may take
such actions as may be necessary to convert such Optionee's Incentive Stock
Option into a Nonstatutory Stock Option. Such actions may include, but shall
not be limited to, extending the exercise period or reducing the exercise price
of the
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appropriate installments of such Incentive Stock Option. At the time of such
conversion, the Board (with the consent of the Optionee) may impose such
conditions on the exercise of the resulting Nonstatutory Stock Option as the
Board in its discretion may determine, provided that such conditions shall not
be inconsistent with this Plan.
12. AMENDMENT OF THE PLAN AND OPTIONS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 10 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(1) Increase the number of shares reserved for Options under the
Plan;
(2) Modify the requirements as to eligibility for participation in
the Plan (to the extent such modification requires stockholder approval in order
for the Plan to satisfy the requirements of Section 422 of the Code); or
(3) Modify the Plan in any other way if such modification requires
stockholder approval in order for the Plan to satisfy the requirements of
Section 422 of the Code or to comply with the requirements of Rule 16b-3.
(b) The Board may in its sole discretion submit any other amendment to the
Plan for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations promulgated thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide Optionees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Incentive Stock Options
and/or to bring the Plan and/or Incentive Stock Options granted under it into
compliance therewith.
(d) Rights and obligations under any Option granted before amendment of
the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the person to whom the Option was granted and
(ii) such person consents in writing.
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(e) The Board at any time, and from time to time, may amend the terms of
any one or more Options; provided, however, that the rights and obligations
under any Option shall not be impaired by any such amendment unless (i) the
Company requests the consent of the person to whom the Option was granted and
(ii) such person consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on September 30, 2007, which shall
be within ten (10) years from the date the Plan is adopted by the Board or
approved by the stockholders of the Company, whichever is earlier. No Options
may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) Rights and obligations under any Option granted while the Plan is in
effect shall not be impaired by suspension or termination of the Plan, except
with the written consent of the person to whom the Option was granted.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Options
granted under the Plan shall be exercised unless and until the Plan has been
approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board.
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EXHIBIT 21.1--SUBSIDIARIES OF REGISTRANT
The following is a list of the Corporation's consolidated subsidiaries as of
January 31, 1998. The Corporation owns, directly or indirectly, 100% of the
voting securities of each subsidiary, unless noted otherwise and except for
director's qualifying shares.
<TABLE>
<CAPTION>
STATE OR JURISDICTION
NAME OF ORGANIZATION
- ---- ---------------------
<S> <C>
EMC Asset Acquisition Corporation............ Delaware
EMC (Benelux) B.V. .......................... The Netherlands
EMC Computer Storage Systems (Israel) Ltd. .. Israel
EMC Computer Storage Systems (Sales and
Services) Ltd. ............................ Israel
EMC Computer Systems AG...................... Switzerland
EMC Computer Systems (Benelux) B.V. ......... The Netherlands
EMC Computer Systems California, Inc. ....... Delaware
EMC Computer Systems (F.E.) Ltd. ............ Hong Kong
EMC Computer Systems France S.A. ............ France
EMC Computer Systems Italy SPA............... Italy
EMC Computer Systems (S.A.) (Pty.) Ltd. ..... South Africa
EMC Computer Systems (South Asia) Pte. Ltd... Singapore
EMC Computer Systems (U.K.) Limited.......... United Kingdom
EMC Computer-Systems AS...................... Norway
EMC Computer-Systems A/S..................... Denmark
EMC Computer Systems Austria GmbH............ Austria
EMC Computer-Systems Brazil Ltda. ........... Brazil
EMC Computer-Systems Deutschland GmbH........ Germany
EMC Computer-Systems Ireland Limited......... Ireland
EMC Computer-Systems OY...................... Finland
EMC Computer Systems Spain S.L. ............. Spain
EMC Computer-Systems Svenska AB.............. Sweden
EMC Foreign Sales Corporation (F.S.C.)....... Barbados
EMC International Holdings, Inc. ............ Delaware
EMC Japan K.K.*.............................. Japan
EMC Securities Corporation................... Massachusetts
EMC System Peripherals Canada, Inc. ......... Canada
Epoch, Inc. ................................. Delaware
Hankook EMC Computer Systems Chusik Hoesa.... South Korea
McDATA Asia Pacific Pte. Ltd. ............... Singapore
McDATA Corporation**......................... Delaware
McDATA Europa GmbH........................... Germany
McDATA Holdings Corporation.................. Delaware
McDATA International, Inc. .................. U.S. Virgin Islands
McDATA UK Limited............................ United Kingdom
</TABLE>
- --------
* 95% owned by EMC Corporation.
** 89% owned by McDATA Holdings Corporation.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
EMC Corporation on Form S-3 as amended (File Nos. 333-24901 and 333-41079) and
on Form S-8 (File Nos. 33-51800, 33-54860, 33-63665, 333-1375, 333-5133 and 333-
31471) of our report dated January 21, 1998 on our audits of the Consolidated
Financial Statements and Consolidated Financial Statement Schedule of EMC
Corporation as of December 31, 1997 and 1996 and for each of three years in the
period ended December 31, 1997, which report is included in this Annual Report
on Form 10-K.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> DEC-31-1997
<CASH> 954,595
<SECURITIES> 686,038
<RECEIVABLES> 788,869
<ALLOWANCES> 6,773
<INVENTORY> 404,660
<CURRENT-ASSETS> 2,627,026
<PP&E> 396,511
<DEPRECIATION> 89,632
<TOTAL-ASSETS> 3,490,109
<CURRENT-LIABILITIES> 505,870
<BONDS> 517,500
0
0
<COMMON> 4,968
<OTHER-SE> 2,371,333
<TOTAL-LIABILITY-AND-EQUITY> 3,490,109
<SALES> 2,862,646
<TOTAL-REVENUES> 2,937,860
<CGS> 1,571,012
<TOTAL-COSTS> 1,571,012
<OTHER-EXPENSES> 704,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,463
<INCOME-PRETAX> 718,037
<INCOME-TAX> 179,509
<INCOME-CONTINUING> 538,528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 538,528
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.04
</TABLE>
