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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999 COMMISSION FILE NUMBER 1-9853
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EMC CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2680009
(State or other jurisdiction of (I.R.S. Employer Identification
organization or incorporation) Number)
35 PARKWOOD DRIVE
HOPKINTON, MASSACHUSETTS 01748
(Address of principal executive offices, including zip code)
(508) 435-1000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
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Common Stock, $.01 par value New York Stock Exchange
6% Convertible Subordinated Notes due 2004 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $109,479,197,772 as of January 31, 2000.
The number of shares of Common Stock, $.01 par value, outstanding as of
January 31, 2000 was 1,041,079,616.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in response to Part III of Form 10-K is hereby
incorporated by reference to the specified portions of the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 3, 2000.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's prospects are subject to certain uncertainties and risks.
This Annual Report on Form 10-K also contains certain forward-looking
statements within the meaning of the Federal Securities Laws. The Company's
future results may differ materially from its current results and actual
results could differ materially from those projected in the forward-looking
statements as a result of certain risk factors. READERS SHOULD PAY
PARTICULAR ATTENTION TO THE CONSIDERATIONS DESCRIBED IN THE SECTION OF THIS
REPORT ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE
RESULTS." Readers should also carefully review the risk factors described
in the other documents the Company files from time to time with the
Securities and Exchange Commission.
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PART I
ITEM 1. BUSINESS
GENERAL
EMC Corporation and its subsidiaries ("EMC" or the "Company") design,
manufacture, market and support a wide range of hardware and software products
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. Its
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. EMC believes these and other
information-intensive applications provide it with significant growth
opportunities.
The effective management, sharing, protection and availability of critical
information is a major challenge for organizations as the number, size and scope
of and reliance on computer systems continues to grow. To address this market
opportunity, EMC has introduced the Enterprise Storage Network, or "ESN." An EMC
ESN is a dedicated network connecting EMC storage systems and software to all
major computing platforms via various network protocols, including fibre
channel. An ESN provides the basis for an E-Infostructure by enabling customers
to consolidate all of their information resources for more effective and
efficient management, sharing and protection.
The Company's objective is to extend its position as the enterprise storage
solutions leader in the IT industry and to strengthen the EMC E-Infostructure as
the standard for networked storage. EMC develops its products by integrating
technologically advanced, industry standard components with Company-designed
hardware and software that the Company believes provide competitive advantages
for its customers.
The customers for the Company's products are located worldwide and represent
a cross section of industries and government agencies. EMC products continue to
be accepted widely by both existing customers and new accounts in all major
industries worldwide.
In 1999, the Company acquired Data General Corporation ("Data General"), a
leading provider of CLARiiON Fibre Channel storage systems and AViiON computer
systems. The Company integrated the CLARiiON product line into EMC's primary
storage line of business and formed a new Data General division to continue to
develop, market and service AViiON computers and related services.
EMC, a Massachusetts corporation, was incorporated in 1979 and has its
corporate headquarters at 35 Parkwood Drive, Hopkinton, Massachusetts.
1
PRODUCTS AND OFFERINGS
STORAGE SYSTEMS
EMC SYMMETRIX ENTERPRISE STORAGE SYSTEMS
The Company's flagship product line is the EMC Symmetrix Enterprise Storage
family of systems. The Company believes that the Symmetrix Enterprise Storage
systems offer the highest levels of functionality, performance and availability
in data centers and the high-end of the storage market. EMC's common hardware
architecture on which its Symmetrix products are based is called MOSAIC:2000, a
modular design and interface that allows new technologies to be rapidly
incorporated. This hardware architecture enables EMC to deliver advanced
technologies to market quickly while maintaining a consistent platform upon
which its customers can expand capacity, performance, connectivity and
functionality. This architectural hardware design has enabled the Company to
expand its Symmetrix products into existing markets and to enter new, strategic
markets quickly with proven storage products and services.
Since the introduction of the first Symmetrix model in 1991, EMC has
continued to enhance and increase the capabilities of the Symmetrix family,
including increasing the host connectivity capabilities and adding advanced
software functionality. The Company intends to continue to introduce new
versions of the Symmetrix systems with increased performance and other
capabilities.
The Company also continues to engage in research and development of new
hardware technology for the enterprise storage market.
EMC CLARIION FIBRE CHANNEL STORAGE SYSTEMS
The EMC CLARiiON Fibre Channel family of products represents a range of
flexible and scalable midrange storage systems for Microsoft Windows NT and UNIX
platforms. EMC CLARiiON Fibre Channel storage systems offer fast, scalable and
dependable storage solutions for applications in the distributed environments of
large enterprises and for emerging companies with moderate but rapidly growing
demands on the performance, availability and manageability of their storage
infrastructure.
The Company believes that the EMC CLARiiON Fibre Channel storage systems
offer storage with the highest performance and availability in the midrange
storage market. The Company intends to continue to introduce new versions of the
EMC CLARiiON systems with increased performance and other capabilities.
EMC CONNECTRIX ENTERPRISE STORAGE NETWORK SYSTEMS
The EMC Connectrix Enterprise Storage Network System, introduced in March
1999, is the industry's first fully integrated fibre channel network
connectivity solution. EMC Connectrix facilitates the connection of a large
number of servers to a single storage system through fibre channel links. EMC
Connectrix offers up to 64-port switched Fibre Channel (FC-SW) connectivity
between EMC Symmetrix Enterprise Storage systems, EMC CLARiiON Fibre Channel
storage systems and distributed servers. Connectrix systems quadruple the number
of servers that can connect to these systems, when compared with direct fibre
channel server-to-storage connections.
The Company believes that its EMC Connectrix systems, combined with its
storage systems with fibre channel connectivity, facilitate the implementation
of the EMC ESN and enable customers to build an E-Infostructure in which a
single pool of storage will handle all information storage requirements of even
the largest, most complex organizations.
The Company intends to continue to introduce new versions of the EMC
Connectrix system with additional features and capabilities.
2
EMC CELERRA FILE SERVER
The EMC Celerra File Server is a network-attached storage system providing
high performance, high availability and scalability for enterprise file storage.
The system features EMC-developed software and hardware, known as Data Movers,
within a common enclosure and with a common management environment. The Data
Movers and management environment connect to Symmetrix Enterprise Storage
systems and external customer networks through a variety of interfaces. A file
server's purpose is to provide end users with the ability to access, update and
store common files to a central location directly from their desktop computer
without the need to utilize a general purpose server.
The Company intends to continue to introduce new versions of the EMC Celerra
File Server system with additional features and capabilities.
Revenue from enterprise storage systems (including Symmetrix, Connectrix and
Celerra products) represented approximately 60%, 58% and 56% of revenues in
1999, 1998 and 1997, respectively. Revenue from CLARiiON storage systems
represented approximately 6%, 8% and 11% of revenues in 1999, 1998 and 1997,
respectively.
ENTERPRISE STORAGE SOFTWARE
EMC offers highly innovative software that provides customers with superior
information management, sharing and protection capabilities. These capabilities
include enhanced backup/restore, disaster recovery, business continuance, data
migration and data movement. The Company's enterprise storage software is
intended to be used with its storage systems as well as with a variety of host
computers and applications developed by third parties. During 1999, the Company
introduced several new software products and enhancements to existing products.
EMC's information management software includes EMC Control Center, EMC
PowerPath and EMC VolumeLogix. Examples of information sharing software are
Symmetrix Enterprise Storage Platform (ESP) and EMC InfoMover. The Company's
information protection software includes Symmetrix Remote Data Facility (SRDF),
EMC TimeFinder and EMC Data Manager (EDM).
In August 1999, the Company announced its E-Infostructure Developers
Program, which makes certain of its application programming interfaces (APIs)
available to third-party independent software vendors (ISVs) to facilitate the
development and sale of software optimized to run on EMC systems. Customers are
then able to select from a wider range of software tools when deploying EMC
systems and to more easily integrate EMC systems into their existing software
environments.
EMC also sponsored the formation of the FibreAlliance in 1999. The
FibreAlliance is an independent standards group comprised of numerous hardware
and software companies. The goal of the FibreAlliance is to develop and
implement common methods for managing the heterogeneous fibre channel-based
networks of storage systems and computer servers, which EMC calls ESNs. The
FibreAlliance is submitting these methods to independent standards bodies for
consideration as an industry-wide standard.
The Company finalized its acquisition of software developer Softworks, Inc.
in January 2000. Softworks, Inc.'s products improve the management, performance
and integrity of critical corporate information across Windows NT, UNIX and
mainframe platforms and will be incorporated into the Company's software
portfolio.
During 1999, EMC completed construction of a state-of-the-art software
development lab in Hopkinton, Massachusetts to support the Company's growing
software research and development efforts. EMC believes that its investments in
software development will accelerate adoption of EMC Enterprise Storage Network
models and facilitate implementation of an E-Infostructure by customers.
3
Revenues from enterprise storage software represented approximately 12%, 8%
and 4% of revenues in 1999, 1998 and 1997, respectively.
ENTERPRISE STORAGE SERVICES
PROFESSIONAL SERVICES
EMC's Enterprise Storage Professional Services business, formed in 1997,
designs and delivers world-class professional services to its global customer
base. Such professional services assist customers in assessing, designing and
implementing storage solutions and an E-Infostructure customized to maximize
their return on information assets.
INTERNET SERVICES
EMC's Internet Services Group, formed in 1997, provides a comprehensive web
site management service, leveraging the Company's resources, including its
Symmetrix systems and its suite of enterprise storage software. Through this
service, the Company develops, implements, maintains and monitors all the
technical aspects of a customer's internet presence, including management of
internet-based electronic commerce and database applications as well as web and
online advertising.
DATA GENERAL DIVISION
EMC's Data General division, formed in 1999, designs, manufactures, markets
and supports the Company's line of AViiON open systems servers, which range from
dual-processor departmental servers to enterprise-wide systems. These servers,
combined with software and services, address market requirements for a
simplified computing environment that eliminates the complexity, reduces the
total cost of ownership, and provides reliability, high availability and
increased control of information.
EMC's Data General division also provides integrated, pre-packaged
solutions, function-specific servers and related services that provide customers
with the highest levels of information availability.
Revenue from EMC's Data General division server products represented
approximately 9%, 12% and 15% of revenues in 1999, 1998 and 1997, respectively.
CUSTOMER SERVICE
EMC's Customer Service organization, which includes over 3,000 technical,
field and support personnel, monitors the status of the Company's storage
solutions at customer sites 24 hours a day, seven days a week, 365 days a year.
These hardware and software solutions contain remote support features which
enable EMC customer service personnel to continuously monitor, diagnose and
resolve issues, wherever the product is located, often without the need for
on-site service. In 1999, the Company expanded its customer service capabilities
with the addition of new customer support centers in Japan and Australia.
MARKETS AND CHANNELS
STORAGE SYSTEMS MARKET
During 1999, the Company focused primarily on two major customer markets:
the Global 2000 and Internet businesses. These markets are characterized by
their requirements for large amounts of information storage capacity and the
advanced functionality provided by EMC's products.
4
GLOBAL 2000
The Global 2000, defined as the world's 2000 largest corporations, represent
a significant percentage of the Company's customer base. The Global 2000's
computing requirements encompass multiple computer platforms, including
mainframes, and those running the UNIX and Windows NT operating systems.
As the size and scope of those systems increases, the Company's Global 2000
customers are deploying EMC's Enterprise Storage Networks for the consolidation,
management, sharing and protection of the information generated by those
platforms. By building an E-Infostructure to support multiple business
applications, these customers are able to quickly, cost-effectively and reliably
deploy and expand applications and systems. The Company believes it is the
leading storage supplier to the Global 2000.
INTERNET BUSINESS
Internet-related businesses, those that conduct their primary business over
the Internet or provide Internet-related services to end users or other
businesses, represent a rapidly growing segment of the Company's customer base.
These businesses require rapid and constant access to extremely large volumes of
information. The Internet-related businesses' computing requirements are
typically standardized on a single computer platform, incorporating components
from several leading suppliers. EMC believes it is the leading storage provider
to Internet-related businesses.
In October 1999, the Company launched its EMC Proven E-Infostructure
program. The EMC Proven program provides Internet-based businesses and service
providers with a marketing vehicle to effectively communicate the inherent value
of their investments in information infrastructure to customers and investors.
EMC Proven members have implemented the necessary enterprise storage resources
to operate at peak efficiency, adapt to a constantly changing business climate
and easily manage Internet-driven growth.
MARKETING AND CUSTOMERS
EMC markets its products through multiple distribution channels, including
its direct sales force and selected distributors, systems integrators, resellers
and OEMs. The Company has a direct sales presence throughout North America,
Latin America, Europe, the Middle East, South Africa and the Asia Pacific region
and uses distributors as its primary distribution channel in other areas of the
world. During 1999, the Company continued broadening its direct and indirect
sales presence worldwide.
During 1999, the Company derived 63% of its revenue from North America; 3%
from Latin America; 27% from Europe, the Middle East and Africa; and 7% from the
Asia Pacific region.
INDIRECT CHANNELS
The Company believes its Symmetrix and CLARiiON products are well suited for
sale by resellers, systems integrators and OEMs. The Company has reseller or OEM
agreements with several systems vendors. These agreements enable the reseller or
OEM to market and resell certain of the Company's systems worldwide, subject to
certain terms and conditions, for connection to certain of the reseller or OEM's
respective computing platforms. The Company's principal reseller and OEM
agreements are with Unisys Corporation, Fujitsu/Siemens Computers ("FSC"),
International Business Machines Corporation ("IBM") (formerly Sequent Computer
Corporation), Selectron, a subsidiary of AT&T/ NCR Corporation, Compagnie des
Machines Bull S.A. and NEC Corporation ("NEC"). EMC also had a reseller
agreement with Hewlett-Packard Company for enterprise storage products until
June 30, 1999, at which time the parties agreed to terminate this contract.
5
ALLIANCES
The Company has alliances with leading software, relational database and
application companies, including Microsoft Corporation, SAP AG, Oracle
Corporation and other major independent software applications vendors. EMC
intends to continue to form additional strategic alliances. EMC's strategy is to
work closely with leading software companies to provide added value to its
customers by integrating EMC solutions with software applications that customers
rely on to manage their day-to-day business operations.
NEW BUSINESS DEVELOPMENT
The Company actively pursues new business development through a dedicated
organization focused on developing new businesses aligned to the Company's
markets. This is accomplished by maintaining a long-term view on the industry's
potential and continually assessing the market. Key objectives are to identify
and close significant business development opportunities (mergers, acquisitions
and investments) that are aligned with the Company's strategic direction,
including hardware, software and services businesses that complement and augment
those of the Company, and to manage, develop and integrate such new businesses
into EMC.
MANUFACTURING AND QUALITY
EMC's products are assembled and tested primarily at the Company's
facilities in Massachusetts, North Carolina and Cork, Ireland. Product
components manufactured by subcontractors in the United States and Europe are
assembled in accordance with production standards and quality controls
established by EMC. See "Properties."
The Company employs a corporate-wide Total Quality Management philosophy to
ensure the quality of its designs, manufacturing processes and suppliers. The
Company's manufacturing operations in Massachusetts currently hold an ISO 9001
Certificate of Registration. This internationally recognized endorsement of
ongoing quality management represents the highest level of certification
available. The Company's manufacturing operations in Ireland currently hold an
ISO 9002 Certificate of Registration and ISO 14001 Environmental Management
Standard Certification. In addition, EMC sites in the United Kingdom, Italy,
France, Australia, New Zealand and South Africa hold ISO certifications.
RAW MATERIALS
EMC's products utilize the Company's engineering designs, with industry
standard and semi-custom components and subsystems. Among the most important
components that EMC uses are disk drives, high density memory components and
power supplies. See "Factors that May Affect Future Results--If EMC's suppliers
do not meet its quality or delivery requirements, EMC could have decreased
revenues and earnings."
PATENTS
EMC has been granted or owns by assignment approximately 500 patents. The
Company also has a number of patent applications pending relating to its
hardware and software products.
BACKLOG
The Company manufactures its products on the basis of its forecast of
near-term demand and maintains inventory in advance of receipt of firm orders
from customers. Products are configured to customer specifications and are
generally shipped by the Company shortly after receipt of the order. Customers
may reschedule orders with little or no penalty. For these reasons, the
Company's backlog at any particular time is not meaningful because it is not
necessarily indicative of future sales levels.
6
COMPETITION
In the Global 2000 and Internet markets, EMC competes primarily with
computer systems manufacturers. In the Company's opinion, these companies
compete based on their overall market presence and their ability to sell both
computer systems and storage systems.
The Company believes that it has a number of competitive advantages over
these companies, including product, distribution and customer service. The
Company believes the advantages in its products include performance, capacity,
availability, connectivity, value-added software, time to market enhancements
and total value of ownership. The Company believes its advantages in
distribution include its direct sales force and its broad network of indirect
sales channels. The Company believes its advantages in customer service include
its ability to effectively monitor and provide service (which is often remote
and without interruption to a company's business) for its systems and software
24 hours a day, seven days a week, 365 days a year.
EMPLOYEES
As of January 31, 2000, EMC had approximately 17,700 employees worldwide.
None of the Company's domestic employees is represented by a labor union, and
the Company has never suffered an interruption of business as a result of a
labor dispute. The Company considers its relations with its employees to be
good.
FINANCIAL INFORMATION ABOUT SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
The Company is active in three business segments: storage products; server
products; and services. Sales and marketing operations outside the United States
are conducted through sales subsidiaries and branches located principally in
Europe, Latin America and the Asia Pacific region. The Company has three primary
manufacturing facilities, one in Massachusetts, which provides Symmetrix
products to the North American markets, one in North Carolina, which
manufactures CLARiiON systems and AViiON servers, and one in Ireland which
manufactures Symmetrix systems and CLARiiON systems. Total exports, in millions,
from these facilities amounted to approximately $2,575, $2,184, and $1,884 in
1999, 1998 and 1997, respectively. (See Note P to the Company's Consolidated
Financial Statements.)
ITEM 2. PROPERTIES
The Company's principal corporate offices are located at 35 Parkwood Drive,
Hopkinton, Massachusetts. As of December 31, 1999, the Company owned or leased a
total of approximately 4.5 million square feet of space worldwide which is used
primarily for manufacturing, research and development, customer service, sales,
marketing and general administration.
The Company also owns and leases space for its sales and services offices
and for general administration worldwide, and owns land in the Hopkinton,
Massachusetts and Cork, Ireland areas for possible expansion purposes. The
Company believes its present level of manufacturing and other capacity, along
with its plans for expansion, will be sufficient to accommodate its
requirements.
ITEM 3. 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
No matter was submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year covered by this report.
7
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
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Richard J. Egan........................... 64 Chairman of the Board of Directors
Michael C. Ruettgers...................... 57 Chief Executive Officer and Director
Joseph M. Tucci........................... 52 President and Chief Operating Officer
Paul E. Noble, Jr......................... 44 Executive Vice President, Products and
Offerings
Michael A. Ruffolo........................ 38 Executive Vice President, Global Sales,
Services and Marketing
Paul T. Dacier............................ 42 Senior Vice President and General Counsel
David A. Donatelli........................ 34 Senior Vice President, New Business
Development
Colin G. Patteson......................... 51 Senior Vice President, Chief
Administrative Officer and Treasurer
William J. Teuber, Jr..................... 48 Senior Vice President and Chief Financial
Officer
Richard J. Egan is a founder of the Company and has served as a Director of
the Company since its inception in 1979. He was elected Chairman of the Board of
the Company in January 1988. Prior to January 1988, he was also President of
EMC. From 1979 to January 1992, he was Chief Executive Officer of the Company.
He is also a Director of Cognition Corporation, a CAD/CAM software supplier,
NSTAR, a public utility, and NetScout Systems, Inc., a provider of network and
application performance management solutions.
Michael C. Ruettgers has been Chief Executive Officer of the Company since
January 1992. He has served as a Director of the Company since May 1992. Mr.
Ruettgers served as President of EMC from October 1989 to January 2000. He also
served as Executive Vice President, Operations of EMC from July 1988 to
October 1989, and as Chief Operating Officer of EMC from October 1989 to January
1992. Mr. Ruettgers is also a director of PerkinElmer Inc., a diversified
technology company.
Joseph M. Tucci joined EMC in January 2000 as President and Chief Operating
Officer. Prior to joining EMC, Mr. Tucci served as Deputy Chief Executive
Officer of Getronics N.V., an information technology services company, from June
1999 through December 1999 and as Chairman of the Board and Chief Executive
Officer of Wang Laboratories, Inc. ("Wang"), an information technology services
company, from December 1993 until June 1999. Getronics acquired Wang in June
1999. Mr. Tucci joined Wang in 1990 as its Executive Vice President, Operations.
Paul E. Noble, Jr. has been Executive Vice President, Products and Offerings
of the Company since September 1998. Mr. Noble has had a number of other
executive positions with EMC since 1987, including serving most recently as the
Senior Vice President, New Business Development of EMC.
Michael A. Ruffolo joined EMC in January 2000 as Executive Vice President,
Global Sales, Services and Marketing. Prior to joining EMC, Mr. Ruffolo served
as President of the Document Solutions Group for Xerox Corporation, a document
processing company, from May 1998 through December 1999. Prior to joining Xerox,
Mr. Ruffolo held several positions at AT&T/NCR Corporation, a computer and
communications company, from 1988 to 1998, most recently as Vice President and
Chief Information Officer and Vice President of Worldwide Services.
Paul T. Dacier has been Senior Vice President and General Counsel of the
Company since February 2000. Mr. Dacier served as Vice President and General
Counsel to EMC from February 1993 until February 2000 and also served as General
Counsel to EMC from March 1990 until February 1993.
8
Prior to joining EMC, Mr. Dacier was Senior Counsel, Corporate Operations at
Apollo Computer Inc., a computer manufacturer, from January 1987 to
January 1990.
David A. Donatelli has been Senior Vice President, New Business Development
of the Company since February 2000. Mr. Donatelli served as Vice President, New
Business Development of EMC from April 1999 until February 2000 and has also had
a number of other executive positions with EMC since 1987, including serving
most recently as the Vice President, General Manager of the Company's EDM
business.
Colin G. Patteson has been Senior Vice President, Chief Administrative
Officer and Treasurer of the Company since February 1997. Mr. Patteson served as
European Controller of EMC from January 1989 to March 1991, Corporate Controller
from March 1991 to February 1993, Vice President and Corporate Controller from
February 1993 to April 1995, and Vice President, Chief Financial Officer and
Treasurer from April 1995 to February 1997.
William J. Teuber, Jr. has been Senior Vice President and Chief Financial
Officer of the Company since February 2000. Mr. Teuber served as Vice President
and Chief Financial Officer of the Company from February 1997 until February
2000. He also served as Vice President and Controller of the Company from
August 1995 to February 1997. From 1988 to August 1995, Mr. Teuber was a partner
at Coopers & Lybrand L.L.P., a predecessor to PricewaterhouseCoopers, LLP, an
accounting firm.
------------------------
Richard J. Egan, Chairman of the Board of Directors, is the husband of
Maureen E. Egan, a Director of the Company. He is also the brother-in-law of W.
Paul Fitzgerald, a Director of the Company. W. Paul Fitzgerald is the brother of
Maureen E. Egan. John R. Egan, a Director of the Company, is the son of Richard
J. and Maureen E. Egan. Paul E. Noble, Jr., Executive Vice President, Products
and Offerings of the Company, is the nephew of Richard J. and Maureen E. Egan
and of W. Paul Fitzgerald.
------------------------
The President and Treasurer are elected annually to serve until the first
meeting of the Board of Directors following the next annual meeting of
stockholders and until their successors are elected and qualified.
------------------------
EMC(2), EMC, Celerra, Connectrix, Control Center, ManageSuite, EDM,
E-Infostructure, ESN, EMC Proven, InfoMover, MOSAIC:2000, PowerPath, Symmetrix,
SRDF, TimeFinder, VolumeLogix, CLARiiON and AViiON are either registered
trademarks or trademarks of the Company. Other trademarks and logos are either
registered trademarks or trademarks of their respective owners.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
EMC's common stock, $.01 par value (the "Common Stock"), began trading on
the over-the-counter market on April 4, 1986 under the NASDAQ symbol EMCS. On
March 22, 1988, the Company's stock began trading on the New York Stock Exchange
(the "NYSE") under the symbol EMC.
During the last five fiscal years, the following stock splits have been
effected in the form of a stock dividend:
- a two-for-one stock split effective November 17, 1997, for stockholders of
record on October 31, 1997; and
- a two-for-one stock split effective May 28, 1999, for stockholders of
record on May 14, 1999.
The following table sets forth the range of high and low prices on the NYSE
for the past two years during the fiscal periods shown, adjusted to reflect the
effects of the November 17, 1997 and May 28, 1999 stock splits.
FISCAL 1999 HIGH LOW
- ----------- -------------- -------------
First Quarter..................................... $ 64 7/8 $43 1/2
Second Quarter.................................... 67 7/16 47 3/4
Third Quarter..................................... 74 5/8 53 5/8
Fourth Quarter.................................... 110 5/16 63
FISCAL 1998 HIGH LOW
- ----------- -------------- -------------
First Quarter..................................... $ 19 11/32 $12 19/32
Second Quarter.................................... 23 15/32 18
Third Quarter..................................... 30 15/16 22 1/4
Fourth Quarter.................................... 42 1/2 22 19/32
As of January 31, 2000, there were approximately 10,700 holders of record of
Common Stock.
The Company has never paid cash dividends on its Common Stock. While subject
to periodic review, the current policy of its Board of Directors is to retain
all earnings primarily to provide funds for the continued growth of the Company.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA(1)
EMC CORPORATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 30,
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
SUMMARY OF OPERATIONS:
Revenues...................... $6,715,610 $5,436,158 $4,487,851 $3,616,746 $3,125,995
Operating income(2)........... 1,241,094 834,267 716,958 539,039 376,242
Net income(2)................. 1,010,570 653,978 587,511 420,080 260,645
Net income per weighted
average share,
basic(2)(3)................. $ 0.98 $ 0.64 $ 0.59 $ 0.45 $ 0.29
Net income per weighted
average share,
diluted(2)(3)............... $ 0.92 $ 0.61 $ 0.56 $ 0.42 $ 0.26
Weighted average shares,
basic(3).................... 1,030,551 1,015,371 1,001,016 939,337 912,955
Weighted average shares,
diluted(3).................. 1,109,532 1,094,215 1,065,484 1,010,159 1,007,304
BALANCE SHEET DATA:
Working capital............... $2,922,481 $2,825,000 $2,581,640 $1,597,486 $1,185,491
Total assets.................. 7,173,288 5,627,020 4,627,936 3,178,101 2,600,529
Long-term obligations(4)...... 686,609 751,646 771,204 339,232 397,879
Stockholders' equity.......... $4,951,786 $3,728,990 $2,900,941 $1,978,025 $1,426,318
- ------------------------
(1) The selected consolidated financial data for 1995-1998 has been restated for
the effects of the acquisition of Data General on October 12, 1999, which
was accounted for as a pooling-of-interests. The Company changed its fiscal
year to a calendar year end basis beginning with the fiscal year ended
December 31, 1996.
(2) In 1999, the Company incurred charges totaling $223,598 (pre-tax) which
consists of restructuring, merger and asset impairment charges of $208,246
included in operating expenses and other cost of sales charges of $15,352.
Net income for the year ended December 31, 1999, adjusted to exclude the
impact of the charges was $1,180,468 or $1.07 per diluted share. In 1998,
the Company incurred charges totaling $135,000 consisting of $82,400 of
restructuring charges and $52,600 of other cost of sales charges related to
asset writedowns. Net income for the year ended December 31, 1998 adjusted
to exclude the impact of the charges was $788,978 or $0.73 per diluted
share.
(3) All share and per share amounts have been restated to reflect the stock
splits effective November 17, 1997 and May 28, 1999 for all periods
presented.
(4) Excludes current portion of long-term debt.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All historical financial information and analysis have been restated to
reflect the acquisition of Data General in October 1999, which was accounted for
as a pooling-of-interests.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") should be read in conjunction with "Factors that
May Affect Future Results" included herein. All dollar amounts in this MD&A are
in millions except per share amounts.
The following table presents certain consolidated statement of operations
information stated as a percentage of total revenues.
FISCAL YEAR ENDED
---------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
REVENUES
Enterprise storage hardware........................... 59.7% 58.3% 55.6%
Enterprise storage software........................... 12.2 8.2 4.0
Enterprise switching products (McDATA)................ 2.1 3.3 4.2
CLARiiON storage products............................. 6.2 7.6 11.1
------ ------ ------
Total storage products revenue........................ 80.2 77.4 74.9
AViiON server products................................ 8.9 12.0 14.7
Services.............................................. 10.9 10.6 10.4
------ ------ ------
TOTAL REVENUE........................................... 100.0% 100.0% 100.0%
COST AND EXPENSES
Cost of product sales................................. 41.0% 47.9% 51.6%
Cost of service....................................... 7.5 7.3 6.6
Research and development.............................. 8.5 8.0 7.4
Selling, general and administrative................... 21.4 20.0 18.4
Restructuring, merger and other charges............... 3.1 1.5 --
------ ------ ------
OPERATING INCOME........................................ 18.5 15.3 16.0
Investment income, interest expense and other income,
net................................................. 1.7 1.5 1.1
------ ------ ------
Income before income taxes............................ 20.2 16.8 17.1
Provision for income taxes............................ 5.2 4.8 4.0
------ ------ ------
NET INCOME.............................................. 15.0% 12.0% 13.1%
====== ====== ======
REVENUES
Total revenues were $6,715.6, $5,436.2 and $4,487.9 in 1999, 1998 and 1997,
respectively, representing increases of $1,279.4, or 24%, from 1998 to 1999, and
$948.3 or 21% from 1997 to 1998.
Enterprise storage hardware revenues from products sold directly and through
OEMs and resellers were $4,006.5, $3,167.1 and $2,496.7 in 1999, 1998 and 1997,
respectively, representing increases of $839.4, or 27%, from 1998 to 1999 and
$670.4, or 27%, from 1997 to 1998. The increase in enterprise systems revenues
was primarily due to the 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.
12
Enterprise storage software revenues from products sold directly and through
OEMs and resellers were $821.7, $445.4 and $176.9 in 1999, 1998 and 1997,
respectively, representing increases of $376.3, or 85%, from 1998 to 1999 and
$268.5, or 152%, from 1997 to 1998. 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,
primarily the ESCON director series of products, were $142.8, $178.8 and $189.1
in 1999, 1998 and 1997, respectively, representing a decrease of $36.0, or 20%,
from 1998 to 1999 and a decrease of $10.3, or 5%, from 1997 to 1998. The
decreases from 1998 to 1999 and from 1997 to 1998 were primarily due to the
product transition from ESCON-based to fibre-channel-based directors. 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 $415.6, $413.9 and $499.4 in 1999, 1998 and 1997,
respectively, representing an increase of $1.7, or 0.4%, from 1998 to 1999 and a
decrease of $85.5, or 17%, from 1997 to 1998. The increase in 1999 CLARiiON
revenues reflects an increase in direct sales offset by decreased sales volume
from indirect channels. The decrease in 1998 is primarily the result of a longer
than anticipated product transition from SCSI-based to fibre-based storage
products, and the resultant decrease in sales volume from indirect channels.
Total storage products revenues were $5,386.7, $4,205.2 and $3,362.0 in
1999, 1998 and 1997, respectively, representing an increase of $1,181.5, or 28%,
from 1998 to 1999 and an increase of $843.2, or 25%, from 1997 to 1998. The
increase in both periods is due primarily to sales of enterprise storage
hardware and software.
Revenues from AViiON server products were $596.3, $655.6 and $660.6 in 1999,
1998 and 1997, respectively, representing decreases of $59.3, or 9%, from 1998
to 1999 and $5.0, or 1%, from 1997 to 1998. The decrease in revenue from 1998 to
1999 was primarily the result of the closing of certain international sales
offices in an effort to refocus the business and improve profitability.
Service revenues were $732.6, $575.3 and $465.3 in 1999, 1998 and 1997,
respectively representing an increase of $157.3, or 27%, from 1998 to 1999 and
an increase of $110.0, or 24%, from 1997 to 1998. The increase in both periods
was primarily a result of the growth in EMC professional services and the
acquisitions of the professional services businesses Groupe MCI and Millennia
III, Inc. in the second and third quarters of 1998, respectively. In addition,
service revenues continue to grow as a result of the larger installed base
driven by increased product unit sales.
Enterprise hardware and software revenues for 1999, 1998 and 1997 under the
Company's reseller agreement with Hewlett-Packard Company ("HP") were $217.1,
$718.0 and $504.1, respectively, representing 3%, 13% and 11% of total revenues,
respectively. The Company and HP agreed to terminate their reseller contract for
enterprise storage products effective as of June 30, 1999. The Company also has
a reseller agreement with HP for CLARiiON and AViiON products, which represented
2%, 3% and 6% of revenues in 1999, 1998 and 1997, respectively.
Revenues on sales into the North American markets were $4,257.1, $3,367.8
and $2,708.2 in 1999, 1998 and 1997, respectively, representing increases of
$889.3, or 26%, from 1998 to 1999, and $659.6, or 24%, from 1997 to 1998. The
revenue growth reflects continued strong demand for the Company's products and
services.
Revenues on sales into the markets of Europe, the Middle East and Africa
were $1,844.3, $1,597.6 and $1,323.2 in 1999, 1998 and 1997, respectively,
representing increases of $246.7, or 15%, from 1998 to 1999, and $274.4, or 21%,
from 1997 to 1998. The reduced growth rate in 1999 reflects the impact of
closing certain Data General sales offices.
13
Revenues on sales into the markets in the Asia Pacific region were $439.0,
$381.5 and $396.3 in 1999, 1998 and 1997, respectively, representing an increase
of $57.5, or 15%, from 1998 to 1999, and a decrease of $14.8, or 4%, from 1997
to 1998. The increase in 1999 was due to the Company's efforts to expand its
business in this region combined with strong demand for the Company's products
and services. The decrease in 1998 was principally attributable to a downturn in
economic trends in the Asia Pacific market.
Revenues on sales into the markets of Latin America were $175.2, $89.2 and
$60.2 in 1999, 1998 and 1997, respectively, representing increases of $86.0, or
96%, from 1998 to 1999 and $29.0, or 48%, from 1997 to 1998. The increase in
both periods was primarily due to the Company's efforts to expand its business
in this region combined with strong demand for the Company's products and
services.
GROSS MARGINS
Overall gross margins increased to 51.5% in 1999, compared to 44.9% in 1998
and 41.8% in 1997. Product gross margins increased to 54.0% in 1999, compared to
46.5% in 1998 and 42.4% in 1997. The increase in product margins for both
periods is 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 12% in 1999 from 8% in 1998 and 4% in 1997. 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 30.8% in 1999, compared to 31.2% in 1998
and 36.5% in 1997. The decrease in service margins from 1998 to 1999 is
primarily due to a decrease in Data General service revenues caused by the
closure of certain international sales offices. The decrease in service margins
from 1997 to 1998 is primarily due to a significant investment in EMC
professional services during 1998.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $572.5, $435.3 and $332.1 in
1999, 1998 and 1997, respectively. As a percentage of revenues, R&D expenses
were 9%, 8% and 7% in 1999, 1998 and 1997, respectively. The increase in R&D
spending levels from 1997 to 1998 and 1998 to 1999 reflects the Company's
ongoing research and development efforts in a variety of areas, including EMC
ESN technologies, network attached storage products, enhancements to the
Symmetrix family of products, new enterprise storage software products and fibre
channel connectivity. R&D for 1998 also includes costs associated with the
integration of Conley Corporation, acquired in August 1998, which became the EMC
Cambridge Software Development Center.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses were $1,435.5,
$1,087.7 and $826.4 in 1999, 1998 and 1997, respectively. As a percentage of
revenues, SG&A expenses were 21%, 20% and 18% in 1999, 1998 and 1997,
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 upon resellers.
14
RESTRUCTURING, MERGER AND OTHER CHARGES
During fiscal year 1999, the Company recorded a total charge of $223.6
related to restructuring, merger and other charges primarily related to the
acquisition of Data General. During 1998, the Company recorded charges totaling
$135.0 related to a restructuring program and other charges.
During the fourth quarter of 1999, the Company approved and implemented a
restructuring program in connection with its acquisition of Data General. The
restructuring plan, which is expected to be completed by December 2000, provides
for the consolidation of the Company's operations and elimination of duplicative
facilities worldwide. Accordingly, during 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 expected cash impact of the charge is approximately
$140.7 of which $52.4 was paid in 1999.
The restructuring program includes an aggregate 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.
Of the approximately 1,100 employees identified, approximately 500 were
terminated in 1999.
In 1999, the Company also recorded a charge for merger costs of $23.5 for
financial advisory services, legal, accounting and other direct expenses related
to the Data General acquisition which has been recorded in operating expenses.
In addition, the Company recorded a $14.1 charge related to asset impairments
recorded in operating expenses and recorded a charge of $15.4 for capitalized
software and inventory write-downs which is included in cost of product sales.
In 1998, the Company recorded a charge of $135.0 related to a restructuring
program and certain asset write-downs resulting from the program. The charge
included approximately $82.4 related to employee termination benefits, asset
write downs and other exit costs which the Company has recorded in operating
expenses and approximately $52.6 for capitalized software and inventory write
downs which are included in cost of product sales. The total cash impact of the
restructuring charge is approximately $58.5, of which $24.4 was paid in 1998 and
$21.6 was paid in 1999. As of December 31, 1999, the remaining accruals of $15.7
from the 1998 restructuring program are primarily related to excess vacant
rental properties in Europe.
The 1998 restructuring program included an aggregate net reduction of the
workforce by approximately 480 employees, approximately 65% of whom were based
in North America and the remainder of whom were based in Europe and the Asia
Pacific region. The employee separations affected the majority of business
functions and job classes. Of the 480 employees identified, approximately 400
were terminated during 1998 and 80 were terminated in 1999.
15
The amounts accrued and charged against the established provisions described
above were as follows:
BEGINNING CURRENT YEAR CURRENT YEAR
BALANCE PROVISION UTILIZATION ENDING BALANCE
--------- ------------ ------------ --------------
1999
Employee termination benefits................. $21.4 $121.5 $ 67.4 $ 75.5
Lease abandonments............................ 13.3 11.2 5.9 18.6
Asset disposals............................... 5.7 17.9 19.5 4.1
Other exit costs.............................. 3.1 20.0 11.9 11.2
----- ------ ------ ------
$43.5 $170.6 $104.7 $109.4
===== ====== ====== ======
1998
Employee termination benefits................. $ -- $ 43.7 $ 22.3 $ 21.4
Lease abandonments............................ 6.5 11.3 4.5 13.3
Asset disposals............................... -- 19.9 14.2 5.7
Other exit costs.............................. -- 7.5 4.4 3.1
----- ------ ------ ------
$ 6.5 $ 82.4 $ 45.4 $ 43.5
===== ====== ====== ======
INVESTMENT INCOME AND INTEREST EXPENSE
Investment income increased to $131.9 in 1999, from $114.4 in 1998 and $82.6
in 1997. Investment income was earned primarily from investments in cash
equivalents and short and long-term investments. Investment income increased in
1999 and 1998 primarily due to higher average cash and investment balances which
were derived from operations.
Interest expense decreased to $33.5 in 1999 from $34.8 in 1998. Interest
expense increased to $34.8 in 1998 from $31.3 in 1997. The decrease in 1999 from
1998 is primarily due to conversions of the 3 1/4% Convertible Subordinated
Notes due 2002 of the Company (the "3 1/4% Notes") to Common Stock. The increase
in 1998 from 1997 was primarily due to the issuance of the 3 1/4% Notes and the
6% Convertible Subordinated Notes due 2004 of the Company (the "6% Notes").
OTHER INCOME/(EXPENSE), NET
The net other income was $17.7 in 1999 compared with the net other income of
$0.4 in 1998 and $1.1 in 1997. The increase in the net other income from 1998 to
1999 is primarily attributable to gains on the sale of publicly traded
securities acquired as part of the Data General acquisition.
PROVISION FOR INCOME TAXES
The provision for income taxes was $346.6 in 1999, $260.3 in 1998 and $181.8
in 1997, which resulted in effective tax rates of 25.5%, 28.5% and 23.6% in
1999, 1998 and 1997, respectively. The effective tax rates in 1999, 1998, and
1997 were lower than the statutory federal rate (35%) due primarily to the
realization of the benefits of the Company's global tax strategies and the
benefits derived from its offshore manufacturing operations. The major impact of
the Data General acquisition to the tax provision under the pooling of interest
method of acquisition accounting was a reduction in the valuation reserve
formerly recorded for certain Data General net operating loss carryforwards and
the non-deductibility of certain restructuring charges. The Company anticipates
that the effective tax rate for fiscal 2000 will be approximately 27%.
FINANCIAL CONDITION
Cash and cash equivalents and short and long-term investments were $3,173.7
and $2,380.3 at December 31, 1999 and 1998, respectively, an increase of $793.4.
In 1999, cash and cash equivalents
16
increased by $273.9 and short and long-term investments increased by $519.5.
This reflects the Company's continued efforts to invest excess cash in short and
long-term investments, which generate a higher yield than cash and cash
equivalents.
Cash provided by operating activities was $1,371.6. This was primarily
generated from net income offset by an increase in working capital, primarily
attributable to an increase in accounts receivable, consistent with the growth
of the business. Cash used by investing activities was $1,170.9, principally for
purchases of investments and additions to property, plant and equipment.
Cash provided by financing activities was $73.2, principally from the
issuance of Common Stock from stock option exercises.
The Company has available for use a credit line of $50.0 and may elect to
borrow at any time. In March 1997, the Company sold $517.5 of the 3 1/4% Notes.
The 3 1/4% Notes are generally convertible into shares of Common Stock at any
time prior to the redemption date at a conversion price of $11.33 per share. As
of December 31, 1999, $57.1 of the 3 1/4% Notes have been converted into Common
Stock. On February 15, 2000, the Company announced that it would redeem all of
the outstanding 3 1/4% Notes on March 15, 2000; however, the Company believes
that substantially all of the outstanding 3 1/4% Notes were converted into
Common Stock on or prior to such date. In May 1997, the Company sold $212.8 of
the 6% Notes. The 6% Notes are generally convertible into shares of common stock
at a conversion price of $83.82 per share, subject to adjustment in certain
events. As of December 31, 1999, none of the 6% Notes have been converted into
Common Stock. 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.
To date, inflation has not had a material impact on the Company's financial
results.
17
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's prospects are subject to certain uncertainties and risks. This
Annual Report on Form 10-K also contains certain forward-looking statements
within the meaning of the Federal Securities Laws. The Company's future results
may differ materially from its current results and 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 those set forth below, other
one-time events and other important factors disclosed previously and from time
to time in EMC's other filings with the Securities and Exchange Commission.
IF EMC'S SUPPLIERS DO NOT MEET ITS QUALITY OR DELIVERY REQUIREMENTS, EMC COULD
HAVE DECREASED REVENUES AND EARNINGS.
EMC purchases several sophisticated components and products from one or a
limited number of qualified suppliers, including some of its competitors. These
components and products include disk drives, high density memory components and
power supplies. EMC has experienced delivery delays from time to time because of
high industry demand or the inability of some vendors to consistently meet its
quality and delivery requirements. If any of its suppliers were to fail to meet
the quality or delivery requirements needed to satisfy customer orders for its
products, EMC could lose time-sensitive customer orders and have significantly
decreased quarterly revenues and earnings, which would have a material adverse
effect on EMC's business, results of operations or financial condition.
Additionally, EMC periodically transitions its product line to incorporate
new technologies. The importance of transitioning its customers smoothly to new
technologies, along with its historically uneven pattern of quarterly sales,
intensifies the risk that a supplier who fails to meet its delivery or quality
requirements will have an adverse impact on EMC's revenues and earnings.
EMC MAY BE UNABLE TO KEEP PACE WITH RAPID INDUSTRY CHANGES.
The computer storage and server markets are characterized by rapid
technological change, frequent new product introductions and evolving industry
standards. Sales of the Symmetrix series of products constitute the principal
source of revenues for EMC and EMC expects these sales to continue to be the
principal source of its revenues in the near future. Customer preferences in
these markets are difficult to predict, however, and there can be no assurance
that the Symmetrix series or other of the Company's products will continue to be
properly positioned in the market or to receive customer acceptance. In
addition, as a significant number of EMC's products are designed to be fully
compatible with the computers and operating systems of IBM and others, EMC's
business could also be adversely affected by modifications in the design or
configuration of these computers and operating systems.
Risks inherent in the transition to new products include the difficulty in
forecasting customer demand accurately, the inability to expand production
capacity to meet demand for new products, the impact of customers' demand for
new products on the products being replaced and delays in initial shipments of
new products. Further risks inherent in new product introductions include the
uncertainty of price-performance relative to products of competitors,
competitors' responses to the introductions and the desire by customers to
evaluate new products for longer periods of time. There can be no assurance that
EMC will be able to effectively manage the transitions to new products or new
technologies.
THE MARKETS EMC SERVES ARE HIGHLY COMPETITIVE, AND EMC MAY BE UNABLE TO COMPETE
EFFECTIVELY.
EMC competes with many established companies in the computer storage and
server industries and certain of these companies have substantially greater
financial, marketing and technological resources, larger distribution
capabilities, earlier access to customers and more opportunity to address
18
customers' various information technology requirements than EMC. EMC's business
may be adversely affected by the announcement or introduction of new products by
its competitors, including hardware, software and services, price reductions of
its competitors' equipment or services and the implementation of effective
marketing strategies by its competitors.
COMPETITIVE PRICING COULD ADVERSELY AFFECT EMC'S REVENUES AND EARNINGS.
Competitive pricing pressures exist in the computer storage and server
markets and have had and may in the future have an adverse effect on EMC's
revenues and earnings. There also has been and may continue to be a willingness
on the part of certain competitors to reduce prices in order to preserve or gain
market share, which EMC cannot foresee. EMC currently believes that pricing
pressures are likely to continue.
To date, EMC has been able to manage its component and product design costs.
However, there can be no assurance that EMC will be able to continue to achieve
reductions in component and product design costs. The relative and varying rates
of product price and component cost declines could have an adverse effect on
EMC's earnings.
CHANGES IN FOREIGN LAWS, RULES OR REGULATIONS OR OTHER CONDITIONS COULD IMPAIR
EMC'S INTERNATIONAL SALES.
A substantial portion of EMC's revenues is derived from sales outside the
United States. In addition, a substantial portion of EMC's products is
manufactured outside of the United States. Accordingly, EMC's future results
could be adversely affected by a variety of factors, including changes in
foreign currency exchange rates, changes in a specific country's or region's
political or economic conditions, trade restrictions, import or export licensing
requirements, the overlap of different tax structures or changes in
international tax laws, changes in regulatory requirements, compliance with a
variety of foreign laws and regulations and longer payment cycles in certain
countries.
RISKS ASSOCIATED WITH EMC'S INDIRECT CHANNELS OF DISTRIBUTION MAY ADVERSELY
AFFECT EMC'S FINANCIAL RESULTS.
EMC derives a significant percentage of its product revenues from indirect
channels of distribution, including resellers, systems integrators and
distributors. EMC's financial results could be adversely affected if its
contracts with its indirect channels of distribution were terminated, if EMC's
relationship with its indirect channels were to deteriorate or if the financial
condition of its indirect channels were to weaken. In addition, as EMC's
business grows, EMC may have an increased reliance on indirect channels of
distribution. There can be no assurance that EMC will be successful in
maintaining or expanding these channels. If EMC is not successful, EMC may lose
certain sales opportunities. Furthermore, the partial reliance on indirect
channels of distribution may materially reduce the visibility to management of
potential orders, thereby making it more difficult to accurately forecast such
orders. In addition, there can be no assurance that indirect channels will not
develop or market products in competition with EMC in the future.
HISTORICALLY UNEVEN SALES PATTERNS COULD SIGNIFICANTLY IMPACT QUARTERLY REVENUES
AND EARNINGS.
EMC's quarterly sales have historically reflected an uneven pattern in which
a disproportionate percentage of a quarter's total sales occur in the last month
and weeks and days of each quarter. This pattern makes prediction of revenues,
earnings and working capital for each financial period especially difficult and
uncertain and increases the risk of unanticipated variations in quarterly
results and financial condition. EMC believes this uneven sales pattern is a
result of many factors including:
19
- the significant size of EMC's average product price in relation to its
customers' budgets, resulting in long lead times for customers' budgetary
approval, which tends to be given late in a quarter
- the tendency of customers to wait until late in a quarter to commit to
purchase in the hope of obtaining more favorable pricing from one or more
competitors seeking their business
- the fourth quarter influence of customers spending their remaining capital
budget authorization prior to new budget constraints in the first quarter
of the following year
- seasonal influences
EMC's uneven sales pattern also makes it extremely difficult to predict
near-term demand and adjust manufacturing capacity accordingly. If orders vary
substantially from the predicted demand, the ability to assemble, test and ship
orders received in the last weeks and days of each quarter may be limited, which
could adversely affect quarterly revenues and earnings.
In addition, EMC's revenues in any quarter are substantially dependent on
orders booked and shipped in that quarter, and its backlog at any particular
time is not necessarily indicative of future sales levels. This is because:
- EMC manufactures its products on the basis of its forecast of near-term
demand and maintains inventory in advance of receipt of firm orders from
customers
- EMC generally ships products shortly after receipt of the order
- customers may reschedule orders with little or no penalty
Moreover, delays in product shipping, caused by loss of power or
telecommunications or similar services, or an unexpected decline in revenues
without a corresponding and timely slowdown in expenses, could intensify the
impact of these factors on EMC's business, results of operations and financial
condition.
EMC MAY HAVE DIFFICULTY SUSTAINING AND MANAGING ITS GROWTH.
EMC has a history of rapid growth. EMC's future operating results will
depend on its management's ability to manage growth, including, but not limited
to, hiring and retaining significant numbers of qualified employees, forecasting
revenues, controlling expenses and managing its manufacturing capacity and other
assets and executing on its plans. An unexpected decline in the growth rate of
revenues without a corresponding and timely reduction in expense growth or a
failure to manage other aspects of growth could have a material adverse effect
on EMC's business, results of operations or financial condition.
In addition, EMC's growth requires enhancement and expansion of its
infrastructure, including its management team, information systems and
manufacturing operations. The Company's continued success and profitability
depends on its ability to continue to improve its infrastructure to keep pace
with the growth in its overall business.
EMC'S BUSINESS MAY SUFFER IF IT IS UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL.
EMC's continued growth and success depends to a significant extent on the
continued service of senior management and other key employees, the development
of additional management personnel and the hiring of new qualified employees.
Competition for highly skilled personnel is intense in the high technology
industry. There can be no assurance that EMC will be successful in continuously
recruiting new personnel or in retaining existing personnel. The loss of one or
more key or other employees or EMC's inability to attract additional qualified
employees or retain other employees could have a material adverse effect on
EMC's business, results of operations or financial condition.
20
MANUFACTURING RISKS COULD DIRECTLY IMPAIR EMC'S FINANCIAL RESULTS.
EMC's products operate near the limits of electronic and physical
performance and are designed and manufactured with relatively small tolerances.
If flaws in design, production, assembly or testing were to occur by EMC or its
suppliers, EMC could experience a rate of failure in its products that would
result in substantial repair or replacement costs and potential damage to EMC's
reputation. Continued improvement in manufacturing capabilities and control of
material and manufacturing quality and costs are critical factors in the future
growth of EMC. EMC frequently revises and updates manufacturing and test
processes to address engineering and component changes to its products and
evaluates the reallocation of manufacturing resources among its facilities.
There can be no assurance that EMC's efforts to monitor, develop and implement
appropriate test and manufacturing processes for its products will be sufficient
to permit EMC to avoid a rate of failure in its products that results in
substantial delays in shipment, significant repair or replacement costs and
potential damage to EMC's reputation, any of which could have a material adverse
effect on EMC's business, results of operations or financial condition.
EMC'S BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF THE RISKS
ASSOCIATED WITH ACQUISITIONS AND INVESTMENTS.
As part of its business strategy, EMC seeks to acquire businesses that offer
complementary products, services or technologies. These acquisitions are
accompanied by the risks commonly encountered in an acquisition of a business
including, among other things:
- the effect of the acquisition on EMC's financial and strategic position
and reputation
- the failure of an acquired business to further EMC's strategies
- the difficulty of integrating the acquired business
- the lack of experience in new markets, products or technologies
- the diversion of EMC's management's attention from other business concerns
- the impairment of relationships with customers of the acquired business
- the potential loss of key employees of the acquired company
- the implementation and maintenance of uniform company-wide standards,
procedures and policies
- the potential incompatibility of business cultures
These factors could have a material adverse effect on EMC's business,
results of operations or financial condition. EMC expects that the consideration
paid for future acquisitions, if any, could be in the form of cash, stock,
rights to purchase stock or a combination of these. To the extent that EMC
issues shares of stock or other rights to purchase stock in connection with any
future acquisition, existing stockholders will experience dilution and
potentially decreased earnings per share.
EMC also seeks to invest in businesses that offer complementary products,
services or technologies. These investments are accompanied by risks similar to
those encountered in an acquisition of a business.
EMC'S BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF THE RISKS
ASSOCIATED WITH ALLIANCES.
EMC has alliances with leading software, relational database and enterprise
application companies, and EMC plans to continue its strategy of developing key
alliances. EMC works with these companies to integrate its products with their
software applications. There can be no assurance that EMC will be
21
successful in its ongoing strategic alliances or that EMC will be able to find
further suitable business relationships as it develops new products. Any failure
to continue or expand such relationships could have a material adverse effect on
EMC's business, results of operations or financial condition.
There can be no assurance that companies with which EMC has strategic
alliances, certain of which have substantially greater financial, marketing and
technological resources than EMC, will not develop or market products in
competition with EMC in the future, discontinue their alliances with EMC or form
alliances with EMC's competitors.
EMC'S BUSINESS MAY SUFFER IF IT CANNOT PROTECT ITS INTELLECTUAL PROPERTY.
EMC generally relies upon patent, copyright, trademark and trade secret laws
and contract rights in the United States and in other countries to establish and
maintain EMC's proprietary rights in its technology and products. However, there
can be no assurance that any of EMC's proprietary rights will not be challenged,
invalidated or circumvented. In addition, the laws of certain countries do not
protect EMC's proprietary rights to the same extent as do the laws of the United
States. Therefore, there can be no assurance that EMC will be able to adequately
protect its proprietary technology against unauthorized third-party copying or
use, which could adversely affect EMC's competitive position. Further, there can
be no assurance that EMC will be able to obtain licenses to any technology that
it may require to conduct its business or that, if obtainable, such technology
can be licensed at a reasonable cost.
From time to time, EMC receives notices from third parties claiming
infringement by EMC's products of third-party patent or other intellectual
property rights. Responding to any such claim, regardless of its merit, could be
time-consuming, result in costly litigation, divert management's attention and
resources and cause EMC to incur significant expenses. In the event there is a
temporary or permanent injunction entered prohibiting EMC from marketing or
selling certain of its products or a successful claim of infringement against
EMC requiring EMC to pay royalties to a third party, and EMC fails to develop or
license a substitute technology, EMC's business, results of operations or
financial condition could be materially adversely affected.
YEAR 2000 PROBLEMS MAY DISRUPT EMC'S BUSINESS.
The information provided below constitutes a "Year 2000 Readiness
Disclosure" under the Year 2000 Information and Readiness Disclosure Act.
In February 1997, EMC established a Year 2000 program to address systems and
software problems in interpreting certain dates in calendar year 2000. Under
this program, EMC completed, prior to January 1, 2000, an assessment of the
hardware and software in its business information systems and completed the
necessary modifications. To date, EMC has not experienced, and is not aware of,
any Year 2000 problems or disruptions in its internal systems; however, EMC
cannot, at this time, be assured that any such problems or disruptions, if they
were to occur, would not have a material impact on EMC's business, results of
operations or financial condition.
Under its Year 2000 program, EMC sought and has received certifications of
Year 2000 compliance from all of its key vendors and suppliers. EMC has also
received certifications or statements of Year 2000 compliance from other vendors
and suppliers and has assessed questionnaire responses and related information
from other third parties. To date, EMC has not received any notification from
any of its key vendors, suppliers or other third parties of any Year 2000
problems or disruptions; however, EMC cannot, at this time, be assured that Year
2000 problems of third parties will not have a material impact on EMC's
business, results of operations or financial condition.
EMC has designed and tested the current versions of its Symmetrix series of
products and the current versions of its other products to be Year 2000
compliant. EMC has made upgrades available for
22
the older versions of its Symmetrix series of products and for certain other of
its older products that have not been tested for Year 2000 compliance so that
such products will test as Year 2000 compliant. EMC's CLARiiON storage products
and AViiON servers test as Year 2000 ready or EMC has made upgrades available to
make such products test as Year 2000 ready. There can be no assurance that Year
2000 problems in EMC's products, if they were to occur, would not have a
material impact on EMC's business, results of operations or financial condition.
The assessment, remediation, testing and contingency planning phases of
EMC's Year 2000 program are complete. The total cost of such 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.
The most reasonably likely worst case scenarios regarding failures to
interpret certain dates in calendar Year 2000 would include a hardware failure,
the corruption or loss of data contained in EMC's internal information systems,
a failure affecting EMC's key vendors, suppliers or customers, the failure of
infrastructure services provided by government agencies or other third parties,
and customer dissatisfaction related to the performance of EMC's products.
Under its program, EMC developed a Year 2000 contingency plan. This
contingency plan includes, among other things, manual "work-arounds" for
hardware and software failures, as well as substitution of systems, if required.
Further information about EMC's Year 2000 readiness is available at the
Company's website at HTTP://WWW.EMC.COM/YEAR2000.
LITIGATION THAT EMC MAY BECOME INVOLVED IN MAY ADVERSELY AFFECT EMC.
In the ordinary course of business, EMC may become involved in litigation,
administrative proceedings and governmental proceedings. Such matters can be
time-consuming, divert management's attention and resources and cause EMC to
incur significant expenses. Furthermore, there can be no assurance that the
results of any of these actions will not have a material adverse effect on its
business, results of operations or financial condition.
CHANGES IN REGULATIONS COULD ADVERSELY AFFECT EMC.
EMC's business, results of operations and financial condition could be
adversely affected if laws, regulations or standards relating to EMC or its
products were newly implemented or changed.
EMC'S STOCK PRICE IS VOLATILE.
EMC's stock price, like that of other technology companies, is subject to
significant volatility because of factors such as:
- the announcement of new products, services or technological innovations by
EMC or its competitors
- quarterly variations in its operating results
- changes in revenue or earnings estimates by the investment community
- speculation in the press or investment community
In addition, EMC's stock price may be affected by general market conditions
and domestic and international economic factors unrelated to EMC's performance.
Because of these factors, recent trends should not be considered reliable
indicators of future stock prices or financial results.
23
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company is exposed to market risk, primarily from changes in interest
rates, foreign exchange rates and credit risk. To manage the volatility relating
to these exposures, the Company enters into various derivative transactions
pursuant to the Company's policies to hedge against known or forecasted market
exposures.
FOREIGN EXCHANGE RISK MANAGEMENT
As a multinational corporation, the Company is exposed to changes in foreign
exchange rates. These exposures may change over time and could have a material
adverse impact on our financial results. Historically, the Company's primary
exposures related to sales denominated in the Euro, the Japanese yen and the
British pound. Additionally, the Company's exposure to emerging market
economies, particularly in Latin America and South East Asia, has recently
increased because of its expanding presence in these markets. Despite the
relative size of the Company's exposures in these markets, the inherent
volatility of these economies could negatively impact the Company's financial
results.
The Company uses foreign currency forward and option contracts to manage the
risk of exchange rate fluctuations. In all cases, the Company uses these
derivative instruments to reduce its foreign exchange risk by essentially
creating offsetting market exposures. The instruments held by the Company are
not leveraged and are not held for trading or speculative purposes.
The Company uses forward exchange contracts to hedge its net asset position
and uses a combination of option and forward contracts to hedge anticipated cash
flows. The hedging activity is intended to offset the impact of currency
fluctuations on assets, liabilities and cash flows denominated in foreign
currencies. The success of the hedging program depends on forecasts of
transaction activity in the various currencies. To the extent that these
forecasts are overstated or understated during periods of currency volatility,
the Company could experience unanticipated currency gains or losses.
The Company employs a variance/covariance model to calculate value-at-risk
for its combined foreign exchange position. This model assumes that the
relationships among market rates and prices that have been observed over the
last year are valid for estimating risk over the next trading day. Estimates of
volatility and correlations of market factors are drawn from the RiskMetrics
dataset as of December 31, 1999. This model measures the potential loss in fair
value that could arise from changes in market conditions, using a 95% confidence
level and assuming a one-day holding period. The value-at-risk on the combined
foreign exchange position was $0.4 million as of December 31, 1999.
INTEREST RATE RISK
The Company maintains an investment portfolio consisting of debt securities
of various issuers, types and maturities. The investments are classified as
available for sale and all are denominated in U.S. dollars. These securities are
recorded on the balance sheet at market value, with any unrealized gain or loss
recorded in other comprehensive income/(loss). These instruments are not
leveraged, and are not held for trading purposes. A portion of the Company's
investment portfolio is comprised of mortgage-backed securities which are
subject to prepayment risk.
The Company employs a variance/covariance model to calculate value-at-risk
for its combined investment portfolios. This model assumes that the
relationships among market rates and prices that have been observed over the
last year are valid for estimating risk over the next trading day. Estimates of
volatility and correlations of market factors are drawn from the RiskMetrics
dataset as of December 31, 1999. This model measures the potential loss in fair
value that could arise from changes
24
in market conditions, using a 95% confidence level and assuming a one day
holding period. The value at risk on the investment portfolios was $2.2 million
as of December 31, 1999.
CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments,
short and long-term investments and trade and notes receivable. The Company
places its temporary cash investments and short and long-term investments in
investment grade instruments and limits the amount of investment with any one
financial institution. The credit risk associated with trade receivables is
minimal due to the large number of customers and their broad dispersion over
many different industries and geographic areas.
25
EMC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS
FORM 10-K
----------
Report of Independent Accountants........................... p. 27
Consolidated Balance Sheets at December 31, 1999 and 1998... p. 28
Consolidated Statements of Income for the years ended
December 31, 1999, 1998
and 1997.................................................. p. 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998
and 1997.................................................. p. 30
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997.......... p. 31
Consolidated Statements of Comprehensive Income for
the years ended December 31, 1999, 1998 and 1997.......... p. 32
Notes to Consolidated Financial Statements.................. pp. 33-58
Schedule:
Schedule II--Valuation and Qualifying Accounts............ p. S-1
Note: All other financial statement schedules are omitted because they are not
applicable or the required information is included in the consolidated
financial statements or notes thereto.
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the
Board of Directors of EMC Corporation:
In our opinion, the consolidated financial statements listed in the
accompanying index on page 26 present fairly in all material respects, the
financial position of EMC Corporation and its subsidiaries at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
appearing under item 14(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 21, 2000
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $1,109,409 $ 835,466
Short-term investments.................................... 714,730 982,482
Trade and notes receivable less allowance for doubtful
accounts of
$34,279 and $26,755 in 1999 and 1998, respectively...... 1,625,438 1,292,790
Inventories............................................... 618,885 620,025
Deferred income taxes..................................... 147,471 49,682
Other assets.............................................. 104,463 85,570
---------- ----------
Total current assets........................................ 4,320,396 3,866,015
Long-term investments....................................... 1,349,599 562,360
Notes receivable, net....................................... 76,756 34,870
Property, plant and equipment, net.......................... 1,023,179 823,160
Deferred income taxes....................................... 108,587 26,561
Intangible and other assets, net............................ 294,771 314,054
---------- ----------
Total assets............................................ $7,173,288 $5,627,020
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations.................. $ 9,116 $ 29,361
Accounts payable.......................................... 370,055 299,412
Accrued expenses.......................................... 611,052 457,122
Income taxes payable...................................... 249,234 160,792
Deferred revenue.......................................... 158,458 94,328
---------- ----------
Total current liabilities................................... 1,397,915 1,041,015
Deferred income taxes....................................... 125,353 75,290
Long-term obligations:
3 1/4% convertible subordinated notes due 2002............ 460,399 517,500
6% convertible subordinated notes due 2004................ 212,750 212,750
Notes payable............................................. 13,460 21,396
Other liabilities........................................... 11,625 30,079
---------- ----------
Total liabilities....................................... 2,221,502 1,898,030
---------- ----------
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 and outstanding 1,039,275 and 1,022,952 in 1999
and 1998, respectively.................................. 10,393 10,230
Additional paid-in capital................................ 1,706,387 1,479,823
Deferred compensation..................................... (30,282) (36,516)
Retained earnings......................................... 3,299,821 2,289,251
Accumulated other comprehensive income/(loss)............. (34,533) (7,890)
---------- ----------
Subtotal................................................ 4,951,786 3,734,898
Treasury stock............................................ -- (5,908)
---------- ----------
Total stockholders' equity............................ 4,951,786 3,728,990
---------- ----------
Total liabilities and stockholders' equity.......... $7,173,288 $5,627,020
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
28
EMC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED
---------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
Revenues:
Net sales............................................. $5,983,009 $4,860,838 $4,022,584
Services.............................................. 732,601 575,320 465,267
---------- ---------- ----------
6,715,610 5,436,158 4,487,851
Costs and expenses:
Cost of sales......................................... 2,751,360 2,600,405 2,317,189
Cost of service....................................... 506,885 395,995 295,269
Research and development.............................. 572,517 435,344 332,078
Selling, general and administrative................... 1,435,508 1,087,747 826,357
Restructuring, merger and other charges............... 208,246 82,400 --
---------- ---------- ----------
Operating income........................................ 1,241,094 834,267 716,958
Investment income....................................... 131,911 114,355 82,582
Interest expense........................................ (33,490) (34,786) (31,302)
Other income/(expense), net............................. 17,650 397 1,082
---------- ---------- ----------
Income before taxes..................................... 1,357,165 914,233 769,320
Income tax provision.................................... 346,595 260,255 181,809
---------- ---------- ----------
Net income.............................................. $1,010,570 $ 653,978 $ 587,511
========== ========== ==========
Net income per weighted average share, basic............ $ 0.98 $ 0.64 $ 0.59
========== ========== ==========
Net income per weighted average share, diluted.......... $ 0.92 $ 0.61 $ 0.56
========== ========== ==========
Weighted average shares, basic.......................... 1,030,551 1,015,371 1,001,016
Weighted average shares, diluted........................ 1,109,532 1,094,215 1,065,484
The accompanying notes are an integral part of the consolidated financial
statements.
29
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED
---------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
Cash flows from operating activities:
Net income............................................ $ 1,010,570 $ 653,978 $ 587,511
Adjustments to reconcile net income to net cash
provided/ (used) by operating activities:
Depreciation and amortization....................... 447,114 366,403 241,789
Deferred income taxes............................... (122,973) (615) 8,538
Net loss on disposal of property and equipment...... 9,896 9,073 10,432
Tax benefit from stock options exercised............ 58,033 43,670 18,540
Minority interest................................... 135 (499) (337)
Changes in assets and liabilities:
Trade and notes receivable........................ (383,547) (212,988) (197,895)
Inventories....................................... 12,483 (18,671) (120,109)
Other assets...................................... (49,789) (13,250) (57,916)
Accounts payable.................................. 70,798 (45,383) 42,771
Accrued expenses.................................. 158,191 145,396 13,049
Income taxes payable.............................. 88,442 15,978 46,063
Deferred revenue.................................. 67,116 34,394 458
Other liabilities................................. 5,166 (6,816) (3,842)
----------- ----------- ----------
Net cash provided by operating activities....... 1,371,635 970,670 589,052
----------- ----------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment............ (524,279) (484,708) (328,669)
Proceeds from sales of property and equipment......... 1 6 313
Capitalized software development costs................ (88,201) (71,689) (66,010)
Purchase of short and long-term held-to-maturity
securities.......................................... (191,254) (1,100,361) (904,308)
Maturity of short and long-term held-to-maturity
securities.......................................... 940,483 1,016,607 669,198
Purchase of short and long-term available for sale
securities.......................................... (2,752,925) (1,758,564) (192,818)
Sales of short and long-term available for sale
securities.......................................... 1,445,237 1,157,077 2,590
Business acquisitions................................. -- (53,903) --
----------- ----------- ----------
Net cash used by investing activities........... (1,170,938) (1,295,535) (819,704)
----------- ----------- ----------
Cash flows from financing activities:
Issuance of common stock.............................. 101,424 64,269 50,928
Redemption of 4 1/4% convertible subordinated notes
due 2001............................................ -- -- (65)
Proceeds from investment in new McDATA................ -- -- 10,000
Issuance of convertible subordinated notes, net of
issuance costs...................................... -- -- 713,524
Payment of long-term and short-term obligations....... (30,435) (12,413) (36,754)
Issuance of long-term and short-term obligations...... 2,256 14,553 4,732
----------- ----------- ----------
Net cash provided by financing activities....... 73,245 66,409 742,365
----------- ----------- ----------
Effect of exchange rate changes on cash................. 1 (2,020) (8,039)
Net (decrease)/increase in cash and cash equivalents.... 273,942 (258,456) 511,713
Cash and cash equivalents at beginning of period........ 835,466 1,095,942 592,268
----------- ----------- ----------
Cash and cash equivalents at end of period.............. $ 1,109,409 $ 835,466 $1,095,942
=========== =========== ==========
Non-cash activity--conversions of debentures and
notes................................................. $ 57,101 -- $ 140,682
--business acquisitions................. -- $ 51,755 --
The accompanying notes are an integral part of the consolidated financial
statements.
30
EMC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
---------------------------------------------------------------
COMMON STOCK
---------------------
ADDITIONAL
PAR PAID-IN DEFERRED RETAINED
SHARES VALUE CAPITAL COMPENSATION EARNINGS
---------- -------- ---------- ------------- ----------
Balance, December 31,
1996.................... 965,463 $ 9,655 $ 935,479 $(17,512) $1,047,762
Exercise of stock
options............... 12,615 126 50,802 -- --
Tax benefit from stock
options exercised..... -- -- 18,540 -- --
Grant of stock
options............... -- -- 20,778 (20,778) --
Issuance of common stock
pursuant to
conversions of
notes................. 30,792 308 265,474 -- --
Amortization of deferred
compensation.......... -- -- -- 8,678 --
Treasury stock
transactions.......... -- -- (579) -- --
Proceeds in excess of
minority interest in
new McDATA............ -- -- 6,625 -- --
Unrealized gain/(loss)
on investments........ -- -- -- -- --
Translation
adjustment............ -- -- -- -- --
Net income.............. -- -- -- -- 587,511
---------- ------- ---------- -------- ----------
Balance, December 31,
1997.................... 1,008,870 10,089 1,297,119 (29,612) 1,635,273
---------- ------- ---------- -------- ----------
Exercise of stock
options............... 11,868 119 64,150 -- --
Tax benefit from stock
options exercised..... -- -- 43,670 -- --
Grant of stock
options............... -- -- 21,341 (21,341) --
Amortization of deferred
compensation.......... -- -- -- 14,437 --
Business acquisitions... 2,214 22 51,175 -- --
Other adjustments....... -- -- 2,335 -- --
Treasury stock
transactions.......... -- -- 33 -- --
Unrealized gain/(loss)
on investments........ -- -- -- -- --
Minimum pension
liability............. -- -- -- -- --
Translation
adjustment............ -- -- -- -- --
Net income.............. -- -- -- -- 653,978
---------- ------- ---------- -------- ----------
Balance, December 31,
1998.................... 1,022,952 10,230 1,479,823 (36,516) 2,289,251
---------- ------- ---------- -------- ----------
Exercise of stock
options............... 11,373 113 103,219 -- --
Tax benefit from stock
options exercised..... -- -- 58,033 -- --
Grant of stock
options............... -- -- 16,077 (16,077) --
Issuance of common stock
pursuant to conversion
of notes.............. 5,041 50 57,051 -- --
Amortization of deferred
compensation.......... -- -- -- 22,311 --
Retirement of treasury
stock................. (91) -- (7,816) -- --
Minimum pension
liability............. -- -- -- -- --
Unrealized gain/(loss)
on investments........ -- -- -- -- --
Translation
adjustment............ -- -- -- -- --
Net income.............. -- -- -- -- 1,010,570
---------- ------- ---------- -------- ----------
Balance, December 31,
1999.................... 1,039,275 $10,393 $1,706,387 $(30,282) $3,299,821
========== ======= ========== ======== ==========
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
----------------------------------------------------
ACCUMULATED TREASURY
OTHER STOCK TOTAL
COMPREHENSIVE ------------------- STOCKHOLDERS'
INCOME SHARES COST EQUITY
-------------- -------- -------- -------------
Balance, December 31,
1996.................... $ 9,095 69 $(6,454) $1,978,025
Exercise of stock
options............... -- -- -- 50,928
Tax benefit from stock
options exercised..... -- -- -- 18,540
Grant of stock
options............... -- -- -- --
Issuance of common stock
pursuant to
conversions of
notes................. -- -- -- 265,782
Amortization of deferred
compensation.......... -- -- -- 8,678
Treasury stock
transactions.......... -- (4) 579 --
Proceeds in excess of
minority interest in
new McDATA............ -- -- -- 6,625
Unrealized gain/(loss)
on investments........ (5,608) -- -- (5,608)
Translation
adjustment............ (9,540) -- -- (9,540)
Net income.............. -- -- -- 587,511
-------- ---- ------- ----------
Balance, December 31,
1997.................... (6,053) 65 (5,875) 2,900,941
-------- ---- ------- ----------
Exercise of stock
options............... -- -- -- 64,269
Tax benefit from stock
options exercised..... -- -- -- 43,670
Grant of stock
options............... -- -- -- --
Amortization of deferred
compensation.......... -- -- -- 14,437
Business acquisitions... -- -- -- 51,197
Other adjustments....... -- -- -- 2,335
Treasury stock
transactions.......... -- -- (33) --
Unrealized gain/(loss)
on investments........ 6,777 -- -- 6,777
Minimum pension
liability............. (6,252) -- -- (6,252)
Translation
adjustment............ (2,362) -- -- (2,362)
Net income.............. -- -- -- 653,978
-------- ---- ------- ----------
Balance, December 31,
1998.................... (7,890) 65 (5,908) 3,728,990
-------- ---- ------- ----------
Exercise of stock
options............... -- 26 (1,908) 101,424
Tax benefit from stock
options exercised..... -- -- -- 58,033
Grant of stock
options............... -- -- -- --
Issuance of common stock
pursuant to conversion
of notes.............. -- -- -- 57,101
Amortization of deferred
compensation.......... -- -- -- 22,311
Retirement of treasury
stock................. -- (91) 7,816 --
Minimum pension
liability............. 6,252 -- -- 6,252
Unrealized gain/(loss)
on investments........ (30,592) -- -- (30,592)
Translation
adjustment............ (2,303) -- (2,303)
Net income.............. -- -- -- 1,010,570
-------- ---- ------- ----------
Balance, December 31,
1999.................... $(34,533) -- $ -- $4,951,786
======== ==== ======= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
31
EMC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE YEAR ENDED
---------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
Net income.............................................. $1,010,570 $653,978 $587,511
Other comprehensive income/(loss) net of tax benefit:
Foreign currency translation adjustments, net of tax
of $(768), $(787) and $(3,180)...................... (2,303) (2,362) (9,540)
Equity adjustment for minimum pension liability, net
of tax of $2,084, $(2,084) and $0................... 6,252 (6,252) --
Unrealized gain/(loss) on investments and derivatives,
net of tax of $(10,197), $2,259 and $(1,869)........ (30,592) 6,777 (5,608)
---------- -------- --------
Other comprehensive income/(loss)....................... (26,643) (1,837) (15,148)
---------- -------- --------
Comprehensive income.................................... $ 983,927 $652,141 $572,363
========== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
32
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 those solutions, which are
comprised of enterprise storage systems, networks, software and services. Its
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated. The Company treats gains/ losses on sales of subsidiary
stock of development stage companies as equity transactions.
BASIS OF PRESENTATION
The Company's fiscal year ends on December 31. On October 12, 1999, EMC
completed the acquisition of Data General Corporation ("Data General"), which
was accounted for as a pooling-of-interests. Prior to the acquisition, Data
General's fiscal year end was the last Saturday in September and its month end
was the last Saturday of the month. Data General's financial information has
been conformed to a calendar year end for each of the years presented. EMC's
consolidated financial statements include the results of Data General.
Certain prior year amounts have been reclassified to conform with the 1999
presentation.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
reported amounts of revenues and expenses during the reporting period and the
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company generally recognizes revenue from product sales upon shipment
provided that no significant post-delivery obligations remain and collection of
the resulting receivable is reasonably assured. When significant post-delivery
obligations exist, revenue is deferred until such obligations are fulfilled. The
Company accrues for warranty costs, sales returns, and other allowances at the
time of shipment based on its experience. Revenue from sales-type leases is
recognized at the net present value of expected future payments. Service revenue
is recognized over the contractual period or as services are rendered. In
transactions that include multiple products and/or services, the Company
allocates the sales value among each of the deliverables based on their relative
fair values.
33
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOREIGN CURRENCY TRANSLATION
The local currency is the functional currency of the majority of the
Company's subsidiaries. Assets and liabilities are translated into U.S. dollars
at exchange rates in effect at the balance sheet date and income and expense
items are translated at average rates for the period, except for property, plant
and equipment which is translated at historical exchange rates. The Company's
subsidiaries in Ireland, Israel and Hong Kong are generally dependent on the
U.S. dollar and therefore, their functional currency is the U.S. dollar.
Consolidated foreign currency transaction results included in other
income/(expense), net were gains of $2,712 in 1999, $5,746 in 1998 and $2,959 in
1997.
DERIVATIVES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
adopted SFAS 133 on January 1, 1999. As a result of this adoption, all
derivatives are recognized on the balance sheet at fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income. The Company does not engage in currency speculation. The
Company may, from time to time, enter into derivative instruments to hedge
against known or forecasted market exposures.
The Company uses forward exchange contracts to hedge its net asset position
and a combination of forward and option contracts to hedge anticipated cash
flows. The gains or losses arising from forward contracts hedging the Company's
net asset position are recorded in other income or expense as offsets to the
gains or losses resulting from the underlying hedged items. Gains and losses
from contracts hedging cash flow exposures are recognized in the income
statement as appropriate in the same period in which the related underlying
hedged item is recognized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with a
maturity of ninety days or less at the time of purchase. These investments are
stated at amortized cost plus accrued interest, which approximates market. Total
cash equivalents were $598,684 and $565,420 at December 31, 1999 and 1998,
respectively. Cash equivalents consist primarily of commercial paper and money
market securities.
INVESTMENTS
The Company's investments are comprised primarily of debt securities which
are classified at purchase as either held-to-maturity or available for sale
during 1998 and as available for sale in 1999. Investments with remaining
maturities of less than twelve months from the balance sheet date are classified
as short-term investments. Investments with remaining maturities of more than
twelve months from the balance sheet date are classified as long-term
investments.
34
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
1999 1998 1997
-------- -------- --------
Cash paid for:
Income taxes................................ $325,990 $214,727 $112,645
Interest.................................... 31,285 34,666 28,649
INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market,
not in excess of net realizable value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is computed
on a straight-line basis over the estimated useful lives of the assets, as
follows:
Furniture and fixtures...................................... 7 years
Equipment................................................... 3-10 years
Improvements................................................ 5-25 years
Buildings................................................... 25-31 1/2 years
When assets are retired or disposed of, the cost and accumulated
depreciation thereon are removed from the accounts and the related gains or
losses are included in the statement of income.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Software
development costs incurred subsequent to establishment of technological
feasibility through the general release of the software products are
capitalized. Technological feasibility is demonstrated by the completion of a
working model. Capitalized costs are amortized on a straight-line basis over a
period of two to four years. Unamortized software development costs were
$123,936 and $96,013 at December 31, 1999 and 1998, respectively, and are
included in intangible and other assets. Amortization expense was $60,278,
$48,017 and $40,064 in 1999, 1998 and 1997, respectively.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the tax bases of assets and
liabilities and their reported amounts using enacted tax rates in effect for the
year in which the differences are expected to reverse (see Note J). Tax credits
are generally recognized as reductions of income tax provisions in the year in
which the credits arise.
The Company does not provide for U.S. income tax liability on undistributed
earnings of its foreign subsidiaries. The earnings of non-U.S. subsidiaries,
which reflect full provision for non-U.S. income taxes, are indefinitely
reinvested in non-U.S. operations or will be remitted substantially free of
35
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
additional tax. Accordingly, no material provision has been made for taxes that
might be payable upon remittance of such non-U.S. earnings.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128") beginning with the fiscal year ended
December 31, 1997. This Statement requires the presentation of basic and diluted
net income per share. Basic net income per share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of stock options and convertible debt. The Company has
restated all prior period per share data presented as required by SFAS 128.
RETIREMENT/POST EMPLOYMENT BENEFITS
Net pension cost for the Company's domestic defined benefit pension plan is
funded as accrued, to the extent that current pension cost is deductible for
U.S. Federal tax purposes and to comply with the General Agreement on Tariff and
Trade Bureau (GATT) additional minimum funding requirements for the plan year
beginning October 1, 1995. Net pension cost for the Company's international
defined benefit pension plans are generally funded as accrued. The net
transition surplus or obligation for these international plans are amortized
over periods ranging from 15 to 20 years.
Net post-retirement benefit costs for the Company's domestic post-retirement
benefits plan are generally funded as accrued, to the extent that current cost
is deductible for U.S. Federal tax purposes. The net transition obligation for
the plan is amortized over 18 years.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), issued in 1995, defined a fair value
method of accounting for stock options and other equity instruments. Under the
fair value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which is
usually the vesting period. As provided for in SFAS 123, the Company elected to
apply Accounting Principles Board ("APB") Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation plans. The
required disclosures under SFAS 123 are included in Note M.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments,
short and long-term investments and trade and notes receivable. The Company
places its temporary cash investments and short and long-term investments in
investment grade instruments and limits the amount of investment with any one
financial institution. The credit risk associated with trade receivables is
minimal due to the large number of customers and their broad dispersion over
many different industries and geographic areas.
Hewlett-Packard Company ("HP") represented 5%, 16% and 17% of the Company's
total revenues in 1999, 1998 and 1997, respectively. The Company and HP agreed
to terminate their reseller contract effective as of June 30, 1999.
36
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
B. ACQUISITIONS
On October 12, 1999, EMC acquired Data General, a designer, manufacturer and
marketer of CLARiiON Fibre Channel storage systems and AViiON computer systems
servers for fast growing segments of the server market, in a transaction
accounted for as a pooling-of-interests. EMC issued an aggregate of
approximately 16 million shares of common stock, or 0.3125 shares of EMC common
stock for each share of outstanding Data General common stock, in the
acquisition.
Separate company results for 1999 before the combination was consummated
were as follows:
NINE MONTHS ENDED
SEPTEMBER 30, 1999
-----------------------
REVENUES NET INCOME
---------- ----------
EMC................................................... $3,753,434 $819,126
Data General.......................................... 1,086,423 (15,162)
---------- --------
Total................................................. $4,839,857 $803,964
========== ========
The Company acquired several companies during 1998, in transactions
accounted for using the purchase method, which are not significant to its
financial position or results of operations. Under the purchase method, the
results of operations of acquired companies are included prospectively from the
date of acquisition, and the acquisition cost is allocated to the acquirees'
assets and liabilities based upon their fair market values at the date of
acquisition.
On December 31, 1999 and 1998 the net book value of goodwill associated with
all acquisitions was $66,915 and $102,610, respectively. Goodwill is being
amortized on a straight-line basis over periods ranging from five to ten years
and is included in intangible and other assets, net. Accumulated amortization
was $41,769 and $18,925 on December 31, 1999 and 1998, respectively.
C. RESTRUCTURING, MERGER AND OTHER CHARGES
During fiscal year 1999, the Company recorded a total charge of $223.6
million related to restructuring, merger and other charges primarily related to
the acquisition of Data General. During 1998, the Company recorded charges
totaling $135.0 million related to a restructuring program and other charges.
During the fourth quarter of 1999, the Company approved and implemented a
restructuring program in connection with its acquisition of Data General. The
restructuring plan, which is expected to be completed by December 2000, provides
for the consolidation of the Company's operations and elimination of duplicative
facilities worldwide. Accordingly, during 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 expected cash impact of the charge is
approximately $140.7 million of which $52.4 million was paid in 1999.
The restructuring program includes an aggregate net reduction of the
workforce of 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
37
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
job classes. Of the approximately 1,100 employees identified, approximately 500
were terminated in 1999.
In 1999, the Company also recorded a charge for merger costs of $23.5
million for financial advisory services, legal, accounting and other direct
expenses related to the Data General acquisition which has been recorded in
operating expenses. In addition, the Company recorded a $14.1 million charge
related to asset impairments recorded in operating expenses and recorded a
charge of $15.4 million for capitalized software and inventory write-downs which
is included in cost of product sales.
In 1998, the Company recorded a charge of $135.0 million related to a
restructuring program and certain asset write-downs resulting from the program.
The charge included approximately $82.4 million related to employee termination
benefits, asset write-downs and other exit costs which the Company has recorded
in operating expenses and approximately $52.6 million for capitalized software
and inventory write-downs which are included in cost of product sales. The total
cash impact of the restructuring charge is approximately $58.5 million of which
$24.4 million was paid in 1998 and $21.6 million was paid in 1999. As of
December 31, 1999, the remaining accruals of $15.7 million from the 1998
restructuring program are primarily related to excess vacant rental properties
in Europe.
The 1998 restructuring program included an aggregate net reduction of the
workforce by approximately 480 employees, approximately 65% of whom were based
in North America and the remainder of whom were in Europe and Asia Pacific. The
employee separations affected the majority of business functions and job
classes. Of the 480 employees identified, approximately 400 were terminated
during 1998 and 80 were terminated in 1999.
The amounts accrued and charged against the established provisions described
above were as follows:
CURRENT CURRENT
BEGINNING YEAR YEAR ENDING
BALANCE PROVISION UTILIZATION BALANCE
--------- --------- ----------- --------
1999
Employee termination benefits........................ $21,359 $121,539 $ 67,417 $ 75,481
Lease abandonments................................... 13,321 11,193 5,859 18,655
Asset disposals...................................... 5,747 17,930 19,561 4,116
Other exit costs..................................... 3,109 19,948 11,862 11,195
------- -------- -------- --------
$43,536 $170,610 $104,699 $109,447
======= ======== ======== ========
1998
Employee termination benefits........................ $ -- $ 43,709 $ 22,350 $ 21,359
Lease abandonments................................... 6,500 11,341 4,520 13,321
Asset disposals...................................... -- 19,850 14,103 5,747
Other exit costs..................................... -- 7,500 4,391 3,109
------- -------- -------- --------
$ 6,500 $ 82,400 $ 45,364 $ 43,536
======= ======== ======== ========
D. 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
38
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
exchange derivative contracts to hedge foreign exchange exposures, the changes
in the value of the derivatives are highly effective in offsetting changes in
the fair value or cash flows of the hedged item. Any ineffective portion of the
derivatives is recognized in current earnings, which represented an immaterial
amount for fiscal year 1999. The ineffective portion of the derivatives is
primarily related to option premiums and to discounts or premiums on forward
contracts.
The Company hedges its net asset position with forward exchange contracts.
Since these derivatives hedge existing net assets that are denominated in
foreign currencies, the contracts do not qualify for hedge accounting under SFAS
133. The changes in fair value from these contracts as well as the underlying
exposures are generally offsetting, and are recorded in other income/(expense)
on the income statement. These derivative contracts generally mature within six
months. At December 31, 1999 and 1998, the Company had $592,581 and $477,251,
respectively, of forward exchange contracts outstanding.
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's cash flow hedges generally mature within nine months or less. At
December 31, 1999 and 1998, the Company had $40,545 and $0, respectively, of
forward contracts outstanding. In addition, at December 31, 1999 and 1998, the
Company had $55,000 and $10,000, respectively, of foreign currency options
outstanding.
The Company recorded in revenue and expense approximately $1,814 in net
losses from cash flow hedges related to items forecasted for fiscal year 1999.
The amount that will be reclassified from other accumulated comprehensive
income/(expense) to earnings over the next twelve months is a gain of
approximately $1,212, net of tax.
As permitted with the adoption of SFAS133, the Company also reclassified
$602,575 of held-to-maturity securities as "available for sale" in the first
quarter of 1999. This reclassification resulted in an immaterial adjustment
recorded to accumulated other comprehensive income/(expense) to reflect the
difference between the carrying cost and market value of these securities.
39
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
E. FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE
The carrying amounts reflected in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, current portion of long-term debt and
accounts payable approximate fair value due to the short maturities of these
instruments.
The carrying and estimated fair values of the Company's 3 1/4% Convertible
Subordinated Notes due 2002 (the "3 1/4% Notes") at December 31, 1999 were
$460,399 and $4,440,375, respectively. The carrying and estimated fair values of
the Company's 6% Convertible Subordinated Notes due 2004 (the "6% Notes") at
December 31, 1999 were $212,750 and $277,277, respectively. The fair values of
the 3 1/4% Notes and the 6% Notes are based on the closing price of the Common
Stock as of December 31, 1999.
INVESTMENTS
The Company's investment portfolio includes available for sale securities
only. Prior to 1999, the Company's investment portfolio included
held-to-maturity and available for sale securities. The following tables
summarize the composition of the Company's held-to-maturity short and long-term
investments at December 31, 1998.
DECEMBER 31, 1998
-----------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
U.S. corporate debt securities.......................... $509,478 $508,923
U.S. government and agencies............................ 218,363 218,214
Foreign debt securities................................. 21,388 21,221
-------- --------
Total due within one year............................. $749,229 $748,358
======== ========
There were no for held-to-maturity securities at December 31, 1999. The net
unrealized loss of $871 at December 31, 1998 consisted of gross unrealized gains
of $160 and gross unrealized losses of $1,031.
40
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following tables summarize the composition of the Company's available
for sale short and long-term investments at December 31, 1999 and 1998,
respectively.
DECEMBER 31, 1999
-----------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
Asset and mortgage-backed securities................. $ 374,511 $ 369,037
U.S. government and agencies......................... 792,354 777,800
U.S. corporate debt securities....................... 863,736 855,191
Foreign debt securities.............................. 62,445 62,301
---------- ----------
Total.............................................. $2,093,046 $2,064,329
========== ==========
DECEMBER 31, 1998
-----------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
Asset and mortgage-backed securities................. $ 411,098 $ 411,251
U.S. government and agencies......................... 218,855 218,996
U.S. corporate debt securities....................... 153,140 153,823
U.S. corporate equity securities..................... 1,254 10,530
Foreign debt securities.............................. 1,011 1,013
---------- ----------
Total.............................................. $ 785,358 $ 795,613
========== ==========
The contractual maturities of available for sale investments held at
December 31, 1999 and 1998 are as follows:
DECEMBER 31, 1999
-----------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
Due within one year.................................. $ 717,589 $ 714,730
Due after one year through five years................ 1,375,457 1,349,599
---------- ----------
Total.............................................. $2,093,046 $2,064,329
========== ==========
DECEMBER 31, 1998
-----------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
Due within one year.................................. $ 224,252 $ 233,253
Due after one year through five years................ 561,106 562,360
---------- ----------
Total.............................................. $ 785,358 $ 795,613
========== ==========
The net unrealized loss on available for sale securities at December 31,
1999 was $28,717, which consisted of gross unrealized gains of $54 and gross
unrealized losses of $28,771. The gross unrealized gain at December 31, 1998 was
$10,255 consisting of $12,164 of gross unrealized gains and $1,909 of gross
unrealized losses. The unrealized gains and losses are included in other
comprehensive income/ (loss).
41
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Investment income consists principally of interest income, including
interest on notes receivable from sales-type leases.
F. INVENTORIES
Inventories consist of:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Purchased parts..................................... $ 38,204 $ 33,692
Work-in-process..................................... 379,679 347,695
Finished goods...................................... 201,002 238,638
-------- --------
$618,885 $620,025
======== ========
G. NOTES RECEIVABLE
Notes receivable are primarily from installment sales and sales-type leases
of the Company's products. The payment schedule for such notes at December 31,
1999 is as follows:
2000........................................................ $ 65,843
2001........................................................ 42,933
2002........................................................ 39,917
2003........................................................ 11,454
2004........................................................ 2,703
Thereafter.................................................. 184
--------
Face value.................................................. 163,034
Less amounts representing interest.......................... 16,514
--------
Present value............................................... 146,520
Current portion............................................. 69,764
--------
Long-term portion........................................... $ 76,756
========
Implicit interest rates range from approximately 7% to 14%.
Actual cash collections may differ from amounts shown on the table due to
early customer buyouts, upgrades or refinancings.
The Company may receive proceeds for its sales-type leases through
third-party financing arrangements with various financial institutions on a
nonrecourse basis, which may either be collateralized by a lien on the
equipment, which is returned to the Company at the end of the lease, or title to
the equipment may pass to the funding source at the time of financing. Residual
values recorded by the Company for equipment under leases at December 31, 1999
and 1998 were $3,215 and $21,878, respectively, and are included in intangible
and other assets.
42
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
H. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Furniture and fixtures.............................. $ 101,954 $ 72,044
Equipment........................................... 1,237,247 1,162,695
Buildings and improvements.......................... 439,924 347,686
Land................................................ 32,451 22,268
Construction in progress............................ 106,304 51,205
---------- ----------
1,917,880 1,655,898
Accumulated depreciation............................ (894,701) (832,738)
---------- ----------
$1,023,179 $ 823,160
========== ==========
Depreciation expense was $301,480, $226,151 and $168,548 in 1999, 1998 and
1997, respectively.
I. ACCRUED EXPENSES
Accrued expenses consist of:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Salaries and benefits............................... $204,222 $167,215
Warranty............................................ 60,165 47,119
Restructure......................................... 109,447 43,536
Other............................................... 237,218 199,252
-------- --------
$611,052 $457,122
======== ========
J. INCOME TAXES
The Company's provision for income taxes consists of:
1999 1998 1997
--------- -------- --------
Federal and state
Current.................................... $ 424,274 $247,280 $163,142
Deferred................................... (115,056) (1,811) 7,790
--------- -------- --------
309,218 245,469 170,932
--------- -------- --------
Foreign
Current.................................... 45,294 13,590 10,129
Deferred................................... (7,917) 1,196 748
--------- -------- --------
37,377 14,786 10,877
--------- -------- --------
Total provision for income taxes............. $ 346,595 $260,255 $181,809
========= ======== ========
43
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net undistributed earnings of foreign subsidiaries at December 31, 1999 and
1998 approximated $1,384,035 and $984,946, respectively. Based on the Company's
policy of indefinite reinvestment in non-U.S. operations, it is not currently
practicable to determine the tax liability associated with the repatriation of
these earnings. The Company's manufacturing facility in Ireland incurs a 10% tax
rate on income from manufacturing operations until the year 2010. Income before
income taxes from foreign operations for 1999, 1998 and 1997 approximated
$449,775, $374,297 and $265,628, respectively.
A reconciliation of the Company's income tax provision to the statutory
federal tax rate is as follows:
1999 1998 1997
-------- -------- --------
Statutory federal tax rate................................. 35.0% 35.0% 35.0%
State taxes, net of federal tax benefits................... 2.4 2.2 1.9
International tax benefits................................. (9.6) (13.3) (10.6)
U.S. tax credits........................................... (1.1) (0.4) (0.6)
Rate detriment/(benefit) from Data General net operating
losses................................................... 0.8 5.5 (2.3)
Merger related costs and change in valuation
allowance................................................ (1.2) -- --
Other...................................................... (0.8) (0.5) 0.2
------ ------ ------
25.5% 28.5% 23.6%
====== ====== ======
The components of the current and noncurrent deferred tax assets and
liabilities are as follows:
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Current deferred tax assets:
Accounts receivable........................................ $ 24,120 $ 14,072
Inventory.................................................. 49,650 33,277
Other liabilities.......................................... 27,412 27,141
Other assets............................................... 9,085 1,860
Fringe..................................................... 20,616 28,445
Restructuring.............................................. 16,588 8,894
Valuation reserve.......................................... -- (64,007)
--------- ---------
Total current deferred tax assets........................ $ 147,471 $ 49,682
========= =========
Noncurrent deferred tax assets/(liabilities):
Fixed assets............................................... $ -- $ 6,590
Intangible assets.......................................... 15,049 11,963
Net operating loss carryforwards........................... 128,416 162,371
Credit carryforwards....................................... 19,770 20,287
Other...................................................... 31,390 8,015
Deferred compensation...................................... 14,382 12,400
Restructuring.............................................. 19,919 11,817
Valuation reserve.......................................... (120,339) (206,882)
--------- ---------
Deferred tax assets........................................ 108,587 26,561
--------- ---------
Fixed assets............................................... (27,246) --
Deferral of lease revenue.................................. (39,256) (33,537)
Software development costs................................. (54,774) (38,753)
Other...................................................... (4,077) (3,000)
--------- ---------
Deferred tax liabilities................................... (125,353) (75,290)
--------- ---------
Total noncurrent deferred tax liabilities, net........... $ (16,766) $ (48,729)
========= =========
44
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company had federal and foreign net operating loss carryforwards of
$388 million and tax credit carry forwards of $20 million. The utilization of
these tax attributes is limited under Section 382 of the Internal Revenue Code
of 1986, as amended (the "Code"), for U.S. tax purposes and similar provisions
under local country tax laws. Certain net operating losses will begin to expire
in the year 2000, while others have an unlimited carryforward period. As of
December 31, 1999, the valuation allowance primarily relates to foreign
operating losses which are subject to limitation. In conjunction with the
acquisition of Data General, the Company reviewed the net realizability of its
deferred tax assets and recorded a benefit of $65 million in 1999. The
realization of the remaining net deferred tax assets is considered more likely
than not.
K. RETIREMENT PLANS AND RETIREE MEDICAL BENEFITS
401(K) PLAN
The Company has established a deferred compensation program for certain
employees which is qualified under Section 401(k) of the Code.
At the end of each calendar quarter, the Company makes a contribution that
matches 100% of the employee's contribution up to 3% of the employee's quarterly
compensation. Additionally, provided that certain quarterly profit goals are
attained, the Company in succeeding quarters, provides an additional matching
contribution of 1% of the employee's quarterly compensation up to a maximum
quarterly matching contribution not to exceed 5% of compensation or $750 per
quarter. The Company's contribution amounted to approximately $12,729 in 1999,
$6,880 in 1998 and $4,990 in 1997, pursuant to this formula.
DEFINED BENEFIT PENSION PLANS
The Company has a noncontributory defined benefit pension plan which was
assumed as part of the Data General acquisition, which covers substantially all
former Data General employees located in the U.S. The Company also has a
supplemental retirement benefit plan, which covers certain former Data General
employees located in the U.S. In addition, certain of the former Data General
foreign subsidiaries also have retirement plans covering substantially all of
their employees.
Benefits under these plans are generally based on either career average or
final average salaries and creditable years of service as defined in the plans.
The annual cost for these plans is determined using the projected unit credit
actuarial cost method which includes significant actuarial assumptions and
estimates which are subject to change in the near term. Prior service cost is
amortized over the average remaining service period of employees expected to
receive benefits under the plan. Funds contributed to the plans are invested
primarily in common stock, mutual funds, bond funds and cash equivalent
securities.
The Data General U.S. pension plan, U.S. supplemental retirement benefit
plan and foreign retirement plans (the "Pension Plans") are summarized in the
following tables.
45
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The components of the change in benefit obligation of the Pension Plans are
as follows:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Benefit obligation at beginning of year............. $273,826 $213,229
Service cost........................................ 10,635 9,879
Interest cost....................................... 17,890 17,135
Participant contributions........................... 802 848
Plan amendments..................................... 390 114
Foreign exchange (gain)/loss........................ (2,144) 1,964
Curtailment gain.................................... (13,568) (1,490)
Special termination benefits........................ -- 1,044
Benefits paid....................................... (5,566) (4,397)
Settlement payments................................. (100) (214)
Actuarial (gain)/loss............................... (28,715) 35,714
-------- --------
Benefit obligation at end of year................... $253,450 $273,826
======== ========
The reconciliation of the beginning and ending balances of the fair value of
the assets of the Pension Plans is as follows:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Fair value of plan assets at beginning of year...... $238,198 $198,264
Actual return on plan assets........................ 30,269 17,238
Employer contributions.............................. 9,505 24,470
Participant contributions........................... 802 848
Foreign exchange gain/(loss)........................ (1,297) 1,989
Benefits paid....................................... (5,566) (4,397)
Settlement payments................................. (100) (214)
-------- --------
Fair value of plan assets at end of year............ $271,811 $238,198
======== ========
The funded status of the Pension Plans is as follows:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Funded status....................................... $18,361 $(35,628)
Unrecognized actuarial (gain)/loss.................. (15,854) 23,081
Unrecognized transition asset....................... (3,780) (5,598)
Unrecognized prior service cost/(credit)............ (648) 22,112
------- --------
Net amount recognized at year end................... $(1,921) $ 3,967
======= ========
46
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Amounts recognized in the balance sheet consist of the following:
1999 1998
---------- ----------
Prepaid benefit cost................................ $ 4,874 $ 1,875
Accrued benefit liability........................... (6,795) (24,544)
Intangible asset.................................... -- 20,384
Accumulated other comprehensive income.............. -- 6,252
------- --------
Net amount recognized at year end................... $(1,921) $ 3,967
======= ========
The components of net periodic benefit cost of the Pension Plans are as
follows:
1999 1998 1997
---------- ---------- ----------
Service cost............................ $ 10,635 $ 9,879 $ 7,989
Interest cost........................... 17,890 17,135 14,533
Expected return on plan assets.......... (21,427) (19,963) (15,830)
Amortization of transition asset........ (772) (849) (853)
Amortization of prior service cost...... 1,286 1,806 1,374
Recognized actuarial (gain)/loss........ 229 27 (32)
Curtailment, net of settlements......... 7,947 183 (63)
Special termination benefit............. -- 1,044 --
-------- -------- --------
Net periodic benefit cost............... $ 15,788 $ 9,262 $ 7,118
======== ======== ========
The weighted-average assumptions used in the Pension Plans are as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
Discount rate........................... 8% 7% 8%
Expected long-term rate of return on
plan assets........................... 9% 9% 10%
Rate of compensation increase........... 4% 4% 4%
As of December 31, 1999, the U.S. Data General pension plan was frozen. In
1998, the terms of some severance benefits from the reduction in workforce
resulted in special termination benefits paid from the pension plan of $1,044
and resulted in a small curtailment loss.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the Pension Plans with accumulated benefit obligations
in excess of plan assets was $8,130, $6,496 and $3,137, respectively, as of
December 31, 1999, and $264,040, $244,670 and $229,152, respectively as of
December 31, 1998.
POST RETIREMENT MEDICAL AND LIFE INSURANCE PLAN
The Company's post-retirement benefit plan, which was assumed in connection
with the acquisition of Data General, provides certain medical and life
insurance benefits for retired former Data General employees. With the exception
of certain participants who retired prior to 1986, the medical benefit plan
requires monthly contributions by retired participants in an amount equal to
insured equivalent costs less a fixed Company contribution which is dependent on
the participant's length of service and Medicare eligibility. Benefits are
continued to dependents of eligible retiree participants for 39 weeks
47
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
after the death of the retiree. The life insurance benefit plan is
noncontributory. Funds contributed to the plan are invested primarily in common
stocks, mutual funds, and cash equivalent securities.
The components of the change in benefit obligation are as follows:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Benefit obligation at beginning of year............. $10,421 $ 9,669
Service cost........................................ 319 327
Interest cost....................................... 752 727
Participant contributions........................... -- 162
Plan amendments..................................... (3,939) --
Curtailment gain.................................... -- (237)
Special termination benefits........................ -- 132
Benefits paid....................................... (1,047) (952)
Settlement payments................................. -- --
Actuarial (gain)/loss............................... (99) 593
------- -------
Benefit obligation at end of year................... $ 6,407 $10,421
======= =======
The reconciliation of the beginning and ending balances of the fair value of
plan assets is as follows:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Fair value of plan assets at beginning of year...... $ 335 $ 174
Actual return on plan assets........................ 36 (1)
Employer contributions.............................. 1,047 952
Participant contributions........................... -- 162
Benefits paid....................................... (1,047) (952)
------- -------
Fair value of plan assets at end of year............ $ 371 $ 335
======= =======
The funded status of the plan is as follows:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Funded status....................................... $ (6,036) $(10,086)
Unrecognized actuarial gain......................... (761) (685)
Unrecognized transition obligation.................. 1,768 1,933
Unrecognized prior service cost/(credit)............ (3,420) 587
-------- --------
Accrued benefit liability........................... $ (8,449) $ (8,251)
======== ========
48
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The components of net periodic benefit cost are as follows:
1999 1998 1997
---------- ---------- ----------
Service cost............................ $ 319 $ 327 $ 304
Interest cost........................... 752 727 696
Expected return on plan assets.......... (54) (19) (19)
Amortization of transition asset........ 67 69 72
Amortization of prior service cost...... 164 170 175
Recognized actuarial gain............... (4) (18) (11)
Curtailment, net........................ -- (46) --
Special termination benefit............. -- 132 --
------- ------- -------
Net periodic benefit cost............... $ 1,244 $ 1,342 $ 1,217
======= ======= =======
The weighted-average assumptions used in the plan are as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
Discount rate........................... 8% 7% 8%
Expected long-term rate of return on
plan assets........................... 10% 10% 10%
Rate of compensation increase........... 4% 5% 4%
The effect of a one-percentage-point increase and the effect of a
one-percentage-point decrease in the assumed health care cost trend rates are as
follows:
1% INCREASE 1% DECREASE
----------- -----------
Effect on total service and interest cost components
for
1999................................................ $ 4 $ (4)
Effect on year-end post retirement obligation......... 45 (45)
L. COMMITMENTS AND LONG-TERM OBLIGATIONS
OPERATING LEASE COMMITMENTS
The Company leases office and warehouse facilities and other equipment under
various operating leases. Facilities rent expense amounted to $61,326, $52,664,
and $41,850 in 1999, 1998 and 1997, respectively. The Company's commitments
under its operating leases are as follows:
OPERATING
FISCAL YEAR LEASES
- ----------- ---------
2000........................................................ $124,998
2001........................................................ 79,901
2002........................................................ 50,383
2003........................................................ 36,549
2004........................................................ 25,420
Thereafter.................................................. 75,473
--------
Total minimum lease payments................................ $392,724
========
49
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LINES OF CREDIT
EMC has a line of credit providing a maximum of $50,000. There were no
borrowings outstanding at either December 31, 1999 or 1998. The Company must
maintain certain minimum financial ratios, including a minimum level of working
capital and tangible net worth, upon utilization of the line of credit.
3 1/4% NOTES
In March 1997, the Company sold $517,500 of 3 1/4% Notes. The 3 1/4% Notes
are generally convertible into shares of Common Stock, $.01 par value per share,
of the Company (the "Common Stock") at a conversion price of $11.33 per share,
subject to adjustment in certain events. Interest is payable semiannually and
the 3 1/4% Notes are redeemable at the option of the Company at set redemption
prices (which range from 100.65% to 101.30% of principal), plus accrued
interest, commencing March 15, 2000. On February 15, 2000, the Company announced
that it would redeem all of the outstanding 3 1/4% Notes on March 15, 2000;
however, the Company believes that substantially all of the outstanding 3 1/4%
Notes were converted into Common Stock on or prior to such date.
4 1/4% NOTES
In December 1993 and January 1994, the Company sold $230 million of its
4 1/4% Convertible Subordinated Notes due 2001 (the "4 1/4% Notes"). The 4 1/4%
Notes were generally convertible into shares of Common Stock at any time prior
to the redemption date at a conversion price of $4.96 per share. On January 2,
1997, the Company paid approximately sixty-five thousand dollars to redeem the
outstanding 4 1/4% Notes and converted the remainder into Common Stock.
6% NOTES
In May 1997, Data General sold $212,750 of the 6% Notes. The 6% Notes are
generally convertible into shares of Common Stock at a conversion price of
$83.82 per share, subject to adjustment in certain events. Interest is payable
semi-annually and the 6% Notes are redeemable at the option of the Company at
set redemption prices (which range from 100.857% to 103.429% of principal), plus
accrued interest, commencing May 14, 2000.
IDA GRANT
The Industrial Development Authority ("IDA") of Ireland has granted the
Company a total of $5,189 towards the purchase price and improvements to the
Company's facility in Ireland. The grants are included in long-term obligations
and are amortized over the related estimated useful lives of the assets
purchased of twenty-five years for building improvements and seven years for
equipment. Remaining unpaid grants at December 31, 1999 are $3,582, of which
$324 is current and $3,258 is long-term.
PURCHASE OF PATENT PORTFOLIO
In February 1996, the Company acquired a patent portfolio valued at $40
million. Payments of approximately $26 million have been made to date with the
remainder due in annual installments over two years. The asset is being
amortized over the remaining estimated useful life of one year and is
50
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
included in intangible and other assets, net. Accumulated amortization at
December 31, 1999 and 1998 was approximately $37,833 and $28,333, respectively.
Payments remaining on the above commitments and other noncurrent liabilities
(excluding the IDA grant, the 3 1/4% Notes and the 6% Notes) are as follows:
FISCAL YEAR
-----------
2000........................................................ $ 8,989
2001........................................................ 9,771
2002........................................................ 540
2003........................................................ --
2004........................................................ --
-------
Total minimum payments...................................... 19,300
Less amounts representing interest.......................... 306
-------
Present value of net payments............................... 18,994
Current portion............................................. 8,792
-------
Long-term portion........................................... $10,202
=======
MINORITY INTEREST
On October 1, 1997, the Company reorganized McDATA Corporation ("McDATA"),
acquired by the Company in 1995, into a new McDATA Corporation ("New McDATA")
and McDATA Holdings Corporation ("McDATA Holdings"). New McDATA designs,
develops and markets fibre channel solutions for switched enterprise
environments. McDATA Holdings, a wholly-owned subsidiary of EMC, is currently
the majority shareholder in New McDATA. New McDATA is also currently performing
services under the ESCON OEM Agreement with IBM on behalf of McDATA Holdings.
The minority interest amounts are included in other liabilities and other
income/(expense), net.
M. STOCKHOLDERS' EQUITY
STOCK SPLIT
On October 21, 1997, the Company announced a 2-for-1 stock split in the form
of a 100% stock dividend with a record date of October 31, 1997 and a
distribution date of November 17, 1997. On February 25, 1999, the Company
announced a 2-for-1 stock split in the form of a 100% stock dividend with a
record date of May 14, 1999 and a distribution date of May 28, 1999. Share and
per share amounts have been restated to reflect the stock splits for all periods
presented.
51
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NET INCOME PER SHARE
Calculation of per share earnings is as follows:
1999 1998 1997
---------- ---------- ----------
BASIC:
Net income............................................... $1,010,570 $ 653,978 $ 587,511
Weighted average common shares outstanding............... 1,030,551 1,015,371 1,001,016
Net income per share, basic.............................. $ 0.98 $ 0.64 $ 0.59
========== ========== ==========
DILUTED:
Net income............................................... $1,010,570 $ 653,978 $ 587,511
Add back of interest expense on convertible notes........ 15,974 16,819 13,502
Less tax effect of interest expense on convertible 3 1/4%
notes.................................................. (6,390) (6,728) (5,401)
---------- ---------- ----------
Net income for calculating diluted earnings per share.... $1,020,154 $ 664,069 $ 595,612
Weighted average common shares outstanding............... 1,030,551 1,015,371 1,001,016
Weighted common stock equivalents........................ 78,981 78,844 64,468
---------- ---------- ----------
Total weighted average shares............................ 1,109,532 1,094,215 1,065,484
Net income per share, diluted............................ $ 0.92 $ 0.61 $ 0.56
========== ========== ==========
The calculation of earnings per share excludes the 6% Notes as these are
considered antidilutive.
PREFERRED STOCK
The Company's Series Preferred Stock may be issued from time to time in one
or more series, with such terms as the Board of Directors may determine, without
further action by the stockholders of the Company.
STOCK OPTION PLANS
The Board of Directors and stockholders adopted the EMC Corporation 1993 and
1985 Stock Option Plans (the "1993 Plan" and the "1985 Plan," respectively).
These plans provide qualified incentive stock options and nonqualified stock
options to key employees of the Company. A total of 80 million and 144 million
shares of Common Stock have been reserved for issuance under the 1993 Plan and
the 1985 Plan, respectively.
Under the terms of each of the 1993 Plan and the 1985 Plan, the exercise
price of incentive stock options issued must be equal to at least the fair
market value of the Common Stock on the date of grant. In the event that
nonqualified stock options are granted under the 1993 Plan, the exercise price
may be less than the fair market value at the time of grant but not less than
par value which is $.01 per share. In the event that nonqualified stock options
are granted under the 1985 Plan, the exercise price may be less than the fair
market value at the time of grant, but in the case of employees not subject to
Section 16 of the Securities Exchange Act of 1934 ("Section 16"), not less than
par value which is $.01 per share, and in the case of employees subject to
Section 16, not less than 50% of the fair market value on the date of grant.
Since May 1995, no new incentive stock options have been available for grant
under the 1985 Plan.
52
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In 1999, options to purchase an aggregate of 261 thousand shares of Common
Stock at $.01 per share were granted to certain employees. Also in 1999, options
to purchase an aggregate of 145 thousand shares of Common Stock at $64.25 per
share were granted to certain employees, representing 73% of the per share fair
market value on the date of grant. In 1998, options to purchase an aggregate of
424 thousand shares of Common Stock at $.01 per share were granted to an
executive officer and certain other employees. Also in 1998, an executive
officer was granted options to purchase 250 thousand shares at $12.97 per share,
representing 50% of the per share fair market value on the date of grant. In
1997, options to purchase 1 million shares at $6.12 per share and 800 thousand
shares at $13.78 per share were granted to executive officers, representing 50%
and 90%, respectively, of the per share fair market value on the date of grant.
Discounts from fair market value have been recorded as deferred compensation and
are being amortized over the vesting periods of the options, which range from
eighteen months to five years.
The EMC Corporation 1992 Stock Option Plan for Directors (the "Directors
Plan") was adopted by the Board of Directors and stockholders. A total of 7.2
million shares of Common Stock have been reserved for issuance under the
Directors Plan. The exercise price for each option granted under the Directors
Plan will be at a price per share determined at the time the option is granted,
but not less than 50% of the per share fair market value of Common Stock on the
date of grant.
In 1998, options to purchase 240 thousand shares of Common Stock at $10.56
per share were granted to three directors, representing 50% of the per share
fair market value on the date of grant. In 1997, options to purchase 320
thousand shares of Common Stock at $6.12 per share were granted to two
directors, representing 50% of the per share fair market value on the date of
grant. Discounts from fair market value have been recorded as deferred
compensation and are being amortized over the three-year vesting period of the
options.
Generally, when shares acquired pursuant to the exercise of incentive stock
options are sold within one year of exercise or within two years from the date
of grant, the Company derives a tax deduction measured by the amount that the
fair market value exceeds the option price at the date the options are
exercised. When nonqualified stock options are exercised, the Company derives a
tax deduction measured by the amount that the fair market value exceeds the
option price on the date the options are exercised.
As of December 31, 1999, there were options to acquire an aggregate of
approximately 19.6 million shares of Common Stock exercisable under the 1993
Plan, the 1985 Plan and the Directors Plan, as well as under certain plans
assumed in connection with the acquisition of Data General. At December 31,
1999, there were an aggregate of approximately 24.1 million shares available for
issuance pursuant to future option grants under the 1993 Plan, the 1985 Plan and
the Directors Plan. Options generally become exercisable in equal annual
installments over a period of three to five years after the date of grant and
expire ten years after the date of grant.
The Company has, in connection with the acquisition of various companies,
assumed the stock option plans of these companies. Details of the stock option
plans assumed in connection with the acquisition of Data General are set out
below. The Company does not intend to make future grants under any of such
plans.
Data General had authorized the grant of either incentive stock options or
non-qualified stock options to employees to purchase up to an aggregate of
7.5 million shares of Common Stock under certain stock option plans. For
incentive options, the purchase price is equal to the fair market value
53
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
on the date of grant. For non-qualified options, the purchase price is
determined within limits as set forth in the plans. Options granted under the
plans generally are immediately exercisable and include restrictions against
disposition of the shares and a requirement, upon termination of employment, to
offer unvested shares for resale to the Company at their original purchase
price. Options may expire up to ten years after the date of grant.
All former Data General employees were eligible to participate in the Data
General Corporation 1998 Employee Stock Option Plan (the "1998 Plan"). The 1998
Plan authorizes the grant of stock options to employees to purchase up to 781
thousand shares of Common Stock. The purchase price per share shall not be lower
than 25% of the fair market value of the Common Stock on the date of grant or
50% of the Company's book value per share of Common Stock as of the fiscal year
end preceding the date of grant. In 1999, 71 thousand shares were granted at an
average price of $17.25, representing 40% of the per share fair market value on
the date of grant. In 1998, 464 thousand shares were granted at an average price
of $52.22, representing 50% of the per share fair market value on the date of
grant. In 1997, 342 thousand shares were granted at an average price of $69.18,
representing 50% of the per share fair market value on the date of grant.
The Data General Corporation 1994 Non-Employee Director Stock Option Plan
(the "1994 Plan") and the Data General Corporation 1998 Non-Employee Director
Stock Option Plan (the "1998 Director's Plan") authorize the grant of options to
acquire shares of Common Stock to each non-employee director on the date of the
director's annual election(s) to the Board of Directors. Options to acquire
1,250, 1,250 and 2,188 shares of Common Stock were granted to each Data General
director in 1997, 1998 and 1999, respectively. These options were granted at
fair market value on the date of grant.
SUPPLEMENTAL DISCLOSURES FOR STOCK-BASED COMPENSATION
Activity under the Plans and option activity relating to business
acquisitions for the three years ended December 31, 1999 is as follows:
WTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
--------- ---------
Outstanding, December 31, 1996........................... 51,353 $ 3.92
Granted................................................ 17,358 12.74
Canceled............................................... (1,923) 5.30
Exercised.............................................. (11,225) 3.24
------- ------
Outstanding, December 31, 1997........................... 55,563 6.76
Options relating to business acquisitions.............. 429 6.67
Granted................................................ 10,418 24.13
Canceled............................................... (893) 10.84
Exercised.............................................. (10,756) 3.83
------- ------
Outstanding, December 31, 1998........................... 54,761 10.56
Granted................................................ 9,584 59.78
Canceled............................................... (1,214) 19.18
Exercised.............................................. (10,631) 7.12
------- ------
Outstanding, December 31, 1999........................... 52,500 $20.04
======= ======
54
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Summarized information about stock options outstanding at December 31, 1999
is as follows:
EXERCISABLE
WEIGHTED --------------------
AVG. WEIGHTED WEIGHTED
NUMBER OF REMAINING AVG. AVG.
RANGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
- --------------- ----------- ----------- --------- --------- --------
$0.01 - 2.86 5,739 4.78 $1.32 4,870 1.36
2.87 - 5.22 10,766 5.77 4.44 6,777 4.32
5.23 - 8.88 5,144 6.00 5.89 2,750 5.75
8.89 - 13.78 10,341 7.33 11.74 2,800 11.78
13.79 - 21.13 3,667 7.61 16.16 1,009 15.37
21.14 - 30.75 7,159 8.34 26.53 1,080 26.45
30.76 - 49.31 652 8.70 45.34 77 34.33
49.32 - 106.61 9,032 9.28 62.52 277 59.21
Options exercisable at December 31, 1999, 1998 and 1997 were 19,640, 17,787
and 15,330, respectively.
The fair value of each option granted during 1999, 1998 and 1997 is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions:
1999 1998 1997
-------- -------- --------
Dividend yield........................................ None None None
Expected volatility................................... 52.0% 52.0% 45.0%
Risk-free interest rate............................... 5.5% 5.4% 6.1%
Expected life......................................... 5.0 5.0 5.0
Weighted average fair value of options granted at fair market value
during:
1999........................................................ $31.72
1998........................................................ $13.04
1997........................................................ $ 5.76
Weighted average fair value of options granted below fair market value
during:
1999........................................................ $45.94
1998........................................................ $21.30
1997........................................................ $13.94
55
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Had compensation cost for the Company's 1999, 1998 and 1997 stock option
grants and employee stock purchase plan issuances been determined consistent
with SFAS 123, the Company's net income and net income per share would
approximate the pro forma amounts below:
NET INCOME PER NET INCOME PER
NET INCOME SHARE, DILUTED SHARE, BASIC
---------- -------------- --------------
As reported:
1999................................. $1,011 $0.92 $0.98
1998................................. $ 654 $0.61 $0.64
1997................................. $ 588 $0.56 $0.59
Pro forma:
1999................................. $ 945 $0.86 $0.92
1998................................. $ 615 $0.57 $0.61
1997................................. $ 567 $0.54 $0.57
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards made prior to
1995. Additional awards in future years are anticipated.
EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors and stockholders adopted the 1989 Employee Stock
Purchase Plan (the "1989 Plan"). Under the 1989 Plan, eligible employees of the
Company may purchase shares of Common Stock, through payroll deductions, at the
lower of 85% of fair market value of the stock at the time of grant or 85% of
fair market value at the time of exercise. A total of 24 million shares have
been reserved for issuance under the 1989 Plan. Options to purchase shares are
granted twice yearly, on January 1 and July 1, and are exercisable on the
succeeding June 30 or December 31. Grants for the last three years are as
follows:
1999 1998 1997
-------- -------- --------
Shares.............................................. 742 1,192 1,388
Weighted average exercise price..................... $39.53 $13.10 $ 8.20
Weighted average fair value......................... $19.20 $ 7.32 $ 4.77
N. 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.
O. RISKS AND UNCERTAINTIES
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from expectations include, but are
not limited to, dependence on suppliers, rapid technology and industry changes,
competition, competitive pricing pressures, changes in foreign laws and
regulations, risks associated with indirect channels of distribution,
historically uneven quarterly sales patterns, ability to sustain and manage
growth, dependence upon key personnel, manufacturing risks, risks associated
56
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
with acquisitions, investments and alliances, enforcement of the Company's
intellectual property rights, Year 2000 issues, litigation and changes in
regulations.
P. SEGMENT INFORMATION
The Company operates 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:
1999 1998 1997
---------- ---------- ----------
Enterprise storage hardware.............. $4,006,488 $3,167,125 $2,496,697
Enterprise storage software.............. 821,727 445,350 176,859
Enterprise switching products (McDATA)... 142,824 178,816 189,090
CLARiiON storage products................ 415,644 413,909 499,368
---------- ---------- ----------
Total storage products revenue........... $5,386,683 $4,205,200 $3,362,014
========== ========== ==========
Storage related services................. $ 361,806 $ 190,286 $ 78,085
Server related services.................. 370,795 385,034 387,182
---------- ---------- ----------
Total service revenue.................... $ 732,601 $ 575,320 $ 465,267
========== ========== ==========
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 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:
STORAGE SERVER
PRODUCTS PRODUCTS SERVICES CONSOLIDATED
---------- -------- -------- ------------
1999
Revenues......................... $5,386,683 $596,326 $732,601 $6,715,610
Gross profit..................... 3,034,062 197,587 225,716 3,457,365
1998
Revenues......................... $4,205,200 $655,638 $575,320 $5,436,158
Gross profit..................... 2,070,923 189,510 179,325 2,439,758
1997
Revenues......................... $3,362,014 $660,570 $465,267 $4,487,851
Gross profit..................... 1,505,992 199,403 169,998 1,875,393
57
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company's revenues are attributed to the geographic areas according to
the location of the customers. Intercompany transfers between geographic areas
are accounted for at prices which are designed to be representative of
unaffiliated party transactions.
EUROPE,
NORTH LATIN MIDDLE EAST, ASIA INTERCOMPANY CONSOLIDATED
AMERICA AMERICA AFRICA PACIFIC ELIMINATIONS TOTAL
---------- -------- ------------ -------- ------------ ------------
1999
Revenues......................... $4,257,116 $175,207 $1,844,320 $438,967 $ -- $6,715,610
Identifiable assets at year
end............................ 4,630,506 73,195 2,245,460 306,266 (82,139) 7,173,288
1998
Revenues......................... $3,367,835 $ 89,223 $1,597,648 $381,452 $ -- $5,436,158
Identifiable assets at year
end............................ 3,954,985 38,677 1,626,823 253,144 (246,609) 5,627,020
1997
Revenues......................... $2,708,212 $ 60,171 $1,323,173 $396,295 $ -- $4,487,851
Identifiable assets at year
end............................ 3,590,457 36,021 1,153,521 236,357 (388,420) 4,627,936
Q. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Q1 1999 Q2 1999 Q3 1999 Q4 1999
---------- ---------- ---------- ----------
1999
Net sales and service......................... $1,483,305 $1,647,642 $1,708,910 $1,875,753
Gross profit.................................. 717,414 836,211 886,162 1,017,578
Net income.................................... 222,325 285,871 295,768 206,606
Net income per share, (diluted)............... $ 0.20 $ 0.26 $ 0.27 $ 0.19
Q1 1998 Q2 1998 Q3 1998 Q4 1998
---------- ---------- ---------- ----------
1998
Net sales and service......................... $1,190,161 $1,303,272 $1,386,295 $1,556,430
Gross profit.................................. 505,213 531,641 643,927 758,977
Net income.................................... 141,612 34,406 204,990 272,970
Net income per share, (diluted)............... $ 0.13 $ 0.03 $ 0.19 $ 0.25
R. SUBSEQUENT EVENTS (UNAUDITED)
In January 2000, the Company acquired all of the outstanding common stock of
Softworks, Inc. in exchange for cash. The transaction is valued at approximately
$212 million and is being accounted for using the purchase method. Softworks'
products improve the management, performance and integrity of critical corporate
information across Windows NT, UNIX, OS/390, and MVS platforms.
58
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company will furnish to the Securities and Exchange Commission a
definitive Proxy Statement (the "Proxy Statement") not later than 120 days after
the close of the fiscal year ended December 31, 1999. The information required
by this item is incorporated herein by reference to the Proxy Statement. Also
see "Executive Officers of the Registrant" in Part I of this form.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)
1. Financial Statements
The financial statements listed in the Index to Consolidated Financial
Statements and Schedule on page 26 are filed as part of this report.
2. Schedule
The schedule listed in the Index to Consolidated Financial Statements and
Schedule on page 26 is filed as part of this report.
3. Exhibits
See Index to Exhibits on page 62 of this report.
The exhibits are filed with or incorporated by reference in this report.
(b) Reports on Form 8-K.
On October 20, 1999, EMC filed a Current Report on Form 8-K reporting under
Item 2 the acquisition of Data General Corporation.
On November 4, 1999, EMC filed a Current Report on Form 8-K/A incorporating
pro forma combined condensed statements of operations for the six month periods
ended June 30, 1999 and 1998 and for the years ended December 31, 1998, 1997 and
1996, as well as a pro forma combined condensed balance sheet as of June 30,
1999, in each case giving retroactive effect to EMC's acquisition of Data
General for all periods presented.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, EMC Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 16, 2000.
EMC CORPORATION
By: /s/ RICHARD J. EGAN
------------------------------------------
Richard J. Egan
CHAIRMAN OF THE BOARD OF DIRECTORS
60
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of EMC
Corporation and in the capacities indicated as of March 16, 2000.
SIGNATURE TITLE
--------- -----
/s/ RICHARD J. EGAN
- --------------------------------------------- Chairman of the Board of Directors
Richard J. Egan (Principal Executive Officer)
/s/ MICHAEL C. RUETTGERS
- --------------------------------------------- Chief Executive Officer and Director
Michael C. Ruettgers
/s/ COLIN G. PATTESON Senior Vice President, Chief Administrative
- --------------------------------------------- Officer and Treasurer
Colin G. Patteson (Principal Financial Officer)
/s/ WILLIAM J. TEUBER, JR.
- --------------------------------------------- Senior Vice President and Chief Financial Officer
William J. Teuber, Jr. (Principal Accounting Officer)
/s/ MICHAEL J. CRONIN
- --------------------------------------------- Director
Michael J. Cronin
/s/ JOHN R. EGAN
- --------------------------------------------- Director
John R. Egan
/s/ MAUREEN E. EGAN
- --------------------------------------------- Director
Maureen E. Egan
/s/ W. PAUL FITZGERALD
- --------------------------------------------- Director
W. Paul Fitzgerald
/s/ JOSEPH F. OLIVERI
- --------------------------------------------- Director
Joseph F. Oliveri
/s/ ALFRED M. ZEIEN
- --------------------------------------------- Director
Alfred M. Zeien
61
EXHIBIT INDEX
The exhibits listed below are filed with or incorporated by reference in
this Annual Report on Form 10-K.
3.1 Restated Articles of Organization of EMC Corporation.*
3.2 Amended and Restated By-laws of EMC Corporation.*
4.1 Form of Stock Certificate. (1)
4.2 Indenture, dated as of March 11, 1997 between EMC
Corporation and State Street Bank and Trust Company,
Trustee. (2)
4.3 Form of 3 1/4% Convertible Subordinated Note due 2002 of EMC
Corporation. (2)
4.4 Indenture dated as of May 21, 1997 between Data General
Corporation and The Bank of New York, as Trustee (the "6%
Note Indenture").(3)
4.5 First Supplemental Indenture dated as of October 12, 1999 to
the 6% Note Indenture by and between Data General
Corporation and The Bank of New York, as Trustee. (3)
4.6 Second Supplemental Indenture dated as of November 4, 1999
to the 6% Note Indenture by and between EMC Corporation
and The Bank of New York, as Trustee.*
4.7 Form of 6% Convertible Subordinated Note due 2004 of EMC
Corporation. (4)
10.1 EMC Corporation 1985 Stock Option Plan, as amended. *
10.2 EMC Corporation 1992 Stock Option Plan for Directors, as
amended. *
10.3 EMC Corporation 1993 Stock Option Plan, as amended. *
21.1 Subsidiaries of Registrant. *
23.1 Consent of Independent Accountants. *
27.1 Financial Data Schedule. *
- ------------------------
* Filed herewith
(1) Incorporated by reference to the Company's Annual Report on Form 10-K filed
March 31, 1988.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 333-24901).
(3) Incorporated by reference to the Company's Post-Effective Amendment No. 1 to
a Registration Statement on Form S-4 (No. 333-86659).
(4) Incorporated by reference to the Registration Statement on Form 8-A of Data
General Corporation filed March 16, 1998.
62
EMC CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ---------- ---------
Year ended December 31, 1999 allowance
for doubtful accounts.................. $26,755 $25,817 -- $(18,293) $34,279
Year ended December 31, 1998 allowance
for doubtful accounts.................. $23,342 $14,150 -- $(10,737) $26,755
Year ended December 31, 1997 allowance
for doubtful accounts.................. $23,053 $13,171 -- $(12,882) $23,342
S-1