<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED: JUNE 30, 1998 COMMISSION FILE NUMBER 1-9853
EMC CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2680009
(State or other jurisdiction of (I.R.S. Employer
organization or incorporation) Identification Number)
35 PARKWOOD DRIVE
HOPKINTON, MASSACHUSETTS 01748-9103
(Address of principal executive offices, including zip code)
(508) 435-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
COMMON STOCK, PAR VALUE $.01 PER SHARE 499,511,372
CLASS OUTSTANDING AS OF JUNE 30, 1998
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<PAGE>
EMC CORPORATION
<TABLE>
<CAPTION>
PAGE NO
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<S> <C>
Part I--Financial Information
Consolidated Balance Sheets at June 30, 1998 and December 31,
1997............................................................. 3
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 1998 and 1997..................................... 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997........................................... 5
Notes to Interim Consolidated Financial Statements............... 6-9
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 10-15
Part II--Other Information.......................................... 16-17
Signatures.......................................................... 18
Exhibit Index....................................................... 19
</TABLE>
2
<PAGE>
EMC CORPORATION
PART I.
FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 983,784 $ 954,595
Short-term investments.............................. 402,113 419,262
Trade and notes receivable less allowance for
doubtful accounts of $7,645 and $6,773, in 1998 and
1997, respectively................................. 814,076 788,869
Inventories......................................... 480,856 404,660
Deferred income taxes............................... 40,976 37,095
Other assets........................................ 43,884 22,545
---------- ----------
Total current assets.................................. 2,765,689 2,627,026
Long-term investments................................. 481,693 276,776
Notes receivable, net................................. 24,064 20,013
Property, plant and equipment, net.................... 487,668 396,511
Deferred income taxes................................. 13,243 14,174
Intangible and other assets, net...................... 190,842 155,609
---------- ----------
Total assets........................................ $3,963,199 $3,490,109
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations............ $ 17,414 $ 7,665
Accounts payable.................................... 220,160 187,117
Accrued expenses.................................... 186,927 151,216
Income taxes payable................................ 151,963 151,088
Deferred revenue.................................... 24,476 8,784
---------- ----------
Total current liabilities............................. 600,940 505,870
Deferred income taxes................................. 44,464 45,353
Long-term obligations:
3 1/4% convertible subordinated notes due 2002...... 517,500 517,500
Notes payable....................................... 33,087 40,954
Other liabilities..................................... 3,205 4,131
---------- ----------
Total liabilities................................... 1,199,196 1,113,808
---------- ----------
Commitments and contingencies
Stockholders' equity:
Series Preferred Stock, par value $.01; authorized
25,000,000 shares, none outstanding................ -- --
Common Stock, par value $.01; authorized 750,000,000
shares; issued 499,511,372 and 496,792,608, in 1998
and 1997, respectively............................. 4,995 4,968
Additional paid-in capital.......................... 728,096 670,297
Deferred compensation............................... (18,350) (12,738)
Unrealized gain/(loss) on investments............... 146 (9)
Retained earnings................................... 2,046,967 1,711,356
Cumulative translation adjustment................... 2,149 2,427
---------- ----------
Total stockholders' equity........................ 2,764,003 2,376,301
---------- ----------
Total liabilities and stockholders' equity...... $3,963,199 $3,490,109
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Net sales...................... $918,822 $694,511 $1,724,755 $1,295,411
Service and rental............. 33,180 18,950 55,598 36,487
--------- --------- ---------- ----------
952,002 713,461 1,780,353 1,331,898
Costs and expenses:
Cost of sales and service...... 467,480 384,545 898,616 720,530
Research and development....... 74,228 53,446 139,903 101,537
Selling, general and
administrative................ 177,353 114,640 330,849 212,264
--------- --------- ---------- ----------
Operating income................. 232,941 160,830 410,985 297,567
Investment income................ 23,954 17,412 46,461 29,096
Interest expense................. (4,999) (4,640) (9,729) (6,042)
Other income/(expense), net...... 765 (369) (236) 1,728
--------- --------- ---------- ----------
Income before taxes.............. 252,661 173,233 447,481 322,349
Income tax provision............. 63,165 44,434 111,870 82,682
--------- --------- ---------- ----------
Net income....................... $189,496 $128,799 $ 335,611 $ 239,667
========= ========= ========== ==========
Net income per weighted average
share, basic.................... $0.38 $0.26 $0.67 $0.49
========= ========= ========== ==========
Net income per weighted average
share, diluted.................. $0.36 $0.25 $0.64 $0.47
========= ========= ========== ==========
Weighted average shares, basic... 498,648 492,477 497,944 492,037
Weighted average shares, diluted. 537,550 527,899 536,431 518,826
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
--------------------------
<S> <C> <C>
JUNE 30, JUNE 30,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 335,611 $ 239,667
Adjustments to reconcile net income to net cash
provided by
operating activities:
Depreciation and amortization................... 89,482 59,635
Deferred income taxes........................... (3,839) 1,643
Net loss on disposal of property and equipment.. 597 366
Tax benefit from stock options exercised........ 9,970 5,740
Changes in assets and liabilities:
Trade and notes receivable................... (29,076) (78,258)
Inventories.................................. (76,196) (110,227)
Other assets................................. (26,780) (49,207)
Accounts payable............................. 33,177 (18,097)
Accrued expenses............................. 35,697 (7,000)
Income taxes payable......................... 889 18,203
Other liabilities............................ 14,833 (3,927)
------------ ------------
Net cash provided by operating activities.. 384,365 58,538
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment....... (150,027) (82,289)
Proceeds from sales of property and equipment.... 6 313
Capitalized software development costs........... (15,514) (12,400)
Purchase of short-term and long-term investments,
net............................................. (187,613) (209,981)
Business acquisitions............................ (19,700) --
------------ ------------
Net cash used by investing activities...... (372,848) (304,357)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock......................... 16,418 11,998
Redemption of 4 1/4% convertible subordinated
notes due 2001.................................. -- (65)
Issuance of 3 1/4% convertible subordinated notes
due 2002, net of issuance costs................. -- 506,671
Payment of long-term and short-term obligations.. (8,747) (9,050)
Issuance of long-term and short-term obligations. 10,632 1,419
------------ ------------
Net cash provided by financing activities.. 18,303 510,973
------------ ------------
Effect of exchange rate changes on cash............ (631) (2,405)
Net increase in cash and cash equivalents.......... 29,820 265,154
Cash and cash equivalents at beginning of period... 954,595 496,377
------------ ------------
Cash and cash equivalents at end of period......... $ 983,784 $ 759,126
------------ ------------
Non-cash activity:
Conversions of notes............................. -- $140,682
Business acquisitions............................ $22,300 --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
Company
EMC Corporation and its subsidiaries ("EMC" or the "Company") design,
manufacture, market and support a wide range of enterprise systems and
software products and related services for the enterprise storage market
worldwide. EMC's products provide solutions for a wide range of customer
information storage requirements, from the highest performance mission
critical applications to extremely high capacity business support
applications. EMC's solutions integrate with major open systems operating
systems such as UNIX, Microsoft Corporation's Windows NT and International
Business Machines Corporation's ("IBM") OS400 as well as major mainframe
operating systems such as IBM's MVS. EMC's products are sold as storage
solutions for customers utilizing a variety of computer system platforms
including, but not limited to, IBM and IBM- compatible mainframe, Unisys
Corporation, Compagnie des Machines Bull S.A., Hewlett-Packard Company ("HP"),
NCR Corporation, Sequent Computer Systems, Inc., Siemens Nixdorf
Informationssysteme AG, Silicon Graphics, Inc. ("SGI") and other open systems
and mainframe platforms.
Accounting
The accompanying consolidated interim financial statements are unaudited and
have been prepared in accordance with generally accepted accounting
principles. These statements include the accounts of EMC and its subsidiaries.
Certain information and footnote disclosures normally included in the
Company's annual consolidated financial statements have been condensed or
omitted. The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair statement of the results for the interim
periods ended June 30, 1998 and 1997.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the entire fiscal
year. It is suggested that these interim consolidated financial statements be
read in conjunction with the audited consolidated financial statements for the
year ended December 31, 1997, which are contained in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March
6, 1998.
2. INVENTORY
Inventories consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Purchased parts......................................... $ 24,778 $ 24,641
Work-in-process......................................... 314,371 240,845
Finished goods.......................................... 141,707 139,174
-------- --------
$480,856 $404,660
======== ========
</TABLE>
6
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. NET INCOME PER SHARE
Calculation of earnings per share is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
BASIC:
Net income..................................... $ 189,496 $ 128,799
Weighted average shares, basic................. 498,647,929 492,476,670
Net income per share, basic.................... $ 0.38 $ 0.26
============= =============
DILUTED:
Net income..................................... $ 189,496 $ 128,799
Add back of interest expense on convertible
notes......................................... 4,205 4,205
Less tax effect of interest expense on
convertible notes............................. (1,682) (1,682)
------------- -------------
Net income for calculating diluted earnings per
share......................................... $ 192,019 $ 131,322
Weighted average shares........................ 498,647,929 492,476,670
Weighted common stock equivalents.............. 38,901,715 35,422,810
------------- -------------
Total weighted average shares, diluted......... 537,549,644 527,899,480
Net income per share, diluted.................. $ 0.36 $ 0.25
============= =============
<CAPTION>
FOR THE SIX MONTHS ENDED
-----------------------------
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
BASIC:
Net income..................................... $ 335,611 $ 239,667
Weighted average shares, basic................. 497,943,909 492,036,768
Net income per share, basic.................... $ 0.67 $ 0.49
============= =============
DILUTED:
Net income..................................... $ 335,611 $ 239,667
Add back of interest expense on convertible
notes......................................... 8,409 5,092
Less tax effect of interest expense on
convertible notes............................. (3,364) (2,037)
------------- -------------
Net income for calculating diluted earnings per
share......................................... $ 340,656 $ 242,722
Weighted average shares........................ 497,943,909 492,036,768
Weighted common stock equivalents.............. 38,486,858 26,789,328
------------- -------------
Total weighted average shares, diluted......... 536,430,767 518,826,096
Net income per share, diluted.................. $ 0.64 $ 0.47
============= =============
</TABLE>
7
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
establishes standards for reporting and displaying comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general- purpose financial statements. This Statement requires the
classification of items of comprehensive income by their nature in a financial
statement and the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
the balance sheet. Financial statements for prior periods must be restated.
The Company's total comprehensive income was as follows:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
----------------- ------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income............................. $189,496 $128,799 $335,611 $239,667
Other comprehensive income/(expense),
net of tax:
Unrealized gain on investments....... 409 -- 116 --
Cumulative translation adjustment.... 45 (514) (209) (1,304)
-------- -------- -------- --------
Total other comprehensive
income/(expense)...................... 454 (514) (93) (1,304)
-------- -------- -------- --------
Total comprehensive income............. $189,950 $128,285 $335,518 $238,363
======== ======== ======== ========
</TABLE>
5. LITIGATION
In August 1997, TM Patents, L.P. ("TM") filed suit against the Company in
the United States District Court for the Southern District of New York
alleging that the Company is infringing two patents and seeking unspecified
damages. The Company filed a motion to transfer the case to the United States
District Court for the District of Massachusetts and a motion to dismiss the
suit. The Company's motion to transfer was granted with leave for the
plaintiff to amend the complaint to overcome the grounds for dismissal. In the
amended complaint, TM alleged infringement only as to one of the two patents
originally at issue. Fact discovery in this case has concluded. A trial is set
for January 1999. The Company believes TM's claims are without merit.
In December 1997, NewFrame Corporation Ltd. ("NewFrame") filed suit against
the Company in the United States District Court for the District of
Massachusetts. The suit contains a variety of allegations relating to the
Company's use of NewFrame's software developments, including various contract
claims and breach of fiduciary duty, and seeks monetary damages relating
primarily to lost future profits. The Company filed a motion to dismiss the
complaint, which was granted in part. The Company believes NewFrame's claims
are without merit.
In January 1998, Storage Technology Corporation ("STK") filed suit against
the Company in the United States District Court for the Northern District of
California alleging that the Company is infringing one patent and seeking
unspecified damages. The Company has answered and counterclaimed. Among other
defenses, the Company has asserted that its activities are covered by a
license agreement between the parties. A trial on the license issue was held
from August 4 to August 6, 1998. A decision from the court is expected
shortly. The Company believes STK's claims are without merit.
The Company is a party to other litigation which it considers routine and
incidental to its business. Management does not expect the results of any of
these actions to have a material adverse effect on the Company's business,
results of operations or financial condition.
8
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. ACQUISITION
In April 1998, the Company acquired all of the outstanding common stock of
Groupe MCI, a French information technology professional services firm, in
exchange for cash and common stock. The acquisition was accounted for as a
purchase. Pro forma presentations have not been included as the acquisition
was not material to the results of operations or financial condition of the
Company.
7. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("FAS 133"). FAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000
for the Company). FAS 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in either current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. For fair-
value hedge transactions in which the Company is hedging changes in fair value
of an asset, liability, or firm commitment, changes in the fair value of the
derivative instrument will generally be offset in the income statement by
changes in the fair value of the hedged item. For cash-flow hedge
transactions, in which the Company is hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
other comprehensive income. The gains and losses on the derivative instrument
that are reported in other comprehensive income will be reclassified as
earnings in the periods in which earnings are impacted by the variability of
the cash flows of the hedged item. The ineffective portion of all hedges will
be recognized in current earnings.
The Company is assessing the impact of FAS 133, and currently believes it
will not have a material impact on its earnings or statement of financial
position.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") should be read in conjunction with "Factors That May
Affect Future Results" set forth on page 15 and in EMC's other filings with
the U.S. Securities and Exchange Commission.
ALL DOLLAR AMOUNTS IN THE MD&A ARE IN MILLIONS.
RESULTS OF OPERATIONS--SECOND QUARTER OF 1998 COMPARED TO SECOND QUARTER OF
1997
Revenues
Total revenues for the second quarter of 1998 were $952.0 compared to $713.5
for the second quarter of 1997, an increase of $238.5 or 33%.
Enterprise systems revenues from products sold directly and through OEMs and
resellers were $765.8 in the second quarter of 1998, compared to $604.1 in the
second quarter of 1997, an increase of $161.7 or 27%. The increase was due to
continued strong demand for the Company's Symmetrix series of products in all
geographies. These products address the growing demand for enterprise-wide
storage solutions, allowing users to move, store and protect mission critical
information in mainframe, UNIX and Windows NT environments.
Enterprise software revenues from products sold directly and through OEMs
and resellers were $97.9 in the second quarter of 1998 compared to $40.8 in
the second quarter of 1997, an increase of $57.1 or 140%. Enterprise software
products provide primary and extended functionality for the Company's storage
products.
Revenues from products sold by McDATA Corporation, primarily the ESCON
Director series of products, were $55.1 in the second quarter of 1998,
compared to $49.6 in the second quarter of 1997, an increase of $5.5 or 11%.
Revenues from service and rental income were $33.2 in the second quarter of
1998, compared to $19.0 in the second quarter of 1997, an increase of $14.2 or
75%.
In May 1998, the Company announced the expansion of the terms and scope of
its original reseller agreement with HP. This will enable HP to resell the
Company's enterprise systems and software for connection to its Intel-based HP
NetServer Systems, a leading Windows NT platform. Revenues for the second
quarter of 1998 and 1997 under this agreement were $186.2 and $118.6, or 20%
and 17% of total revenues, respectively.
Revenues on sales into the North American markets were $577.2 in the second
quarter of 1998 compared to $400.5 in the second quarter of 1997, an increase
of $176.7 or 44%.
Revenues on sales into all markets outside North America were $374.8 in the
second quarter of 1998 compared to $312.9 in the second quarter of 1997. This
represented 39% and 44% of total revenues, respectively.
Revenues on sales into the markets of Europe, Africa and the Middle East
were $295.3 in the second quarter of 1998 compared to $238.8 in the second
quarter of 1997, an increase of $56.5 or 24%.
Revenues on sales into the markets of the Asia Pacific region were $71.1 in
the second quarter of 1998 compared to $68.2 in the second quarter of 1997, an
increase of $2.9 or 4%.
Revenues on sales into the markets of South America were $8.5 in the second
quarter of 1998 compared to $5.9 in the second quarter of 1997, an increase of
$2.6 or 43%.
10
<PAGE>
Gross Margins
Gross margins increased to 50.9% of revenues in the second quarter of 1998,
compared to 46.1% of revenues in the second quarter of 1997. This increase is
primarily attributable to increased licensing of the Company's enterprise
software which has higher gross margins than sales of hardware. Other factors
affecting gross margins in the second quarter of 1998 include the impact of
component cost declines being greater than the impact of price declines. The
Company currently believes that price declines will continue.
Research and Development
Research and development ("R&D") expenses were $74.2 and $53.4 in the second
quarters of 1998 and 1997, respectively, an increase of $20.8 or 38.9%. R&D
expenses were 7.8% and 7.5% of revenues in the second quarters of 1998 and
1997, respectively. The dollar increase was partially due to the cost of
additional technical staff to support a variety of projects including both
fibre channel connectivity and enterprise software products. This increase is
also attributable to expenses associated with computer equipment acquired to
facilitate this development. The Company expects to continue to spend
substantial amounts for R&D for the balance of 1998 and thereafter.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $177.4 and $114.6
in the second quarters of 1998 and 1997, respectively, an increase of $62.8 or
54.7%. SG&A expenses were 18.6% and 16.1% of revenues in the second quarters of
1998 and 1997, respectively. The dollar and percentage increase is due
primarily to costs associated with a continued investment in additional
worldwide sales and support personnel and their related overhead costs with the
objective of achieving broader coverage and greater account depth around the
world. SG&A expenses are expected to increase in dollar terms for the balance
of 1998 and thereafter.
Investment Income and Interest Expense
Investment income was $24.0 in the second quarter of 1998 compared with $17.4
in the same period a year ago. Interest income was earned from investments in
cash equivalents, and short and long-term investments. Investment income
increased in the second quarter of 1998 primarily due to higher cash and
investment balances which were derived from operations.
Interest expense was $5.0 in the second quarter of 1998 as compared to $4.6
in the second quarter of 1997 and relates primarily to the $517.5 of 3 1/4%
convertible subordinated notes due 2002 (the "Notes") issued in March 1997.
Provision for Income Taxes
The provision for income taxes was $63.2 and $44.4 in the second quarters of
1998 and 1997, respectively, which resulted in an effective tax rate of 25.0%
in the second quarter of 1998 and 25.6% in the second quarter of 1997. The
decrease in the effective tax rate is mainly attributable to the realization of
benefits associated with the continued progress on the Company's various tax
strategies.
11
<PAGE>
RESULTS OF OPERATIONS--FIRST SIX MONTHS OF 1998 COMPARED TO FIRST SIX MONTHS
OF 1997
Revenues
Total revenues for the first six months ended June 30, 1998 were $1,780.4
compared to $1,331.9 for the first six months of 1997, an increase of $448.5
or 34%.
Enterprise systems revenues from products sold directly and through OEMs and
resellers were $1,464.6 in the first six months of 1998, compared to $1,135.0
in the first six months of 1997, an increase of $329.6 or 29%. The increase
was due to continued strong demand for the Company's Symmetrix series of
products in all geographies. These products address the growing demand for
enterprise-wide storage solutions, allowing users to move, store and protect
mission critical information in mainframe, UNIX and Windows NT environments.
Enterprise software revenues from products sold directly and through OEMs
and resellers were $163.9 in the first six months of 1998 compared to $67.4 in
the first six months of 1997, an increase of $96.5 or 143%. Enterprise
software products provide primary and extended functionality for the Company's
storage products.
Revenues from products sold by McDATA Corporation, primarily the ESCON
Director series of products, were $96.3 in the first six months of 1998,
compared to $93.1 in the first six months of 1997, an increase of $3.2 or 3%.
Revenues from service and rental income were $55.6 in the first six months
of 1998, compared to $36.5 in the first six months of 1997, an increase of
$19.1 or 52%.
In February 1998, the Company announced a reseller agreement under which SGI
will resell the Company's enterprise systems and software for connection to
SGI's Origin servers and Onyx2 graphics systems.
In May 1998, the Company announced the expansion of the terms and scope of
its original reseller agreement with HP. This will enable HP to resell the
Company's enterprise systems and software for connection to its Intel-based HP
NetServer Systems, a leading Windows NT platform. Revenues for the first six
months of 1998 and 1997 under this agreement were $343.0 and $226.1, or 19%
and 17% of total revenues, respectively.
Revenues on sales into the North American markets were $1,058.9 in the first
six months of 1998 compared to $762.2 in the first six months of 1997, an
increase of $296.7 or 39%.
Revenues on sales into all markets outside North America were $721.5 in the
first six months of 1998 compared to $569.7 in the first six months of 1997.
This represented 41% and 43% of total revenues, respectively.
Revenues on sales into the markets of Europe, Africa and the Middle East
were $557.4 in the first six months of 1998 compared to $435.1 in the first
six months of 1997, an increase of $122.3 or 28%.
Revenues on sales into the markets of the Asia Pacific region were $148.1 in
the first six months of 1998 compared to $127.1 in the first six months of
1997, an increase of $21.0 or 17%.
Revenues on sales into the markets of South America were $16.0 in the first
six months of 1998 compared to $7.6 in the first six months of 1997, an
increase of $8.4 or 111%.
Gross Margins
Gross margins increased to 49.5% of revenues in the first six months of
1998, compared to 45.9% of revenues in the first six months of 1997. This
increase is primarily attributable to increased licensing of the Company's
enterprise software which has higher gross margins than sales of hardware.
Other factors affecting gross margins in the first six months of 1998 include
the impact of component cost declines being greater than the impact of price
declines. The Company currently believes that price declines will continue.
12
<PAGE>
Research and Development
Research and development ("R&D") expenses were $139.9 and $101.5 in the
first six months of 1998 and 1997, respectively, an increase of $38.4 or 38%.
R&D expenses were 7.9% and 7.6% of revenues in the first six months of 1998
and 1997, respectively. The dollar increase was partially due to the cost of
additional technical staff to support a variety of projects including both
fibre channel connectivity and enterprise software products. This increase is
also attributable to expenses associated with computer equipment acquired to
facilitate this development. The Company expects to continue to spend
substantial amounts for R&D for the balance of 1998 and thereafter.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $330.8 and $212.3
in the first six months of 1998 and 1997, respectively, an increase of $118.5
or 56%. SG&A expenses were 18.6% and 15.9% of revenues in the first six months
of 1998 and 1997, respectively. The dollar and percentage increase is due
primarily to costs associated with a continued investment in additional
worldwide sales and support personnel and their related overhead costs with
the objective of achieving broader coverage and greater account depth around
the world. SG&A expenses are expected to increase in dollar terms for the
balance of 1998 and thereafter.
Investment Income and Interest Expense
Investment income was $46.5 in the first six months of 1998 compared with
$29.1 in the same period a year ago. Interest income was earned from
investments in cash equivalents, and short and long-term investments.
Investment income increased in the first six months of 1998 primarily due to
higher cash and investment balances which were derived from operations and the
Notes issued in March 1997.
Interest expense increased by $3.7 to $9.7 in the first six months of 1998
from $6.0 in the first six months of 1997. The increase was attributable to
the Notes.
Provision for Income Taxes
The provision for income taxes was $111.9 and $82.7 in the first six months
of 1998 and 1997, respectively, which resulted in an effective tax rate of
25.0% in the first six months of 1998 and 25.6% in the first six months of
1997. The decrease in the effective tax rate is mainly attributable to the
realization of benefits associated with the continued progress on the
Company's various tax strategies.
13
<PAGE>
Financial Condition
Cash and cash equivalents and short and long-term investments were $1,867.6
and $1,650.6 at June 30, 1998 and December 31, 1997, respectively, an increase
of $217.0.
Cash provided by operating activities for the first six months of 1998 was
$384.4, generated primarily from net income. Cash used by investing activities
was $372.8, principally from the purchase of short-term and long-term
investments and additions to property, plant and equipment. Additions to
property, plant and equipment include approximately $25.0 accrued for
construction of the manufacturing facility in Franklin, Massachusetts. Cash
provided by financing activities was $18.3, principally from the issuance of
common stock from option exercises.
At June 30, 1998, the Company had available for use its credit line of $50.0
and may elect to borrow at any time. Based on its current operating and
capital expenditure forecasts, the Company presently believes that the
combination of funds currently available, funds generated from operations and
its available line of credit will be adequate to finance its ongoing
operations.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("FAS 133"). FAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000
for the Company). FAS 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in either current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. For fair-
value hedge transactions in which the Company is hedging changes in fair value
of an asset, liability, or firm commitment, changes in the fair value of the
derivative instrument will generally be offset in the income statement by
changes in the fair value of the hedged item. For cash-flow hedge
transactions, in which the Company is hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
other comprehensive income. The gains and losses on the derivative instrument
that are reported in other comprehensive income will be reclassified as
earnings in the periods in which earnings are impacted by the variability of
the cash flows of the hedged item. The ineffective portion of all hedges will
be recognized in current earnings.
The Company is assessing the impact of FAS 133, and currently believes it
will not have a material impact on its earnings or statement of financial
position.
Year 2000 Issues
The Company uses a significant number of computer software programs and
operating systems in its product development, financial business systems and
administrative functions. To the extent these software applications are unable
to appropriately interpret the upcoming calendar year "2000," conversion of
such applications will be necessary. The Company has implemented a program to
determine whether the Company's systems are "Year 2000" compliant, assess the
impact of any non-compliance and make any necessary adjustments. As part of
this program, the Company is in the process of making the necessary
conversions to its internal software. The Company anticipates that its
conversion program will be completed in a timely manner. The Company does not
anticipate that the total cost of such program will have a material adverse
effect on the Company's business, results of operations or financial
condition.
In addition, the Company has contacted its key suppliers and other key third
parties to determine the potential effect of the "Year 2000" issue on such
parties. To the extent such third parties are materially adversely affected by
the "Year 2000" issue, this could disrupt the Company's operations.
14
<PAGE>
There can be no assurance that the conversion of the Company's systems will
be successful or that the Company's key contractors will have successful
conversion programs, and that any such "Year 2000" compliance failures will
not have a material adverse effect on the Company's business, results of
operations or financial condition.
ECU Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to establish fixed conversion rates between their existing
sovereign currencies and the euro. The participating countries have agreed to
adopt the euro as their common legal currency on that date. The euro will then
trade on currency exchanges and be available for non-cash transactions. The
participating countries will issue sovereign debt exclusively in euros, and
will redenominate outstanding sovereign debt. At that time, the participating
countries will no longer control their own monetary policies by directing
independent interest rates for the legacy currencies. Instead, the authority
to direct monetary policy, including money supply and official interest rates
for the euro will be exercised by the new European Central Bank.
Following the introduction of the euro, the legacy currencies are scheduled
to remain legal tender in the participating countries as denominations of the
euro between January 1, 1999 and January 1, 2002 (the "transition period").
During the transition period, public and private parties may pay for goods and
services using either the euro or the participating country's legacy currency
on a "no compulsion, no prohibition" basis. However, conversion rates no
longer will be computed directly from one legacy currency to another. Instead,
a triangular process will apply whereby an amount denominated in one legacy
currency will first be converted into the euro. The resultant euro-denominated
amount will then be converted into the second legacy currency.
The Company has a task force assigned to address the business implications
of conversion to the euro, including technical adaptation of information
technology and other systems to accommodate euro-denominated transactions,
long term competitive implications of the conversions and the effect on market
risk with respect to financial instruments. At this time, management is in the
process of evaluating the impact of this conversion on the Company.
Factors That May Affect Future Results
This Quarterly Report on Form 10-Q contains forward-looking statements as
defined under the Federal Securities Laws. Actual results could differ
materially from those projected in the forward-looking statements as a result
of certain risk factors, including but not limited to: (i) a failure by any
supplier of high density DRAMs, disk drives or other components to meet EMC's
requirements for an extended period of time; (ii) delays in the development of
new technology and the transition to new products; (iii) the historic and
recurring "hockey stick" pattern of the Company's sales by which a
disproportionate percentage of a quarter's total sales occur in the last month
and weeks and days of each quarter; (iv) the "hockey stick" pattern of the
Company's sales, making it extremely difficult to predict near-term demand and
adjust production capacity accordingly; (v) competitive factors, including but
not limited to pricing pressures, in the computer storage market; (vi)
fluctuating currency exchange rates; (vii) the relative and varying rates of
product price and component cost declines; (viii) deterioration or termination
of the agreements with certain of the Company's OEMs or resellers; (ix) risks
associated with acquisitions; (x) Year 2000 issues; (xi) other one-time events
and other important factors disclosed previously and from time to time in
EMC's other filings with the U.S. Securities and Exchange Commission.
15
<PAGE>
EMC CORPORATION
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1997, TM Patents, L.P. ("TM") filed suit against the Company in
the United States District Court for the Southern District of New York
alleging that the Company is infringing two patents and seeking unspecified
damages. The Company filed a motion to transfer the case to the United States
District Court for the District of Massachusetts and a motion to dismiss the
suit. The Company's motion to transfer was granted with leave for the
plaintiff to amend the complaint to overcome the grounds for dismissal. In the
amended complaint, TM alleged infringement only as to one of the two patents
originally at issue. Fact discovery in this case has concluded. A trial is set
for January 1999. The Company believes TM's claims are without merit.
In December 1997, NewFrame Corporation Ltd. ("NewFrame") filed suit against
the Company in the United States District Court for the District of
Massachusetts. The suit contains a variety of allegations relating to the
Company's use of NewFrame's software developments, including various contract
claims and breach of fiduciary duty, and seeks monetary damages relating
primarily to lost future profits. The Company filed a motion to dismiss the
complaint, which was granted in part. The Company believes NewFrame's claims
are without merit.
In January 1998, Storage Technology Corporation ("STK") filed suit against
the Company in the United States District Court for the Northern District of
California alleging that the Company is infringing one patent and seeking
unspecified damages. The Company has answered and counterclaimed. Among other
defenses, the Company has asserted that its activities are covered by a
license agreement between the parties. A trial on the license issue was held
from August 4 to August 6, 1998. A decision from the court is expected
shortly. The Company believes STK's claims are without merit.
The Company is a party to other litigation which it considers routine and
incidental to its business. Management does not expect the results of any of
these actions to have a material adverse effect on the Company's business,
results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 23, 1998, the Company issued 602,702 shares of its common stock,
$.01 par value per share, in connection with the acquisition of the
outstanding common stock of Groupe MCI, a French information technology
professional services firm.
These shares were issued pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
provided for in Section 4(2) thereunder.
The Company filed a Registration Statement on Form S-3 with the Securities
and Exchange Commission under the Securities Act, which became effective on
August 5, 1998 and which permits the resale, on a registered basis, of these
shares from time to time by the securityholders named therein. The Company
also listed these shares of common stock on the New York Stock Exchange.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 6, 1998. There was no
solicitation in opposition to management's nominees as listed in the Company's
proxy statement and all such nominees were elected as Class II directors for a
three-year term. In addition, the stockholders approved an amendment to the
Company's 1993 Stock Option Plan to increase the number of shares available
for grant under the plan by 3,500,000, and an amendment to the Company's 1989
Employee Stock Purchase Plan to provide that employees whose customary
employment is 20 hours or less per week are ineligible to participate in the
plan. The results of the votes for each of these proposals were as follows:
16
<PAGE>
1. Election of Class II Directors:
<TABLE>
<CAPTION>
FOR WITHHELD
----------- ----------
<S> <C> <C>
John R. Egan............................................. 439,047,923 15,076,022
Joseph F. Oliveri........................................ 439,352,075 14,771,870
Michael C. Ruettgers..................................... 439,083,330 15,040,615
</TABLE>
In addition to these directors, the Company's other incumbent directors
(Richard J. Egan, Michael J. Cronin, John F. Cunningham, Maureen E. Egan, and
W. Paul Fitzgerald) had terms that continued after the 1998 Annual Meeting.
2. To amend the Company's 1993 Stock Option Plan:
<TABLE>
<S> <C>
For:........................................................ 379,030,950
Against:.................................................... 72,874,548
Abstain:.................................................... 2,217,047
Broker Non-Votes:........................................... 1,400
</TABLE>
3. To amend the Company's 1989 Employee Stock Purchase Plan:
<TABLE>
<S> <C>
For:........................................................ 442,646,692
Against:.................................................... 8,697,433
Abstain:.................................................... 2,778,420
Broker Non-Votes:........................................... 1,400
</TABLE>
ITEM 5. OTHER INFORMATION
On July 22, 1998, the Company's Board of Directors amended its By-laws,
including certain amendments to Sections 2.4 and 3.2 thereof relating to
advance notice procedures, which are as follows.
Section 2.4 now provides that no business may be brought before an annual
meeting except as specified in the notice of the meeting or as otherwise
brought before the meeting by or at the direction of the Board of Directors,
the presiding officer or by a stockholder entitled to vote at such annual
meeting who has delivered notice to the principal executive offices of the
Company (containing certain information specified in the By-laws) (i) not less
than 95 days nor more than 125 days prior to the first anniversary of the
preceding year's annual meeting, or (ii) for a special meeting or an annual
meeting called for a date which is not within 30 days before or after such
anniversary date, not later than the close of business on the 10th day
following the date notice of such meeting is mailed or made public, whichever
is earlier.
Section 3.2 now provides that nominations for a director may be made only by
the Board of Directors, a nominating committee of the Board of Directors, a
person appointed by the Board of Directors or by a stockholder entitled to
vote who has delivered notice to the principal executive offices of the
Company (containing certain information specified in the By-laws) (i) not less
than 95 days nor more than 125 days prior to the first anniversary of the
preceding year's annual meeting, or (ii) if the meeting is called for a date
which is not within 30 days before or after such anniversary date, not later
than the close of business on the 10th day following the date notice of such
meeting is mailed or made public, whichever is earlier.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company for the quarter ended June
30, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMC CORPORATION
Date: August 13, 1998
By: /s/ COLIN G. PATTESON
---------------------------------
Colin G. Patteson
Senior Vice President,
Chief Administrative Officer and
Treasurer
(Principal Financial Officer)
By: /s/ WILLIAM J. TEUBER, JR.
---------------------------------
William J. Teuber, Jr.
Vice President and Chief
Financial Officer
(Principal Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule (filed herewith)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EMC
CORPORATION'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 983,784
<SECURITIES> 402,113
<RECEIVABLES> 814,076
<ALLOWANCES> 7,645
<INVENTORY> 480,856
<CURRENT-ASSETS> 2,765,689
<PP&E> 487,668
<DEPRECIATION> 298,348
<TOTAL-ASSETS> 3,963,199
<CURRENT-LIABILITIES> 600,940
<BONDS> 517,500
0
0
<COMMON> 4,995
<OTHER-SE> 2,759,008
<TOTAL-LIABILITY-AND-EQUITY> 3,963,199
<SALES> 1,724,755
<TOTAL-REVENUES> 1,780,353
<CGS> 898,616
<TOTAL-COSTS> 1,369,368
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,729
<INCOME-PRETAX> 447,481
<INCOME-TAX> 111,870
<INCOME-CONTINUING> 335,611
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 335,611
<EPS-PRIMARY> .67
<EPS-DILUTED> .64
</TABLE>
