<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: JUNE 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 2,180,377,107
----------------------------------- ----------------------------
CLASS OUTSTANDING AS OF JUNE 30, 2000
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
EMC CORPORATION
<TABLE>
<CAPTION>
PAGE NO
--------
<S> <C>
Part I--Financial Information
Consolidated Balance Sheets at June 30, 2000 and December
31, 1999................................................ 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2000 and 1999..................... 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999............................ 5
Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended June 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>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
<CAPTION>
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents................................. $1,794,925 $1,109,409
Short-term investments.................................... 544,567 714,730
Trade and notes receivable less allowance for doubtful
accounts of $38,302 and $34,279 in 2000 and 1999,
respectively............................................ 1,792,678 1,625,438
Inventories............................................... 757,869 618,885
Deferred income taxes..................................... 155,731 147,471
Other assets.............................................. 98,403 104,463
---------- ----------
Total current assets........................................ 5,144,173 4,320,396
Long-term investments....................................... 1,325,065 1,349,599
Notes receivable, net....................................... 120,822 76,756
Property, plant and equipment, net.......................... 1,225,790 1,023,179
Deferred income taxes....................................... 93,579 108,587
Intangible and other assets, net............................ 525,296 294,771
---------- ----------
Total assets............................................ $8,434,725 $7,173,288
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Current portion of long-term obligations.................. $ 10,852 $ 9,116
Accounts payable.......................................... 429,590 370,055
Accrued expenses.......................................... 639,688 611,052
Income taxes payable...................................... 306,207 249,234
Deferred revenue.......................................... 220,479 158,458
---------- ----------
Total current liabilities................................... 1,606,816 1,397,915
Deferred income taxes....................................... 146,574 125,353
Long-term obligations:
3 1/4% convertible subordinated notes due 2002............ -- 460,399
6% convertible subordinated notes due 2004................ -- 212,750
Notes payable............................................. 15,136 13,460
Other liabilities......................................... 31,237 11,625
---------- ----------
Total liabilities....................................... 1,799,763 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 2,180,377 and 2,078,550, in 2000 and 1999,
respectively............................................ 21,804 20,786
Additional paid-in capital................................ 2,640,788 1,695,994
Deferred compensation..................................... (53,005) (30,282)
Retained earnings......................................... 4,060,845 3,299,821
Accumulated other comprehensive income/(expense).......... (35,470) (34,533)
---------- ----------
Total stockholders' equity.............................. 6,634,962 4,951,786
---------- ----------
Total liabilities and stockholders' equity............ $8,434,725 $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 SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Net sales........................................ $1,935,472 $1,469,598 $3,560,919 $2,782,823
Service.......................................... 210,455 178,044 407,606 348,124
---------- ---------- ---------- ----------
2,145,927 1,647,642 3,968,525 3,130,947
Costs and expenses:
Cost of sales.................................... 756,608 691,128 1,407,488 1,339,862
Cost of service.................................. 145,824 120,303 286,003 237,460
Research and development......................... 194,286 139,706 356,066 269,074
Selling, general and administrative.............. 506,149 335,993 954,268 646,909
---------- ---------- ---------- ----------
Operating income................................... 543,060 360,512 964,700 637,642
Investment income.................................. 48,051 29,550 88,694 58,158
Interest expense................................... (2,956) (8,244) (9,827) (16,962)
Other income/(expense), net........................ (433) 949 (1,069) 213
---------- ---------- ---------- ----------
Income before taxes................................ 587,722 382,767 1,042,498 679,051
Income tax provision............................... 158,685 96,896 281,474 170,855
---------- ---------- ---------- ----------
Net income......................................... $ 429,037 $ 285,871 $ 761,024 $ 508,196
========== ========== ========== ==========
Net income per weighted average share, basic....... $ 0.20 $ 0.14 $ 0.36 $ 0.25
========== ========== ========== ==========
Net income per weighted average share, diluted..... $ 0.19 $ 0.13 $ 0.34 $ 0.23
========== ========== ========== ==========
Weighted average shares, basic..................... 2,174,291 2,057,559 2,140,049 2,053,494
Weighted average shares, diluted................... 2,240,805 2,214,676 2,238,031 2,213,362
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------
JUNE 30, JUNE 30,
2000 1999
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 761,024 $ 508,196
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Depreciation and amortization........................... 254,650 191,096
Deferred income taxes................................... 30,719 (28,499)
Net (gain)/loss on disposal of property and equipment... 13,835 4,614
Tax benefit from stock options exercised................ 120,521 17,060
Minority interest....................................... 828 (165)
Changes in assets and liabilities net of acquired assets
and liabilities:
Trade and notes receivable............................ (176,817) (167,370)
Inventories........................................... (139,575) (23,003)
Other assets.......................................... (37,523) (40,020)
Accounts payable...................................... 60,497 79,487
Accrued expenses...................................... 22,000 26,329
Income taxes payable.................................. 56,973 49,265
Deferred revenue...................................... 50,117 15,627
Other liabilities..................................... (6) (4,625)
---------- ---------
Net cash provided by operating activities............. 1,017,243 627,992
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.............. (386,162) (242,365)
Capitalized software development costs.................. (52,460) (39,539)
Maturity/(purchase) of short-term and long-term
investments, net...................................... 197,447 (375,875)
Business acquisitions net of cash acquired.............. (198,251) --
---------- ---------
Net cash used by investing activities................. (439,426) (657,779)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock................................ 111,316 23,641
Redemption of 6% convertible subordinated notes......... (155) --
Payment of long-term and short-term obligations......... (8,146) (29,716)
Issuance of long-term and short-term obligations........ 9,009 1,900
---------- ---------
Net cash provided/(used) by financing activities...... 112,024 (4,175)
---------- ---------
Effect of exchange rate changes on cash..................... (4,325) (1,130)
Net increase/(decrease) in cash and cash equivalents........ 689,841 (33,962)
Cash and cash equivalents at beginning of period............ 1,109,409 835,466
---------- ---------
Cash and cash equivalents at end of period.................. $1,794,925 $ 800,374
========== =========
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 SIX
MONTHS ENDED MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income.......................................... $429,037 $285,871 $761,024 $508,196
Other comprehensive income/(expense), net of tax:
Foreign currency translation adjustments, net of
tax of $(2,180), $290, $(1,806), and $(349)..... (161) (326) (3,487) (3,844)
Unrealized gains/(losses) on investment securities
and derivatives:
Unrealized holding gains/(losses) arising during
the period, net of tax of $1,024, $(2,295),
$200, and $(4,316)............................ 5,023 (4,633) 2,550 (12,455)
-------- -------- -------- --------
Other comprehensive income/(expense)................ 4,862 (4,959) (937) (16,299)
-------- -------- -------- --------
Comprehensive income................................ $433,899 $280,912 $760,087 $491,897
======== ======== ======== ========
</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 June 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>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Purchased parts............................................. $ 55,383 $ 38,204
Work in process............................................. 493,119 379,679
Finished goods.............................................. 209,367 201,002
-------- --------
$757,869 $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>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
Furniture and fixtures...................................... $ 107,974 $ 101,954
Equipment................................................... 1,381,029 1,237,247
Buildings and improvements.................................. 450,095 439,924
Land........................................................ 45,881 32,451
Construction in progress.................................... 216,181 106,304
---------- ----------
2,201,160 1,917,880
Accumulated depreciation.................................... (975,370) (894,701)
---------- ----------
$1,225,790 $1,023,179
========== ==========
</TABLE>
4. NET INCOME PER SHARE
Calculation of earnings per share is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
---------------------
JUNE 30, JUNE 30,
2000 1999
--------- ---------
<S> <C> <C>
BASIC:
Net income.................................................. $ 429,037 $ 285,871
Weighted average shares, basic.............................. 2,174,291 2,057,559
Net income per share, basic................................. $ 0.20 $ 0.14
========= =========
DILUTED:
Net income.................................................. $ 429,037 $ 285,871
Add back of interest expense on 3 1/4% Notes................ -- 3,936
Less tax effect of interest expense on 3 1/4% Notes......... -- (1,574)
--------- ---------
Net income for calculating diluted earnings per share....... $ 429,037 $ 288,233
Weighted average shares..................................... 2,174,291 2,057,559
Weighted common stock equivalents........................... 66,514 157,117
--------- ---------
Total weighted average shares, diluted...................... 2,240,805 2,214,676
Net income per share, diluted............................... $ 0.19 $ 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 SIX MONTHS
ENDED
---------------------
JUNE 30, JUNE 30,
2000 1999
--------- ---------
<S> <C> <C>
BASIC:
Net income.................................................. $ 761,024 $ 508,196
Weighted average shares, basic.............................. 2,140,049 2,053,494
Net income per share, basic................................. $ 0.36 $ 0.25
========= =========
DILUTED:
Net income.................................................. $ 761,024 $ 508,196
Add back of interest expense on 3 1/4% Notes................ 2,987 8,141
Less tax effect of interest expense on 3 1/4% Notes......... (1,195) (3,256)
--------- ---------
Net income for calculating diluted earnings per share....... $ 762,816 $ 513,081
Weighted average shares..................................... 2,140,049 2,053,494
Weighted common stock equivalents........................... 97,982 159,868
--------- ---------
Total weighted average shares, diluted...................... 2,238,031 2,213,362
Net income per share, diluted............................... $ 0.34 $ 0.23
========= =========
</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"). On March 15, 2000, all of the
outstanding 3 1/4% Notes were converted into Common Stock. In May 1997, Data
General Corporation sold $212.8 of the 6% Notes, which were assumed by the
Company in connection with the acquisition of Data General in 1999. The 6% Notes
were generally convertible into shares of common stock at a conversion price of
approximately $41.91 per share, subject to adjustment in certain events. As of
June 30, 2000, $212.6 of the 6% Notes were converted into EMC 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 5, 2000. Share and per share amounts have been restated to reflect
the stock splits for all periods presented.
9
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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. All
derivative contracts generally mature within six 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 $1,835 and $8,306
in net gains from cash flow hedges related to items forecasted for the second
quarter and first six 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 loss of approximately $569, net of tax.
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. The
aggregate cost of these transactions was approximately $209 million, net of cash
acquired of approximately $28 million.
The Company accounted for each acquisition as a purchase transaction. The
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 ("IPRD") 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 IPRD for
10
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. BUSINESS ACQUISITIONS (CONTINUED)
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 IPRD associated with both 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
Corporation. The restructuring plan, which is expected to be 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 $43.5 million was paid in 2000.
The program included 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 June 30, 2000, employee
separations due to restructuring actions totaled approximately 900.
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 $1.5 million was paid during the first six
months of 2000. As of June 30, 2000, the remaining accruals of $14.3 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 JUNE 30, 2000
----------------- ----------- -------------
<S> <C> <C> <C>
Employee termination benefits.......................... $ 75,481 $36,997 $38,484
Lease abandonments..................................... 18,655 1,491 17,164
Asset write-downs...................................... 4,116 3,245 871
Other exit costs....................................... 11,195 7,115 4,080
-------- ------- -------
$109,447 $48,848 $60,599
======== ======= =======
</TABLE>
11
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
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 SIX MONTHS
ENDED ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STORAGE PRODUCTS:
Enterprise storage hardware................... $1,340,325 $ 985,514 $2,471,837 $1,846,634
Enterprise storage software................... 350,257 178,635 620,245 334,054
Enterprise switching products (McDATA)........ 37,062 45,819 75,970 84,826
CLARiiON storage products..................... 138,529 105,748 235,273 208,713
---------- ---------- ---------- ----------
Total storage products........................ $1,866,173 $1,315,716 $3,403,325 $2,474,227
========== ========== ========== ==========
SERVICES:
Storage related services...................... $ 134,437 $ 84,169 $ 250,842 $ 159,117
Server related services....................... 76,018 93,875 156,764 189,007
---------- ---------- ---------- ----------
Total service revenue......................... $ 210,455 $ 178,044 $ 407,606 $ 348,124
========== ========== ========== ==========
</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 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>
JUNE 30, 2000
Revenues......................................... $1,866,173 $ 69,299 $210,455 $2,145,927
Gross profit..................................... 1,152,588 26,276 64,631 1,243,495
JUNE 30, 1999
Revenues......................................... $1,315,716 $153,882 $178,044 $1,647,642
Gross profit..................................... 728,506 49,964 57,741 836,211
</TABLE>
12
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
STORAGE SERVER
FOR THE SIX MONTHS ENDED PRODUCTS PRODUCTS SERVICES CONSOLIDATED
------------------------ ---------- -------- -------- ------------
<S> <C> <C> <C> <C>
JUNE 30, 2000
Revenues......................................... $3,403,325 $157,594 $407,606 $3,968,525
Gross profit..................................... 2,093,891 59,540 121,603 2,275,034
JUNE 30, 1999
Revenues......................................... $2,474,227 $308,596 $348,124 $3,130,947
Gross profit..................................... 1,341,997 100,964 110,664 1,553,625
</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 SIX MONTHS
ENDED ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SALES
North America................................. $1,328,653 $1,048,803 $2,479,717 $1,987,075
Latin America................................. 40,432 47,566 78,953 72,597
Europe, Middle East, Africa................... 571,436 444,060 1,065,438 877,499
Asia Pacific.................................. 205,406 107,213 344,417 193,776
---------- ---------- ---------- ----------
Consolidated Total............................ $2,145,927 $1,647,642 $3,968,525 $3,130,947
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
IDENTIFIABLE ASSETS
North America............................................... $4,810,724 $4,630,506
Latin America............................................... 80,550 73,195
Europe, Middle East, Africa................................. 3,204,298 2,245,460
Asia Pacific................................................ 354,834 306,266
Intercompany eliminations................................... (15,681) (82,139)
---------- ----------
Consolidated Total.......................................... $8,434,725 $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 is
currently evaluating the impact of SAB 101 on its results of operations and
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
13
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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 is 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 does not expect FIN 44 to
have a material impact on its results of operations and financial position.
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 138, "Accounting for Certain
Derivative Instruments--an amendment of FAS 133" ("Accounting for Derivative
Instruments and Hedging Activities"). This statement amends the accounting and
reporting standards for certain derivative instruments and hedging activities.
The Company is required to adopt FAS 138 no later than the third quarter of
fiscal 2000 and is currently evaluating the impact, if any, of FAS 138 on its
results of operations and financial position.
12. SUBSEQUENT EVENT
On August 9, 2000, the Company completed the initial public offering of
12,500 shares of Class B common stock of its majority owned subsidiary McDATA
Corporation. The offering represents approximately 12% of the McDATA common
stock outstanding. All of these shares were offered by McDATA at a price of $28
per share. McDATA has granted the underwriters an option to purchase up to 1,875
additional shares of Class B common stock to cover over-allotments, if any,
within 30 days of the offering date.
14
<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 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--SECOND QUARTER OF 2000 COMPARED TO SECOND QUARTER OF 1999
REVENUES
Total revenues for the second quarter of 2000 were $2,145.9 compared to
$1,647.6 for the second quarter of 1999, representing an increase of $498.3 or
30%.
Enterprise storage hardware revenues from products sold directly and through
resellers and original equipment manufacturers were $1,340.3 in the second
quarter of 2000, compared to $985.5 in the second quarter of 1999, representing
an increase of $354.8, or 36%. 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
Symmetrix, Celerra and Connectrix 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 from products sold directly and through
resellers and original equipment manufacturers were $350.3 in the second quarter
of 2000 compared to $178.6 in the second quarter of 1999, representing an
increase of $171.7, or 96%. 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,
including the ESCON Director series of products, were $37.1 in the second
quarter of 2000 compared to $45.8 in the second quarter of 1999, representing a
decrease of $8.7, or 19%. The decrease was due to the product transition from
ESCON-based to fibre channel-based directors which resulted in a decrease in
ESCON revenues that was partially offset by an increase in fibre channel
revenues. The Company anticipates that revenues from ESCON directors will
continue to decline.
Revenues from the CLARiiON line of storage products, excluding related
service revenues, were $138.5 in the second quarter of 2000, compared to $105.7
in the second quarter of 1999, representing an increase of $32.8, or 31%. The
increase reflects a significant increase in sales volume from direct sales
channels offset by a decrease in sales volume from indirect channels.
Total storage product revenues were $1,866.2 in the second quarter of 2000,
compared to $1,315.7 in the second quarter of 1999, representing an increase of
$550.5, or 42%. The increase is due primarily to sales of enterprise storage
hardware and software.
Revenues from AViiON server products were $69.3 in the second quarter of
2000 compared to $153.9 in the second quarter of 1999, representing a decrease
of $84.6, or 55%. 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.
Overall service revenues were $210.5 in the second quarter of 2000 compared
to $178.0 in the second quarter of 1999, an increase of $32.5 or 18%. Storage
service revenues were $134.4 in the
15
<PAGE>
second quarter of 2000 compared to $84.2 in the second quarter of 1999, an
increase of $50.2, or 60%. These increases were primarily related to increased
maintenance revenues on enterprise storage hardware and software products.
Server service revenues from the Company's Data General division were $76.0 in
the second quarter of 2000 compared to $93.9 in the second quarter of 1999, a
decrease of $17.9, 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 $2,000.6 in the
second quarter of 2000, compared to $1,399.9 in the second quarter of 1999,
representing an increase of $600.7, or 43%. Total revenues from server products
and services were $145.3 in the second quarter of 2000, compared to $247.8 in
the second quarter of 1999, representing a decrease of $102.5, or 41%.
Revenues on sales into the North American markets were $1,328.7 in the
second quarter of 2000 compared to $1,048.8 in the second quarter of 1999, an
increase of $279.9, or 27%. The revenue growth reflects strong demand for the
Company's storage products and services, which increased by 37% compared to the
second quarter 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 $571.4 in the second quarter of 2000 compared to $444.1 in the second
quarter of 1999, an increase of $127.3, or 29%. The increase is primarily due to
strong demand for the Company's storage products and services, which increased
by 42% compared to the second 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
Corporation in 1999.
Revenues on sales into the markets of the Asia Pacific region were $205.4 in
the second quarter of 2000 compared to $107.2 in the second quarter of 1999, an
increase of $98.2, or 92%. 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 111%
compared to the second 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 Corporation
in 1999.
Revenues on sales into the markets of Latin America were $40.4 in the second
quarter of 2000 compared to $47.6 in the second quarter of 1999, a decrease of
$7.2, or 15%. The decrease was primarily due to decreased revenues from AViiON
products due to the closing of certain regional offices acquired in connection
with the acquisition of Data General Corporation in 1999. The Company's storage
products and services increased by 10% compared to the second quarter of 1999.
GROSS MARGINS
Overall gross margins increased to 57.9% of revenues in the second quarter
of 2000, compared to 50.8% of revenues in the second quarter of 1999. Product
gross margins increased to 60.9% in the second quarter of 2000, compared to
53.0% in the second quarter of 1999. This increase in product margins was
primarily attributable to increased licensing of the Company's enterprise
software products, which have higher gross margins than sales of the Company's
hardware products. Software revenue as a percentage of total revenues increased
to 16% in the second quarter of 2000 from 11% in the second 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 decreased to 30.7% in the second quarter of 2000,
compared to 32.4% in the second quarter of 1999. The decrease in service margins
from 1999 to 2000 was primarily due to a
16
<PAGE>
decrease in 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 $194.3 and $139.7 in the
second quarters of 2000 and 1999, respectively, an increase of $54.6, or 39%.
R&D expenses were 9.1% and 8.5% of revenues in the second 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 $506.1 and $336.0
in the second quarters of 2000 and 1999, respectively, an increase of $170.1, or
51%. SG&A expenses were 23.6% and 20.4% of revenues in the second 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 $48.1 in the second quarter of 2000 from
$29.6 in the second quarter of 1999. Interest income was earned primarily from
investments in cash equivalents and short and long-term investments. Investment
income increased in the second quarter 2000 primarily due to higher cash and
investment balances which were derived from operations.
Interest expense decreased to $3.0 in the second quarter of 2000 from $8.2
in the second quarter of 1999 primarily due to conversion of the Company's
3 1/4% convertible subordinated notes due 2002 (the "3 1/4% Notes") during
March 2000 and the Company's 6% convertible subordinated notes due 2004 (the "6%
Notes") during May 2000.
PROVISION FOR INCOME TAXES
The provision for income taxes was $158.7 and $96.9 in the second quarters
of 2000 and 1999, respectively, which resulted in effective tax rates of 27.0%
and 25.3%, 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 SIX MONTHS OF 2000 COMPARED TO FIRST SIX MONTHS OF
1999
REVENUES
Total revenues for the first six months of 2000 were $3,968.5 compared to
$3,130.9 for the first six months of 2000, representing an increase of $837.6,
or 27%.
Enterprise storage hardware revenues from products sold directly and through
resellers and original equipment manufacturers were $2,471.8 in the first six
months of 2000, compared to $1,846.6 in the first six months of 1999,
representing an increase of $625.2, or 34%. 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 from products sold directly and through
resellers and original equipment manufacturers were $620.2 in the first six
months of 2000 compared to $334.1 in the first six months of 1999, representing
an increase of $286.1, or 86%. 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,
including the ESCON Director series of products, were $76.0 in the first six
months of 2000 compared to $84.8 in the first six months of 1999, representing a
decrease of $8.8, or 10%. The decrease was due to the product transition from
ESCON-based to fibre channel-based directors, resulting in a decrease in ESCON
revenues that was offset by an increase in fibre channel revenues. The Company
anticipates that revenues from ESCON directors will continue to decline.
Revenues from the CLARiiON line of storage products, excluding related
service revenues, were $235.3 in the first six months of 2000, compared to
$208.7 in the first six months of 1999, representing an increase of $26.6, or
13%. The increase reflects an increase in revenues from direct sales channels
offset by a decrease in sales volume from indirect channels.
Total storage product revenues were $3,403.3 in the first six months of
2000, compared to $2,474.2 in the first six months of 1999, representing an
increase of $929.1 or 38%. The increase is due primarily to sales of enterprise
storage hardware and software.
Revenues from AViiON server products were $157.6 in the first six months of
2000 compared to $308.6 in the first six months of 1999, representing a decrease
of $151.0, or 49%. 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.
Overall service revenues were $407.6 in the first six months of 2000
compared to $348.1 in the first six months of 1999, an increase of $59.5, or
17%. Storage service revenues were $250.8 in the first six months of 2000
compared to $159.1 in the first six months of 1999, an increase of $91.7, or
58%. These increases are primarily related to increased maintenance revenues on
enterprise storage hardware and software products. Server service revenues from
the Company's Data General division were $156.8 in the first six months of 2000
compared to $189.0 in the first six months of 1999, a decrease of $32.2 or 17%.
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 $3,654.2 in the first
six months of 2000, compared to $2,633.3 in the first six months of 1999,
representing an increase of $1,020.9, or 39%. Total revenues from server
products and services were $314.4 in the first six months of 2000, compared to
$497.6 in the first six months of 1999, representing a decrease of $183.2 or
37%.
18
<PAGE>
Revenues on sales into the North American markets were $2,479.7 in the first
six months of 2000 compared to $1,987.1 in the first six months of 1999, an
increase of $492.6, or 25%. The revenue growth reflects strong demand for the
Company's storage products and services, which increased by 35% compared to the
first six 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 $1,065.4 in the first six months of 2000 compared to $877.5 in the first
six months of 1999, an increase of $187.9, or 21%. The increase is primarily due
to strong demand for the Company's storage products and services, which
increased by 33% compared to the first six 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 Corporation in 1999.
Revenues on sales into the markets of the Asia Pacific region were $344.4 in
the first six months of 2000 compared to $193.8 in the first six months of 1999,
an increase of $150.6, or 78%. 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 94%
compared to the first six 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 Corporation
in 1999.
Revenues on sales into the markets of Latin America were $79.0 in the first
six months of 2000 compared to $72.6 in the first six months of 1999, an
increase of $6.4, or 9%. The increase was primarily due to increased sales of
the Company's storage products and services, which increased by 42% compared to
the first six 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 Corporation in 1999.
GROSS MARGINS
Overall gross margins increased to 57.3% of revenues in the first six months
of 2000, compared to 49.6% of revenues in the first six months of 1999. Product
gross margins increased to 60.5% in the first six months of 2000, compared to
51.9% in the first six 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 16% in the first six months of 2000 from 11% in the first six 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 29.8% in the first six months of 2000,
compared to 31.8% in the first six months of 1999. The decrease in service
margins from 1999 to 2000 is primarily due to a decrease in 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 $356.1 and $269.1 in the
first six months of 2000 and 1999, respectively, an increase of $87.0, or 32%.
R&D expenses were 9.0% and 8.6% of revenues in the first six 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, enhancements to the Symmetrix family of products, new
enterprise storage software products and fibre
19
<PAGE>
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 $954.3 and $646.9
in the first six months of 2000 and 1999, respectively, an increase of $307.4,
or 48%. SG&A expenses were 24.0% and 20.7% of revenues in the first six 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 $88.7 in the first six months of 2000 from
$58.2 in the first six 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 six months of 2000 primarily due to higher cash
and investment balances which were derived from operations.
Interest expense decreased to $9.8 in the first six months of 2000 from
$17.0 in the first six 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 $281.5 and $170.9 in the first six months
of 2000 and 1999, respectively, which resulted in effective tax rates of 27.0%
and 25.2%, 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
Corporation. The restructuring plan, which is expected to be 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 $43.5 was paid in 2000.
The program included 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 June 30, 2000, employee
separations due to restructuring actions totaled approximately 900.
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 $1.5 was paid during the first six months of 2000. As of
June 30, 2000, the remaining accruals of $14.3 from the 1998 restructuring
program are related to excess vacant rental properties in Europe.
20
<PAGE>
The amounts charged against the established provisions described above were
as follows:
<TABLE>
<CAPTION>
BALANCE CURRENT BALANCE
DECEMBER 31, 1999 UTILIZATION JUNE 30, 2000
(IN THOUSANDS) ----------------- ----------- -------------
<S> <C> <C> <C>
Employee termination benefits.......................... $ 75,481 $36,997 $38,484
Lease abandonments..................................... 18,655 1,491 17,164
Asset write-downs...................................... 4,116 3,245 871
Other exit costs....................................... 11,195 7,115 4,080
-------- ------- -------
$109,447 $48,848 $60,599
======== ======= =======
</TABLE>
FINANCIAL CONDITION
Cash and cash equivalents and short and long-term investments were $3,664.6
and $3,173.7 at June 30, 2000 and December 31, 1999, respectively, an increase
of $490.9. Cash provided by operating activities for the first six months of
2000 was $1,017.2, generated primarily from net income. Cash used by investing
activities was $439.4, principally from the acquisition of Softworks, Inc. and
additions to property, plant and equipment. Cash provided by financing
activities was $112.0, principally from the issuance of common stock from stock
option exercises.
In March 1997, the Company sold $517.5 of the 3 1/4% Notes. On March 15,
2000, all of the outstanding 3 1/4% Notes were converted into Common Stock. In
May 1997, Data General Corporation sold $212.8 of the 6% Notes, which were
assumed by the Company in connection with the acquisition of Data General in
1999. The 6% Notes were generally convertible into shares of EMC common stock at
a conversion price of approximately $41.91 per share, subject to adjustment in
certain events. As of June 30, 2000, $212.6 of the 6% Notes were converted into
EMC common stock. The Company paid approximately one hundred fifty-five thousand
dollars to redeem the remaining 6% Notes.
At June 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 is
currently evaluating the impact of SAB 101 on its results of operations and
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 is
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
does not expect FIN 44 to have a material impact on its results of operations
and financial position.
21
<PAGE>
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 138, "Accounting for Certain
Derivative Instruments--an amendment of FAS 133" ("Accounting for Derivative
Instruments and Hedging Activities"). This statement amends the accounting and
reporting standards for certain derivative instruments and hedging activities.
The Company is required to adopt FAS 138 no later than the third quarter of
fiscal 2000 and is currently evaluating the impact, if any, of FAS 138 on its
results of operations and financial position.
YEAR 2000 ISSUES
The information provided below constitutes a "Year 2000 Readiness
Disclosure" under the Year 2000 Information and Readiness Disclosure Act.
To date, EMC has not experienced, and is not aware of, any significant Year
2000 problems or disruptions in any of its internal systems or products and has
not received any notification from any of its key vendors, suppliers or other
third parties of any significant Year 2000 problems or disruptions.
EMC had established a Year 2000 program to assess and remediate potential
systems and software problems in interpreting certain dates. EMC also received
certifications or statements of Year 2000 compliance from all of its key vendors
and suppliers and developed a contingency plan to address the most reasonably
likely worst-case scenarios for Year 2000 problems or disruptions.
The total cost of EMC's Year 2000 program has not had, and EMC does not
anticipate that the total cost of this program will have a material effect on
its business, results of operations or financial condition; however, EMC cannot,
at this time, be assured that Year 2000 problems or disruptions in its internal
systems or products, or in the systems or products of third parties will not
have such a material effect on its business, results of operations or financial
condition.
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 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) deterioration or termination of the agreements with certain
of the Company's resellers or original equipment manufacturers and other
indirect channel participants; (vii) the uneven pattern of quarterly sales;
(viii) risks associated with strategic investments and acquisitions; (ix) the
ability to attract and retain highly qualified employees; 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.
22
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 3, 2000. There was no
solicitation in opposition to management's nominees as listed in the Company's
proxy statement and all such nominees were elected as Class I directors for a
three-year term. In addition, the stockholders approved an amendment to the
Company's 1993 Stock Option Plan to increase the number of shares available for
grant under the plan by 20,000,000, and an amendment to the Company's 1989
Employee Stock Purchase Plan as described in the Company's Proxy Statement. The
results of the votes for each of these proposals were as follows:
1. Election of Class I Directors:
<TABLE>
<CAPTION>
FOR WITHHELD
----------- ----------
<S> <C> <C>
Richard J. Egan..................................... 815,712,098 73,088,076
Alfred M. Zeien..................................... 871,944,029 16,856,145
</TABLE>
In addition to these directors, the Company's other incumbent directors (Michael
J. Cronin, John R. Egan, Maureen E. Egan, W. Paul Fitzgerald, Joseph F. Oliveri
and Michael C. Ruettgers) had terms that continued after the 2000 Annual
Meeting.
2. To amend the Company's 1993 Stock Option Plan:
<TABLE>
<S> <C>
For:........................................................ 702,808,424
Against:.................................................... 181,610,595
Abstain:.................................................... 4,381,155
</TABLE>
3. To amend the Company's 1989 Employee Stock Purchase Plan:
<TABLE>
<S> <C>
For:........................................................ 874,686,857
Against:.................................................... 9,885,473
Abstain:.................................................... 4,227,844
</TABLE>
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 report on Form 8-K during the quarter
ended June 30, 2000.
23
<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
By: /s/ WILLIAM J. TEUBER, JR.
--------------------------------------------
William J. Teuber, Jr.
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL AND CHIEF
Date: August 11, 2000 ACCOUNTING OFFICER)
</TABLE>
24
<PAGE>
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule (filed herewith)
25
