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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, 2000 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 organization or (I.R.S. Employer Identification Number)
incorporation)
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, par value $.01 per share 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. / /
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $166,049,386,793 as of January 31, 2001.
The number of shares of the registrant's Common Stock, par value $.01 per
share, outstanding as of January 31, 2001 was 2,204,513,686.
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 9, 2001.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
EMC'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. EMC'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 EMC files from time to time with the Securities
and Exchange Commission.
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 enterprise information infrastructure, or what EMC calls an
E-Infostructure. EMC is the leading supplier of these solutions, which comprise
information storage systems, software and services. Its products are sold to
customers that use 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.
EMC's information storage products and services help organizations network,
unite and generate value from all of their electronic information, regardless of
where it resides, what type of software it is working with or how it is
connected to a network. EMC believes that its sole focus on information enables
its customers to realize higher returns on information and results in
competitive advantage for EMC customers.
EMC focuses on the growing trend toward networked information storage.
Networked information storage involves connecting storage systems to servers via
a networked environment instead of direct connections, with a goal of providing
unlimited access to information, regardless of its location. EMC expects that
with anticipated dramatic growth in the amount of information that will be
created over the next few years, organizations will demand a dependable and
adaptable information infrastructure with wide-scale network information access.
An EMC Enterprise Storage Network enables customers to weave together
heterogeneous storage, switches, hubs and servers into a single, easily-managed
centralized information infrastructure.
EMC's objective is to extend its position as the information storage leader
and to strengthen the EMC E-Infostructure as the standard for information
storage and access.
The customers for EMC'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.
EMC was incorporated in Massachusetts in 1979 and has its corporate
headquarters at 35 Parkwood Drive, Hopkinton, Massachusetts.
1
PRODUCTS AND OFFERINGS
EMC operates in the following segments: information storage products,
information storage services and other businesses. Information storage products
consists of information storage systems and information storage software.
INFORMATION STORAGE SYSTEMS
SYMMETRIX SYSTEMS
EMC believes that its Symmetrix family of enterprise storage systems offer
the highest levels of functionality, performance and availability in the
high-end of the information storage market. EMC's Symmetrix systems are based on
a modular architecture that 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 design
has enabled EMC to expand its Symmetrix systems in existing markets and to
rapidly enter new strategic markets.
Since the introduction of the first Symmetrix model in 1991, EMC has
continued to enhance and increase the capabilities of the Symmetrix family of
products, including increasing the host connectivity capabilities and adding
advanced software functionality. In 2000, EMC introduced a complete new line of
Symmetrix systems, the Symmetrix 8000 line, EMC's most advanced family of
storage systems to date. EMC believes that the Symmetrix 8000 line, which runs
EMC's most advanced information management software, is the world's highest
performance and most functionally rich information storage system.
EMC intends to continue to introduce new versions of the Symmetrix family of
systems with additional features and capabilities.
CLARIION SYSTEMS
The CLARiiON family of systems represents a range of flexible and scalable
mid-tier information storage systems. CLARiiON systems act as a platform for
mid-sized companies with rapidly growing demands on their information storage
infrastructure, and offer fast, scalable and dependable information storage
solutions for applications in the distributed environments of large enterprises.
In 2000, EMC introduced the CLARiiON FC4500 storage system, the first
CLARiiON to offer storage consolidation for multiple computers from different
vendors and participate in a storage area network, or "SAN," environment. In
2000, EMC also introduced the CLARiiON IP4700, a network-attached storage, or
"NAS," system for the mid-tier market, which offers high availability and a wide
range of network connections. EMC also announced the integration of CLARiiON's
management software, Navisphere, into EMC Control Center software, allowing
customers to build seamless information storage networks using CLARiiON,
Symmetrix and other systems throughout the enterprise.
EMC intends to continue to enhance and improve the CLARiiON family of
systems with additional features and capabilities.
CELERRA SYSTEMS
The Celerra File Server is a high-end NAS system providing high performance,
high availability and scalability for enterprise-class file serving. A file
server allows users to access and update files over a local area network and
store them in a central location. The Celerra system features EMC-developed
hardware and software within a common enclosure and with a common management
environment. Celerra systems can be integrated with or connected to Symmetrix
systems and customer networks through a variety of interfaces.
2
In 2000, EMC introduced the Celerra SE File Server, which combines a Celerra
File Server and Symmetrix storage in a single enclosure. In 2000, EMC also
introduced significant new Celerra software, called HighRoad. HighRoad enhances
file sharing capabilities and performance in high-bandwidth, collaborative and
publishing applications. Celerra with HighRoad software combines the best
attributes of NAS with the best attributes of a storage area network, or "SAN,"
in one unified storage network. In 2000, EMC also introduced enhancements to the
Celerra File Server.
EMC intends to continue to enhance and improve the Celerra family of systems
with additional features and capabilities.
CONNECTRIX SYSTEMS
The Connectrix fibre channel 32-port director was introduced in March 1999
as the industry's first fully integrated fibre channel network connectivity
solution. In 2000, EMC introduced a new 16-port Connectrix DS-16 departmental
switch and an 8-port Connectrix DS-8 departmental switch for the mid-tier market
to complement the high-end Connectrix fibre channel director. The Connectrix
family of fibre channel switches and directors significantly increase the
connectivity between servers and storage systems in a fibre channel SAN
configuration, compared to direct fibre channel server-to-storage connections.
The Company believes that its Connectrix systems, combined with its storage
systems with fibre channel connectivity, facilitate the implementation of
networked storage and enable customers to build an E-Infostructure in which a
single storage infrastructure will handle all information storage requirements
of even the largest, most complex organizations.
EMC intends to continue to introduce new versions of its Connectrix family
of switches and directors with additional features and capabilities.
Revenue from information storage systems (including Symmetrix, CLARiiON,
Celerra and Connectrix products) represented approximately 70%, 68% and 69% of
revenues in 2000, 1999 and 1998, respectively.
INFORMATION 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. EMC's information storage software is intended to
be used with its information storage systems, as well as with a variety of host
computers and applications developed by third parties. During 2000, EMC
introduced significant new software products and enhancements to existing
products.
EMC's information management software includes EMC Control Center (ECC),
Navisphere, PowerPath, Access Logix and ESN Manager. Examples of information
sharing software are HighRoad and InfoMover. EMC's information mobility and
protection software includes Symmetrix Remote Data Facility (SRDF), TimeFinder,
SnapView, Mirror View and EMC Data Manager (EDM).
The EMC E-Infostructure Developers Program makes many of EMC's 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 supports its software research and development efforts through a
state-of-the art software development lab in Massachusetts and at other
facilities, and, from time to time, through acquisitions of complementary
businesses or products. In 2000, EMC acquired software companies CrosStor
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Software, Inc., Softworks, Inc., Terascape Software Inc., Avalon Consulting
Group and Digital Bitcasting Corporation.
Revenues from information storage software represented approximately 16%,
12% and 8% of revenues in 2000, 1999 and 1998, respectively.
INFORMATION STORAGE SERVICES
EMC's Global Services organization offers information technology services
including consulting, installation, training, day-to-day support, parts delivery
and system upgrades. This single organization unites all of EMC's service
functions, including customer service, professional service and technical
training service. EMC's Global Services organization has a staff of over 5,000
professionals who provide EMC customers with a complete set of service solutions
before, during and following the purchase of an EMC system or software.
PROFESSIONAL SERVICES
EMC's Professional Services business designs and delivers world-class
professional services to its global customer base. Such professional services
assist customers to assess, design and implement information storage solutions
and an E-Infostructure customized to maximize their return on information
assets.
CUSTOMER SERVICE
EMC's Customer Service organization monitors the status of EMC's information
storage solutions at worldwide customer sites 24 hours a day, seven days a week,
365 days a year. These hardware and software solutions contain remote support
features that 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.
GLOBAL TECHNICAL TRAINING
EMC's Global Technical Training organization provides training for EMC's
Global Services staff and systems engineers on all EMC technology and products.
In addition, as part of EMC's new EMC Proven Professional Certification program,
the Global Technical Training organization trains customers, prospects and
partners on EMC's technology and products. The program is worldwide in scope and
employs e-learning and geographically dispersed classrooms and testing centers.
Revenue from information storage services represented approximately 7%, 5%
and 4% of revenues in 2000, 1999 and 1998, respectively.
OTHER BUSINESSES
EMC, through its Data General division, designs, manufactures, markets and
supports EMC's line of AViiON open systems servers. In 2000, EMC continued its
strategy of focusing its efforts on other, more profitable business lines.
Revenue from other businesses represented approximately 7%, 14% and 19% of
revenues in 2000, 1999 and 1998, respectively.
4
MARKETS AND CHANNELS
MARKETS
During 2000, EMC focused primarily on three major markets: Global 2000
companies, the mid-tier market and service providers. These markets are
characterized by their requirements for large amounts of information storage
capacity and the advanced functionality provided by EMC's products.
GLOBAL 2000 COMPANIES
The Global 2000 companies, defined as the world's 2000 largest corporations,
represent a significant percentage of EMC's customer base. The Global 2000's
computing requirements encompass multiple computer platforms, including
mainframes, and those running UNIX-based and Microsoft Windows-based operating
systems.
As the size and scope of those systems increases, the Company's Global 2000
customers are deploying EMC's information 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. EMC believes it is the leading
information storage supplier to the Global 2000.
MID-TIER MARKET
The mid-tier market is comprised of mid-sized companies and business units,
departments or locations within larger organizations. The mid-tier market's
computing requirements encompass multiple computer platforms, including those
running UNIX-based, Windows-based and other network operating systems.
As these systems proliferate, mid-sized companies are deploying EMC's
CLARiiON products to meet the performance, availability, capacity, and
functionality requirements of the information processed by those systems. By
building an E-Infostructure, these customers are able to quickly,
cost-effectively and reliably deploy and expand applications and systems. Larger
organizations are also building two and three-tiered E-Infostructures that
integrate CLARiiON and Symmetrix systems to meet their information storage
requirements throughout the enterprise. EMC believes it is a significant
information storage supplier to the mid-tier market.
SERVICE PROVIDERS
Service providers offer out-sourced information technology services to their
customers. They range in type from application services (ASPs) to Internet
services (ISPs) to network services (NSPs) to storage services (SSPs). Both new
and traditional information technology service providers, facing the same
pressures of the Internet economy as their customers, must increase value and
service levels and scale their operations as quickly as possible in order to
succeed. EMC believes that its E-Infostructure enables service providers to
fully leverage EMC's expertise to achieve business success by quickly deploying
and delivering a range of services around the benefits of an EMC
E-Infostructure, thereby producing better results for their customers.
CHANNELS
EMC markets its products through multiple distribution channels, including
its direct sales force and selected distributors, systems integrators, resellers
and original equipment manufacturers ("OEMs").
5
DIRECT SALES
EMC 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.
INDIRECT SALES
EMC believes its systems and software are well suited for sale by indirect
channel partners. EMC has agreements in place with many distributors, systems
integrators, resellers and OEMs. These agreements, subject to certain terms and
conditions, enable these companies to market and resell certain EMC systems and
software.
ALLIANCES
EMC has alliances with leading software, networking and services companies.
EMC intends to continue to form additional strategic alliances. EMC's strategy
is to work closely with these and other companies to provide added value to its
customers by integrating EMC solutions with software and networking applications
that customers rely on to manage their day-to-day business operations.
MANUFACTURING AND QUALITY
EMC's products are assembled and tested primarily at the Company's
facilities in Massachusetts, North Carolina and Ireland. See "Properties."
Product components manufactured by subcontractors in the United States and
Europe are designed, assembled and tested in accordance with production
standards and quality controls established by EMC.
EMC employs a company-wide Total Quality Management philosophy to ensure
that the quality of its designs, manufacturing, test processes and supplier
relationships follow the same methodologies. EMC's manufacturing operations in
Massachusetts, North Carolina and Ireland are ISO 9000 certified. EMC also holds
23 additional certifications worldwide covering ISO 9000, ISO 14000
Environmental Management Standard Certification and Support Center Practices
(SCP) certification for its customer support centers. These internationally
recognized endorsements of ongoing quality management represent the highest
levels of certifications available.
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.
PATENTS
EMC has been granted or owns by assignment over 500 patents. EMC also has a
number of patent applications pending relating to its hardware and software
products.
BACKLOG
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 configures to customer specifications and generally ships
products shortly after receipt of the order. Customers may reschedule orders
with little or no penalty. For these reasons, EMC's backlog at any particular
time is not meaningful because it is not necessarily indicative of future sales
levels.
6
COMPETITION
EMC competes with many established companies in the markets it serves. EMC
believes that most of these companies compete based on their overall market
presence and their ability to address customers' broad information technology
requirements. EMC also competes with many smaller, less established companies in
specific product segments.
EMC believes that it has a number of competitive advantages over these
companies, including product, distribution and service. EMC believes the
advantages in its products include performance, functionality, scalability,
availability, connectivity, value-added software, time to market enhancements
and total value of ownership. EMC believes its advantages in distribution
include its direct sales force and its broad network of indirect channels. EMC
believes its advantages in service include its ability to provide its customers
with a complete set of service solutions, in particular its customer service
(which is often remote and without interruption to a company's business), for
its information storage systems and software 24 hours a day, seven days a week,
365 days a year.
EMPLOYEES
As of January 31, 2001, EMC had approximately 24,100 employees worldwide.
None of EMC's domestic employees is represented by a labor union, and EMC has
never suffered an interruption of business as a result of a labor dispute. EMC
considers its relations with its employees to be good.
FINANCIAL INFORMATION ABOUT SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
EMC operates in three business segments: information storage products,
information storage services and other businesses. (See Note P to EMC's
Consolidated Financial Statements.) 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. EMC has three
primary manufacturing facilities: one in Massachusetts, which provides Symmetrix
systems 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 from these facilities
amounted to approximately $3,580,000,000, $2,575,000,000 and $2,184,000,000 in
2000, 1999 and 1998, respectively.
ITEM 2. PROPERTIES
EMC's principal corporate offices are located at 35 Parkwood Drive,
Hopkinton, Massachusetts. As of December 31, 2000, EMC owned or leased a total
of approximately 6.5 million square feet of space worldwide which is used
primarily for manufacturing, research and development, customer service, sales,
marketing and general administration.
In 2000, EMC began construction on two facilities totaling approximately
800,000 square feet in Hopkinton, Massachusetts for research and development
use. EMC also owns land in Massachusetts and Ireland for possible future
expansion purposes. EMC 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
EMC is a party to 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 EMC'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 EMC's stockholders during the fourth
quarter of 2000.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of EMC are as follows:
NAME AGE POSITION
---- -------- --------
Michael C. Ruettgers......... 58 Executive Chairman of the Board of Directors
Joseph M. Tucci.............. 53 President, Chief Executive Officer and Director
Frank M. Hauck............... 41 Executive Vice President, Products and Offerings
Michael A. Ruffolo........... 39 Executive Vice President, Global Sales, Services
and Marketing
Paul T. Dacier............... 43 Senior Vice President and General Counsel
David A. Donatelli........... 35 Senior Vice President, New Business Development
William J. Teuber, Jr........ 49 Senior Vice President and Chief Financial Officer
Michael C. Ruettgers has been Executive Chairman of the Board of Directors
of EMC since January 2001. Mr. Ruettgers served as Chief Executive Officer of
EMC from January 1992 to January 2001 and has been a Director of EMC since
May 1992. He also served as President from October 1989 to January 2000, as
Chief Operating Officer from October 1989 to January 1992, and as Executive Vice
President, Operations of EMC from July 1988 to October 1989. Mr. Ruettgers is
also a director of Raytheon Company, a global technology and electronics
company, and PerkinElmer Inc., a diversified technology company.
Joseph M. Tucci has been Chief Executive Officer and a Director of EMC since
January 2001 and has served as President since January 2000. He also served as
Chief Operating Officer of EMC from January 2000 to January 2001. 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
Global, an information technology services company, from December 1993 to
June 1999. Getronics acquired Wang in June 1999. Mr. Tucci joined Wang in 1990
as its Executive Vice President, Operations. Mr. Tucci is also a director of
Paychex, Inc., a provider of payroll, human resources and benefits outsourcing
solutions, and Telecom Italia S.p.A., a telecommunications company.
Frank M. Hauck has been Executive Vice President, Products and Offerings, of
EMC since June 2000. He served as Senior Vice President and Chief Information
Officer from January 2000 to June 2000, as Senior Vice President, Business
Integration from July 1999 to January 2000, and as Senior Vice President
Customer Service of EMC from November 1997 to July 1999. Mr. Hauck has also held
a number of other executive positions since he joined EMC in 1990.
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 of Xerox Corporation, a document
processing company, from May 1998 through December 1999. Prior to joining Xerox,
Mr. Ruffolo held several executive 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 EMC
since February 2000. Mr. Dacier served as Vice President and General Counsel of
EMC from February 1993 to February 2000 and as General Counsel of EMC from
March 1990 to February 1993. 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 EMC since February 2000. Mr. Donatelli served as Vice President, New Business
Development of EMC from April 1999 to February 2000 and has also held a number
of other executive positions with EMC since
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1987, including serving most recently as Vice President, General Manager of
EMC's EDM business from September 1996 to April 1999 and as Vice President of
Global Alliances from February 1996 to November 1998.
William J. Teuber, Jr. has been Senior Vice President and Chief Financial
Officer of EMC since February 2000. Mr. Teuber served as Vice President and
Chief Financial Officer of EMC from February 1997 to February 2000. He also
served as Vice President and Controller of EMC 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.
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The President is elected annually to serve until the first meeting of the
Board of Directors following the next annual meeting of stockholders and until
his successor is elected and qualified.
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EMC(2), EMC, Access Logix, AViiON, Celerra, CLARiiON, Connectrix, EMC
Control Center, EDM, E-Infostructure, Enterprise Storage Network, ESN, ESN
Manager, EMC Proven, HighRoad, InfoMover, Mirror View, Navisphere, PowerPath,
SnapView, Symmetrix, SRDF, and TimeFinder are either registered trademarks or
trademarks of EMC Corporation. 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, par value $.01 per share, began trading on the
over-the-counter market on April 4, 1986 under the NASDAQ symbol EMCS. On
March 22, 1988, EMC's common stock began trading on the New York Stock Exchange
under the symbol EMC.
During the last five 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;
- a two-for-one stock split effective May 28, 1999, for stockholders of
record on May 14, 1999; and
- a two-for-one stock split effective June 2, 2000, for stockholders of
record on May 19, 2000.
The following table sets forth the range of high and low prices on the New
York Stock Exchange for the past two years during the fiscal periods shown,
adjusted to reflect the effects of the November 17, 1997, May 28, 1999 and
June 2, 2000 stock splits.
FISCAL 2000 HIGH LOW
- ----------- -------- --------
First Quarter.............................................. $ 71.63 $48.00
Second Quarter............................................. 83.50 53.50
Third Quarter.............................................. 103.25 74.50
Fourth Quarter............................................. 100.00 55.63
FISCAL 1999 HIGH LOW
- ----------- -------- --------
First Quarter.............................................. $ 32.44 $21.75
Second Quarter............................................. 33.72 23.88
Third Quarter.............................................. 37.31 26.81
Fourth Quarter............................................. 55.16 31.50
EMC had approximately 13,275 holders of record of its common stock as of
January 31, 2001.
EMC 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 EMC's continued growth.
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 31,
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
SUMMARY OF OPERATIONS:
Revenues...................... $ 8,872,816 $6,715,610 $5,436,158 $4,487,851 $3,616,746
Operating income(2)........... 2,256,903 1,241,094 834,267 716,958 539,039
Net income(2)................. 1,782,075 1,010,570 653,978 587,511 420,080
Net income per weighted
average share, basic(3)..... $ 0.82 $ 0.49 $ 0.32 $ 0.29 $ 0.22
Net income per weighted
average share,
diluted(2)(3)............... $ 0.79 $ 0.46 $ 0.30 $ 0.28 $ 0.21
Weighted average shares,
basic(3).................... 2,164,180 2,061,101 2,030,742 2,002,032 1,878,673
Weighted average shares,
diluted(3).................. 2,245,203 2,219,065 2,188,430 2,130,969 2,020,318
BALANCE SHEET DATA:
Working capital............... $ 3,986,404 $2,922,481 $2,825,000 $2,581,640 $1,597,486
Total assets.................. 10,628,342 7,173,288 5,627,020 4,627,936 3,178,101
Long-term obligations(4)...... 14,457 686,609 751,646 771,204 339,232
Stockholders' equity.......... $ 8,177,209 $4,951,786 $3,728,990 $2,900,941 $1,978,025
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(1) The selected consolidated financial data for 1996-1998 includes the effects
of the acquisition of Data General Corporation on October 12, 1999, which
was accounted for as a pooling-of-interests.
(2) In 1999, EMC incurred charges totaling $223,598 (pre-tax), consisting 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 $0.54 per diluted share. In 1998, EMC incurred
charges totaling $135,000 (pre-tax), 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 $0.37 per diluted share.
(3) All share and per share amounts have been restated to reflect the stock
splits effective November 17, 1997, May 28, 1999 and June 2, 2000 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
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,
2000 1999 1998
------------ ------------ ------------
REVENUES
Information storage systems........................... 70.4% 68.0% 69.2%
Information storage software.......................... 16.2 12.2 8.2
Information storage services.......................... 6.9 5.4 3.5
----- ----- -----
Total information storage revenue..................... 93.5 85.6 80.9
Other businesses...................................... 6.5 14.4 19.1
----- ----- -----
Total revenue........................................... 100.0% 100.0% 100.0%
===== ===== =====
COST AND EXPENSES
Cost of sales......................................... 42.1% 48.5% 55.2%
Research and development.............................. 8.8 8.5 8.0
Selling, general and administrative................... 23.7 21.4 20.0
Restructuring, merger and other charges............... -- 3.1 1.5
----- ----- -----
OPERATING INCOME........................................ 25.4 18.5 15.3
Investment income, interest expense and other income,
net................................................. 2.1 1.7 1.5
----- ----- -----
Income before income taxes............................ 27.5 20.2 16.8
Provision for income taxes............................ 7.4 5.2 4.8
----- ----- -----
NET INCOME.............................................. 20.1% 15.0% 12.0%
===== ===== =====
REVENUES
Total revenues were $8,872.8, $6,715.6 and $5,436.2 in 2000, 1999 and 1998,
respectively, representing increases of $2,157.2, or 32%, from 1999 to 2000, and
$1,279.4, or 24%, from 1998 to 1999.
Information storage systems revenues were $6,245.8, $4,565.0 and $3,759.9 in
2000, 1999 and 1998, respectively, representing increases of $1,680.8, or 37%,
from 1999 to 2000, and $805.1, or 21%, from 1998 to 1999. The increases were
primarily due to increased sales volume resulting from the continued strong
demand for EMC's Symmetrix and CLARiiON series of products and the successful
introduction of new products within those existing product lines.
Included in information storage systems revenues are revenues from
enterprise switching products sold directly to third parties by McDATA
Corporation, formerly a majority owned subsidiary of EMC. These revenues were
$58.5, $29.5 and $5.2 in 2000, 1999 and 1998, respectively. EMC distributed all
of its interest in McDATA to EMC stockholders on a pro rata basis in the form of
a dividend effective February 7, 2001. After the distribution, revenues from
products sold directly to third parties by McDATA will no longer be included in
EMC's consolidated results.
Information storage software revenues were $1,435.1, $821.7 and $445.4 in
2000, 1999 and 1998, respectively, representing increases of $613.4, or 75%,
from 1999 to 2000, and $376.3, or 85%, from
12
1998 to 1999. The increases were primarily due to increased licenses of
information storage software on both newly shipped and already installed systems
and the successful introduction of new and enhanced software products.
Information storage services revenues were $612.1, $361.8 and $190.3 in
2000, 1999 and 1998, respectively, representing an increase of $250.3, or 69%,
from 1999 to 2000, and an increase of $171.5, or 90%, from 1998 to 1999. The
increases were primarily related to increased maintenance revenues on
information storage systems and information storage software products and
increased revenues from professional services.
Total information storage revenues were $8,293.0, $5,748.5 and $4,395.5 in
2000, 1999 and 1998, respectively, representing an increase of $2,544.5, or 44%,
from 1999 to 2000, and $1,353.0, or 31%, from 1998 to 1999.
Other businesses revenues were $579.8, $967.1 and $1,040.7 in 2000, 1999 and
1998, respectively, representing a decrease of $387.3, or 40%, from 1999 to
2000, and a decrease of $73.6, or 7%, from 1998 to 1999. Other businesses
revenues consist of revenues from AViiON server products and related services.
The decreases in other businesses revenues were due to refocusing the Company's
efforts on more profitable lines of business. EMC anticipates further declines
in revenues from AViiON server products and related services in 2001.
Revenues on sales into the North American markets were $5,436.2, $4,257.1
and $3,367.8 in 2000, 1999 and 1998, respectively, representing increases of
$1,179.1, or 28%, from 1999 to 2000, and $889.3, or 26%, from 1998 to 1999. The
revenue growth reflects continued strong demand for EMC's products and services.
Revenues on sales into the markets of Europe, the Middle East and Africa
were $2,351.8, $1,844.3 and $1,597.6 in 2000, 1999 and 1998, respectively,
representing increases of $507.5, or 28%, from 1999 to 2000, and $246.7, or 15%,
from 1998 to 1999. Revenues on sales into the markets in the Asia Pacific region
were $880.1, $439.0 and $381.5 in 2000, 1999 and 1998, respectively,
representing an increase of $441.1, or 100%, from 1999 to 2000, and an increase
of $57.5, or 15%, from 1998 to 1999. Revenues on sales into the markets of Latin
America were $204.7, $175.2 and $89.2 in 2000, 1999 and 1998, respectively,
representing increases of $29.5, or 17%, from 1999 to 2000 and $86.0, or 96%,
from 1998 to 1999.
The increases in international sales were a result of EMC's efforts to
expand its sales infrastructure throughout the world to meet the increasing
demands for information storage. International revenues accounted for 39% of
total revenues in 2000, compared to 37% in 1999 and 38% in 1998. EMC anticipates
that international revenues will continue to account for an increasing
percentage of its total sales.
GROSS MARGINS
Overall gross margins increased to 58.0% in 2000, compared to 51.5% in 1999
and 44.9% in 1998. Information storage systems and information storage software
gross margins increased to 61.4% in 2000, compared to 56.3% in 1999 and 49.2% in
1998. The increases were primarily attributable to increased licensing of EMC's
information storage software products, which have higher gross margins than
sales of EMC's information storage systems. Information storage software
revenue, as a percentage of total revenues, increased to 16% in 2000 from 12% in
1999 and 8% in 1998. Gross margins were also affected by component cost
declines, which were greater than product price declines. EMC currently believes
that both component cost and product price declines will continue.
Gross margins for information storage services increased to 33.8% in 2000,
compared to 26.1% in 1999 and 19.3% in 1998. The improvements in the gross
margin percentages were attributable to greater productivity of EMC field
personnel in EMC's Global Services organization. Gross margins for
13
other businesses increased to 37.8% in 2000 from 34.0% in 1999 and 31.9% in
1998. The improvements in gross margin percentages reflect EMC's efforts to
refocus this business on the most profitable products and services.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $783.2, $572.5 and $435.3 in
2000, 1999 and 1998, respectively. As a percentage of revenues, R&D expenses
were 9%, 9% and 8% in 2000, 1999 and 1998, respectively. The increase in R&D
spending from 1999 to 2000 and 1998 to 1999 reflects EMC's ongoing research and
development efforts in a variety of areas, including networked storage products,
enhancements to both the Symmetrix and CLARiiON families of systems, new
information storage software products and fibre channel connectivity. EMC
expects to continue to spend substantial amounts for R&D in 2001.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses were $2,103.0,
$1,435.5 and $1,087.7 in 2000, 1999 and 1998, respectively. As a percentage of
revenues, SG&A expenses were 24%, 21% and 20% in 2000, 1999 and 1998,
respectively. The increases in spending levels were primarily due to efforts to
build an infrastructure to achieve broader customer coverage and greater account
depth around the world.
RESTRUCTURING, MERGER AND OTHER CHARGES
During 1999, EMC recorded a charge of $223.6 related to restructuring,
merger and other charges primarily related to the acquisition of Data General.
The restructuring provided for the consolidation of EMC's operations and
elimination of duplicative facilities worldwide. Accordingly, during 1999, EMC
recorded a charge of approximately $170.6 related to employee termination
benefits, facility closure costs, asset disposals and other exit costs which EMC
has recorded in operating expenses. The expected cash impact of the charge is
approximately $140.7, of which $52.4 was paid in 1999 and $60.2 was paid in
2000.
The restructuring included an aggregate net reduction of the workforce by
approximately 1,100 employees, approximately 59% of whom were based in North
America and 23% of whom were based in Europe. The employee separations affected
the majority of business functions and job classes. Of the approximately 1,100
employees identified, approximately 500 were terminated in 1999 and 600 were
terminated in 2000.
As part of the 1999 charge, EMC 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, EMC 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, EMC 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 EMC 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 expected cash impact of the restructuring
charge is approximately $58.5, of which $24.4 was paid in 1998, $21.6 was paid
in 1999 and $3.0 was paid in 2000.
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
14
affected the majority of business functions and job classes. Of the 480
employees identified, approximately 400 were terminated in 1998 and 80 were
terminated in 1999.
The amounts accrued and charged against the established provisions described
above were as follows:
BEGINNING CURRENT YEAR CURRENT YEAR ENDING
BALANCE PROVISION UTILIZATION BALANCE
--------- ------------ ------------ --------
2000
Employee termination benefits....................... $ 75.5 $ -- $ 52.1 $ 23.4
Lease abandonments.................................. 18.6 -- 3.1 15.5
Asset disposals..................................... 4.1 -- 3.2 0.9
Other exit costs.................................... 11.2 -- 9.3 1.9
------ ------ ------ ------
$109.4 $ -- $ 67.7 $ 41.7
====== ====== ====== ======
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
====== ====== ====== ======
INVESTMENT INCOME AND INTEREST EXPENSE
Investment income increased to $206.2 in 2000, from $131.9 in 1999 and
$114.4 in 1998. Investment income was earned primarily from investments in cash
equivalents and short and long-term investments and lease income. Investment
income increased in 2000 and 1999 primarily due to higher average cash and
investment balances which were derived from operations and the net proceeds from
McDATA's initial public offering. As a result of the distribution of EMC's
interest in McDATA to EMC stockholders in February 2001, EMC anticipates that
investment income will grow at a lower rate in 2001.
Interest expense decreased to $14.6 in 2000 from $33.5 in 1999. Interest
expense decreased to $33.5 in 1999 from $34.8 in 1998. The decrease in 2000 from
1999 was primarily due to conversions of EMC's 3 1/4% convertible subordinated
notes due 2002 in March 2000 and EMC's 6% convertible subordinated notes due
2004 in May 2000. The decrease in 1999 from 1998 was primarily due to
conversions of the 3 1/4% Notes.
OTHER INCOME/(EXPENSE), NET
Other expense was $7.3 in 2000 compared with other income of $17.7 in 1999
and other income of $0.4 in 1998. The increase in other expense in 2000 compared
to 1999 was due to an increase in the losses from the sale of fixed assets and
an increase in the minority's interest in the earnings of McDATA. The increase
in other income from 1998 to 1999 was primarily attributable to gains on the
sale of publicly traded securities.
PROVISION FOR INCOME TAXES
The provision for income taxes was $659.1 in 2000, $346.6 in 1999 and $260.3
in 1998, which resulted in effective tax rates of 27.0%, 25.5% and 28.5% in
2000, 1999 and 1998, respectively. The effective tax rates in 2000, 1999, and
1998 were lower than the U.S. statutory rate due primarily to EMC's global tax
strategies and the benefits derived from its offshore manufacturing operations.
The reduction in the 1999 rate compared to the 1998 rate resulted from the Data
General acquisition,
15
causing a reduction in the valuation allowance to recognize net operating loss
carryforwards, partially offset by an increase in the rate due to the
non-deductibility of certain merger-related costs. EMC anticipates that the
effective tax rate for 2001 will be approximately 27%.
FINANCIAL CONDITION
Cash and cash equivalents and short and long-term investments were $4,745.3
and $3,173.7 at December 31, 2000 and 1999, respectively, an increase of
$1,571.6. In 2000, cash and cash equivalents increased by $873.8 and short and
long-term investments increased by $697.8.
Cash provided by operating activities was $2,108.7 in 2000 compared to
$1,371.6 in 1999 and $970.7 in 1998. The annual increases were primarily due to
growth in net income.
Cash used for investing activities was $1,842.4, $1,170.9 and $1,295.5 in
2000, 1999 and 1998, respectively. Capital additions were $858.4, $524.3 and
$484.7 in 2000, 1999 and 1998, respectively. The increase in capital additions
resulted from EMC's expansion of its infrastructure to meet the increased
demands for EMC's products. Net purchases of investments were $647.9, $558.5 and
$685.2 in 2000, 1999 and 1998, respectively.
Cash provided by financing activities was $611.7, $73.2 and $66.4 in 2000,
1999 and 1998, respectively. In 2000, EMC generated $376.6 from the issuance of
common stock in the initial public offering of McDATA. The majority of the
remaining cash generated in 2000, 1999 and 1998 was from the exercise of stock
options.
EMC has available for use a credit line of $50.0 and may elect to borrow at
any time. In 2000, $665.4 of convertible debt was converted into common stock.
Based on its current operating and capital expenditure forecasts, EMC 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 for the next twelve months.
To date, inflation has not had a material impact on EMC's financial results.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," subsequently updated by SAB 101A and SAB 101B ("SAB 101"). SAB 101
summarizes certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. EMC adopted SAB 101
in the fourth quarter of 2000 and there was no material impact on EMC's results
of operations or financial position.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequences of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. EMC adopted
FIN 44 in the third quarter of 2000 and there was no material impact on EMC's
results of operations or financial position.
In June 2000, the FASB issued Statement of Financial Accounting Standards
("FAS") No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities--an Amendment of FAS 133" ("FAS 138"). FAS 138 amends the
accounting and reporting standards for certain derivative
16
instruments and hedging activities. For an entity that has adopted FAS No. 133
prior to June 15, 2000, FAS 138 is effective for all quarters beginning after
June 15, 2000. EMC adopted FAS 138 in the third quarter of 2000 and there was no
material impact on EMC's results of operations or financial position.
FACTORS THAT MAY AFFECT FUTURE RESULTS
EMC'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. EMC'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 many 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 and 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 quality or delivery
requirements will have an adverse impact on EMC's revenues and earnings.
EMC MAY BE UNABLE TO KEEP PACE WITH RAPID INDUSTRY CHANGES.
The markets in which EMC competes are characterized by rapid technological
change, frequent new product introductions and evolving industry standards.
Customer preferences in these markets are difficult to predict and there can be
no assurance that EMC's products will continue to be properly positioned in the
market or to receive customer acceptance. Risks associated with the development
of new products include delays in development and the modification of the design
or configuration of the computers or operating systems with which EMC's products
are compatible.
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. EMC's failure to keep pace
with rapid industry changes or to effectively manage the transitions to new
products or new technologies could adversely effect EMC's business and
reputation.
THE MARKETS EMC SERVES ARE HIGHLY COMPETITIVE, AND EMC MAY BE UNABLE TO COMPETE
EFFECTIVELY.
EMC competes with many established companies in the markets it serves and
some of these companies may have substantially greater financial, marketing and
technological resources, larger distribution capabilities, earlier access to
customers and more opportunity to address customers' various information
technology requirements than EMC. EMC also competes with many smaller, less
17
established companies in specific product segments. Some of these companies may
have earlier access to new technologies, products or business models 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, 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 information storage and
server markets and have had, and in the future may 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 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 distributors, systems integrators, resellers
and OEMs. 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 EMC's 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:
- 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
18
- 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 assembles 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, such as hiring and
retaining significant numbers of qualified employees, enhancing and expanding
its infrastructure, including but not limited to its information systems and
management team, forecasting revenues, controlling expenses, 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.
EMC'S BUSINESS MAY SUFFER IF IT IS UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL.
EMC's continued growth 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.
UNDETECTED PROBLEMS IN EMC'S PRODUCTS COULD DIRECTLY IMPAIR EMC'S FINANCIAL
RESULTS.
If flaws in design, production, assembly or testing of EMC's products 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, control of material and manufacturing quality and costs and
product testing, are critical factors in the future growth of EMC. There can be
no assurance that EMC's efforts to
19
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 or the
initial dependence on unfamiliar supply or distribution partners
- 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
These factors could have a material adverse effect on EMC's business,
results of operations or financial condition. To the extent that EMC issues
shares of common stock or other rights to purchase common stock in connection
with any future acquisition, existing stockholders may 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 information technology companies and EMC
plans to continue its strategy of developing key alliances in order to expand
its reach into emerging markets. There can be no assurance that EMC will be
successful in its ongoing strategic alliances or that EMC will be able to find
further suitable business relationships as it develops new products and
strategies. 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
20
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.
EMC MAY BECOME INVOLVED IN LITIGATION THAT 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 BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF A LESSENING
DEMAND IN THE IT MARKET.
EMC's revenue growth and profitability depend on the overall demand for
information storage hardware, software and services, particularly in the product
segments in which EMC competes. A softening of demand for information storage
systems, software or services caused by a weakening economy could result in
decreased revenues or earnings or lower growth rates.
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.
21
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
EMC is exposed to market risk, primarily from changes in foreign exchange
rates, interest rates and credit risk. To manage the volatility relating to
these exposures, EMC enters into various derivative transactions pursuant to
EMC's policies to hedge against known or forecasted market exposures.
FOREIGN EXCHANGE RISK MANAGEMENT
As a multinational corporation, EMC 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, EMC's primary exposures
related to sales denominated in the Euro, the Japanese yen and the British
pound. Additionally, EMC'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 EMC's
exposures in these markets, the inherent volatility of these economies could
negatively impact EMC's financial results.
EMC uses foreign currency forward and option contracts to manage the risk of
exchange rate fluctuations. In all cases, EMC uses these derivative instruments
to reduce its foreign exchange risk by essentially creating offsetting market
exposures. The instruments EMC holds are not leveraged and are not held for
trading or speculative purposes.
EMC 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, EMC could experience
unanticipated currency gains or losses.
EMC 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, 2000. 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 $2.2 million as of December 31, 2000 and $0.4 million as
of December 31, 1999.
INTEREST RATE RISK
EMC maintains an investment portfolio consisting of debt securities of
various issuers, types and maturities. The investments are classified as
available for sale and are all 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 EMC's investment
portfolio is comprised of mortgage-backed securities which are subject to
prepayment risk.
EMC 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, 2000. 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
22
investment portfolios was $8.3 million as of December 31, 2000 and $2.2 million
as of December 31, 1999.
CREDIT RISK
Financial instruments which potentially subject EMC to concentrations of
credit risk consist principally of temporary cash investments, short and
long-term investments and trade and notes receivable. EMC 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 accounts and notes receivables is
minimal due to the large number of customers and their broad dispersion over
many different industries and geographic areas.
23
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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. 25
Consolidated Balance Sheets at December 31, 2000 and 1999... p. 26
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998.......................... p. 27
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... p. 28
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998.............. p. 29
Consolidated Statements of Comprehensive Income for the
years ended December 31, 2000, 1999 and 1998.............. p. 30
Notes to Consolidated Financial Statements.................. pp. 31-55
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.
24
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 index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of EMC Corporation and its subsidiaries at December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the 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 of America, 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 our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 22, 2001, except for
Note R as to which the date
is February 7, 2001
25
EMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,983,221 $1,109,409
Short-term investments.................................... 673,731 714,730
Accounts and notes receivable, less allowance for doubtful
accounts of $38,560 and $34,279 in 2000 and 1999,
respectively............................................ 2,114,368 1,625,438
Inventories............................................... 1,024,964 618,885
Deferred income taxes..................................... 188,074 147,471
Other assets.............................................. 115,693 104,463
----------- ----------
Total current assets........................................ 6,100,051 4,320,396
Long-term investments....................................... 2,088,379 1,349,599
Notes receivable, net....................................... 241,234 76,756
Property, plant and equipment, net.......................... 1,510,088 1,023,179
Deferred income taxes....................................... 90,543 108,587
Intangible and other assets, net............................ 598,047 294,771
----------- ----------
Total assets............................................ $10,628,342 $7,173,288
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations.................. $ 11,816 $ 9,116
Accounts payable.......................................... 516,469 370,055
Accrued expenses.......................................... 823,079 611,052
Income taxes payable...................................... 477,318 249,234
Deferred revenue.......................................... 284,965 158,458
----------- ----------
Total current liabilities................................... 2,113,647 1,397,915
Deferred income taxes....................................... 191,456 125,353
Long-term obligations:
3 1/4% convertible subordinated notes due 2002............ -- 460,399
6% convertible subordinated notes due 2004................ -- 212,750
Notes payable............................................. 14,457 13,460
Other liabilities........................................... 20,538 8,951
Minority interest........................................... 111,035 2,674
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 2,195,489 and 2,078,550 in 2000
and 1999, respectively.................................. 21,955 20,786
Additional paid-in capital................................ 3,138,061 1,695,994
Deferred compensation..................................... (49,525) (30,282)
Retained earnings......................................... 5,072,600 3,299,821
Accumulated other comprehensive loss, net................. (5,882) (34,533)
----------- ----------
Total stockholders' equity.............................. 8,177,209 4,951,786
----------- ----------
Total liabilities and stockholders' equity............ $10,628,342 $7,173,288
=========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
26
EMC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Revenues:
Net sales............................................. $7,966,974 $5,983,009 $4,860,838
Services.............................................. 905,842 732,601 575,320
---------- ---------- ----------
8,872,816 6,715,610 5,436,158
Costs and expenses:
Cost of sales......................................... 3,125,908 2,751,360 2,600,405
Cost of service....................................... 603,857 506,885 395,995
Research and development.............................. 783,166 572,517 435,344
Selling, general and administrative................... 2,102,982 1,435,508 1,087,747
Restructuring, merger and other charges............... -- 208,246 82,400
---------- ---------- ----------
Operating income........................................ 2,256,903 1,241,094 834,267
Investment income....................................... 206,240 131,911 114,355
Interest expense........................................ (14,604) (33,490) (34,786)
Other income/(expense), net............................. (7,341) 17,650 397
---------- ---------- ----------
Income before taxes..................................... 2,441,198 1,357,165 914,233
Income tax provision.................................... 659,123 346,595 260,255
---------- ---------- ----------
Net income.............................................. $1,782,075 $1,010,570 $ 653,978
========== ========== ==========
Net income per weighted average share, basic............ $ 0.82 $ 0.49 $ 0.32
========== ========== ==========
Net income per weighted average share, diluted.......... $ 0.79 $ 0.46 $ 0.30
========== ========== ==========
Weighted average shares, basic.......................... 2,164,180 2,061,101 2,030,742
Weighted average shares, diluted........................ 2,245,203 2,219,065 2,188,430
The accompanying notes are an integral part of the consolidated financial
statements.
27
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income................................................ $ 1,782,075 $ 1,010,570 $ 653,978
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 516,798 424,803 351,966
Amortization of deferred compensation................. 27,027 22,311 14,437
Provision for doubtful accounts....................... 27,537 25,817 14,150
Deferred income taxes................................. 35,349 (122,973) (615)
Net loss on disposal of property and equipment........ 18,523 9,896 9,073
Tax benefit from stock options exercised.............. 207,694 58,033 43,670
Minority interest..................................... 2,235 135 (499)
Changes in assets and liabilities, net of acquired assets
and liabilities:
Accounts and notes receivable......................... (647,577) (409,364) (227,138)
Inventories........................................... (406,985) 12,483 (18,671)
Other assets.......................................... (134,306) (49,789) (13,250)
Accounts payable...................................... 147,675 70,798 (45,383)
Accrued expenses...................................... 200,033 158,191 145,396
Income taxes payable.................................. 228,089 88,442 15,978
Deferred revenue...................................... 109,594 67,116 34,394
Other liabilities..................................... (5,105) 5,166 (6,816)
----------- ----------- -----------
Net cash provided by operating activities........... 2,108,656 1,371,635 970,670
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment................ (858,423) (524,279) (484,708)
Proceeds from sales of property and equipment............. 200 1 6
Capitalized software development costs.................... (102,772) (88,201) (71,689)
Purchase of short and long-term held-to-maturity
securities.............................................. -- (191,254) (1,100,361)
Maturity of short and long-term held-to-maturity
securities.............................................. -- 940,483 1,016,607
Purchase of short and long-term available for sale
securities.............................................. (2,644,077) (2,752,925) (1,758,564)
Sales of short and long-term available for sale
securities.............................................. 1,961,208 1,445,237 1,157,077
Maturity of short and long-term available for sale
securities.............................................. 35,000 -- --
Business acquisitions net of cash acquired................ (233,554) -- (53,903)
----------- ----------- -----------
Net cash used by investing activities............... (1,842,418) (1,170,938) (1,295,535)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock.................................. 234,057 101,424 64,269
Issuance of subsidiary's stock............................ 376,607 -- --
Redemption of 6% convertible subordinated notes due
2004.................................................... (155) -- --
Payment of long-term and short-term obligations........... (10,244) (30,435) (12,413)
Issuance of long-term and short-term obligations.......... 11,392 2,256 14,553
----------- ----------- -----------
Net cash provided by financing activities........... 611,657 73,245 66,409
----------- ----------- -----------
Effect of exchange rate changes on cash..................... (4,083) 1 (2,020)
----------- ----------- -----------
Net increase/(decrease) in cash and cash equivalents........ 877,895 273,942 (258,456)
Cash and cash equivalents at beginning of period............ 1,109,409 835,466 1,095,942
----------- ----------- -----------
Cash and cash equivalents at end of period.................. $ 1,983,221 $ 1,109,409 $ 835,466
=========== =========== ===========
Non-cash activity:
- -- conversion of convertible subordinated notes, net of debt
issuance
costs.................................................. $ 665,397 $ 57,101 --
- -- options issued in business acquisitions.................. $ 11,372 -- $ 51,755
The accompanying notes are an integral part of the consolidated financial
statements.
28
EMC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER
-------------------- ADDITIONAL DEFERRED COMPRE- TREASURY STOCK
PAR PAID-IN COMPEN- RETAINED HENSIVE -------------------
SHARES VALUE CAPITAL SATION EARNINGS INCOME SHARES COST
--------- -------- ---------- -------- ---------- ------------ -------- --------
Balance, January 1, 1998.... 2,017,739 $20,177 $1,287,031 $(29,612) $1,635,273 $ (6,053) 130 $(5,875)
Exercise of stock
options................. 23,737 237 64,032 -- -- -- -- --
Tax benefit from stock
options exercised....... -- -- 43,670 -- -- -- -- --
Grant of stock options.... -- -- 21,341 (21,341) -- -- -- --
Amortization of deferred
compensation............ -- -- -- 14,437 -- -- -- --
Purchase acquisitions..... 4,429 44 51,153 -- -- -- -- --
Other adjustments......... -- -- 2,335 -- -- -- -- --
Treasury stock
transactions............ -- -- 33 -- -- -- -- (33)
Unrealized gain/(loss) on
investments............. -- -- -- -- -- 6,777 -- --
Minimum pension
liability............... -- -- -- -- -- (6,252) -- --
Translation adjustment.... -- -- -- -- -- (2,362) -- --
Net income................ -- -- -- -- 653,978 -- -- --
--------- ------- ---------- -------- ---------- -------- ---- -------
Balance, December 31,
1998...................... 2,045,905 20,458 1,469,595 (36,516) 2,289,251 (7,890) 130 (5,908)
--------- ------- ---------- -------- ---------- -------- ---- -------
Exercise of stock
options................. 22,745 227 103,105 -- -- -- 52 (1,908)
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................ 10,082 101 57,000 -- -- -- -- --
Amortization of deferred
compensation............ -- -- -- 22,311 -- -- -- --
Retirement of treasury
stock................... (182) -- (7,816) -- -- -- (182) 7,816
Minimum pension
liability............... -- -- -- -- -- 6,252 -- --
Unrealized gain/(loss) on
investments............. -- -- -- -- -- (30,592) -- --
Translation adjustment.... -- -- -- -- -- (2,303) -- --
Net income................ -- -- -- -- 1,010,570 -- -- --
--------- ------- ---------- -------- ---------- -------- ---- -------
Balance, December 31,
1999...................... 2,078,550 20,786 1,695,994 (30,282) 3,299,821 (34,533) -- --
--------- ------- ---------- -------- ---------- -------- ---- -------
Exercise of stock
options................. 27,083 270 233,787 -- -- -- -- --
Tax benefit from stock
options exercised....... -- -- 207,694 -- -- -- -- --
Grant of stock options.... -- -- 55,919 (55,919) -- -- -- --
Issuance of common stock
pursuant to conversion
of notes................ 86,361 864 664,533 -- -- -- -- --
Amortization of deferred
compensation............ -- -- -- 27,027 -- -- -- --
Reversal of deferred
compensation due to
employee terminations... -- -- (9,649) 9,649 -- -- -- --
Pooling of interests
acquisitions............ 3,495 35 7,930 -- (9,296) -- -- --
Purchase acquisitions..... -- -- 11,372 -- -- -- -- --
Sale of subsidiary's stock
securities.............. -- -- 270,481 -- -- -- -- --
Unrealized gain/(loss) on
investments............. -- -- -- -- -- 32,811 -- --
Translation adjustment.... -- -- -- -- -- (4,160) -- --
Net income................ -- -- -- -- 1,782,075 -- -- --
--------- ------- ---------- -------- ---------- -------- ---- -------
Balance, December 31,
2000...................... 2,195,489 $21,955 $3,138,061 $(49,525) $5,072,600 $ (5,882) -- $ --
========= ======= ========== ======== ========== ======== ==== =======
TOTAL
STOCK-
HOLDERS'
EQUITY
----------
Balance, January 1, 1998.... $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
Purchase acquisitions..... 51,197
Other adjustments......... 2,335
Treasury stock
transactions............ --
Unrealized gain/(loss) on
investments............. 6,777
Minimum pension
liability............... (6,252)
Translation adjustment.... (2,362)
Net income................ 653,978
----------
Balance, December 31,
1998...................... 3,728,990
----------
Exercise of stock
options................. 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................... --
Minimum pension
liability............... 6,252
Unrealized gain/(loss) on
investments............. (30,592)
Translation adjustment.... (2,303)
Net income................ 1,010,570
----------
Balance, December 31,
1999...................... 4,951,786
----------
Exercise of stock
options................. 234,057
Tax benefit from stock
options exercised....... 207,694
Grant of stock options.... --
Issuance of common stock
pursuant to conversion
of notes................ 665,397
Amortization of deferred
compensation............ 27,027
Reversal of deferred
compensation due to
employee terminations... --
Pooling of interests
acquisitions............ (1,331)
Purchase acquisitions..... 11,372
Sale of subsidiary's stock
securities.............. 270,481
Unrealized gain/(loss) on
investments............. 32,811
Translation adjustment.... (4,160)
Net income................ 1,782,075
----------
Balance, December 31,
2000...................... $8,177,209
==========
The accompanying notes are an integral part of the consolidated financial
statements.
29
EMC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Net income.............................................. $1,782,075 $1,010,570 $653,978
Other comprehensive income/(loss) net of tax benefit:
Foreign currency translation adjustments, net of taxes
of $(2,053), $(768) and $(787)...................... (4,160) (2,303) (2,362)
Equity adjustment for minimum pension liability, net
of tax of $0, $2,084 and $(2,084)................... -- 6,252 (6,252)
Unrealized gain/(loss) on investments and derivatives,
net of taxes of $11,393, $(10,197) and $2,259....... 32,811 (30,592) 6,777
---------- ---------- --------
Other comprehensive income/(loss)....................... 28,651 (26,643) (1,837)
---------- ---------- --------
Comprehensive income.................................... $1,810,726 $ 983,927 $652,141
========== ========== ========
The accompanying notes are an integral part of the consolidated financial
statements.
30
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") 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 enterprise information
infrastructure, or what EMC calls an E-Infostructure. EMC is the leading
supplier of these solutions, which are comprised of information storage systems,
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 EMC and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
BASIS OF PRESENTATION
EMC'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.
Certain prior year amounts have been reclassified to conform with the 2000
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
EMC 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. EMC
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, EMC allocates the
sales value among each of the deliverables based on the amounts charged when
such deliverables are sold separately.
SHIPPING AND HANDLING COSTS
EMC classifies shipping and handling costs in cost of sales.
31
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 EMC'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. EMC'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
$5,821 in 2000, $2,712 in 1999 and $5,746 in 1998.
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. EMC 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 fair value of
derivatives are recorded each period in current earnings or other comprehensive
income. EMC does not engage in currency speculation. EMC may, from time to time,
enter into derivative instruments to hedge against known or forecasted market
exposures.
In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an amendment of SFAS 133" ("FAS 138"). FAS 138 amends the accounting
and reporting standards for certain derivative instruments and hedging
activities. EMC adopted FAS 138 beginning in the third quarter of 2000 and there
was no material impact on its results of operations or financial position.
EMC 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 EMC'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. Cash equivalents
consist primarily of commercial paper and money market securities. Cash
equivalents are stated at amortized cost plus accrued interest, which
approximates market. Total cash equivalents were $1,131,900 and $598,684 at
December 31, 2000 and 1999, respectively.
INVESTMENTS
EMC's investments are comprised primarily of debt securities which are
classified at purchase as available for sale. EMC did not have any
held-to-maturity investments as of December 31, 2000 or 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.
32
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
2000 1999 1998
-------- -------- --------
Cash paid for:
Income taxes........................................ $189,140 $325,990 $214,727
Interest............................................ 13,835 31,285 34,666
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. Assets under development
are included in construction in progress. Depreciation commences upon placing
the asset in service. Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets, as follows:
Furniture and fixtures...................................... 5-7 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
$142,279 and $123,936 at December 31, 2000 and 1999, respectively and are
included in intangible and other assets. Amortization expense was $84,565,
$60,278 and $48,017 in 2000, 1999 and 1998, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
EMC reviews long-lived assets, including goodwill, for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable or that the useful lives of these assets
are no longer appropriate. Each impairment test is based on a comparison of the
undiscounted cash flows to the recorded value of the asset. If an impairment is
indicated, the asset is written down to its estimated fair value on a discounted
cash flow basis.
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
33
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
EMC 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 additional tax.
EARNINGS 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.
RETIREMENT/POST EMPLOYMENT BENEFITS
Net pension cost for EMC'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. Net pension cost
for EMC's international defined benefit pension plans are generally funded as
accrued. The net transition surplus or obligation for these international plans
is amortized over periods ranging from 15 to 20 years.
Net post-retirement benefit cost for EMC's domestic post-retirement benefits
plan is 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, EMC elected to apply
Accounting Principles Board 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 EMC to concentrations of
credit risk consist principally of temporary cash investments, short and
long-term investments and accounts and notes receivable. EMC 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 accounts and notes receivables is
limited due to the large number of customers and their broad dispersion over
many different industries and geographic areas.
34
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Hewlett-Packard Company ("HP") represented 16% of EMC's total revenues in
1998. EMC and HP terminated their reseller contract effective as of June 30,
1999.
B. BUSINESS ACQUISITIONS
In 2000, EMC acquired all of the outstanding common stock of
Softworks, Inc., a software company, by means of a tender offer, whereby all of
the shares of Softworks were converted into the right to receive cash. Also in
2000, EMC acquired all of the outstanding common stock of software companies
Terascape Software, Inc., Avalon Consulting Group and Digital Bitcasting, Inc.
The aggregate cost of these transactions was approximately $245,000, net of cash
acquired of approximately $28,000.
EMC accounted for each of these acquisitions under the purchase method.
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. The consolidated financial statements include
the operating results of each business from the dates of acquisition. Pro forma
results of operations have not been presented because the effects of these
acquisitions were not material to EMC on either an individual or an aggregate
basis.
EMC calculated amounts allocated to in-process research and development
("IPRD") using established valuation techniques and expensed such amounts in the
quarter that each acquisition was consummated because technological feasibility
of the in-process technology had not been achieved and no alternate future use
has been established. EMC computed its valuations of IPRD for the acquisitions
using a discounted cash flow analysis on the anticipated income stream to be
generated by the purchased technology. During 2000, EMC recorded a $3,300 charge
to research and development expense representing the write-off of IPRD.
The excess of the purchase price over the estimated value of the net
tangible assets was allocated to various intangible assets, consisting primarily
of developed technology and goodwill. The value of developed technology was
based upon future discounted cash flows relating to the existing products'
projected income stream. Intangible assets, including goodwill, are being
amortized on a straight-line basis over their estimated useful lives of five
years.
In October 2000, EMC acquired all of the outstanding common stock of
CrosStor Software, Inc. in exchange for approximately 3,495 shares of common
stock. CrosStor is a leader in high-performance software for networked storage
systems. EMC accounted for this acquisition under the pooling-of interests
method. CrosStor's historical operations were not material to EMC's consolidated
operations and therefore prior period statements have not been restated for this
transaction.
In October 1999, EMC acquired Data General, a designer, manufacturer and
marketer of CLARiiON information storage systems and AViiON open systems
servers, in a transaction accounted for as a pooling-of-interests. EMC issued an
aggregate of approximately 32,000 shares of common stock in the acquisition.
On December 31, 2000 and 1999, the net book value of goodwill and other
intangible assets associated with all acquisitions was $231,908 and $66,915,
respectively. Goodwill and other intangible assets are being amortized on a
straight-line basis over periods ranging from two to five years and are included
in intangible and other assets, net. Accumulated amortization was $117,640 and
$41,769 on December 31, 2000 and 1999, respectively.
35
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
C. RESTRUCTURING, MERGER AND OTHER CHARGES
During 1999, EMC recorded a charge of $223,600 related to restructuring,
merger and other charges primarily related to the acquisition of Data General.
The restructuring provided for the consolidation of EMC's operations and
elimination of duplicative facilities worldwide. Accordingly, during 1999, EMC
recorded a charge of approximately $170,600 related to employee termination
benefits, facility closure costs, asset disposals and other exit costs which EMC
has recorded in operating expenses. The expected cash impact of the charge is
approximately $140,700, of which $52,400 was paid in 1999 and $60,200 was paid
in 2000.
The restructuring included an aggregate net reduction of the workforce of
approximately 1,100 employees approximately 59% of whom were based in North
America and 23% of whom were based in Europe. The employee separations affected
the majority of business functions and job classes. Of the approximately 1,100
employees identified, approximately 500 were terminated in 1999 and 600 were
terminated in 2000.
As part of the 1999 charge, EMC also recorded a charge for merger costs of
$23,500 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, EMC recorded a $14,100 charge related to asset
impairments recorded in operating expenses and recorded a charge of $15,400 for
capitalized software and inventory write-downs which is included in cost of
product sales.
In 1998, EMC recorded a charge of $135,000 related to a restructuring
program and certain asset write-downs resulting from the program. The charge
included approximately $82,400 related to employee termination benefits, asset
write-downs and other exit costs which EMC has recorded in operating expenses
and approximately $52,600 for capitalized software and inventory write-downs
which are included in cost of product sales. The expected cash impact of the
restructuring charge is approximately $58,500, of which $24,400 was paid in
1998, $21,600 was paid in 1999 and $3,000 was paid in 2000.
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 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
in 1998 and 80 were terminated in 1999.
36
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The amounts accrued and charged against the established provisions described
above were as follows:
CURRENT CURRENT
BEGINNING YEAR YEAR ENDING
BALANCE PROVISION UTILIZATION BALANCE
--------- --------- ----------- --------
2000
Employee termination benefits....................... $ 75,481 $ -- $ 52,107 $ 23,374
Lease abandonments.................................. 18,655 -- 3,103 15,552
Asset disposals..................................... 4,116 -- 3,214 902
Other exit costs.................................... 11,195 -- 9,277 1,918
-------- -------- -------- --------
$109,447 $ -- $ 67,701 $ 41,746
======== ======== ======== ========
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
======== ======== ======== ========
D. DERIVATIVES
EMC uses derivatives to hedge foreign currency cash flows on a continuing
basis for periods consistent with its net asset and forecasted exposures. Since
EMC is using foreign exchange derivative contracts to hedge foreign exchange
exposures, the changes in the value of the derivatives are highly effective in
offsetting changes in the fair value or cash flows of the hedged item. Any
ineffective portion of the derivatives is recognized in current earnings, which
represented an immaterial amount for the fiscal years covered. The ineffective
portion of the derivatives is primarily related to option premiums and to
discounts or premiums on forward contracts.
EMC 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, 2000 and 1999, EMC had $1,000,367 and $592,581,
respectively, of forward exchange contracts outstanding.
EMC 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. EMC's
cash flow hedges generally mature within nine months or less. At December 31,
2000 and 1999, EMC had $121,501 and $40,545, respectively, of
37
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
forward contracts outstanding. In addition, at December 31, 2000 and 1999, EMC
had $155,000 and $55,000, respectively, of foreign currency options outstanding.
EMC recorded in revenues and expenses $20,056 in net gains from cash flow
hedges related to items forecasted for fiscal year 2000. The amount that will be
reclassified from other accumulated comprehensive income/(expense) to earnings
in 2001 is a loss of approximately $2,997, net of tax. The amount that was
reclassified from other accumulated comprehensive income/expense to earnings in
2000 was a gain of $1,212, net of tax.
E. FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE
The carrying amounts reflected in the consolidated balance sheets for cash
and cash equivalents, accounts and notes receivable, current portion of
long-term debt and accounts payable approximate fair value due to the short
maturities of these instruments.
INVESTMENTS
The following tables summarize the composition of EMC's available for sale
short and long-term investments at December 31, 2000 and 1999.
DECEMBER 31, 2000
-----------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
Asset and mortgage backed securities........................ $ 496,220 $ 499,505
U.S. corporate debt securities.............................. 610,869 614,370
U.S. government and agencies................................ 1,088,597 1,096,761
Foreign debt securities..................................... 6,771 6,793
Municipal obligations....................................... 538,458 544,681
---------- ----------
Total..................................................... $2,740,915 $2,762,110
========== ==========
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
========== ==========
38
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The contractual maturities of available for sale investments held at
December 31, 2000 and 1999 are as follows:
DECEMBER 31, 2000
-----------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
Due within one year......................................... $ 673,276 $ 673,731
Due after one year through eight years...................... 2,067,639 2,088,379
---------- ----------
Total..................................................... $2,740,915 $2,762,110
========== ==========
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
========== ==========
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,
2000 1999
------------ ------------
Purchased parts............................................. $ 62,636 $ 38,204
Work-in-process............................................. 701,907 379,679
Finished goods.............................................. 260,421 201,002
---------- --------
$1,024,964 $618,885
========== ========
39
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
G. NOTES RECEIVABLE
Notes receivable are primarily from installment sales and sales-type leases
of EMC's products. The payment schedule for such notes at December 31, 2000 is
as follows:
2001........................................................ $184,490
2002........................................................ 179,267
2003........................................................ 124,761
2004........................................................ 7,299
2005........................................................ 3,340
--------
Face value.................................................. 499,157
Less amounts representing interest.......................... 80,695
--------
Present value............................................... 418,462
Current portion............................................. 177,228
--------
Long-term portion........................................... $241,234
========
Implicit interest rates range from approximately 7.5% to 18%.
Actual cash collections may differ from amounts shown on the table due to
early customer buyouts, upgrades or refinancings.
EMC may receive proceeds for its sales-type leases through third-party
financing arrangements with various financial institutions, which may either be
collateralized by a lien on the equipment, which is returned to EMC at the end
of the lease, or title to the equipment may pass to the funding source at the
time of financing.
H. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Furniture and fixtures...................................... $ 129,721 $ 101,954
Equipment................................................... 1,539,510 1,237,247
Buildings and improvements.................................. 499,823 439,924
Land........................................................ 69,522 32,451
Construction in progress.................................... 321,587 106,304
----------- -----------
2,560,163 1,917,880
Accumulated depreciation.................................... (1,050,075) (894,701)
----------- -----------
$ 1,510,088 $ 1,023,179
=========== ===========
Depreciation expense was $354,884, $301,480 and $226,151 in 2000, 1999 and
1998, respectively.
40
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
I. ACCRUED EXPENSES
Accrued expenses consist of:
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Salaries and benefits....................................... $313,094 $204,222
Warranty.................................................... 107,266 60,165
Restructuring............................................... 41,746 109,447
Other....................................................... 360,973 237,218
-------- --------
$823,079 $611,052
======== ========
J. INCOME TAXES
EMC's provision for income taxes consists of:
2000 1999 1998
-------- -------- --------
Federal
Current................................................... $507,442 $385,147 $234,172
Deferred.................................................. 46,237 (108,203) (1,287)
-------- -------- --------
553,679 276,944 232,885
-------- -------- --------
State
Current................................................... 45,955 39,127 13,108
Deferred.................................................. 3,691 (6,853) (524)
-------- -------- --------
49,646 32,274 12,584
-------- -------- --------
Foreign
Current................................................... 70,377 45,294 13,590
Deferred.................................................. (14,579) (7,917) 1,196
-------- -------- --------
55,798 37,377 14,786
-------- -------- --------
Total provision for income taxes............................ $659,123 $346,595 $260,255
======== ======== ========
Net undistributed earnings of foreign subsidiaries at December 31, 2000 and
1999 were $2,038,890 and $1,384,035, respectively. Based on EMC'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. EMC'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 2000, 1999 and 1998 was $879,132, $449,775 and
$374,297, respectively.
41
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A reconciliation of EMC's income tax provision to the statutory federal tax
rate is as follows:
2000 1999 1998
-------- -------- --------
Statutory federal tax rate.................................. 35.0% 35.0% 35.0%
State taxes, net of federal tax benefits.................... 2.1 2.4 2.2
International tax benefits.................................. (10.5) (9.6) (13.3)
U.S. tax credits............................................ (0.2) (1.1) (0.4)
Rate detriment from Data General net operating losses....... 0.1 0.8 5.5
Change in valuation allowance and merger related costs...... -- (1.2) --
Other....................................................... 0.5 (0.8) (0.5)
----- ---- -----
27.0% 25.5% 28.5%
===== ==== =====
The components of the current and noncurrent deferred tax assets and
liabilities are as follows:
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Current deferred tax assets:
Accounts receivable......................................... $ 46,369 $ 24,120
Inventory................................................... 70,253 49,650
Other liabilities........................................... 39,982 27,412
Other assets................................................ 13,401 9,085
Fringe...................................................... 16,891 20,616
Restructuring............................................... 1,178 16,588
--------- ---------
Total current deferred tax assets......................... $ 188,074 $ 147,471
========= =========
Noncurrent deferred tax assets/(liabilities):
Intangible assets........................................... $ 19,147 $ 15,049
Net operating loss carryforwards............................ 130,166 128,416
Credit carryforwards........................................ 5,014 19,770
Other....................................................... 38,924 31,390
Deferred compensation....................................... 12,147 14,382
Restructuring............................................... 5,754 19,919
Valuation reserve........................................... (120,609) (120,339)
--------- ---------
Deferred tax assets......................................... 90,543 108,587
--------- ---------
Fixed assets................................................ (17,699) (27,246)
Deferral of lease revenue................................... (101,876) (39,256)
Software development costs.................................. (68,193) (54,774)
Other....................................................... (3,688) (4,077)
--------- ---------
Deferred tax liabilities.................................... (191,456) (125,353)
--------- ---------
Total noncurrent deferred tax liabilities, net............ $(100,913) $ (16,766)
========= =========
EMC has federal and foreign net operating loss carryforwards of $366,000.
The utilization of these tax carryforwards is limited under Section 382 of the
Internal Revenue Code of 1986, as amended, for U.S. tax purposes and similar
provisions under other country's tax laws. Certain net operating losses
42
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
will begin to expire in the year 2001, while others have an unlimited
carryforward period. As of December 31, 1999 and December 31, 2000, the
valuation allowance primarily relates to foreign operating losses which are
subject to limitation. In conjunction with the acquisition of Data General, EMC
reviewed the net realizability of its deferred tax assets and recorded a benefit
of $65,000 in 1999.
K. RETIREMENT PLANS AND RETIREE MEDICAL BENEFITS
401(K) PLAN
EMC has established a deferred compensation program for certain employees
which is qualified under Section 401(k) of the Internal Revenue Code of 1986.
At the end of each calendar quarter, EMC 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, in succeeding quarters, EMC provides an additional matching
contribution of 1% of the employee's quarterly compensation up to a maximum
quarterly matching contribution not to exceed 6% of compensation or $750 (in
dollars) per person per quarter. EMC's contribution amounted to $23,710 in 2000,
$12,729 in 1999 and $6,880 in 1998.
DEFINED BENEFIT PENSION PLANS
EMC 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. EMC 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.
43
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,
2000 1999
------------ ------------
Benefit obligation at beginning of year..................... $253,450 $273,826
Service cost................................................ 3,455 10,635
Interest cost............................................... 19,272 17,890
Participant contributions................................... 850 802
Plan amendments............................................. -- 390
Foreign exchange gain....................................... (4,095) (2,144)
Curtailment gain............................................ (1,079) (13,568)
Benefits paid............................................... (10,235) (5,566)
Settlement payments......................................... (1,034) (100)
Actuarial (gain)/loss....................................... 9,687 (28,715)
-------- --------
Benefit obligation at end of year........................... $270,271 $253,450
======== ========
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,
2000 1999
------------ ------------
Fair value of plan assets at beginning of year.............. $271,811 $238,198
Actual return on plan assets................................ (9,157) 30,269
Employer contributions...................................... 2,364 9,505
Participant contributions................................... 850 802
Foreign exchange loss....................................... (4,133) (1,297)
Benefits paid............................................... (10,235) (5,566)
Settlement payments......................................... (1,034) (100)
-------- --------
Fair value of plan assets at end of year.................... $250,466 $271,811
======== ========
The funded status of the Pension Plans is as follows:
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Funded status............................................... $(19,805) $ 18,361
Unrecognized actuarial (gain)/loss.......................... 26,097 (15,854)
Unrecognized transition asset............................... (3,867) (3,780)
Unrecognized prior service credit........................... -- (648)
-------- --------
Net amount recognized at year end........................... $ 2,425 $ (1,921)
======== ========
44
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Amounts recognized in the balance sheet consist of the following:
2000 1999
-------- --------
Prepaid benefit cost........................................ $ 9,796 $ 4,874
Accrued benefit liability................................... (7,371) (6,795)
------- -------
Net amount recognized at year end........................... $ 2,425 $(1,921)
======= =======
The components of net periodic benefit cost of the Pension Plans are as
follows:
2000 1999 1998
-------- -------- --------
Service cost........................................... $ 3,455 $ 10,635 $ 9,879
Interest cost.......................................... 19,272 17,890 17,135
Expected return on plan assets......................... (23,244) (21,427) (19,963)
Amortization of transition asset....................... (821) (772) (849)
Amortization of prior service cost..................... -- 1,286 1,806
Recognized actuarial (gain)/loss....................... (185) 229 27
Curtailment, net of settlements........................ (53) 7,947 183
Special termination benefit............................ -- -- 1,044
-------- -------- --------
Net periodic benefit cost/(credit)..................... $ (1,576) $ 15,788 $ 9,262
======== ======== ========
The weighted-average assumptions used in the Pension Plans are as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Discount rate................................... 7.2% 7.6% 7.0%
Expected long-term rate of return on plan
assets........................................ 8.5% 9.4% 9.4%
Rate of compensation increase................... 4.0% 3.9% 4.0%
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. As of December 31, 1999, the Canadian
pension plan was frozen. As employees will no longer accrue pension benefits
under the plan for future service, the wind-up results in a plan curtailment
resulting in income of approximately $186 in 2000.
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 $226,263, $226,130 and $204,707, respectively, as
of December 31, 2000, and $8,130, $6,496 and $3,137, respectively, as of
December 31, 1999.
POST RETIREMENT MEDICAL AND LIFE INSURANCE PLAN
EMC'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
45
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
costs less a fixed EMC 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 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,
2000 1999
------------ ------------
Benefit obligation at beginning of year............. $6,407 $10,421
Service cost........................................ -- 319
Interest cost....................................... 457 752
Plan amendments..................................... -- (3,939)
Benefits paid....................................... (994) (1,047)
Actuarial (gain)/loss............................... 30 (99)
------ -------
Benefit obligation at end of year................... $5,900 $ 6,407
====== =======
The reconciliation of the beginning and ending balances of the fair value of
plan assets is as follows:
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Fair value of plan assets at beginning of year...... $ 371 $ 335
Actual return on plan assets........................ (24) 36
Employer contributions.............................. 994 1,047
Benefits paid....................................... (994) (1,047)
----- -------
Fair value of plan assets at end of year............ $ 347 $ 371
===== =======
The funded status of the plan is as follows:
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Funded status....................................... $(5,553) $(6,036)
Unrecognized actuarial gain......................... (653) (761)
Unrecognized transition obligation.................. -- 1,768
Unrecognized prior service credit................... (1,551) (3,420)
------- -------
Accrued benefit liability........................... $(7,757) $(8,449)
======= =======
46
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The components of net periodic benefit cost are as follows:
2000 1999 1998
-------- -------- --------
Service cost......................................... $ -- $ 319 $ 327
Interest cost........................................ 457 752 727
Expected return on plan assets....................... (33) (54) (19)
Amortization of prior service cost................... (101) 67 69
Amortization of transition asset..................... -- 164 170
Recognized actuarial gain............................ (21) (4) (18)
Curtailment, net..................................... -- -- (46)
Special termination benefit.......................... -- -- 132
----- ------ ------
Net periodic benefit cost............................ $ 302 $1,244 $1,342
===== ====== ======
The weighted-average assumptions used in the plan are as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Discount rate........................... 7.5% 8.0% 7.3%
Expected long-term rate of return on
plan assets........................... 9.0% 10.0% 10.0%
Rate of compensation increase........... N/A 4.0% 5.0%
The effects of a one percent change in the assumed health care cost trend
rates are as follows:
1% INCREASE 1% DECREASE
----------- -----------
Effect on total service and interest cost components
for 2000............................................ $ 4 $ (3)
Effect on year-end post retirement obligation......... 48 (43)
L. COMMITMENTS AND LONG-TERM OBLIGATIONS
OPERATING LEASE COMMITMENTS
EMC leases office and warehouse facilities and other equipment under various
operating leases. Facilities rent expense amounted to $78,321, $61,326, and
$52,664 in 2000, 1999 and 1998, respectively. EMC's commitments under its
operating leases are as follows:
OPERATING
FISCAL YEAR LEASES
- ----------- ---------
2001........................................................ $180,012
2002........................................................ 120,712
2003........................................................ 79,830
2004........................................................ 59,059
2005........................................................ 46,791
Thereafter.................................................. 52,581
--------
Total minimum lease payments................................ $538,985
========
47
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, 2000 or 1999. EMC 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, EMC sold $517,500 of 3 1/4% convertible subordinated notes
due 2002 (the "3 1/4% Notes"). The 3 1/4% Notes were generally convertible into
shares of common stock, par value $.01 per share, of EMC at a conversion price
of $5.67 per share, subject to adjustment in certain events. Interest was
payable semiannually and the 3 1/4% Notes were redeemable at the option of EMC
at set redemption prices (which ranged from 100.65% to 101.3% of principal),
plus accrued interest, commencing March 15, 2000. On February 15, 2000, EMC
announced that it would redeem all of the outstanding 3 1/4% Notes. As of
March 15, 2000, all outstanding 3 1/4% Notes were converted into shares of EMC
common stock.
6% NOTES
In May 1997, Data General sold $212,750 of the 6% convertible subordinated
notes due 2004 (the "6% Notes"), which were assumed by EMC in connection with
the acquisition of Data General in 1999. The 6% Notes were generally convertible
into shares of EMC common stock at a conversion price of $41.91 per share,
subject to adjustment in certain events. Interest was payable semi-annually and
the 6% Notes were redeemable at the option of EMC at set redemption prices
(which ranged from 100.857% to 103.429% of principal), plus accrued interest,
commencing May 14, 2000. On April 14, 2000, EMC announced that it would redeem
all of the outstanding 6% Notes. On May 18, 2000, $212,595 of the 6% Notes were
converted into shares of EMC common stock. EMC paid approximately $155 in 2000
to redeem the remaining 6% Notes.
IDA GRANT
The Industrial Development Authority of Ireland has granted EMC a total of
$5,189 towards the purchase price and improvements to EMC'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, 2000 are $3,276, of which $220 is current and $3,056 is long-term.
M. STOCKHOLDERS' EQUITY
STOCK SPLIT
On May 3, 2000, EMC announced a 2-for-1 stock split in the form of a 100%
stock dividend with a record date of May 19, 2000 and a distribution date of
June 2, 2000. On February 25, 1999, EMC 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.
48
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:
2000 1999 1998
---------- ---------- ----------
BASIC:
Net income......................................... $1,782,075 $1,010,570 $ 653,978
Weighted average common shares outstanding......... 2,164,180 2,061,101 2,030,742
---------- ---------- ----------
Net income per share, basic........................ $ 0.82 $ 0.49 $ 0.32
========== ========== ==========
DILUTED:
Net income......................................... $1,782,075 $1,010,570 $ 653,978
Add back of interest expense on 3 1/4% convertible
notes............................................ 2,987 15,974 16,819
Less tax effect of interest expense on 3 1/4%
convertible notes................................ (1,195) (6,390) (6,728)
---------- ---------- ----------
Net income for calculating diluted earnings per
share............................................ 1,783,867 1,020,154 664,069
========== ========== ==========
Weighted average common shares outstanding......... 2,164,180 2,061,101 2,030,742
Weighted common stock equivalents.................. 81,023 157,964 157,688
---------- ---------- ----------
Total weighted average shares...................... 2,245,203 2,219,065 2,188,430
========== ========== ==========
Net income per share, diluted...................... $ 0.79 $ 0.46 $ 0.30
========== ========== ==========
The calculation of diluted earnings per share excludes the 6% Notes as these
are considered antidilutive.
PREFERRED STOCK
EMC'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 EMC.
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 EMC. In 2000, the Board of Directors and
stockholders approved an amendment to the 1993 Plan to increase the number of
shares available for grant under such plan by 20,000 shares. A total of 180,000
and 288,000 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.
49
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In 2000 and 1999, options to purchase an aggregate of 310 and 522 shares,
respectively, of common stock at $.01 per share were granted to certain
employees. Also in 1999, options to purchase an aggregate of 290 shares of
common stock at $32.13 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 848 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 500 shares at $6.48 per share,
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 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 14,400
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 480 shares of common stock at $5.28 per share
were granted to three 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, EMC derives a tax deduction measured by the amount that the fair
market value exceeds the option price on the date the options are exercised.
When nonqualified stock options are exercised, EMC derives a tax deduction
measured by the amount that the fair market value exceeds the option price on
the date the options are exercised.
At December 31, 2000, there were an aggregate of approximately 45,100 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.
EMC 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.
EMC 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 and directors to purchase up to an
aggregate of 7,500 shares of common stock under certain stock option plans
("Data General Plans"). In 1999, 142 shares were granted at an average price of
$8.63, representing 40% of the per share fair market value on the date of grant.
In 1998, 928 shares were granted at an average price of $26.11, representing 50%
of the per share fair market value on the date of grant. In 1997, 684 shares
were granted at an average price of $34.59, representing 50% of the per share
fair market value on the date of grant.
50
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SUPPLEMENTAL DISCLOSURES FOR STOCK-BASED COMPENSATION
Activity under the Plans and option activity relating to business
acquisitions for the three years ended December 31, 2000 is as follows:
WTD.
AVG.
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Outstanding, January 1, 1998................................ 111,126 $ 3.38
Options relating to business acquisitions................. 858 3.34
Granted................................................... 20,836 12.07
Canceled.................................................. (1,786) 5.42
Exercised................................................. (21,512) 1.92
-------
Outstanding, December 31, 1998.............................. 109,522 5.28
Granted................................................... 19,168 29.89
Canceled.................................................. (2,428) 9.59
Exercised................................................. (21,262) 3.56
-------
Outstanding, December 31, 1999.............................. 105,000 10.02
Options relating to business acquisitions................. 391 27.85
Granted................................................... 31,563 76.31
Canceled.................................................. (6,412) 41.79
Exercised................................................. (25,860) 6.45
-------
Outstanding, December 31, 2000.............................. 104,682 $29.01
=======
Summarized information about stock options outstanding at December 31, 2000
is as follows:
EXERCISABLE
--------------------
WEIGHTED WEIGHTED
WEIGHTED AVG. AVG. AVG.
RANGE OF NUMBER OF OPTIONS REMAINING EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE OPTIONS PRICE
- --------------------- ----------------- ---------------- -------- --------- --------
$0.01 -- $2.74 26,905 4.64 $1.79 22,558 $1.74
2.75 -- 4.12 2,260 6.29 3.13 1,173 3.14
4.13 -- 6.18 15,917 6.42 5.86 5,966 5.95
6.19 -- 9.27 3,612 6.41 7.57 1,332 7.63
9.28 -- 13.91 10,776 7.41 12.72 2,660 12.72
13.92 -- 20.87 1,216 7.50 15.80 356 16.28
20.88 -- 31.31 1,539 8.00 26.17 129 26.27
31.32 -- 46.97 14,063 8.48 31.90 2,297 32.07
46.98 -- 70.46 8,822 9.11 60.17 7 66.09
70.47 -- 90.00 19,572 9.41 86.09 5 75.27
Options exercisable at December 31, 2000, 1999 and 1998 were 36,483, 39,280
and 35,574, respectively.
51
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The fair value of each option granted during 2000, 1999 and 1998 is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions:
2000 1999 1998
-------- -------- --------
Dividend yield.............................................. None None None
Expected volatility......................................... 55.0% 52.0% 52.0%
Risk-free interest rate..................................... 6.21% 5.5% 5.4%
Expected life (years)....................................... 5.0 5.0 5.0
Weighted average fair value of options granted at fair
market value during:
2000........................................................ $42.28
1999........................................................ $15.86
1998........................................................ $ 6.52
Weighted average fair value of options granted below fair
market value during:
2000........................................................ $58.33
1999........................................................ $22.97
1998........................................................ $10.65
Had compensation cost for EMC's 2000, 1999 and 1998 stock option grants and
employee stock purchase plan issuances been determined consistent with
SFAS 123, EMC's net income and net income per share would have been:
NET INCOME PER NET INCOME PER
NET INCOME SHARE, DILUTED SHARE, BASIC
---------- -------------- --------------
As reported:
2000........................................ $1,782,075 $0.79 $0.82
1999........................................ $1,010,570 $0.46 $0.49
1998........................................ $ 653,978 $0.30 $0.32
Pro forma:
2000........................................ $1,599,880 $0.71 $0.74
1999........................................ $ 945,144 $0.43 $0.46
1998........................................ $ 615,124 $0.29 $0.30
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
Under the 1989 Employee Stock Purchase Plan (the "1989 Plan") eligible
employees of EMC 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 48,000
shares have been reserved for issuance under the 1989 Plan. Options to purchase
shares are granted
52
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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:
2000 1999 1998
-------- -------- --------
Shares...................................................... 1,223 1,484 2,384
Weighted average exercise price............................. $51.72 $19.77 $ 6.55
Weighted average fair value................................. $20.63 $ 9.60 $ 3.66
ISSUANCE OF SUBSIDIARY STOCK
On August 9, 2000, EMC completed the initial public offering of 14,375
shares of Class B common stock of its indirect majority owned subsidiary McDATA
Corporation (including the exercise of the underwriter's over-allotment option).
The offering represented approximately 13% of the McDATA common stock
outstanding on August 9, 2000. McDATA offered the shares at a price of $28 per
share and realized net proceeds from the offering of $376,607. McDATA has
retained the net proceeds for general corporate purposes. As of December 31,
2000, EMC owned approximately 74% of the outstanding McDATA common stock with
the remaining 26% interest reflected in the minority interest line item on the
consolidated balance sheet. See Note R.
N. LITIGATION
EMC is a party to 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 EMC's business, results of operations or
financial condition.
O. RISKS AND UNCERTAINTIES
EMC's future results of operations involve a number of risks and
uncertainties. Factors that could affect EMC's future operating results and
cause actual results to vary materially from expectations include, but are not
limited to, component quality and availability, rapid technological and market
change and the transition to new products, competitive factors, including but
not limited to pricing pressures, in the information storage and server markets,
the relative and varying rates of product price and component cost declines,
economic trends in various geographic markets and fluctuating currency exchange
rates, the ability to attract and retain highly qualified employees, the uneven
pattern of quarterly sales, risks associated with strategic investments and
acquisitions, EMC's ability to execute on its plans and other one-time events.
P. SEGMENT INFORMATION
EMC operates in the following segments: information storage products,
information storage services and other businesses. The following table presents
the revenue components for information storage products.
2000 1999 1998
---------- ---------- ----------
Information storage systems...................... $6,245,765 $4,564,956 $3,759,850
Information storage software..................... 1,435,133 821,727 445,350
---------- ---------- ----------
$7,680,898 $5,386,683 $4,205,200
========== ========== ==========
53
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
EMC's management makes financial decisions and allocates resources based on
product segment. EMC's financial reporting focuses on the revenues and gross
profit for each segment. EMC does not allocate marketing, engineering or
administrative expenses to each segment, 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:
INFORMATION INFORMATION
STORAGE STORAGE OTHER
PRODUCTS SERVICES BUSINESSES CONSOLIDATED
----------- ----------- ---------- ------------
2000
Revenues............................... $7,680,898 $612,089 $ 579,829 $8,872,816
Gross profit........................... 4,716,755 206,932 219,364 5,143,051
1999
Revenues............................... $5,386,683 $361,806 $ 967,121 $6,715,610
Gross profit........................... 3,034,062 94,311 328,992 3,457,365
1998
Revenues............................... $4,205,200 $190,286 $1,040,672 $5,436,158
Gross profit........................... 2,070,923 36,673 332,162 2,439,758
EMC'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.
NORTH AMERICA EUROPE, MIDDLE INTERCOMPANY CONSOLIDATED
(PRIMARILY U.S.) EAST, AFRICA ASIA PACIFIC LATIN AMERICA ELIMINATIONS TOTAL
---------------- -------------- ------------ ------------- ------------- ------------
2000
Revenues............... $5,436,227 $2,351,773 $880,121 $204,695 $ -- $ 8,872,816
Identifiable assets at
year end............. 8,220,561 3,274,841 352,279 116,300 (1,335,639) 10,628,342
1999
Revenues............... $4,257,116 $1,844,320 $438,967 $175,207 $ -- $ 6,715,610
Identifiable assets at
year end............. 4,630,506 2,245,460 306,266 73,195 (82,139) 7,173,288
1998
Revenues............... $3,367,835 $1,597,648 $381,452 $ 89,223 $ -- $ 5,436,158
Identifiable assets at
year end............. 3,954,985 1,626,823 253,144 38,677 (246,609) 5,627,020
54
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Q. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Q1 2000 Q2 2000 Q3 2000 Q4 2000
---------- ---------- ---------- ----------
2000
Net sales and service......................... $1,822,598 $2,145,927 $2,283,005 $2,621,286
Gross profit.................................. 1,031,539 1,243,495 1,316,409 1,551,608
Net income.................................... 331,987 429,037 458,178 562,873
Net income per share (diluted)................ $ 0.15 $ 0.19 $ 0.20 $ 0.25
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)................ $ 0.10 $ 0.13 $ 0.13 $ 0.09
Note: Q4 1999 includes an after-tax restructuring charge of $169,898, or
$.08 per diluted share.
R. SUBSEQUENT EVENT
On December 28, 2000, EMC's Board of Directors declared a stock dividend of
approximately .0368069 of a share of McDATA Class A common stock for each share
of EMC common stock. The dividend was distributed on February 7, 2001 to holders
of record on January 24, 2001. As a result of the distribution, EMC no longer
has any equity ownership interest in McDATA.
55
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EMC 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, 2000. 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 are filed as part of this report.
2. Schedule
The Schedule on page S-1 is filed as part of this report.
3. Exhibits
See Index to Exhibits on page 58 of this report.
The exhibits are filed with or incorporated by reference in this report.
(b) Reports on Form 8-K.
On November 8, 2000, EMC filed a Current Report on Form 8-K reporting under
Item 5 the acquisition of CrosStor Software, Inc.
56
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 12, 2001.
EMC CORPORATION
By: /s/ MICHAEL C. RUETTGERS
-----------------------------------------
Michael C. Ruettgers
EXECUTIVE CHAIRMAN OF THE BOARD OF
DIRECTORS
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 12, 2001.
SIGNATURE TITLE
--------- -----
/s/ MICHAEL C. RUETTGERS
------------------------------------------- Executive Chairman of the Board of Directors
Michael C. Ruettgers (PRINCIPAL EXECUTIVE OFFICER)
/s/ JOSEPH M. TUCCI
------------------------------------------- President, Chief Executive Officer and
Joseph M. Tucci Director
/s/ WILLIAM J. TEUBER, JR. Senior Vice President and Chief Financial
------------------------------------------- Officer
William J. Teuber, Jr. (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/s/ RICHARD J. EGAN
------------------------------------------- Chairman Emeritus and Director
Richard J. Egan
/s/ MICHAEL J. CRONIN
------------------------------------------- Director
Michael J. Cronin
/s/ JOHN R. EGAN
------------------------------------------- Director
John R. 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
57
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. (1)
3.2 Amended and Restated By-laws of EMC Corporation. (1)
4.1 Form of Stock Certificate. (3)
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.*
10.4 EMC Corporation Executive Deferred Compensation Plan. (2)
21.1 Subsidiaries of Registrant.*
23.1 Consent of Independent Accountants.*
- ------------------------
* Filed herewith
(1) Incorporated by reference to EMC's Annual Report on Form 10-K filed
March 17, 2000 (No. 1-9053).
(2) Incorporated by reference to EMC's Registration Statement on Form S-8 filed
December 21, 2000.
(3) Incorporated by reference to EMC's Annual Report on Form 10-K filed
March 31, 1988 (No. 0-1436).
58
EMC CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ---------- ----------
Year ended December 31, 2000 allowance
for doubtful accounts.................. $34,279 $27,537 $ -- $(23,256) $38,560
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
S-1