<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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, 2000
COMMISSION FILE NUMBER 1-9853
------------------------
EMC CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2680009
(State or other jurisdiction of (I.R.S. Employer
organization or incorporation) Identification Number)
</TABLE>
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.
<TABLE>
<S> <C>
COMMON STOCK, PAR VALUE $.01 PER SHARE 2,188,016,784
----------------------------------- ---------------------------------
Class Outstanding as of September 30, 2000
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
EMC CORPORATION
<TABLE>
<CAPTION>
PAGE NO
---------------
<S> <C>
Part I--Financial Information
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999....................................... 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2000 and 1999................ 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999....................... 5
Consolidated Statements of Comprehensive Income for the
Three and Nine Months Ended September 30, 2000 and
1999.................................................... 6
Notes to Interim Consolidated Financial Statements........ 7 - 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 15 - 22
Part II--Other Information.................................. 23
Signatures................................................ 24
Exhibit Index............................................. 25
</TABLE>
2
<PAGE>
EMC CORPORATION
PART I.
FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $2,235,909 $1,109,409
Short-term investments.................................... 472,174 714,730
Trade and notes receivable less allowance for doubtful
accounts of $35,413 and $34,279 in 2000 and 1999,
respectively............................................ 1,836,673 1,625,438
Inventories............................................... 868,594 618,885
Deferred income taxes..................................... 179,265 147,471
Other assets.............................................. 132,151 104,463
---------- ----------
Total current assets........................................ 5,724,766 4,320,396
Long-term investments....................................... 1,738,634 1,349,599
Notes receivable, net....................................... 191,174 76,756
Property, plant and equipment, net.......................... 1,344,952 1,023,179
Deferred income taxes....................................... 92,385 108,587
Intangible and other assets, net............................ 583,632 294,771
---------- ----------
Total assets.......................................... $9,675,543 $7,173,288
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations.................. $ 12,497 $ 9,116
Accounts payable.......................................... 477,717 370,055
Accrued expenses.......................................... 717,434 611,052
Income taxes payable...................................... 424,694 249,234
Deferred revenue.......................................... 241,335 158,458
---------- ----------
Total current liabilities................................... 1,873,677 1,397,915
Deferred income taxes....................................... 147,615 125,353
Long-term obligations:
3 1/4% convertible subordinated notes due 2002............ -- 460,399
6% convertible subordinated notes due 2004................ -- 212,750
Notes payable............................................. 14,589 13,460
Minority interest......................................... 111,141 2,674
Other liabilities......................................... 25,445 8,951
---------- ----------
Total liabilities..................................... 2,172,467 2,221,502
---------- ----------
Commitments and contingencies
Stockholders' equity:
Series Preferred Stock, par value $.01; authorized 25,000
shares, none outstanding................................ -- --
Common Stock, par value $.01; authorized 3,000,000 shares;
issued 2,188,017 and 2,078,550, in 2000 and 1999,
respectively............................................ 21,880 20,786
Additional paid-in capital................................ 3,044,679 1,695,994
Deferred compensation..................................... (61,012) (30,282)
Retained earnings......................................... 4,519,023 3,299,821
Accumulated other comprehensive income/(expense).......... (21,494) (34,533)
---------- ----------
Total stockholders' equity............................ 7,503,076 4,951,786
---------- ----------
Total liabilities and stockholders' equity.......... $9,675,543 $7,173,288
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Net sales............................... $2,050,573 $1,525,520 $5,611,492 $4,308,343
Service................................. 232,432 183,390 640,038 531,514
---------- ---------- ---------- ----------
2,283,005 1,708,910 6,251,530 4,839,857
Costs and expenses:
Cost of sales........................... 813,648 696,082 2,221,136 2,035,944
Cost of service......................... 152,948 126,666 438,951 364,126
Research and development................ 204,807 149,426 560,873 418,500
Selling, general and administrative..... 533,124 363,785 1,487,392 1,010,694
---------- ---------- ---------- ----------
Operating income.......................... 578,478 372,951 1,543,178 1,010,593
Investment income......................... 54,370 34,378 143,064 92,536
Interest expense.......................... (2,196) (7,850) (12,023) (24,812)
Other income/(expense), net............... (3,011) 227 (4,080) 440
---------- ---------- ---------- ----------
Income before taxes....................... 627,641 399,706 1,670,139 1,078,757
Income tax provision...................... 169,463 103,938 450,937 274,793
---------- ---------- ---------- ----------
Net income................................ $ 458,178 $ 295,768 $1,219,202 $ 803,964
========== ========== ========== ==========
Net income per weighted average share,
basic................................... $ 0.21 $ 0.14 $ 0.57 $ 0.39
========== ========== ========== ==========
Net income per weighted average share,
diluted................................. $ 0.20 $ 0.13 $ 0.54 $ 0.37
========== ========== ========== ==========
Weighted average shares, basic............ 2,183,409 2,063,248 2,154,647 2,056,650
Weighted average shares, diluted.......... 2,250,121 2,219,254 2,242,228 2,215,932
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 1,219,202 $ 803,964
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 396,819 302,449
Deferred income taxes.................................................... 4,248 (34,651)
Net (gain)/loss on disposal of property and equipment.................... 12,870 6,364
Tax benefit from stock options exercised................................. 174,041 42,155
Minority interest........................................................ 2,341 (225)
Changes in assets and liabilities net of acquired assets and liabilities:
Trade and notes receivable............................................... (291,942) (304,093)
Inventories.............................................................. (250,700) (41,115)
Other assets............................................................. (113,551) (52,578)
Accounts payable......................................................... 109,264 70,739
Accrued expenses......................................................... 97,047 62,427
Income taxes payable..................................................... 175,460 24,904
Deferred revenue......................................................... 68,349 32,117
Other liabilities........................................................ (6) (3,106)
----------- ---------
Net cash provided by operating activities.............................. 1,603,442 909,351
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............................... (591,453) (368,438)
Capitalized software development costs................................... (76,569) (63,412)
Maturity/(purchase) of short-term and long-term investments, net......... (119,896) (487,059)
Business acquisitions net of cash acquired............................... (233,554) --
----------- ---------
Net cash used by investing activities.................................. (1,021,472) (918,909)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock................................................. 174,538 73,456
Issuance of subsidiary stock............................................. 376,607 --
Redemption of 6% convertible subordinated notes.......................... (155) --
Payment of long-term and short-term obligations.......................... (9,263) (30,184)
Issuance of long-term and short-term obligations......................... 11,224 1,978
----------- ---------
Net cash provided by financing activities.............................. 552,951 45,250
----------- ---------
Effect of exchange rate changes on cash.................................... (8,421) (5,189)
Net increase in cash and cash equivalents.................................. 1,134,921 35,692
Cash and cash equivalents at beginning of period........................... 1,109,409 835,466
----------- ---------
Cash and cash equivalents at end of period................................. $ 2,235,909 $ 865,969
=========== =========
Non-cash activity--conversion of 3 1/4% convertible subordinated notes..... $ 460,399 $ 25,864
--conversion of 6% convertible subordinated notes............ $ 212,595 --
--stock issued in business acquisitions...................... $ 11,372 --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income................................ $458,178 $295,768 $1,219,202 $803,964
-------- -------- ---------- --------
Other comprehensive income/(expense), net
of tax:
Foreign currency translation
adjustments, net of tax of $(1,263),
$(444), $(3,069) and $(793),
respectively.......................... (3,421) (688) (6,908) (4,532)
Unrealized gains/(losses) on investment
securities and derivatives:
Unrealized holding gains/(losses)
arising during the period, net of
tax of $6,435, $(1,055), $6,635 and
$(5,372), respectively.............. 17,397 2,120 19,947 (10,335)
-------- -------- ---------- --------
Other comprehensive income/(expense)...... 13,976 1,432 13,039 (14,867)
-------- -------- ---------- --------
Comprehensive income...................... $472,154 $297,200 $1,232,241 $789,097
======== ======== ========== ========
</TABLE>
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 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 hardware and software and
provide services for the storage, management, protection and sharing of
electronic information. These integrated solutions enable organizations to
create an electronic information infrastructure, or what EMC calls an
E-Infostructure. EMC is the leading supplier of these solutions, which are
comprised of enterprise storage systems, networks, software and services. EMC's
products are sold to customers utilizing a variety of the world's most popular
computing platforms for key applications, including electronic commerce, data
warehousing and transaction processing.
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 September 30, 2000 and 1999.
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, 1999, which are contained in the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission on March 17,
2000.
2. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Purchased parts..................................... $ 49,706 $ 38,204
Work in process..................................... 619,598 379,679
Finished goods...................................... 199,290 201,002
-------- --------
$868,594 $618,885
======== ========
</TABLE>
7
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
<S> <C> <C>
Furniture and fixtures.............................. $ 99,107 $ 101,954
Equipment........................................... 1,431,857 1,237,247
Buildings and improvements.......................... 458,886 439,924
Land................................................ 47,574 32,451
Construction in progress............................ 283,211 106,304
---------- ----------
2,320,635 1,917,880
Accumulated depreciation............................ (975,683) (894,701)
---------- ----------
$1,344,952 $1,023,179
========== ==========
</TABLE>
4. NET INCOME PER SHARE
Calculation of earnings per share is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- --------------
<S> <C> <C>
BASIC:
Net income.................................................. $ 458,178 $ 295,768
Weighted average shares, basic.............................. 2,183,409 2,063,248
Net income per share, basic................................. $ 0.21 $ 0.14
========== ==========
DILUTED:
Net income.................................................. $ 458,178 $ 295,768
Add back of interest expense on 3 1/4% convertible
subordinated notes due 2002............................... -- 4,037
Less tax effect of interest expense on 3 1/4% convertible
subordinated notes due 2002............................... -- (1,615)
---------- ----------
Net income for calculating diluted earnings per share....... $ 458,178 $ 298,190
Weighted average shares..................................... 2,183,409 2,063,248
Weighted common stock equivalents........................... 66,712 156,006
---------- ----------
Total weighted average shares, diluted...................... 2,250,121 2,219,254
Net income per share, diluted............................... $ 0.20 $ 0.13
========== ==========
</TABLE>
8
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. NET INCOME PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
BASIC:
Net income.................................................. $1,219,202 $ 803,964
Weighted average shares, basic.............................. 2,154,647 2,056,650
Net income per share, basic................................. $ 0.57 $ 0.39
========== ==========
DILUTED:
Net income.................................................. $1,219,202 $ 803,964
Add back of interest expense on 3 1/4% convertible
subordinated notes due 2002............................... 2,987 12,178
Less tax effect of interest expense on 3 1/4% convertible
subordinated notes due 2002............................... (1,195) (4,871)
---------- ----------
Net income for calculating diluted earnings per share....... $1,220,994 $ 811,271
Weighted average shares..................................... 2,154,647 2,056,650
Weighted common stock equivalents........................... 87,581 159,282
---------- ----------
Total weighted average shares, diluted...................... 2,242,228 2,215,932
Net income per share, diluted............................... $ 0.54 $ 0.37
========== ==========
</TABLE>
The calculation of earnings per share excludes the Company's 6% convertible
subordinated notes due 2004 (the "6% Notes"), as the effect of the conversion
would be antidilutive.
5. EQUITY TRANSACTIONS
CONVERTIBLE NOTES
In March 1997, the Company sold $517.5 of its 3 1/4% convertible
subordinated notes due 2002 (the "3 1/4% Notes"). In March 2000, all of the
outstanding 3 1/4% Notes were converted into common stock, par value $.01 per
share, of EMC ("Common Stock"). In May 1997, Data General Corporation ("Data
General") sold $212.8 of the 6% Notes, which were assumed by the Company in
connection with the acquisition of Data General in 1999. In May 2000, $212.6 of
the 6% Notes were converted into Common Stock. The Company paid approximately
one hundred fifty-five thousand dollars to redeem the remaining 6% Notes.
STOCK SPLIT
On May 3, 2000, the Company announced a two-for-one stock split in the form
of a 100% stock dividend with a record date of May 19, 2000 and a distribution
date of June 2, 2000. Share and per share amounts have been restated to reflect
the stock splits for all periods presented.
ISSUANCE OF SUBSIDIARY STOCK
On August 9, 2000, the Company completed the initial public offering of
14,375 shares of Class B common stock of its indirect majority owned subsidiary
McDATA Corporation (including the exercise
9
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. EQUITY TRANSACTIONS (CONTINUED)
of the underwriters' over-allotment option). The offering represented
approximately 13% of the McDATA common stock outstanding. McDATA offered the
shares at a price of $28 per share and realized net proceeds from the offering
of $376,607. McDATA has retained the net proceeds for general corporate
purposes. After the offering, the Company continues to own approximately 75% of
the outstanding McDATA common stock which it currently intends to distribute to
holders of the Common Stock on a pro rata basis, subject to certain conditions.
The proposed distribution is anticipated to occur in 2001, no later than
February 8. The Company will, in its sole discretion, determine whether to
complete this distribution, and the timing, structure and all other terms of the
distribution. The Company did not recognize any gains in its income statement as
a result of this transaction. The net proceeds were allocated ratably between
additional paid-in capital and minority interest in the Company's consolidated
balance sheet based upon the Company's ownership position in McDATA on the date
of the offering.
6. LITIGATION
The Company is a party to certain 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.
7. DERIVATIVES
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 immaterial amounts for all periods
presented. The ineffective portion of the derivatives is primarily related to
option premiums and to discounts or premiums on forward contracts. The Company's
derivative contracts generally mature within nine months.
The Company uses foreign currency forward 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.
The Company recorded in revenue and expense approximately $15,541 and
$23,847 in net gains from cash flow hedges related to items forecasted for the
third quarter and first nine months of 2000, respectively. The amount that will
be reclassified from accumulated other comprehensive income/ (expense) to
earnings over the next twelve months is a gain of approximately $6,436, net of
tax.
10
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. BUSINESS ACQUISITIONS
In January 2000, the Company acquired all of the outstanding common stock of
Softworks, Inc. by means of a tender offer, whereby all the shares of Softworks
were converted into the right to receive cash. Also in January 2000, the Company
acquired all of the outstanding common stock of Terascape Software, Inc. In July
2000, the Company acquired all of the outstanding common stock of Avalon, Inc.
and in August 2000, the Company acquired all of the outstanding common stock of
Digital Bitcasting, Inc. The aggregate cost of these transactions was
approximately $245 million, net of cash acquired of approximately $28 million.
The Company accounted for each acquisition as a purchase transaction. The
interim consolidated financial statements include the operating results of each
business from the date of acquisition. Pro forma results of operations have not
been presented because the effects of these acquisitions were not material to
the Company on either an individual or an aggregate basis.
The Company calculated amounts allocated to in-process research and
development ("IPR&D") using established valuation techniques and expensed such
amounts in the quarter that each acquisition was consummated because
technological feasibility of the in-process technology had not been achieved and
no alternate future use has been established. The Company computed its
valuations of IPR&D for the acquisitions using a discounted cash flow analysis
on the anticipated income stream to be generated by the purchased technology.
During the first quarter, the Company recorded a $3,300 charge to research and
development expense representing the write-off of IPR&D associated with certain
of these acquisitions.
The excess of the purchase price over the estimated value of the net
tangible assets was allocated to various intangible assets, consisting primarily
of developed technology and goodwill, as well as other intangible assets. The
value of developed technology was based upon future discounted cash flows
relating to the existing product's projected income stream. Intangible assets,
including goodwill, are being amortized on a straight-line basis over their
estimated useful lives, which is a maximum of five years.
9. RESTRUCTURING, MERGER AND OTHER CHARGES
During the fourth quarter of 1999, the Company approved and implemented a
restructuring program in connection with its acquisition of Data General. The
restructuring plan, which is expected to be substantially completed by December
2000, provides for the consolidation of the Company's operations and elimination
of duplicative facilities worldwide. Accordingly, during the fourth quarter of
1999, the Company recorded a charge of approximately $170.6 million related to
employee termination benefits, facility closure costs, asset disposals, and
other exit costs which the Company has recorded in operating expenses. The total
cash impact of the charge is approximately $140.7 million, of which $52.4
million was paid in 1999 and $55.3 million has been paid during the first nine
months of 2000.
The restructuring plan includes a net reduction of the workforce by
approximately 1,100 employees, approximately 59% of whom are or were based in
North America and 23% of whom are or were based in Europe. The employee
separations affect the majority of business functions and job classes. As of
September 30, 2000, employee separations due to restructuring actions totaled
approximately 1,050.
11
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. RESTRUCTURING, MERGER AND OTHER CHARGES (CONTINUED)
During fiscal year 1998, Data General recorded a charge of $82.4 million
related to a restructuring program. The charge included employee termination
benefits, asset write-downs, and other exit costs. The total cash impact of the
restructuring charge is approximately $58.5 million, of which $46.0 million was
paid prior to December 31, 1999 and $1.8 million was paid during the first nine
months of 2000. As of September 30, 2000, the remaining accruals of $13.8
million from the 1998 restructuring program are primarily related to excess
vacant rental properties in Europe.
The amounts charged against the established provisions described above were
as follows:
<TABLE>
<CAPTION>
BALANCE CURRENT BALANCE
DECEMBER 31, 1999 UTILIZATION SEPTEMBER 30, 2000
----------------- ----------- ------------------
<S> <C> <C> <C>
Employee termination benefits..... $ 75,481 $47,067 $28,414
Lease abandonments................ 18,655 2,399 16,256
Asset write-downs................. 4,116 3,337 779
Other exit costs.................. 11,195 8,499 2,696
-------- ------- -------
$109,447 $61,302 $48,145
======== ======= =======
</TABLE>
10. SEGMENT INFORMATION
The Company operates in the following three segments: storage products,
server products and services. The majority of the Company's revenues are
generated from the sale of storage hardware and software products. The Company
also designs, manufactures, markets and supports open systems server products
through its Data General division. The Company also provides a wide range of
services to both storage and server customers. The following table presents
revenues for groups of similar storage products and similar services:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
STORAGE PRODUCTS:
Enterprise storage hardware............... $1,450,630 $1,013,546 $3,922,467 $2,860,180
Enterprise storage software............... 332,344 206,598 952,589 540,652
McDATA switching products................. 34,026 24,270 109,996 109,096
Midrange storage products................. 162,213 114,316 397,486 323,029
---------- ---------- ---------- ----------
Total storage products.................... $1,979,213 $1,358,730 $5,382,538 $3,832,957
========== ========== ========== ==========
SERVICES:
Storage related services.................. $ 161,395 $ 92,768 $ 412,237 $ 251,885
Server related services................... 71,037 90,622 227,801 279,629
---------- ---------- ---------- ----------
Total service revenue..................... $ 232,432 $ 183,390 $ 640,038 $ 531,514
========== ========== ========== ==========
</TABLE>
The Company's management makes financial decisions and allocates resources
based on product segments. The Company's financial reporting focuses on the
revenues and gross profit for the product
12
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. SEGMENT INFORMATION (CONTINUED)
segments. The Company does not allocate marketing, engineering or administrative
expenses to product segments, as management does not use this information to
measure the performance of the operating segments. The revenues and gross
margins attributable to these segments are included in the following table:
<TABLE>
<CAPTION>
STORAGE SERVER
FOR THE THREE MONTHS ENDED PRODUCTS PRODUCTS SERVICES CONSOLIDATED
-------------------------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 2000
Revenues......................................... $1,979,213 $ 71,360 $232,432 $2,283,005
Gross profit..................................... 1,205,812 31,113 79,484 1,316,409
SEPTEMBER 30, 1999
Revenues......................................... $1,358,730 $166,790 $183,390 $1,708,910
Gross profit..................................... 773,790 55,648 56,724 886,162
</TABLE>
<TABLE>
<CAPTION>
STORAGE SERVER
FOR THE NINE MONTHS ENDED PRODUCTS PRODUCTS SERVICES CONSOLIDATED
------------------------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 2000
Revenues......................................... $5,382,538 $228,954 $640,038 $6,251,530
Gross profit..................................... 3,299,703 90,653 201,087 3,591,443
SEPTEMBER 30, 1999
Revenues......................................... $3,832,957 $475,386 $531,514 $4,839,857
Gross profit..................................... 2,115,787 156,612 167,388 2,439,787
</TABLE>
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:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SALES:
North America............................. $1,411,592 $1,097,914 $3,891,309 $3,084,989
Latin America............................. 54,956 41,682 133,909 114,279
Europe, Middle East, Africa............... 568,456 453,192 1,633,894 1,330,691
Asia Pacific.............................. 248,001 116,122 592,418 309,898
---------- ---------- ---------- ----------
Consolidated Total........................ $2,283,005 $1,708,910 $6,251,530 $4,839,857
========== ========== ========== ==========
</TABLE>
13
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
IDENTIFIABLE ASSETS:
North America............................................... $ 7,306,405 $4,630,506
Latin America............................................... 90,960 73,195
Europe, Middle East, Africa................................. 2,980,858 2,245,460
Asia Pacific................................................ 328,022 306,266
Intercompany eliminations................................... (1,030,702) (82,139)
----------- ----------
Consolidated Total.......................................... $ 9,675,543 $7,173,288
=========== ==========
</TABLE>
11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," subsequently updated by SAB 101A and SAB 101B ("SAB 101"). SAB 101
summarizes certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company is
required to adopt SAB 101 no later than the fourth quarter of fiscal 2000. The
Company does not expect that the adoption of SAB 101 will have a material impact
on its results of operations or financial position.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences of various modifications to
the terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective as of July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. The
Company adopted FIN 44 for the third quarter of 2000 and there was no material
impact on the Company's results of operations or financial position for such
quarter.
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an amendment of FAS 133" ("FAS
138"). This statement amends the accounting and reporting standards for certain
derivative instruments and hedging activities. For an entity that has adopted
Statement of Financial Accounting Standards No. 133 prior to June 15, 2000, FAS
138 is effective for all fiscal quarters beginning after June 15, 2000. The
Company adopted FAS 138 for the third quarter of 2000 and there was no material
impact on the Company's results of operations or financial position for such
quarter.
12. SUBSEQUENT EVENT
As of October 31, 2000, the Company acquired all of the outstanding common
stock of CrosStor Software, Inc. in exchange for approximately $300 million in
Common Stock. The transaction is being accounted for as a pooling-of interests.
CrosStor develops high-performance software for networked storage systems.
14
<PAGE>
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 22 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 2000 COMPARED TO THIRD QUARTER OF 1999
REVENUES
Total revenues for the third quarter of 2000 were $2,283.0 compared to
$1,708.9 for the third quarter of 1999, representing an increase of $574.1, or
34%.
Enterprise storage hardware revenues were $1,450.6 in the third quarter of
2000, compared to $1,013.5 in the third quarter of 1999, representing an
increase of $437.1, or 43%. The increase in enterprise systems revenues was due
to increased sales volume resulting from continued strong demand for the
Company's Symmetrix series of products and the successful introduction of new
hardware 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 storage software revenues were $332.3 in the third quarter of
2000 compared to $206.6 in the third quarter of 1999, representing an increase
of $125.7, or 61%. 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 enterprise switching products sold directly by McDATA Holdings
Corporation, a wholly owned subsidiary of EMC and the direct parent of McDATA
Corporation ("McDATA Holdings"), including the ESCON Director series of
products, were $34.0 in the third quarter of 2000 compared to $24.3 in the third
quarter of 1999, representing an increase of $9.7, or 40%. The increase was due
to increased sales of fibre channel-based directors. ESCON revenues were
generally unchanged compared to the third quarter of 1999. The Company
anticipates that future revenues from ESCON directors will generally decline.
Revenues from the midrange line of storage products, including the CLARiiON
product line, were $162.2 in the third quarter of 2000, compared to $114.3 in
the third quarter of 1999, excluding related service revenues. This increase of
$47.9, or 42%, reflects a significant increase in sales volume from non-original
equipment manufacturer sales channels offset in part by a decrease in sales
volume from indirect channels.
Total storage product revenues were $1,979.2 in the third quarter of 2000,
compared to $1,358.7 in the third quarter of 1999, representing an increase of
$620.5, or 46%. The increase is due primarily to increased sales of enterprise
storage hardware and software products.
Revenues from AViiON server products were $71.4 in the third quarter of 2000
compared to $166.8 in the third quarter of 1999, representing a decrease of
$95.4, or 57%. The decrease in revenue was primarily the result of reduced
volume due to the refocusing of the AViiON business on the most profitable
product lines combined with the effect of closing certain international sales
offices. In addition, the Company is reallocating AViiON resources within the
consolidated Company.
Overall service revenues were $232.4 in the third quarter of 2000 compared
to $183.4 in the third quarter of 1999, an increase of $49.0, or 27%. Storage
service revenues were $161.4 in the third quarter
15
<PAGE>
of 2000 compared to $92.8 in the third quarter of 1999, an increase of $68.6, or
74%. These increases were primarily related to increased maintenance revenues on
enterprise storage hardware and software products and increased revenues from
professional services. Server service revenues from the Company's Data General
division were $71.0 in the third quarter of 2000 compared to $90.6 in the third
quarter of 1999, a decrease of $19.6, or 22%. The decrease is primarily due to
the refocusing of the AViiON business combined with the effect of closing
certain international sales offices.
Total revenues from storage products and services were $2,140.6 in the third
quarter of 2000, compared to $1,451.5 in the third quarter of 1999, representing
an increase of $689.1, or 47%. Total revenues from server products and services
were $142.4 in the third quarter of 2000, compared to $257.4 in the third
quarter of 1999, representing a decrease of $115.0, or 45%.
Revenues on sales into the North American markets were $1,411.6 in the third
quarter of 2000 compared to $1,097.9 in the third quarter of 1999, an increase
of $313.7, or 29%. The revenue growth reflects strong demand for the Company's
storage products and services, which increased by 41% compared to the third
quarter of 1999. This growth was offset in part by a decrease in AViiON server
revenues due to the refocusing of the business on the most profitable product
lines.
Revenues on sales into the markets of Europe, the Middle East and Africa
were $568.5 in the third quarter of 2000 compared to $453.2 in the third quarter
of 1999, an increase of $115.3, or 25%. The increase is primarily due to strong
demand for the Company's storage products and services, which increased by 39%
compared to the third quarter of 1999. This growth was offset by decreased
revenues from AViiON products due to the closing of certain regional sales
offices acquired in connection with the acquisition of Data General in 1999.
Revenues on sales into the markets of the Asia Pacific region were $248.0 in
the third quarter of 2000 compared to $116.1 in the third quarter of 1999, an
increase of $131.9, or 114%. The increase was primarily due to the Company's
efforts to expand its business in this region combined with continued strong
demand for the Company's storage products and services, which increased by 130%
compared to the third quarter of 1999. This growth was offset in part by
decreased revenues from AViiON products due to the closing of certain regional
sales offices acquired in connection with the acquisition of Data General in
1999.
Revenues on sales into the markets of Latin America were $55.0 in the third
quarter of 2000 compared to $41.7 in the third quarter of 1999, an increase of
$13.3, or 32%. The increase was primarily due to strong demand for the Company's
storage products and services, which increased by 62% compared to the third
quarter of 1999. This growth was offset by decreased revenues from AViiON
products due to the closing of certain regional sales offices acquired in
connection with the acquisition of Data General in 1999.
GROSS MARGINS
Overall gross margins increased to 57.7% of revenues in the third quarter of
2000, compared to 51.9% of revenues in the third quarter of 1999. Product gross
margins increased to 60.3% in the third quarter of 2000, compared to 54.4% in
the third quarter of 1999. This increase in product margins was primarily
attributable to increased licensing of the Company's enterprise software
products, which has higher gross margins than sales of the Company's hardware
products. Software revenue as a percentage of total revenues increased to 15% in
the third quarter of 2000 from 12% in the third quarter of 1999. Other factors
affecting product gross margins 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.
Service gross margins increased to 34.2% in the third quarter of 2000,
compared to 30.9% in the third quarter of 1999. This increase in service margins
from 1999 to 2000 was primarily due to a
16
<PAGE>
decrease in less profitable service revenues for Data General products caused by
the closure of certain international sales offices.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $204.8 and $149.4 in the
third quarters of 2000 and 1999, respectively, an increase of $55.4, or 37%. R&D
expenses were 9.0% and 8.7% of revenues in the third quarters of 2000 and 1999,
respectively. The increase in R&D spending levels from 1999 to 2000 reflects the
Company's ongoing research and development efforts in a variety of areas,
including EMC Enterprise Storage Network technologies, network attached storage
products, enhancements to the Symmetrix family of products, new enterprise
storage software products and fibre channel connectivity products. The Company
expects to continue to spend substantial amounts for R&D for the balance of 2000
and thereafter.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses were $533.1 and $363.8
in the third quarters of 2000 and 1999, respectively, an increase of $169.3, or
47%. SG&A expenses were 23.4% and 21.3% of revenues in the third quarters of
2000 and 1999, respectively. The increase in spending levels was primarily due
to the Company's efforts to build 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 increased to $54.4 in the third quarter of 2000 from $34.4
in the third quarter of 1999. Interest income was earned primarily from
investments in cash equivalents and short and long-term investments. Investment
income increased in the third quarter of 2000 primarily due to higher cash and
investment balances which were derived from operations and the net proceeds from
McDATA's initial public offering.
Interest expense decreased to $2.2 in the third quarter of 2000 from $7.9 in
the third quarter of 1999 primarily due to conversion of the Company's 3 1/4%
convertible subordinated notes due 2002 (the "3 1/4% Notes") in March 2000 and
the Company's 6% convertible subordinated notes due 2004 (the "6% Notes") in May
2000.
PROVISION FOR INCOME TAXES
The provision for income taxes was $169.5 and $103.9 in the third quarters
of 2000 and 1999, respectively, which resulted in effective tax rates of 27.0%
and 26.0%, respectively. The effective tax rate is less than U.S. statutory
rates due to the Company's various tax strategies and benefits related to
offshore manufacturing.
17
<PAGE>
RESULTS OF OPERATIONS--FIRST NINE MONTHS OF 2000 COMPARED TO FIRST NINE MONTHS
OF 1999
REVENUES
Total revenues for the first nine months of 2000 were $6,251.5 compared to
$4,839.9 for the first nine months of 1999, representing an increase of
$1,411.6, or 29%.
Enterprise storage hardware revenues were $3,922.5 in the first nine months
of 2000, compared to $2,860.2 in the first nine months of 1999, representing an
increase of $1,062.3, or 37%. The increase in enterprise systems revenues was
due to increased sales volume resulting from continued strong demand for the
Company's Symmetrix series of products and the successful introduction of new
hardware 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 storage software revenues were $952.6 in the first nine months of
2000 compared to $540.7 in the first nine months of 1999, representing an
increase of $411.9, or 76%. 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 enterprise switching products sold directly by McDATA
Holdings, including the ESCON Director series of products, were $110.0 in the
first nine months of 2000 compared to $109.1 in the first nine months of 1999,
representing an increase of $0.9, or 1%. The results reflect increased sales of
fibre channel-based directors offset by a decrease in ESCON revenues. The
Company anticipates that future revenues from ESCON directors will generally
decline.
Revenues from the midrange line of storage products, including the CLARiiON
product line, were $397.5 in the first nine months of 2000, compared to $323.0
in the first nine months of 1999, excluding related service revenues. This
increase of $74.5, or 23%, reflects a significant increase in sales volume from
non-original equipment manufacturer sales channels offset in part by a decrease
in sales volume from indirect channels.
Total storage product revenues were $5,382.5 in the first nine months of
2000, compared to $3,833.0 in the first nine months of 1999, representing an
increase of $1,549.5, or 40%. The increase is due primarily to increased sales
of enterprise storage hardware and software.
Revenues from AViiON server products were $229.0 in the first nine months of
2000 compared to $475.4 in the first nine months of 1999, representing a
decrease of $246.4, or 52%. The decrease in revenue was primarily the result of
reduced volume due to the refocusing of the AViiON business on the most
profitable product lines combined with the effect of closing certain
international sales offices. In addition, the Company is reallocating AViiON
resources within the consolidated Company.
Overall service revenues were $640.0 in the first nine months of 2000
compared to $531.5 in the first nine months of 1999, an increase of $108.5, or
20%. Storage service revenues were $412.2 in the first nine months of 2000
compared to $251.9 in the first nine months of 1999, an increase of $160.3, or
64%. These increases are primarily related to increased maintenance revenues on
enterprise storage hardware and software products and increased revenues from
professional services. Server service revenues from the Company's Data General
division were $227.8 in the first nine months of 2000 compared to $279.6 in the
first nine months of 1999, a decrease of $51.8, or 19%. The decrease is
primarily due to the refocusing of the AViiON business combined with the effect
of closing certain international sales offices.
Total revenues from storage products and services were $5,794.8 in the first
nine months of 2000, compared to $4,084.8 in the first nine months of 1999,
representing an increase of $1,710.0, or 42%.
18
<PAGE>
Total revenues from server products and services were $456.8 in the first nine
months of 2000, compared to $755.0 in the first nine months of 1999,
representing a decrease of $298.2, or 40%.
Revenues on sales into the North American markets were $3,891.3 in the first
nine months of 2000 compared to $3,085.0 in the first nine months of 1999, an
increase of $806.3, or 26%. The revenue growth reflects strong demand for the
Company's storage products and services, which increased by 37% compared to the
first nine months of 1999. This growth was offset by a decrease in AViiON server
revenues due to the refocusing of the business on the most profitable product
lines.
Revenues on sales into the markets of Europe, the Middle East and Africa
were $1,633.9 in the first nine months of 2000 compared to $1,330.7 in the first
nine months of 1999, an increase of $303.2, or 23%. The increase is primarily
due to strong demand for the Company's storage and switching products and
services, which increased by 35% compared to the first nine months of 1999. This
growth was offset by decreased revenues from AViiON products due to the closing
of certain regional sales offices acquired in connection with the acquisition of
Data General in 1999.
Revenues on sales into the markets of the Asia Pacific region were $592.4 in
the first nine months of 2000 compared to $309.9 in the first nine months of
1999, an increase of $282.5, or 91%. The increase was primarily due to the
Company's efforts to expand its business in this region combined with continued
strong demand for the Company's storage products and services, which increased
by 108% compared to the first nine months of 1999. This growth was offset by
decreased revenues from AViiON products due to the closing of certain regional
sales offices acquired in connection with the acquisition of Data General in
1999.
Revenues on sales into the markets of Latin America were $133.9 in the first
nine months of 2000 compared to $114.3 in the first nine months of 1999, an
increase of $19.6, or 17%. The increase was primarily due to increased sales of
the Company's storage products and services, which increased by 49% compared to
the first nine months of 1999. This growth was offset by decreased revenues from
AViiON products due to the closing of certain regional offices acquired in
connection with the acquisition of Data General in 1999.
GROSS MARGINS
Overall gross margins increased to 57.4% of revenues in the first nine
months of 2000, compared to 50.4% of revenues in the first nine months of 1999.
Product gross margins increased to 60.4% in the first nine months of 2000,
compared to 52.7% in the first nine months of 1999. This increase in product
margins is primarily attributable to increased licensing of the Company's
enterprise software products, which has higher gross margins than sales of the
Company's hardware products. Software revenue as a percentage of total revenues
increased to 15% in the first nine months of 2000 from 11% in the first nine
months of 1999. Other factors affecting product gross margins 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.
Service gross margins decreased to 31.4% in the first nine months of 2000,
compared to 31.5% in the first nine months of 1999.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $560.9 and $418.5 in the
first nine months of 2000 and 1999, respectively, an increase of $142.4, or 34%.
R&D expenses were 9.0% and 8.6% of revenues in the first nine months of 2000 and
1999, respectively. The increase in R&D spending levels from 1999 to 2000
reflects the Company's ongoing research and development efforts in a variety of
areas, including EMC Enterprise Storage Network technologies, network attached
storage products,
19
<PAGE>
enhancements to the Symmetrix family of products, new enterprise storage
software products and fibre channel connectivity products. The Company expects
to continue to spend substantial amounts for R&D for the balance of 2000 and
thereafter.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses were $1,487.4 and
$1,010.7 in the first nine months of 2000 and 1999, respectively, an increase of
$476.7, or 47%. SG&A expenses were 23.8% and 20.9% of revenues in the first nine
months of 2000 and 1999, respectively. The increase in spending levels from 1999
to 2000 is primarily due to the Company's efforts to build 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 increased to $143.1 in the first nine months of 2000 from
$92.5 in the first nine months of 1999. Interest income was earned primarily
from investments in cash equivalents and short and long-term investments.
Investment income increased in the first nine months of 2000 primarily due to
higher cash and investment balances which were derived from operations and the
net proceeds from McDATA's initial public offering.
Interest expense decreased to $12.0 in the first nine months of 2000 from
$24.8 in the first nine months of 1999 primarily due to conversion of the
Company's 3 1/4% Notes during March 2000 and the Company's 6% Notes during May
2000.
PROVISION FOR INCOME TAXES
The provision for income taxes was $450.9 and $274.8 in the first nine
months of 2000 and 1999, respectively, which resulted in effective tax rates of
27.0% and 25.5%, respectively. The effective tax rate is less than U.S.
statutory rates due to the Company's various tax strategies and benefits related
to offshore manufacturing.
RESTRUCTURING, MERGER AND OTHER CHARGES
During the fourth quarter of 1999, the Company approved and implemented a
restructuring program in connection with its acquisition of Data General. The
restructuring plan, which is expected to be substantially completed by December
2000, provides for the consolidation of the Company's operations and elimination
of duplicative facilities worldwide. Accordingly, during the fourth quarter of
1999, the Company recorded a charge of approximately $170.6 related to employee
termination benefits, facility closure costs, asset disposals, and other exit
costs which the Company has recorded in operating expenses. The total cash
impact of the charge is approximately $140.7, of which $52.4 was paid in 1999
and $55.3 has been paid during the first nine months of 2000.
The restructuring plan includes a net reduction of the workforce by
approximately 1,100 employees, approximately 59% of whom are or were based in
North America and 23% of whom are or were based in Europe. The employee
separations affect the majority of business functions and job classes. As of
September 30, 2000, employee separations due to restructuring actions totaled
approximately 1,050.
During fiscal year 1998, Data General recorded a charge of $82.4 related to
a restructuring program. The charge included employee termination benefits,
asset write-downs, and other exit costs. The total cash impact of the
restructuring charge is approximately $58.5, of which $46.0 was paid prior to
December 31, 1999 and $1.8 was paid during the first nine months of 2000. As of
September 30,
20
<PAGE>
2000, the remaining accruals of $13.8 from the 1998 restructuring program are
primarily related to excess vacant rental properties in Europe.
The amounts charged against the established provisions described above were
as follows:
<TABLE>
<CAPTION>
BALANCE CURRENT BALANCE
(IN THOUSANDS) DECEMBER 31, 1999 UTILIZATION SEPTEMBER 30, 2000
-------------- ----------------- ----------- ------------------
<S> <C> <C> <C>
Employee termination benefits..................... $ 75,481 $47,067 $28,414
Lease abandonments................................ 18,655 2,399 16,256
Asset write-downs................................. 4,116 3,337 779
Other exit costs.................................. 11,195 8,499 2,696
-------- ------- -------
$109,447 $61,302 $48,145
======== ======= =======
</TABLE>
FINANCIAL CONDITION
Cash and cash equivalents and short and long-term investments were $4,446.7
and $3,173.7 at September 30, 2000 and December 31, 1999, respectively, an
increase of $1,273.0. Cash provided by operating activities for the first nine
months of 2000 was $1,603.4, generated primarily from net income. Cash used by
investing activities was $1,021.5, principally from the acquisition of
Softworks, Inc. and additions to property, plant and equipment. Cash provided by
financing activities was $553.0, principally from the issuance of stock in
McDATA's initial public offering and from stock option exercises.
In March 1997, the Company sold $517.5 of the 3 1/4% Notes. In March 2000,
all of the outstanding 3 1/4% Notes were converted into Common Stock. In May
1997, Data General sold $212.8 of the 6% Notes, which were assumed by the
Company in connection with the acquisition of Data General in 1999. In May 2000,
$212.6 of the 6% Notes were converted into Common Stock. The Company paid
approximately one hundred fifty-five thousand dollars to redeem the remaining 6%
Notes.
At September 30, 2000, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
subsequently updated by SAB 101A and SAB 101B ("SAB 101"). SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting principles
to revenue recognition in financial statements. The Company is required to adopt
SAB 101 no later than the fourth quarter of fiscal 2000. The Company does not
expect that the adoption of SAB 101 will have a material impact on its results
of operations or financial position.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
adopted FIN 44 for the third quarter of 2000 and there was no material impact on
the Company's results of operations or financial position for such quarter.
21
<PAGE>
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an amendment of FAS 133" ("FAS
138"). This statement amends the accounting and reporting standards for certain
derivative instruments and hedging activities. For an entity that has adopted
Statement of Financial Accounting Standards No. 133 prior to June 15, 2000, FAS
138 is effective for all fiscal quarters beginning after June 15, 2000. The
Company adopted FAS 138 for the third quarter of 2000 and there was no material
impact on its results of operations or financial position for such quarter.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report 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 and server markets; (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) the ability to
attract and retain highly qualified employees; (vii) deterioration or
termination of the agreements with certain of the Company's indirect channels;
(viii) the uneven pattern of quarterly sales; (ix) risks associated with
strategic investments and acquisitions; and (x) other one-time events and other
important factors disclosed previously and from time to time in EMC's filings
with the U.S. Securities and Exchange Commission.
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<PAGE>
EMC CORPORATION
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to certain 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
27 Financial Data Schedule (filed herewith).
(B) REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the
quarter ended September 30, 2000.
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<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.
<TABLE>
<S> <C> <C>
EMC CORPORATION
Date: November 9, 2000 By: /s/ WILLIAM J. TEUBER, JR.
------------------------------------------------
William J. Teuber, Jr.
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND CHIEF ACCOUNTING
OFFICER)
</TABLE>
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EXHIBIT INDEX
Exhibit 27 Financial Data Schedule (filed herewith)
25
