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: March 31, 1999 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 506,165,804
______________________________________ ________________________________
Class Outstanding as of March 31, 1999
<PAGE>
EMC CORPORATION
Page
No
Part I-Financial Information
Consolidated Balance Sheets at March 31, 1999 and 3
December 31, 1998
Consolidated Statements of Income for the Three Months 4
Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Three 5
Months Ended March 31, 1999 and 1998
Consolidated Statements of Comprehensive Income for the 6
Three Months Ended March 31, 1999 and 1998
Notes to Interim Consolidated Financial Statements 7-11
Management's Discussion and Analysis of Financial 12-16
Condition and Results of Operations
Part II-Other Information 17
Signatures 18
Exhibit Index 19
2
<PAGE>
EMC CORPORATION
PART I.
FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
March 31, December 31,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $816,283 $705,177
Short-term investments 694,886 825,298
Trade and notes receivable less
allowance for doubtful accounts of
$7,798 and $6,562 in 1999 and 1998,
respectively 983,739 984,412
Inventories 526,624 485,844
Deferred income taxes 55,557 49,682
Other assets 67,935 54,400
Total current assets 3,145,024 3,104,813
Long-term investments 763,964 562,360
Notes receivable, net 37,233 34,870
Property, plant and equipment, net 666,379 637,534
Deferred income taxes 10,574 7,974
Intangible and other assets, net 235,454 221,020
Total assets $4,858,628 $4,568,571
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
obligations $ 23,763 $ 29,361
Accounts payable 190,853 173,285
Accrued expenses 269,177 246,894
Income taxes payable 176,165 167,580
Deferred revenue 48,031 36,073
Total current liabilities 707,989 653,193
Deferred income taxes 49,433 50,591
Long-term obligations:
3 1/4% convertible subordinated
notes due 2002 491,841 517,500
Notes payable 13,761 21,396
Other liabilities 1,521 1,755
Total liabilities 1,264,545 1,244,435
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 506,165,804
and 503,633,490 in 1999 and 1998,
respectively 5,062 5,036
Additional paid-in capital 897,560 830,238
Deferred compensation (27,118) (17,022)
Retained earnings 2,725,395 2,504,719
Unrealized gain/(loss) on investments (5,085) 979
Cumulative translation adjustment (1,731) 186
Accumulated other comprehensive
income/(expense) (6,816) 1,165
Total stockholders' equity 3,594,083 3,324,136
Total liabilities and
stockholders' equity $4,858,628 $4,568,571
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)
For the Three Months Ended
March 31, March 31,
1999 1998
Revenues:
Net sales $1,055,546 $805,933
Service and rental 72,409 22,418
1,127,955 828,351
Costs and expenses:
Cost of sales and service 527,409 431,136
Research and development 100,722 65,675
Selling, general and administrative 224,599 153,496
Operating income 275,225 178,044
Investment income 25,582 22,507
Interest expense (5,194) (4,730)
Other expense, net (1,378) (1,001)
Income before taxes 294,235 194,820
Income tax provision 73,559 48,705
Net income $220,676 $146,115
Net income per weighted average share,
basic $ 0.44 $ 0.29
Net income per weighted average share,
diluted $ 0.41 $ 0.28
Weighted average shares, basic 504,477 497,234
Weighted average shares, diluted 545,646 535,120
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Three Months Ended
March 31, March 31,
1999 1998
Cash flows from operating activities:
Net income $220,676 $146,115
Adjustments to reconcile net income to
net cash provided/(used) by operating
activities:
Depreciation and amortization 65,826 43,530
Deferred income taxes (9,633) (453)
Net loss on disposal of property
and equipment 79 163
Tax benefit from stock options
exercised 13,320 3,925
Minority interest (184) 239
Changes in assets and liabilities:
Trade and notes receivable (3,823) 49,295
Inventories (40,967) (21,330)
Other assets (36,539) (25,650)
Accounts payable 16,074 29,193
Accrued expenses 22,639 (7,116)
Income taxes payable 9,326 (65)
Deferred revenue 11,811 8,916
Net cash provided by operating
activities 268,605 226,762
Cash flows from investing activities:
Additions to property, plant and
equipment (72,488) (54,974)
Proceeds from sales of property and
equipment - 4
Capitalized software development costs (10,202) (8,014)
Maturity/(purchase) of short-term and
long-term investments, net (77,256) 90,642
Net cash provided/(used) by
investing activities (159,946) 27,658
Cash flows from financing activities:
Issuance of common stock 15,326 4,469
Payment of long-term and short-term
obligations (13,623) (7,881)
Issuance of long-term and short-term
obligations 390 1,224
Net cash provided/(used)
by financing activities 2,093 (2,188)
Effect of exchange rate changes on cash 354 (500)
Net increase in cash and cash
equivalents 110,752 252,232
Cash and cash equivalents at beginning
of period 705,177 954,595
Cash and cash equivalents at end of
period $816,283 $1,206,327
Non-cash activity-conversion of 3 1/4%
convertible subordinated notes $ 25,659 -
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
For the Three Months Ended
March 31, March 31,
1999 1998
Net income $220,676 $146,115
Other comprehensive expense, net
of tax:
Foreign currency translation
adjustments, net of tax
of $(479) and $(85) (1,438) (254)
Unrealized losses on investment
securities and derivatives:
Unrealized holding losses
arising during the period,
net of tax $(1,516) and $(98) (4,548) (293)
Other comprehensive expense (5,986) (547)
Comprehensive income $214,690 $145,568
The accompanying notes are an integral part of the consolidated
financial statements.
6
<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 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 and Windows NT as well as major
mainframe operating systems. 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, Hewlett-Packard Company (''HP''), NEC Corporation,
Siemens Nixdorf Informationssysteme AG, Unisys Corporation,
Sequent Computer Systems, Inc., Compagnie des Machines Bull S.A.
and other open systems and mainframe platforms.
Accounting
The accompanying consolidated financial statements are
unaudited and have been prepared in accordance with generally
accepted accounting principles. These statements include the
accounts of EMC and its subsidiaries. Certain information and
footnote disclosures normally included in the Company's annual
consolidated financial statements have been condensed or omitted.
The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting only of normal
recurring accruals) necessary for a fair statement of the results
for the interim periods ended March 31, 1999 and 1998.
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, 1998, which are contained in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange
Commission on March 11, 1999.
2. Inventories
Inventories consist of:
March 31, December 31,
1999 1998
Purchased Parts $ 34,193 $ 29,562
Work-in-process 311,636 283,815
Finished goods 180,795 172,467
$526,624 $485,844
7
<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:
For the Three Months Ended
March 31, March 31,
1999 1998
Basic:
Net income $ 220,676 $ 146,115
Weighted average shares,
basic 504,476,983 497,234,497
Net income per share,
basic $ 0.44 $ 0.29
Diluted:
Net income $ 220,676 $ 146,115
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 $ 223,199 $ 148,638
Weighted average shares 504,476,983 497,234,497
Weighted common stock
equivalents 41,169,107 37,885,113
Total weighted average
shares, diluted 545,646,090 535,119,610
Net income per share,
diluted $ 0.41 $ 0.28
4. Litigation
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 parties reached a
negotiated resolution of this matter in April 1999.
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 covering virtual tape and seeking preliminary
and permanent injunctions and unspecified damages. The Company's
response raised 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. The Court found that STK's suit was without
foundation and awarded costs to EMC. In October 1998, STK filed an
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.
8
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share and per share amounts)
5. Adoption of New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board
(''FASB'') issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS
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
accumulated other comprehensive income/(expense), 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 accumulated
other comprehensive income/(expense). The gains and losses on the
derivative instrument that are reported in accumulated other
comprehensive income/(expense) 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 adopted SFAS 133 on January 1, 1999. As a result
of this adoption, all derivatives are recognized on the balance
sheet at fair value. The Company uses derivatives to hedge
foreign currency cash flows on a continuing basis for periods
consistent with its net asset and forecasted exposures. Since the
Company is using foreign exchange derivative contracts to hedge
foreign exchange exposures, the changes in the value of the
derivatives are highly effective in offsetting changes in the fair
value or cash flows of the hedged item. Any ineffective portion of
the derivatives is recognized in current earnings, which
represented an immaterial amount in the first quarter of 1999.
The ineffective portion of the derivatives is primarily related to
option premiums and discounts or premiums on forward contracts.
All derivative contracts generally mature within six months.
The Company hedges its net asset (balance sheet) position with
forward exchange contracts. Since these derivatives hedge
existing net assets that are denominated in foreign currencies,
the contracts do not qualify for hedge accounting under SFAS 133.
The changes in fair value from these contracts as well as the
underlying exposures are generally offsetting, and are recorded in
other income/expense on the income statement.
The Company uses forward exchange and option contracts to hedge
a portion of its forecasted transactions. These derivatives are
designated as cash-flow hedges, and changes in their fair value
are carried in accumulated other comprehensive income/(expense)
until the underlying forecasted transaction occurs. Once the
underlying forecasted transaction is realized, the appropriate
gain or loss from the derivative designated as a hedge of the
transaction is reclassified from accumulated other comprehensive
income/(expense) to the income statement, in revenue and expense,
as appropriate. In the event the underlying forecasted
transaction does not occur, the amount recorded in accumulated
other comprehensive income/(expense) will be reclassified to the
other income/expense line of the income statement in the then-
current period.
As a result of adoption of SFAS 133, the Company recorded an
unrealized gain of $340 in accumulated other comprehensive
income/(expense) to recognize the fair value of derivative
instruments that are designated as cash-flow hedging instruments.
In addition, net realized losses of $2,720 from derivatives
designated as cash-flow hedging instruments have been recorded in
accumulated other comprehensive income/(expense). The Company
recorded in revenue and expense as appropriate, approximately
$3,450 in net gains from cash flow hedges related to items
forecasted for the first quarter of 1999. The amount that will be
reclassified from other accumulated comprehensive income/(expense)
to earnings over the next twelve months is a charge of
approximately $2,380. The Company did not record any cumulative
adjustment to earnings from derivatives designated as fair value
hedges, as these hedges were previously carried at fair value,
with all changes in fair value recorded to the income statement.
9
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share and per share amounts)
As permitted with the adoption of SFAS133, the Company also
reclassified $602,575 of held-to-maturity securities as "available
for sale." This reclassification resulted in an immaterial
adjustment recorded to accumulated other comprehensive
income/(expense) to reflect the difference between the carrying
cost and market value of these securities. The net unrealized
loss on available for sale securities at March 31, 1999 was
$2,705.
6. Segment Information
The Company operates exclusively in the enterprise storage
market. Substantially all of the Company's revenues are generated
from the sale or license of storage-related hardware and software
and the sale of related services. The classes of products and
services are included in the following table:
March 31, March 31,
1999 1998
Enterprise storage hardware $ 861,121 $698,755
Enterprise storage software 155,419 65,994
Enterprise switching products 39,007 41,184
Service and rental 72,408 22,418
Total revenue $1,127,955 $828,351
The Company's sales are attributed to geographic areas
according to the customer's location. Revenues and identifiable
assets by geographic area are included in the following table:
Europe,
North/Latin Middle East, Asia Intercompany Consolidated
America Africa Pacific Eliminations Total
Sales
March 31, 1999 $ 720,536 $ 339,600 $ 67,819 - $1,127,955
March 31, 1998 489,265 262,082 77,004 - 828,351
Identifiable assets
March 31, 1999 $3,280,152 $1,548,144 $151,216 $(120,884) $4,858,628
December 31, 1998 3,162,263 1,437,871 147,379 (178,942) 4,568,571
7. Subsequent Events
At the Annual Meeting of Stockholders held on May 5, 1999, the
Company's stockholders elected Michael J. Cronin, Maureen E. Egan
and W. Paul Fitzgerald to the Board of Directors for a three-year
term, approved the amendment to the Company's Articles of
Organization to increase the number of shares of authorized common
stock to 3,000,000,000 shares, and approved the addition of
8,500,000 shares of common stock to the Company's 1993 Stock
Option Plan and the addition of 2,200,000 shares of common stock
to the Company's 1989 Employee Stock Purchase Plan.
10
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share and per share amounts)
The Company's Board of Directors approved a two-for-one stock
split in the form of a 100% stock dividend on February 24, 1999.
Implementation of the stock split was subject to stockholder
approval of an increase in the number of shares of authorized
common stock to 3,000,000,000 shares, which approval was received
at the Company's Annual Meeting of Stockholders. The stock split
will be payable on or about May 28, 1999 to stockholders of record
as of the close of business on May 14, 1999. Because stockholder
approval was pending as of the end of the first quarter of 1999,
financial information contained elsewhere in this document has not
been adjusted to reflect the impact of the stock split.
Earnings per share amounts, after giving retroactive effect to
the two-for-one stock split, are presented below for all of the
per share amounts disclosed in the financial statements and the
notes to the financial statements.
Q1 1999 Q1 1998
Net income per weighted average $0.22 $0.15
share, basic
Net income per weighted averages $0.20 $0.14
share, diluted
Weighted average shares, basic 1,008,953,966 994,468,994
Weighted average shares, diluted 1,091,292,180 1,070,239,220
11
<PAGE>
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 16
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 - First Quarter of 1999 compared to First
Quarter of 1998
Revenues
Total revenues for the first quarter of 1999 were $1,128.0
compared to $828.4 for the first quarter of 1998, an increase of
$299.6 or 36%.
Enterprise systems revenues from products sold directly and
through resellers and original equipment manufacturers ("OEMs")
were $861.1 in the first quarter of 1999, compared to $698.8 in
the first quarter of 1998, an increase of $162.3 or 23%. 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 UNIX,
Windows NT and mainframe environments.
Enterprise software revenues from products sold directly and
through resellers and OEMs were $155.4 in the first quarter of
1999 compared to $66.0 in the first quarter of 1998, an increase
of $89.4 or 136%. The increase in software revenues was primarily
due to increased licenses of enterprise storage software on
Symmetrix systems both newly shipped and already installed, and
the successful introduction of new and enhanced software products.
Revenues from products sold by McDATA Corporation, primarily the
ESCON Director series of products, were $39.0 in the first quarter
of 1999, compared to $41.2 in the first quarter of 1998, a
decrease of $2.2 or 5%, due primarily to the product transition
from ESCON-based to fibre-channel-based directors.
Service and rental revenues were $72.4 in the first quarter of
1999, compared to $22.4 in the first quarter of 1998, an increase
of $50.0 or 223%, primarily as a result of the growth of EMC
professional services and the revenues from the professional
services businesses Groupe MCI and Millennia III, Inc., acquired
during the second and third quarters of 1998.
In January 1999, EMC and HP extended their worldwide reseller
agreement for another three years. Revenues under this agreement
were $146.7 and $156.8, or 13% and 19% of total revenues, for the
first quarters of 1999 and 1998, respectively. On May 5, 1999, HP
announced that it had entered into joint technology and OEM
agreements with Hitachi, Limited and Hitachi Data Systems for high-
end enterprise storage systems.
In March 1999, the Company announced a five-year strategic
technology and business alliance with IBM. Under the terms of the
accord, the Company will continue to purchase IBM disk drives for
incorporation into EMC's Symmetrix Enterprise Storage systems.
The alliance also provides for a broad patent cross-license
between the two companies for storage and other technologies.
Revenues on sales into the North American markets were $704.1 in
the first quarter of 1999 compared to $481.7 in the first quarter
of 1998, an increase of $222.4 or 46%. The revenue growth
reflects continued strong demand for the Company's products and
services.
Revenues on sales into the markets of Europe, the Middle East
and Africa were $339.6 in the first quarter of 1999 compared to
$262.1 in the first quarter of 1998, an increase of $77.5 or 30%.
12
<PAGE>
Revenues on sales into the markets of the Asia Pacific region
were $67.8 in the first quarter of 1999 compared to $77.0 in the
first quarter of 1998, a decrease of $9.2 or 12%. The decrease is
principally attributable to the current economic trends affecting
the Asia Pacific markets.
Revenues on sales into the markets of Latin America were $16.5
in the first quarter of 1999 compared to $7.5 in the first quarter
of 1998, an increase of $9.0 or 119%. The increase was primarily
due to the Company's efforts to expand its business in this
region.
Gross Margins
Gross margins increased to 53.2% of revenues in the first
quarter of 1999, compared to 48.0% of revenues in the first
quarter of 1998. 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 contributing to the increase include the impact of
component cost declines being greater than the impact of product
price declines and a trend towards larger configurations of
enterprise systems. The Company currently believes that product
price declines will continue.
Research and Development
Research and development ("R&D") expenses were $100.7 and $65.7
in the first quarters of 1999 and 1998, respectively, an increase
of $35.0 or 53%. R&D expenses were 8.9% and 7.9% of revenues in
the first quarters of 1999 and 1998, respectively. The increase
reflects the Company's ongoing research and development efforts in
a variety of areas, including EMC Enterprise Storage Network
technologies, enhancements to the Symmetrix family of products,
new and enhanced enterprise storage software products and fibre
channel connectivity. The Company expects to continue to spend
substantial amounts for R&D for the balance of 1999 and
thereafter.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were
$224.6 and $153.5 in the first quarters of 1999 and 1998,
respectively, an increase of $71.1 or 46%. SG&A expenses were
19.9% and 18.5% of revenues in the first quarters of 1999 and
1998, respectively. The dollar increase primarily reflects the
Company's objective of building an infrastructure to achieve
broader coverage and greater account depth around the world and to
expand its technical sales organization to support the current and
expected growth in software revenues.
Investment Income and Interest Expense
Investment income was $25.6 in the first quarter of 1999
compared with $22.5 in the first quarter of 1998. Interest income
was earned from investments in cash equivalents and short and long-
term investments. Investment income increased in the first
quarter of 1999 primarily due to higher cash and investment
balances which were derived from operations.
Interest expense increased to $5.2 in the first quarter of 1999
from $4.7 in the first quarter of 1998.
Provision for Income Taxes
The provision for income taxes was $73.6 and $48.7 in the first
quarters of 1999 and 1998, respectively, which resulted in an
effective tax rate of 25.0% in each period. The effective tax
rate is mainly attributable to the realization of benefits
associated with the Company's various tax strategies and benefits
related to offshore manufacturing.
13
<PAGE>
Financial Condition
Cash and cash equivalents and short and long-term investments
were $2,275.1 and $2,092.8 at March 31, 1999 and December 31,
1998, respectively, an increase of $182.3. Cash provided by
operating activities for the first three months of 1999 was
$268.6, generated primarily from net income. Cash used by
investing activities was $159.9, principally from the purchases of
short and long-term investments and additions to property, plant
and equipment. Cash provided by financing activities was $2.1,
principally from the issuance of common stock from stock option
exercises, offset by payments of short and long-term obligations.
At March 31, 1999, 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
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.
Adoption of New Accounting Pronouncement
In June 1998, FASB issued SFAS 133. SFAS 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15,
1999. SFAS 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 accumulated other comprehensive
income/(expense), 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 accumulated other
comprehensive income/(expense). The gains and losses on the
derivative instrument that are reported in accumulated other
comprehensive income/(expense) 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
adopted SFAS 133 on January 1, 1999. (See Note 5 to the Company's
Interim Consolidated Financial Statements.)
Year 2000 Issues
The information provided below constitutes a ''Year 2000
Readiness Disclosure'' under the Year 2000 Information and
Readiness Disclosure Act.
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
has also completed an assessment of the hardware and software in
other information systems used in its operations and has completed
a majority of the necessary modifications. In addition, the
Company has completed an assessment of the hardware and software
used in its business that is not supported by the Company's
information system department. A majority of the necessary
modifications have also been completed for such hardware and
software.
14
<PAGE>
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. The Company has
received certifications of Year 2000 compliance from many of its
key vendors and suppliers. The Company continues to make progress
in receiving certifications of Year 2000 compliance from other key
vendors and suppliers and in assessing questionnaire responses and
related information from such third parties.
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 currently anticipates that the assessment and
remediation phases of its Year 2000 conversion program will be
substantially complete by the middle of 1999, although the testing
phase and the contingency planning phase, if any, will continue
extensively throughout 1999. The Company does not anticipate that
the total cost of such program will have a material effect on its
business, results of operations or financial condition.
The most reasonably likely worst case scenarios 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 continues to assess 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.
Further information about the Company's Year 2000 readiness is
available at the Company's website at
http://www.emc.com/challenges/supplmts/complnc/y2k_comp.htm.
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 but not limited to 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 established fixed conversion rates between
their existing sovereign currencies and the Euro. The Euro is
currently the common legal currency in such countries. The Euro
trades on currency exchanges and is available for non-cash
transactions. The participating countries are issuing sovereign
debt exclusively in Euros, and have redenominated outstanding
sovereign debt. The participating countries 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, is exercised by the European Central Bank.
The legacy currencies will 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 are no longer computed directly
from one legacy currency to another. Instead, a triangular process
is applied whereby an amount denominated in one legacy currency is
first converted into the Euro. The resultant Euro-denominated
amount is then converted into the third legacy currency.
15
<PAGE>
The Company has developed and implemented the necessary
modifications for the technical adaptation of its internal IT and
other systems to accommodate Euro-denominated transactions. The
Company is continuing to assess certain business implications of
conversion to the Euro, including the long term competitive
implications of the conversion and the impact on market risk with
respect to financial instruments. Management is also continuing
to evaluate 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.
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) component quality and
availability; (ii) delays in the development of new technology and
the transition to new products; (iii) competitive factors,
including but not limited to pricing pressures, in the computer
storage market; (iv) the relative and varying rates of product
price and component cost declines; (v) economic trends in various
geographic markets and fluctuating currency exchange rates; (vi)
deterioration or termination of the agreements with certain of the
Company's resellers or OEMs; (vii) the uneven pattern of quarterly
sales; (viii) risks associated with acquisitions; (ix) Year 2000
issues; and (x) 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.
16
<PAGE>
EMC CORPORATION
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
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 parties reached a
negotiated resolution of this matter in April 1999.
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 covering virtual tape and seeking preliminary
and permanent injunctions and unspecified damages. The Company's
response raised 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. The Court found that STK's suit was without
foundation and awarded costs to EMC. In October 1998, STK filed an
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Amendment to EMC Corporation's Restated
Articles of Organization, as amended (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
On February 25, 1999, the registrant filed a report on Form 8-K
reporting under Item 5, Board approval of a 2-for-1 stock split of
its common stock to be effected in the form of a 100% stock
dividend, with a record date of May 14, 1999 and a distribution
date of May 28, 1999, subject to obtaining stockholder approval of
an amendment to the registrant's charter to increase the number of
shares of authorized common stock.
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: May 13, 1999
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 3.1 Articles of Amendment to EMC Corporation's Restated
Articles of Organization, as amended (filed herewith).
Exhibit 27 Financial Data Schedule (filed herewith).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from EMC
Corporation financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 816,283
<SECURITIES> 694,886
<RECEIVABLES> 983,739
<ALLOWANCES> 7,798
<INVENTORY> 526,624
<CURRENT-ASSETS> 3,145,024
<PP&E> 666,379
<DEPRECIATION> 400,019
<TOTAL-ASSETS> 4,858,628
<CURRENT-LIABILITIES> 707,989
<BONDS> 491,841
0
0
<COMMON> 5,062
<OTHER-SE> 3,589,021
<TOTAL-LIABILITY-AND-EQUITY> 4,858,628
<SALES> 1,055,546
<TOTAL-REVENUES> 1,127,955
<CGS> 527,409
<TOTAL-COSTS> 852,730
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,194
<INCOME-PRETAX> 294,235
<INCOME-TAX> 73,559
<INCOME-CONTINUING> 220,676
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 220,676
<EPS-PRIMARY> .44
<EPS-DILUTED> .41
</TABLE>
Exhibit 3.1
Federal Identification
No. 04-2680009
THE COMMONWEALTH OF MASSACHUSETTS
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
We, Michael C. Ruettgers, President, and Paul T. Dacier,
Assistant Clerk of EMC Corporation, located at 171 South
Street, Hopkinton, Massachusetts 01748, certify that these
Articles of Amendment affecting article numbered 3 of the
Articles of Organization were duly adopted at a meeting held
on May 5, 1999, by vote of 407,169,325 shares of Common Stock
of 504,863,524 shares outstanding, being at least a majority
of each type, class or series outstanding and entitled to
vote thereon.
<PAGE>
To change the number of shares and the par value (if any) of
any type, class or series of stock which the corporation is
authorized to issue, fill in the following:
The total presently authorized is:
With Par Value Stocks
Type Number of Shares Par Value
_______________________________________________________
Common 750,000,000 $.01
Preferred 25,000,000 $.01
Change the total authorized to:
With Par Value Stocks
Type Number of Shares Par Value
______________________________________________________
Common 3,000,000,000 $.01
Preferred 25,000,000 $.01
<PAGE>
The foregoing amendment(s) will become effective when these
Articles of Amendment are filed in accordance with General
Laws, Chapter 156B, Section 6 unless these articles specify,
in accordance with the vote adopting the amendment, a later
effective date not more than thirty days after such filing,
in which event the amendment will become effective on such
later date.
Later effective date:___________________________.
SIGNED UNDER THE PENALTIES OF PERJURY, this 5th day of May,
1999.
/s/ Michael C. Ruettgers, President
/s/ Paul T. Dacier, Assistant Clerk
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
____________________________________________________________
I hereby approve the within Articles of Amendment, and the
filing fee in the amount of $_________ having been paid,
said article is deemed to have been filed with me this
__________ day of _____________________, 1999.
Effective
date:______________________________________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Paul T. Dacier, Esq.
Vice President and General Counsel
EMC Corporation
171 South St.
Hopkinton, MA 01748
Telephone: 508-435-1000
<PAGE>
