<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: MARCH 31, 2000 COMMISSION FILE NUMBER 1-9853
EMC CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2680009
(State or other jurisdiction of (I.R.S. Employer
organization or incorporation) Identification Number)
35 PARKWOOD DRIVE
HOPKINTON, MASSACHUSETTS 01748-9103
(Address of principal executive offices, including zip code)
(508) 435-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
COMMON STOCK, PAR VALUE $.01 PER SHARE 1,084,960,912
- -------------------------------------- --------------------------------
CLASS OUTSTANDING AS OF MARCH 31, 2000
================================================================================
<PAGE>
EMC CORPORATION
<TABLE>
<CAPTION>
PAGE NO
-------
<S> <C>
Part I--Financial Information
Consolidated Balance Sheets at March 31, 2000 and December 31, 1999............................... 3
Consolidated Statements of Income for the Three Months Ended March 31, 2000 and 1999.............. 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999.......... 5
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2000
and 1999................................................................................... 6
Notes to Interim Consolidated Financial Statements................................................ 7-13
Management's Discussion and Analysis of Financial Condition and Results of Operations............. 14-18
Part II--Other Information........................................................................... 19
Signatures........................................................................................... 20
Exhibit Index........................................................................................ 21
</TABLE>
2
<PAGE>
EMC CORPORATION
PART I.
FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $1,439,501 $ 1,109,409
Short-term investments.............................................. 657,027 714,730
Trade and notes receivable less allowance for doubtful accounts of
$34,704 and $34,279 in 2000 and 1999, respectively.............. 1,571,613 1,625,438
Inventories......................................................... 678,518 618,885
Deferred income taxes............................................... 145,747 147,471
Other assets 127,760 104,463
--------------- ---------------
Total current assets..................................................... 4,620,166 4,320,396
Long-term investments.................................................... 1,261,661 1,349,599
Notes receivable, net.................................................... 146,624 76,756
Property, plant and equipment, net....................................... 1,114,406 1,023,179
Deferred income taxes.................................................... 91,073 108,587
Intangible and other assets, net......................................... 525,266 294,771
--------------- ---------------
Total assets ....................................................... $7,759,196 $7,173,288
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations............................ $ 9,875 $ 9,116
Accounts payable.................................................... 460,573 370,055
Accrued expenses.................................................... 598,501 611,052
Income taxes payable................................................ 242,396 249,234
Deferred revenue.................................................... 185,710 158,458
--------------- ---------------
Total current liabilities................................................ 1,497,055 1,397,915
Deferred income taxes.................................................... 124,593 125,353
Long-term obligations:
3 1/4% convertible subordinated notes due 2002...................... -- 460,399
6% convertible subordinated notes due 2004.......................... 212,472 212,750
Notes payable....................................................... 14,963 13,460
Other liabilities........................................................ 29,606 11,625
--------------- ---------------
Total liabilities................................................... 1,878,689 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 1,084,961 and 1,039,275 in 2000 and 1999, respectively.... 10,850 10,393
Additional paid-in capital.......................................... 2,320,767 1,706,387
Deferred compensation............................................... (42,585) (30,282)
Retained earnings................................................... 3,631,808 3,299,821
Accumulated other comprehensive income/(expense).................... (40,333) (34,533)
--------------- ---------------
Total stockholders' equity..................................... 5,880,507 4,951,786
--------------- ---------------
Total liabilities and stockholders' equity................ $7,759,196 $7,173,288
=============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
EMC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------
MARCH 31, MARCH 31,
2000 1999
------ ------
<S> <C> <C>
Revenues:
Net sales..................................................$ 1,625,447 $ 1,313,225
Service and rental......................................... 197,151 170,080
----------- -----------
1,822,598 1,483,305
Costs and expenses:
Cost of products............................................... 650,880 648,734
Cost of service................................................ 140,179 117,157
Research and development....................................... 161,780 129,368
Selling, general and administrative............................ 448,119 310,916
----------- -----------
Operating income................................................... 421,640 277,130
Investment income.................................................. 40,643 28,608
Interest expense................................................... (6,871) (8,718)
Other expense, net................................................. (636) (736)
----------- -----------
Income before taxes................................................ 454,776 296,284
Income tax provision............................................... 122,789 73,959
----------- -----------
Net income......................................................... $331,987 $222,325
=========== ===========
Net income per weighted average share, basic....................... $ 0.32 $ 0.22
=========== ===========
Net income per weighted average share, diluted..................... $ 0.30 $ 0.20
=========== ===========
Weighted average shares, basic..................................... 1,052,837 1,024,681
Weighted average shares, diluted................................... 1,118,091 1,107,427
</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 THREE MONTHS ENDED
-----------------------------------
MARCH 31, MARCH 31,
2000 1999
-----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $331,987 $222,325
Adjustments to reconcile net income to net cash provided/(used) by
operating activities:
Depreciation and amortization................................. 119,755 90,443
Deferred income taxes......................................... 19,829 (15,745)
Net loss on disposal of property and equipment................ 7,514 2,277
Tax benefit from stock options exercised..................... 64,939 13,320
Minority interest............................................ 951 (184)
Changes in assets and liabilities net of acquired assets and
liabilities:
Trade and notes receivable............................... 21,691 4,810
Inventories.............................................. (59,813) (31,655)
Other assets............................................. (42,310) (34,935)
Accounts payable......................................... 90,995 14,958
Accrued expenses......................................... (25,517) 22,565
Income taxes payable..................................... (6,838) 16,050
Deferred revenue......................................... 13,472 10,115
Other liabilities........................................ (5) (2,462)
--------- --------
Net cash provided by operating activities............. 536,650 311,882
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment........................ (183,047) (106,680)
Capitalized software development costs............................ (28,084) (18,657)
Maturity/(purchase) of short-term and long-term investments, net.. 142,344 (73,945)
Business acquisitions net of cash acquired........................ (198,251) --
--------- --------
Net cash used by investing activities................. (267,038) (199,282)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.......................................... 64,256 20,836
Payment of long-term and short-term obligations................... (7,225) (13,623)
Issuance of long-term and short-term obligations.................. 6,935 390
--------- --------
Net cash provided by financing activities............ 63,966 7,603
--------- --------
Effect of exchange rate changes on cash.............................. (3,486) (1,708)
Net increase in cash and cash equivalents............................ 333,578 120,203
Cash and cash equivalents at beginning of period..................... 1,109,409 835,466
--------- --------
Cash and cash equivalents at end of period........................... $1,439,501 $953,961
========== ========
Non-cash activity--conversion of 3 1/4% convertible subordinated
notes............................................... $ 460,399 --
--conversion of 6% convertible subordinated notes... 278 --
--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 MONTHS ENDED
----------------------------------
MARCH 31, MARCH 31,
2000 1999
----------------------------------
<S> <C> <C>
Net income................................................. $331,987 $222,325
Other comprehensive expense, net of tax:
Foreign currency translation adjustments, net of tax
of $374 and $(479) .................................. (3,327) (3,039)
Unrealized losses on investment securities and derivatives:
Unrealized holding losses arising during the period,
net of tax $(824) and $(1,516) ...................... (2,473) (6,306)
-------- --------
Other comprehensive expense................................ (5,800) (9,345)
-------- --------
Comprehensive income....................................... $326,187 $212,980
======== ========
</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 March 31, 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>
March 31, December 31,
2000 1999
--------------- ------------------
<S> <C> <C>
Purchased parts........................................ $68,792 $38,204
Work in process........................................ 435,459 379,679
Finished goods......................................... 174,267 201,002
--------------- ------------------
$678,518 $618,885
=============== ==================
</TABLE>
7
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. NET INCOME PER SHARE
Calculation of earnings per share is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
2000 1999
--------------- --------------
<S> <C> <C>
BASIC:
Net income................................................ $ 331,987 $ 222,325
Weighted average shares, basic............................ 1,052,837 1,024,681
Net income per share, basic............................... $ 0.32 $ 0.22
========== ==========
DILUTED:
Net income................................................ $ 331,987 $ 222,325
Add back of interest expense on 3 1/4% Notes.............. 2,987 4,205
Less tax effect of interest expense on 3 1/4% Notes....... (1,195) (1,682)
---------- ----------
Net income for calculating diluted earnings per share..... $ 333,779 $ 224,848
Weighted average shares................................... 1,052,837 1,024,681
Weighted common stock equivalents......................... 65,254 82,746
---------- ----------
Total weighted average shares, diluted.................... 1,118,091 1,107,427
Net income per share, diluted............................. $ 0.30 $ 0.20
========== ==========
</TABLE>
The calculation of earnings per share excludes the Company's 6% convertible
subordinated notes due 2004 (the "6% Notes") as these are considered
antidilutive.
4. 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.
5. 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 in the first quarter of
2000 and 1999. 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.
8
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 $6,471 in net
gains from cash flow hedges related to items forecasted for the first quarter of
2000. The amount that will be reclassified from other accumulated comprehensive
income/(expense) to earnings over the next twelve months is a loss of
approximately $74, net of tax.
6. 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. Softworks' products
improve the management, performance and integrity of critical corporate
information across Windows NT, UNIX, OS/390 and MVS platforms. 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 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 the acquisitions using a discounted cash flow analysis on
the anticipated income stream to be generated by the purchased technology.
During the 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 over their estimated useful lives, which
is a maximum of five years for the acquisitions consummated in this quarter.
9
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. 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 $30.9 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 March 31, 2000, employee
separations due to restructuring actions totaled approximately 800.
During fiscal year 1998, the Company 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 $0.5 million was paid during
the first quarter of 2000. As of March 31, 2000, the remaining accruals of
$15.2 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 March 31, 2000
-------------------- -------------- ----------------
<S> <C> <C> <C>
Employee termination benefits.... $75,481 $ 26,115 $ 49,366
Lease abandonments............... 18,655 736 17,919
Asset write-downs................ 4,116 2,950 1,166
Other exit costs................. 11,195 4,291 6,904
-------------------- -------------- ----------------
$ 109,447 $ 34,092 $ 75,355
==================== ============== ================
</TABLE>
10
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. 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>
March 31, March 31,
2000 1999
------------- --------------
<S> <C> <C>
STORAGE PRODUCTS:
Enterprise storage hardware..................... $1,131,512 $ 861,120
Enterprise storage software..................... 269,988 155,419
Enterprise switching products (McDATA).......... 38,908 39,007
CLARiiON storage products....................... 96,744 102,965
------------- --------------
Total storage products.......................... $1,537,152 $1,158,511
============= ==============
SERVICES:
Storage related services........................ $ 116,405 $ 74,948
Server related services......................... 80,746 95,132
------------- --------------
Total service revenue........................... $ 197,151 $ 170,080
============= ==============
</TABLE>
The Company's management makes financial decisions and allocates resources
based on product segment. 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
products products Services Consolidated
------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
MARCH 31, 2000
Revenues $1,537,152 $ 88,295 $197,151 $1,822,598
Gross profit 941,303 33,264 56,972 1,031,539
MARCH 31, 1999
Revenues $1,158,511 $154,714 $170,080 $1,483,305
Gross profit 613,491 51,000 52,923 717,414
</TABLE>
11
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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>
Europe,
North Latin Middle East, Asia Intercompany Consolidated
America America Africa Pacific Eliminations Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SALES
March 31, 2000 $1,151,064 $38,521 $ 494,002 $139,011 - $1,822,598
March 31, 1999 938,272 25,031 433,439 86,563 - 1,483,305
IDENTIFIABLE ASSETS
March 31, 2000 $5,029,848 $62,548 $2,445,843 $245,507 $(24,550) $7,759,196
December 31, 1999 4,630,506 73,195 2,245,460 306,266 (82,139) 7,173,288
</TABLE>
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements" subsequently updated by SAB 101A. SAB 101 and SAB 101A summarize
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 second 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 is
currently evaluating the impact of FIN 44 on its results of operations and
financial position.
10. SUBSEQUENT EVENTS
On April 14, 2000, the Company announced that it would redeem its 6%
Convertible Subordinated Notes due 2004 (the "6% Notes"). The redemption date
for the 6% Notes is May 18, 2000. However, the Company anticipates that
substantially all of the outstanding 6% Notes will be converted into Common
Stock on or prior to such date.
At the Company's Annual Meeting of Stockholders held on May 3, 2000, the
Company's stockholders elected Richard J. Egan and Alfred M. Zeien to the Board
of Directors for a three-year term, approved an increase of 10,000,000 shares of
Company common stock to the number of shares of Company common stock reserved
for issuance upon the exercise of options granted under the Company's 1993 Stock
Option Plan, as amended, and approved an amendment to the Company's 1989
Employee Stock Purchase Plan, as amended.
12
<PAGE>
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On May 3, 2000, the Company's Board of Directors approved a two-for-one
stock split in the form of a 100% stock dividend. The stock split will be
payable on or about June 2, 2000 to stockholders of record as of the close of
business on May 19, 2000. Because the stock split is not effective as of the end
of the first quarter of 2000, financial information contained elsewhere in this
document has not been adjusted to reflect the impact of the stock split.
Earnings per share amounts, after giving retroactive effect to the
two-for-one stock split, are presented below for all of the per share amounts
disclosed in the financial statements and the notes to the financial statements
included herein.
<TABLE>
<CAPTION>
Q1 2000 Q1 1999
------------------- -----------------
<S> <C> <C>
Net income per weighted average share, basic....................... $0.16 $.011
Net income per weighted average share, diluted..................... $0.15 $0.10
Weighted average shares, basic..................................... 2,105,673 2,049,361
Weighted average shares, diluted................................... 2,236,181 2,214,853
</TABLE>
13
<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 18 and in EMC's other filings with the U.S.
Securities and Exchange Commission.
- --------------------------------------------------------------------------------
ALL DOLLAR AMOUNTS IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS ARE IN MILLIONS.
RESULTS OF OPERATIONS -- FIRST QUARTER OF 2000 COMPARED TO FIRST QUARTER OF 1999
REVENUES
Total revenues for the first quarter of 2000 were $1,822.6 compared to
$1,483.3 for the first quarter of 1999, representing an increase of $339.3 or
23%.
Enterprise storage hardware revenues from products sold directly and
through resellers and OEMs were $1,131.5 in the first quarter of 2000, compared
to $861.1 in the first quarter of 1999, representing an increase of $270.4 or
31%. The increase in enterprise systems revenues was due to continued strong
demand for the Company's Symmetrix series of products. These products address
the growing demand for enterprise-wide storage solutions, allowing users to
move, store and protect mission critical information in UNIX, Windows NT and
mainframe environments.
Enterprise storage software revenues from products sold directly and
through resellers and OEMs were $270.0 in the first quarter of 2000 compared to
$155.4 in the first quarter of 1999, representing an increase of $114.6 or 74%.
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 $38.9 in the first quarter
of 2000 compared to $39.0 in the first quarter of 1999. 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 $96.7 in the first quarter of 2000, compared to $103.0 in
the first quarter of 1999, representing a decrease of $6.3 or 6%. The decrease
reflects a decrease in sales volume from indirect channels offset in part by an
increase in direct sales.
Total storage product revenues were $1,537.2 in the first quarter of 2000,
compared to $1,158.5 in the first quarter of 1999, representing an increase of
$378.7 or 33%. The increase is due primarily to sales of enterprise storage
hardware and software.
Revenues from AViiON server products were $88.3 in the first quarter of
2000 compared to $154.7 in the first quarter of 1999, representing a decrease of
$66.4 or 43%. The decrease in revenue was primarily the result of a planned
decline in revenue 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 $197.2 in the first quarter of 2000 compared
to $170.1 in the first quarter of 1999, an increase of $27.1 or 16%. Storage
service revenues were $116.4 in the first quarter of 2000 compared to $74.9 in
the first quarter of 1999, an increase of $41.5 or 55%. 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 $80.7 in the first quarter of 2000 compared to $95.1 in
the first quarter of 1999, a decrease of $14.4 or 15%.
14
<PAGE>
Total revenues from storage products and services were $1,653.6 in the
first quarter of 2000, compared to $1,233.5 in the first quarter of 1999,
representing an increase of $420.1 or 34%. Total revenues from server products
and services were $169.0 in the first quarter of 2000, compared to $249.8 in the
first quarter of 1999, representing a decrease of $80.8 or 32%.
Revenues on sales into the North American markets were $1,151.1 in the
first quarter of 2000 compared to $938.3 in the first quarter of 1999, an
increase of $212.8 or 23%. The revenue growth reflects strong demand for the
Company's enterprise storage products and services, which increased by 35%
compared to the first 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 $494.0 in the first quarter of 2000 compared to $433.4 in the first quarter
of 1999, an increase of $60.6 or 14%. The increase is primarily due to strong
demand for the Company's enterprise storage and switching products and services,
which increased by 29% compared to the first quarter of 1999. This growth was
offset by decreased revenues from AViiON and CLARiiON 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 $139.0
in the first quarter of 2000 compared to $86.6 in the first quarter of 1999, an
increase of $52.4 or 61%. 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 enterprise storage products and services, which
increased by 94% compared to the first quarter of 1999. This growth was offset
by decreased revenues from AViiON and CLARiiON 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 $38.5 in the first
quarter of 2000 compared to $25.0 in the first quarter of 1999, an increase of
$13.5 or 54%. The increase was primarily due to the Company's efforts to expand
its business in this region combined with strong demand for the Company's
enterprise storage products and services, which increased by 116% compared to
the first 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.
GROSS MARGINS
Overall gross margins increased to 56.6% of revenues in the first quarter
of 2000, compared to 48.4% of revenues in the first quarter of 1999. Product
gross margins increased to 60.0% in the first quarter of 2000, compared to 50.6%
in the first quarter 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 quarter of 2000 from 10% in the first 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 28.9% in the first quarter of 2000,
compared to 31.1% in the first quarter 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 $161.8 and $129.4 in the
first quarters of 2000 and 1999, respectively, an increase of $32.4 or 25%. R&D
expenses were 8.9% and 8.7% of revenues in the first 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
15
<PAGE>
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 $448.1 and
$310.9 in the first quarters of 2000 and 1999, respectively, an increase of
$137.2 or 44%. SG&A expenses were 24.6% and 21.0% of revenues in the first
quarters of 2000 and 1999, respectively. The increase in spending levels for
both periods 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. In addition, during 1999, the Company
increased its direct sales presence where it previously relied on resellers.
INVESTMENT INCOME AND INTEREST EXPENSE
Investment income increased to $40.6 in the first quarter of 2000 from
$28.6 in the first quarter of 1999. Interest income was earned primarily from
investments in cash equivalents and short and long-term investments. Investment
income increased in the first quarter of 2000 primarily due to higher cash and
investment balances which were derived from operations.
Interest expense decreased to $6.9 in the first quarter of 2000 from $8.7
in the first 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.
PROVISION FOR INCOME TAXES
The provision for income taxes was $122.8 and $74.0 in the first quarters
of 2000 and 1999, respectively, which resulted in effective tax rates of 27.0%
and 25.0%, respectively. The effective tax rate is mainly attributable to the
realization of benefits associated with the Company's various tax strategies and
benefits related to offshore manufacturing.
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 $30.9 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 March 31, 2000, employee
separations due to restructuring actions totaled approximately 800.
During fiscal year 1998, the Company 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 $0.5 was paid during the first quarter of 2000. As
of March 31, 2000, the remaining accruals of $15.2 from the 1998
restructuring program are related to excess vacant rental properties in
Europe.
16
<PAGE>
The amounts charged against the established provisions described above
were as follows:
<TABLE>
<CAPTION>
Balance Current Balance
(in thousands) December 31, 1999 utilization March 31, 2000
---------------------- ----------------- ---------------------
<S> <C> <C> <C>
Employee termination benefits......... $75,481 $26,115 $49,366
Lease abandonments.................... 18,655 736 17,919
Asset write-downs..................... 4,116 2,950 1,166
Other exit costs...................... 11,195 4,291 6,904
---------------------- ----------------- ---------------------
$109,447 $34,092 $75,355
====================== ================= =====================
</TABLE>
FINANCIAL CONDITION
Cash and cash equivalents and short and long-term investments were $3,358.2
and $3,173.7 at March 31, 2000 and December 31, 1999, respectively, an increase
of $184.5. Cash provided by operating activities for the first three months of
2000 was $536.7, generated primarily from net income. Cash used by investing
activities was $267.0, principally from the acquisition of Softworks, Inc. and
additions to property, plant and equipment. Cash provided by financing
activities was $64.0, 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 are generally convertible into shares of common stock at a
conversion price of approximately $83.82 per share, subject to adjustment in
certain events. As of March 31, 2000, $0.278 of the 6% Notes have been converted
into Common Stock. On April 14, 2000, the Company announced that it would redeem
all of the outstanding 6% Notes on May 18, 2000. However, the Company
anticipates that substantially all of the outstanding 6% Notes will be converted
into Common Stock on or prior to such date.
At March 31, 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 ("SAB 101"), "Revenue Recognition in Financial
Statements" subsequently updated by SAB 101A. SAB 101 and SAB 101A summarize
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 second 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 is
currently evaluating the impact of FIN 44 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.
17
<PAGE>
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. EMC also developed a Year 2000 contingency plan to address the
most reasonably likely worst-case scenarios, which include, among other things,
manual "work-arounds" for hardware and software failures, as well as
substitution of systems, if required.
The total cost of EMC's Year 2000 program has not had, and EMC does not
anticipate that the total cost of such 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 OEMs; (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.
18
<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
On February 22, 2000, the registrant filed a Current Report on Form 8-K
reporting under Item 5 the announcement that on March 15, 2000, it would redeem
all of its outstanding 3 1/4% convertible subordinated notes due 2002.
On April 18, 2000, the registrant filed a Current Report on Form 8-K
reporting under Item 5 the announcement that on May 18, 2000, it would redeem
all of its outstanding 6% convertible subordinated notes due 2004.
On May 3, 2000, the registrant filed a Current Report on Form 8-K reporting
under Item 5 the approval by the Company's Board of Directors of a 2-for-1 split
of the Company's common stock, par value $.01 per share, to be effected in the
form of a 100% stock dividend, with a record date of May 19, 2000 and a
distribution date of June 2, 2000.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMC CORPORATION
Date: May 15, 2000
By: /s/ William J. Teuber, Jr.
------------------------------------
William J. Teuber, Jr.
Senior Vice President and Chief
Financial Officer
(PRINCIPAL FINANCIAL OFFICER AND
CHIEF ACCOUNTING OFFICER)
20
<PAGE>
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule (filed herewith).
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EMC
CORPORATION FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,439,501
<SECURITIES> 657,027
<RECEIVABLES> 1,571,613
<ALLOWANCES> 34,704
<INVENTORY> 678,518
<CURRENT-ASSETS> 4,620,166
<PP&E> 1,114,406
<DEPRECIATION> 922,654
<TOTAL-ASSETS> 7,759,196
<CURRENT-LIABILITIES> 1,497,055
<BONDS> 212,472
0
0
<COMMON> 10,850
<OTHER-SE> 5,869,657
<TOTAL-LIABILITY-AND-EQUITY> 7,759,196
<SALES> 1,625,447
<TOTAL-REVENUES> 1,822,598
<CGS> 791,059
<TOTAL-COSTS> 1,400,958
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,871
<INCOME-PRETAX> 454,776
<INCOME-TAX> 122,789
<INCOME-CONTINUING> 331,987
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 331,987
<EPS-BASIC> .32
<EPS-DILUTED> .30
</TABLE>
