SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended: September 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 501,847,214
Class Outstanding as
of September 30, 1998
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EMC CORPORATION
Page
No
Part I-Financial Information
Consolidated Balance Sheets at September 30, 1998 and 3
December 31, 1997
Consolidated Statements of Income for the Three and Nine 4
Months Ended September 30, 1998
and 1997
Consolidated Statements of Cash Flows for the Nine Months 5
Ended September 30, 1998 and 1997
Notes to Interim Consolidated Financial Statements 6-9
Management's Discussion and Analysis of Financial 10-17
Condition and Results of Operations
Part II-Other Information 18
Signatures 19
Exhibit Index 20
2
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EMC CORPORATION
PART I.
FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
September December
30, 1998 31, 1997
ASSETS
Current assets:
Cash and cash equivalents $ 903,726 $ 954,595
Short-term investments 446,954 419,262
Trade and notes receivable less
allowance for doubtful accounts of
$7,495 and $6,773 in 1998 and
1997, respectively 837,647 788,869
Inventories 521,745 404,660
Deferred income taxes 46,184 37,095
Other assets 61,091 22,545
Total current assets 2,817,347 2,627,026
Long-term investments 575,982 276,776
Notes receivable, net 32,927 20,013
Property, plant and equipment, net 584,575 396,511
Deferred income taxes 8,841 14,174
Intangible and other assets, net 235,597 155,609
Total assets $4,255,269 $3,490,109
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
obligations $ 28,216 $ 7,665
Accounts payable 219,249 187,117
Accrued expenses 202,309 151,216
Income taxes payable 147,247 151,088
Deferred revenue 33,673 8,784
Total current liabilities 630,694 505,870
Deferred income taxes 49,414 45,353
Long-term obligations:
3 1/4% convertible subordinated
notes due 2002 517,500 517,500
Notes payable 20,657 40,954
Other liabilities 2,687 4,131
Total liabilities $1,220,952 $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 501,847,214 and 496,792,608
in 1998 and 1997, respectively 5,018 4,968
Additional paid-in capital 787,065 670,297
Deferred compensation (16,231) (12,738)
Unrealized gain/(loss) on
investments 7,996 (9)
Retained earnings 2,248,257 1,711,356
Cumulative translation adjustment 2,212 2,427
Total stockholders' equity 3,034,317 2,376,301
Total liabilities and
stockholders' equity $4,255,269 $3,490,109
The accompanying notes are an integral part of the consolidated
financial statements.
3
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EMC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
For the Three Months Ended For the Nine Months Ended
September September September September
30, 1998 30, 1997 30, 1998 30, 1997
Revenues:
Net sales $ 945,806 $ 713,949 $ 2,670,561 $ 2,009,360
Service and rental 56,735 18,621 112,333 55,108
1,002,541 732,570 2,782,894 2,064,468
Costs and expenses:
Cost of sales and
service 478,187 391,278 1,376,803 1,111,808
Research and
development 80,422 56,531 220,325 158,068
Selling, general and
administrative 193,068 122,093 523,917 334,357
Operating income 250,864 162,668 661,849 460,235
Investment income 25,765 20,708 72,226 49,804
Interest expense (4,862) (4,706) (14,591) (10,748)
Other income/(expense),net (3,380) (294) (3,616) 1,434
Income before taxes 268,387 178,376 715,868 500,725
Income tax provision 67,097 45,754 178,967 128,436
Net income $ 201,290 $ 132,622 $ 536,901 $ 372,289
Net income per weighted
average share, basic $0.40 $0.27 $1.08 $0.76
Net income per weighted
average share, diluted $0.38 $0.25 $1.01 $0.72
Weighted average shares,
basic 501,111 494,667 499,006 492,936
Weighted average shares,
diluted 540,299 531,352 537,944 523,271
The accompanying notes are an integral part of the consolidated
financial statements.
4
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EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the
Nine Months Ended
September September
30, 1998 30, 1997
Cash flows from operating activities:
Net income $536,901 $372,289
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 142,995 95,499
Deferred income taxes 305 6,579
Net loss on disposal of property
and equipment 646 491
Tax benefit from stock options
exercised 23,470 16,500
Changes in assets and liabilities:
Trade and notes receivable (60,745) (45,001)
Inventories (117,088) (112,448)
Other assets (32,554) (42,678)
Accounts payable 32,689 (52,731)
Accrued expenses 51,039 (6,250)
Income taxes payable (3,817) 26,020
Other liabilities 23,585 (3,984)
Net cash provided by operating
activities 597,426 254,286
Cash flows from investing activities:
Additions to property, plant and
equipment (280,683) (125,837)
Proceeds from sales of property and
equipment 6 313
Capitalized software development
costs (27,294) (19,385)
Purchase of short-term and long-term
investments, net (318,893) (157,193)
Business acquisitions (53,903) ---
Net cash used by investing
activities (680,767) (302,102)
Cash flows from financing activities:
Issuance of common stock 33,012 26,342
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 (11,304) (9,763)
Issuance of long-term and short-term
obligations 11,558 1,713
Net cash provided by financing
activities 33,266 524,898
Effect of exchange rate changes on cash (794) (2,218)
Net increase/(decrease) in cash and
cash equivalents (50,075) 477,082
Cash and cash equivalents at beginning
of period 954,595 496,377
Cash and cash equivalents at end of
period $903,726 $971,241
Non-cash activity:
Conversion of notes --- $140,682
Business acquisitions $ 51,755 ---
The accompanying notes are an integral part of the consolidated
financial statements.
5
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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 worldwide enterprise storage market. 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"), International Computers Limited ("ICL") 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 September 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:
September 30, 1998 December 31, 1997
Purchased parts $ 35,047 $ 24,641
Work-in-process 307,382 240,845
Finished goods 179,316 139,174
$521,745 $404,660
6
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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:
For the Three Months Ended
September September
30, 1998 30, 1997
Basic:
Net income $ 201,290 $ 132,622
Weighted average shares, basic 501,110,827 494,666,658
Net income per share, basic $ 0.40 $ 0.27
Diluted:
Net income $ 201,290 $ 132,622
Add back of interest expense 4,205 4,205
on convertible notes
Less tax effect of interest
expense on convertible notes (1,682) (1,682)
Net income for calculating
diluted earnings per share $ 203,813 $ 135,145
Weighted average shares 501,110,827 494,666,658
Weighted common stock
equivalents 39,188,009 36,684,946
Total weighted average
shares, diluted 540,298,836 531,351,604
Net income per share,
diluted $ 0.38 $ 0.25
For the Nine Months Ended
September September
30, 1998 30, 1997
Basic:
Net income $ 536,901 $ 372,289
Weighted average shares, basic 499,005,954 492,936,168
Net income per share, basic $ 1.08 $ 0.76
Diluted:
Net income $ 536,901 $ 372,289
Add back of interest
expense on convertible notes 12,614 9,297
Less tax effect of interest
expense on convertible notes (5,046) (3,719)
Net income for calculating
diluted earnings per share $ 544,469 $ 377,867
Weighted average shares 499,005,954 492,936,168
Weighted common stock
equivalents 38,938,173 30,334,904
Total weighted average
shares, diluted 537,944,127 523,271,072
Net income per share,
diluted $ 1.01 $ 0.72
7
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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 is as follows:
For the Three For the Nine
Months Ended Months Ended
September September September September
30, 1998 30,1997 30, 1998 30, 1997
Net income $201,290 $132,622 $536,901 $372,289
Other comprehensive
income/(expense), net
of tax:
Unrealized gain on
investments 5,888 --- 6,004 ---
Cumulative translation
adjustment 47 (619) (162) (1,923)
Total other comprehensive
income/(expense) 5,935 (619) 5,842 (1,923)
Total comprehensive income $207,225 $132,003 $542,743 $370,366
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. Discovery
in this case has concluded. The Company's motions for summary
judgment based on invalidity and noninfringement were heard on
November 5, 1998. 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 was
infringing a patent purported to cover virtual tape and seeking
unspecified damages. The Company's response to the complaint was
to raise as an affirmative defense that EMC was licensed to
promote the use of, market, sell and make virtual tape products
pursuant to a patent license agreement between EMC and STK dated
April 11, 1996 (the "License Agreement"). After a trial held in
August 1998, the court ruled that EMC is licensed to promote the
use of, market, sell and make virtual tape products pursuant to
the License Agreement. As a result, the Court found that STK's
suit was without foundation and awarded costs to EMC. In October
1998, STK filed a Notice of Appeal of the Court's ruling.
8
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EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(in thousands, except share and per share amounts)
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.
6. Acquisitions
In April, July and August of 1998, the Company acquired all of
the outstanding common stock of Groupe MCI, Millennia III, Inc.,
and Conley Corporation, respectively, in exchange for cash and
common stock. The acquisitions were accounted for using the
purchase method. Accordingly, the purchase price was allocated
to assets and liabilities acquired based on their fair values.
Pro forma presentations have not been included as the
acquisitions were 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
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EMC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with
"Factors That May Affect Future Results" set forth on page 17
and in EMC's other filings with the U.S. Securities and Exchange
Commission.
All dollar amounts in this Management's Discussion and Analysis
are in millions.
Results of Operations - Third Quarter of 1998 compared to Third
Quarter of 1997
Revenues
Total revenues for the third quarter of 1998 were $1,002.5
compared to $732.6 for the third quarter of 1997, an increase of
$269.9 or 37%.
Enterprise systems revenues from products sold directly and
through OEMs and resellers were $792.0 in the third quarter of
1998, compared to $621.0 in the third quarter of 1997, an
increase of $171.0 or 28%. The increase was due to 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.
Enterprise software revenues from products sold directly and
through OEMs and resellers were $117.5 in the third quarter of
1998 compared to $49.8 in the third quarter of 1997, an increase
of $67.7 or 136%. Enterprise software products provide primary
and extended functionality for the Company's enterprise storage
products.
Revenues from products sold by McDATA Corporation, primarily
the ESCON Director series of products, were $36.2 in the third
quarter of 1998, compared to $43.1 in the third quarter of 1997,
a decrease of $6.9 or 16%, due primarily to the product
transition from ESCON-based to fibre channel-based directors.
Revenues from service and rental income were $56.7 in the third
quarter of 1998, compared to $18.6 in the third quarter of 1997,
an increase of $38.1 or 205%, primarily as a result of the
acquisitions of the professional services businesses Groupe MCI
and Millennia III, Inc. in the second and third quarters of 1998.
In May 1998, the Company announced the expansion of the terms
and scope of its original reseller agreement with HP. This
enables 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 third quarter of
1998 and 1997 under this agreement were $164.7 and $134.6, or 16%
and 18% of total revenues, respectively.
In July 1998, the Company announced a reseller agreement under
which ICL will resell the Company's enterprise systems and
software for connection to ICL's Trimetra range of servers
running VME, Unix and Windows NT.
Revenues on sales into the North American markets were $624.1
in the third quarter of 1998 compared to $426.7 in the third
quarter of 1997, an increase of $197.4 or 46%. The revenue
growth in North America reflects continued strong demand for the
Company's products and services.
Revenues on sales into the markets of Europe, Africa and the
Middle East were $294.9 in the third quarter of 1998 compared to
$221.6 in the third quarter of 1997, an increase of $73.3 or 33%.
Revenues on sales into the markets of the Asia Pacific region
were $67.9 in the third quarter of 1998 compared to $77.4 in the
third quarter of 1997, a decrease of $9.5 or 12%. The decrease
is principally attributable to the current economic trends
affecting the Asia Pacific markets.
10
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Revenues on sales into the markets of South America were $15.6
in the third quarter of 1998 compared to $6.9 in the third
quarter of 1997, an increase of $8.7 or 127%, as a result of the
Company's efforts to expand its business in this region.
Gross Margins
Gross margins increased to 52.3% of revenues in the third
quarter of 1998, compared to 46.6% of revenues in the third
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 enterprise systems. Other
factors affecting gross margins in the third quarter of 1998
include the impact of component cost declines being greater than
the impact of product price declines. The Company currently
believes that product price declines will continue.
Research and Development
Research and development ("R&D") expenses were $80.4 and
$56.5 in the third quarters of 1998 and 1997, respectively, an
increase of $23.9 or 42%. R&D expenses were 8.0% and 7.7% of
revenues in the third quarters of 1998 and 1997, respectively.
The dollar increase was primarily due to the cost of technical
staff and equipment to support a variety of projects including
both ongoing development of enterprise software products and
fibre channel connectivity and also includes the integration of
Conley Corporation in August 1998. 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
$193.1 and $122.1 in the third quarters of 1998 and 1997,
respectively, an increase of $71.0 or 58%. SG&A expenses were
19.3% and 16.7% of revenues in the third 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 building an
infrastructure to achieve 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 $25.8 in the third quarter of 1998
compared with $20.7 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
third quarter of 1998 primarily due to higher cash and investment
balances which were derived from operations.
Interest expense was $4.9 in the third quarter of 1998 as
compared to $4.7 in the third quarter of 1997 and relates
primarily to the $517.5 of 3 1/4% convertible subordinated notes
due 2002 issued in March 1997.
Other Income/(Expense), Net
The net other expense was $3.4 in the third quarter of 1998
compared with the net expense of $0.3 in the same period a year
ago. The increase is primarily attributable to costs associated
with a bond offering which was cancelled during the third
quarter, gains and losses on foreign exchange transactions, and
losses on sales of fixed assets.
11
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Provision for Income Taxes
The provision for income taxes was $67.1 and $45.8 in the third
quarters of 1998 and 1997, respectively, which resulted in an
effective tax rate of 25.0% in the third quarter of 1998 and
25.7% in the third 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.
12
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Results of Operations - First Nine Months of 1998 compared to
First Nine Months of 1997
Revenues
Total revenues for the first nine months ended September 30,
1998 were $2,782.9 compared to $2,064.5 for the first nine months
of 1997, an increase of $718.4 or 35%.
Enterprise systems revenues from products sold directly and
through OEMs and resellers were $2,256.6 in the first nine months
of 1998, compared to $1,756.0 in the first nine months of 1997,
an increase of $500.6 or 29%. The increase was due to 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.
Enterprise software revenues from products sold directly and
through OEMs and resellers were $281.4 in the first nine months
of 1998 compared to $117.2 in the first nine months of 1997, an
increase of $164.2 or 140%. Enterprise software products provide
primary and extended functionality for the Company's enterprise
storage products.
Revenues from products sold by McDATA Corporation, primarily
the ESCON Director series of products, were $132.5 in the first
nine months of 1998, compared to $136.2 in the first nine months
of 1997, a decrease of $3.7 or 3%, due primarily to the product
transition from ESCON-based to fibre channel-based directors.
Revenues from service and rental income were $112.3 in the
first nine months of 1998, compared to $55.1 in the first nine
months of 1997, an increase of $57.2 or 104%, primarily as a
result of the acquisitions of the professional services
businesses Groupe MCI and Millennia III, Inc. in the second and
third quarters of 1998.
In May 1998, the Company announced the expansion of the terms
and scope of its original reseller agreement with HP. This
enables 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 nine
months of 1998 and 1997 under this agreement were $507.7 and
$360.7, or 18% and 17% of total revenues, respectively.
Revenues on sales into the North American markets were $1,683.0
in the first nine months of 1998 compared to $1,188.9 in the
first nine months of 1997, an increase of $494.1 or 42%. The
revenue growth in North America reflects continued strong demand
for the Company's products and services.
Revenues on sales into the markets of Europe, Africa and the
Middle East were $852.3 in the first nine months of 1998 compared
to $656.7 in the first nine months of 1997, an increase of $195.6
or 30%.
Revenues on sales into the markets of the Asia Pacific region
were $216.0 in the first nine months of 1998 compared to $204.5
in the first nine months of 1997, an increase of $11.5 or 6%.
The reduced growth rate in 1998 is principally attributable to a
downturn in economic trends in the Asia Pacific markets.
Revenues on sales into the markets of South America were $31.6
in the first nine months of 1998 compared to $14.4 in the first
nine months of 1997, an increase of $17.2 or 119%, as a result of
the Company's efforts to expand its business in this region.
13
<PAGE>
Gross Margins
Gross margins increased to 50.5% of revenues in the first nine
months of 1998, compared to 46.1% of revenues in the first nine
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 enterprise systems. Other
factors affecting gross margins in the first nine months of 1998
include the impact of component cost declines being greater than
the impact of product price declines. The Company currently
believes that product price declines will continue.
Research and Development
Research and development ("R&D") expenses were $220.3 and
$158.1 in the first nine months of 1998 and 1997, respectively,
an increase of $62.2 or 39%. R&D expenses were 7.9% and 7.7% of
revenues in the first nine months of 1998 and 1997, respectively.
The dollar increase was primarily due to the cost of technical
staff and equipment to support a variety of projects including
both ongoing development of enterprise software products and
fibre channel connectivity and also includes the integration of
Conley Corporation in August 1998. 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
$523.9 and $334.4 in the first nine months of 1998 and 1997,
respectively, an increase of $189.5 or 57%. SG&A expenses were
18.8% and 16.2% of revenues in the first nine 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 building an
infrastructure to achieve 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 $72.2 in the first nine months of 1998
compared with $49.8 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 nine months of 1998 primarily due to higher cash and
investment balances which were derived from operations.
Interest expense increased by $3.9 to $14.6 in the first nine
months of 1998 from $10.7 in the first nine months of 1997. The
increase was attributable to the $517.5 of 3 1/4% convertible
subordinated notes due 2002 issued in March 1997.
Other Income/(Expense), Net
The net other expense was $3.6 in the first nine months of 1998
compared with the net other income of $1.4 in the same period a
year ago. The increase in the net expense is primarily
attributable to costs associated with a bond offering which was
cancelled during the third quarter, gains and losses on foreign
exchange transactions, and losses on sales of fixed assets.
Provision for Income Taxes
The provision for income taxes was $179.0 and $128.4 in the
first nine months of 1998 and 1997, respectively, which resulted
in an effective tax rate of 25.0% in the first nine months of
1998 and 25.7% in the first nine 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.
14
<PAGE>
Financial Condition
Cash and cash equivalents and short and long-term investments
were $1,926.7 and $1,650.6 at September 30, 1998 and December 31,
1997, respectively, an increase of $276.1.
Cash provided by operating activities for the first nine months
of 1998 was $597.4, generated primarily from net income. Cash
used by investing activities was $680.8, principally for the
purchase of short-term and long-term investments and additions to
property, plant and equipment. The year-over-year increase in
additions to property, plant and equipment is primarily
attributable to the construction of the manufacturing facilities
in Franklin, Massachusetts and Cork, Ireland. The increase
includes approximately $10.1 accrued for construction of the
manufacturing facility in Massachusetts. Cash provided by
financing activities was $33.3, principally from the issuance of
common stock from stock option exercises.
At September 30, 1998, the Company had available for use its
credit line of $50 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
Certain computer hardware and software is unable to
appropriately interpret the upcoming calendar year 2000. These
systems and software refer to years in terms of their final two
digits only and may interpret the year 2000 as the year 1900 in
error. Therefore, they will need to be modified prior to the
year 2000 in order to remain functional. The Company has
established a Year 2000 program that involves assessing the
Company's key hardware and software, assessing Year 2000
compliance by third parties with which the Company has a material
relationship, assessing Year 2000 compliance of the Company's
products, and modifying and testing hardware and software in the
Company's internal systems and products, where necessary.
The Company has completed an assessment of the hardware and
software in its core business information systems and has
substantially completed the necessary modifications. The Company
is now extending the assessment and remediation process to the
hardware and software in other information systems used in its
operations. The Company has contacted key vendors and suppliers
and other third parties whose systems failures could potentially
have a significant impact on the Company's operations and is
currently assessing questionnaire responses and related
information from such third parties.
15
<PAGE>
The Company has designed and tested the current versions of its
Symmetrix series of products and the current versions of its
other products to be Year 2000 compliant. Some of the Company's
customers are running earlier versions of its Symmetrix series of
products and other products that have not been tested for Year
2000 compliance. The Company has made upgrades available for the
older versions of its Symmetrix series of products and for
certain other of its older products so that such products will
test as Year 2000 compliant.
The Company anticipates that its Year 2000 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 effect on the Company's business, results of operations
or financial condition.
The most reasonably likely worst case scenario regarding the
Year 2000 issue would include a hardware failure, the corruption
or loss of data contained in the Company's internal information
systems, a failure affecting the Company's key vendors, suppliers
or customers, the failure of infrastructure services provided by
government agencies or other third parties, and customer
dissatisfaction related to the performance of the Company's
products.
The Company is currently assessing the need for a Year 2000
contingency plan. However, the Company anticipates that its Year
2000 conversion program will be completed far enough in advance
of January 1, 2000 so as to formulate a contingency plan at such
time, if necessary. The Company expects its contingency plan, if
developed, would include, among other things, manual "work-
arounds" for hardware and software failures, as well as
substitution of systems, if required.
There can be no assurance that conversion of the Company's
hardware and software will be successful, that key third parties
will have successful conversion programs, that the Company's
products do not contain undetected errors or defects associated
with Year 2000 date functions, or that other factors relating to
Year 2000 compliance, including litigation, will not have a
material adverse effect on the Company's business, results of
operations or financial condition.
Euro 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 third
legacy currency.
The Company has established plans and has begun developing the
necessary modifications for the technical adaptation of its
internal information technology and other systems to accommodate
euro-denominated transactions. The Company is currently
assessing the business implications of conversion to the euro,
including the long term competitive implications of the
conversions and the effect on market risk with respect to
financial instruments. At this time, management is also in the
process of evaluating other impacts of this conversion on the
Company, including the potential actions which may or may not be
taken by the Company's competitors and suppliers. The Company is
currently unable to determine the ultimate financial impact, if
any, of the conversion on its operations.
16
<PAGE>
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) economic trends
in various geographic markets and 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.
17
<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. Discovery
in this case has concluded. The Company's motions for summary
judgment based on invalidity and noninfringement were heard on
November 5, 1998. 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 was
infringing a patent purported to cover virtual tape and seeking
unspecified damages. The Company's response to the complaint was
to raise as an affirmative defense that EMC was licensed to
promote the use of, market, sell and make virtual tape products
pursuant to a patent license agreement between EMC and STK dated
April 11, 1996 (the "License Agreement"). After a trial held in
August 1998, the court ruled that EMC is licensed to promote the
use of, market, sell and make virtual tape products pursuant to
the License Agreement. As a result, the Court found that STK's
suit was without foundation and awarded costs to EMC. In October
1998, STK filed a Notice of Appeal of the Court's ruling.
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 July 1, 1998, the Company issued 504,464 shares of its
common stock, $.01 par value per share, in connection with the
acquisition of Millennia III, Inc, a 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 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 September 30, 1998.
18
<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: November 12, 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)
19
< Page>
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule (filed herewith)
20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM EMC CORPORATION FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 903,726
<SECURITIES> 446,954
<RECEIVABLES> 837,647
<ALLOWANCES> 7,495
<INVENTORY> 521,745
<CURRENT-ASSETS> 2,817,347
<PP&E> 584,575
<DEPRECIATION> 326,324
<TOTAL-ASSETS> 4,255,269
<CURRENT-LIABILITIES> 630,694
<BONDS> 517,500
0
0
<COMMON> 5,018
<OTHER-SE> 3,029,299
<TOTAL-LIABILITY-AND-EQUITY> 4,255,269
<SALES> 2,670,561
<TOTAL-REVENUES> 2,782,894
<CGS> 1,376,803
<TOTAL-COSTS> 2,121,045
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,591
<INCOME-PRETAX> 715,868
<INCOME-TAX> 178,967
<INCOME-CONTINUING> 536,901
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 536,901
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.01
</TABLE>
