Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

EMC CORPORATION

(Exact name of registrant as specified in its charter)

176 South Street

Hopkinton, Massachusetts 01748

(Address of principal executive offices, including zip code)

(508) 435-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

The number of shares of common stock, par value $.01 per share, of the registrant outstanding as of March 31, 2003 was 2,186,996,674.

Table of Contents

EMC CORPORATION

2

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.    Financial Statements

EMC CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

The accompanying notes are an integral part of the consolidated financial statements.

3

Table of Contents

EMC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

4

Table of Contents

EMC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

5

Table of Contents

EMC CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

6

Table of Contents

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation

Company

EMC Corporation and its subsidiaries (“EMC”) design, manufacture, market and support a wide range of networked storage platforms, software and related services. EMC products and services are designed to enable organizations of all types and sizes to manage, protect and share their information in the most efficient and cost-effective manner possible.

Accounting

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles. These statements include the accounts of EMC and its subsidiaries. Certain information and footnote disclosures normally included in EMC’s annual consolidated financial statements have been condensed or omitted. The interim consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary to fairly present the results as of and for the periods ended March 31, 2003 and 2002. Certain prior year amounts have been reclassified to conform with the 2003 presentation.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2002 which are contained in EMC’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2003.

Revenue Recognition

EMC derives revenue from sales of information storage systems, software and services. EMC recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. This policy is applicable to all sales, including sales to resellers and end users. The following summarizes the major terms of EMC’s contractual relationships with its customers and the manner in which EMC accounts for sales transactions.

Systems sales consist of the sale of hardware, including Symmetrix systems, CLARiiON systems, Celerra systems, Centera systems and Connectrix systems. Revenue for hardware is generally recognized upon shipment.

Software sales consist of the sale of software application programs that provide customers with information management, sharing or protection capabilities. Revenue for software is generally recognized upon shipment. Software sales also include the licensing of technology, which is recognized ratably over the contract period.

Services revenue consists of the sale of installation services, software warranty and maintenance, hardware maintenance, training and professional services.

7

Table of Contents

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.  Basis of Presentation (Continued)

Installation is not considered essential to the functionality of EMC’s products as these services do not alter the product capabilities, do not require specialized skills and may be performed by the customers or other vendors. Installation services revenues are recognized upon completion of installation.

Software warranty and maintenance and hardware maintenance revenues are recognized ratably over the contract period.

Training revenues are recognized upon completion of the training.

Professional services revenues, which include information infrastructure design, integration and implementation, business continuity, data migration, networking storage and project management, are recognized as milestones are met. The milestones reflect the percentage of costs incurred on the project to total estimated costs.

EMC considers sales contracts that include a combination of systems, software or services to be multiple element arrangements. An item is considered a separate element if it involves a separate earnings process. If an arrangement includes undelivered elements that are not essential to the functionality of the delivered elements, EMC defers the fair value of the undelivered elements with the residual revenue allocated to the delivered elements. Discounts are allocated only to the delivered elements. Fair value is determined based upon the price charged when the element is sold separately. Undelivered elements typically include installation, training, software warranty and maintenance, hardware maintenance and professional services.

EMC sales contracts generally provide for the customer to accept title and risk of loss when the product leaves EMC’s facility. When shipping terms or local laws do not allow for passage of title and risk of loss at shipping point, EMC defers recognizing revenue until title and risk of loss transfer to the customer.

Revenue from sales-type leases is recognized at the net present value of future lease payments. Revenue from operating leases is recognized over the lease period.

EMC accrues for systems’ warranty costs and reduces revenue for estimated sales returns at the time of shipment. Systems’ warranty costs are estimated based upon EMC’s historical experience and specific identification of systems’ requirements. Sales returns are estimated based upon EMC’s historical experience and specific identification of probable returns.

Accounting for Stock-Based Compensation

Statement of Financial Accounting Standards (“FAS”) No. 123, “Accounting for Stock-Based Compensation” 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

8

Table of Contents

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.  Basis of Presentation (Continued)

recognized over the service period, which is usually the vesting period. As provided for in FAS No. 123, EMC elected to apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. The following is a reconciliation of net income (loss) per weighted average share had EMC adopted the fair value measurement provisions of FAS No. 123 (table in thousands, except per share amounts):

The fair value of each option granted during 2003 and 2002 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

9

Table of Contents

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.  Inventories

Inventories consist of (table in thousands):

3.  Property, Plant and Equipment

Property, plant and equipment consists of (table in thousands):

Construction in progress and land owned at March 31, 2003 include $95.3 million and $5.9 million, respectively, of facilities under construction that EMC is holding for future use.

4.  Accrued Expenses

Accrued expenses consist of (table in thousands):

10

Table of Contents

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.  Accrued Expenses (Continued)

The amount charged and accrued against the product warranty reserve is as follows (table in thousands):

5.  Stockholders’ Equity

Common Stock Repurchase Program

EMC’s Board of Directors has authorized the repurchase of up to an aggregate of 300.0 million shares of its common stock, par value $.01 per share (“Common Stock”). The purchased shares will be available for various corporate purposes, including for use in connection with stock option and employee stock purchase plans. EMC utilizes the cost method to account for the purchase of treasury stock, which presents the aggregate cost of reacquired shares as a component of stockholder’s equity. As of March 31, 2003, EMC had reacquired 50.7 million shares.

6.  Net Income (Loss) Per Share

Calculation of diluted earnings (loss) per share is as follows (table in thousands, except per share amounts):

Options to acquire 121.4 million and 155.8 million shares of Common Stock for the three months ended March 31, 2003 and 2002, respectively, were excluded from the calculation of diluted earnings (loss) per share because of their antidilutive effect.

11

Table of Contents

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7.  Commitments and Contingencies

Lines of Credit

EMC has available for use credit lines of $50.0 million in the United States and $50.0 million in Brazil. As of March 31, 2003, EMC had no borrowings outstanding on either line of credit. The U.S. credit line bears interest at the bank’s base rate and requires EMC, upon utilization of the credit line, to meet certain financial covenants with respect to limitations on losses. The Brazilian credit line bears interest at the rate quoted by the lender and requires EMC to meet certain financial covenants with respect to limitations on losses and maintaining minimum levels of cash and investments. In the event the covenants are not met, the lender may require EMC to provide collateral to secure the outstanding balance. At March 31, 2003, EMC was in compliance with the covenants.

Litigation

In April 2002, EMC filed a complaint against Hitachi, Ltd. and Hitachi Data Systems Corporation (together, “Hitachi”) with the International Trade Commission (“ITC”) and in the United States Federal District Court in Worcester, Massachusetts. The ITC complaint alleged that Hitachi had engaged in unlawful activities by importing into the United States products that infringed six EMC patents. EMC asked the ITC to issue an injunction to block importation of Hitachi’s infringing products, and in May 2002, the ITC voted to commence an investigation into EMC’s claims. The suit in District Court sought preliminary and permanent injunctions as well as unspecified monetary damages for patent infringement. In June 2002, the suit in District Court was stayed, pending the outcome of the ITC action. Subsequent to the date EMC filed a complaint against Hitachi, in April 2002, Hitachi and Hitachi Computer Products (America), Inc. (“HICAM”) filed a complaint against EMC in the United States Federal District Court for the Western District of Oklahoma. The complaint alleged that certain of EMC’s products infringed eight Hitachi patents and sought preliminary and permanent injunctions as well as unspecified monetary damages for patent infringement. In July 2002, this suit was transferred to the United States Federal District Court in Worcester, Massachusetts. In March 2003, EMC and Hitachi jointly announced that the parties had entered into agreements whereby they agreed (i) to settle all pending patent infringement claims between EMC, Hitachi and HICAM, (ii) to cross-license their respective patents and (iii) to a framework for exchanging technology in the form of storage-related application programming interfaces. In accordance with the cross-license agreements, EMC will receive payments from Hitachi, which EMC will classify within software revenue and recognize ratably over the term of the agreements. The cross-license agreements expire at the end of 2007. On February 27, 2003, EMC and Hitachi filed a Joint Motion with the ITC to terminate the ITC investigation on the basis of the above-referenced agreements, and on March 11, 2003, the ITC judge signed an order terminating the ITC investigation. On March 28, 2003, the ITC judge’s order was accepted by the ITC. Thereafter, the district court actions referenced above were dismissed.

On September 30, 2002, EMC filed a complaint against Hewlett-Packard Company (“HP”) in the United States Federal District Court in Worcester, Massachusetts alleging that certain HP products infringe six EMC patents. The suit seeks a permanent injunction as well as unspecified monetary damages for patent infringement. On September 30, 2002, HP filed a complaint against EMC in the United States Federal District Court for the Northern District of California alleging that certain EMC products infringe seven HP patents. The suit seeks a permanent injunction as well as unspecified monetary damages for patent infringement. EMC believes that HP’s claims are without merit, and on October 1, 2002, EMC filed an amended complaint asking the court to declare that the seven HP patents referenced in HP’s complaint are invalid and not infringed.

12

Table of Contents

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7.  Commitments and Contingencies (Continued)

EMC is a party to other litigation that 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.

8.  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 (table in thousands):

EMC’s management makes financial decisions and allocates resources based on revenues and gross profit achieved at the segment level. EMC does not allocate selling, general and administrative or research and development expenses to each segment, as management does not use this information to measure the performance of the operating segments. The revenues and gross profit attributable to these segments are included in the following table (table in thousands, except for footnote):

13

Table of Contents

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8.  Segment Information (Continued)

EMC’s revenues are attributed to geographic areas according to the location of customers. Revenues by geographic area are included in the following table (table in thousands):

No country other than the United States accounted for 10% or more of revenues during the three months ended March 31, 2003 or 2002.

At March 31, 2003, long-lived assets, excluding financial instruments, intangible assets and deferred tax assets, were $1,372.6 million in the United States and $146.6 million in Ireland. At December 31, 2002, the long-lived assets, excluding financial instruments, intangible assets and deferred tax assets, were $1,419.6 million in the United States and $145.3 million in Ireland. No other country accounted for 10% or more of these assets at March 31, 2003 or December 31, 2002.

9.  Restructuring Costs and Other Special Charges

2002 Restructuring Program

In the fourth quarter of 2002, EMC implemented a restructuring program to further reduce its cost structure. As a result of the program, EMC incurred restructuring and other special charges. The restructuring charge included employee termination benefits, consolidation of excess facilities, impairment of long-lived assets and contractual and other obligations for which EMC will no longer derive an economic benefit. The activity for the first quarter of 2003 is presented below (table in thousands):

The $15.7 million addition to the provision for workforce reduction was primarily attributable to finalizing severance packages for employees in foreign jurisdictions. The $4.8 million addition to the provision for the consolidation of excess facilities represents additional charges for facilities being vacated.

14

Table of Contents

EMC CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9.  Restructuring Costs and Other Special Charges (Continued)

The 2002 restructuring program includes a reduction in force of approximately 1,500 employees across all business functions and geographic regions. Approximately 64% of such employees are or were based in North America and the remainder are or were based in Europe, Latin America and the Asia Pacific region. As of March 31, 2003, approximately 1,100 employees had been terminated.

The 2002 restructuring program is expected to be substantially completed by June 30, 2003, although the ability to sublet facilities is subject to appropriate market conditions. The expected cash impact of the 2002 restructuring program is $130.0 million, of which $24.2 million was paid in 2002 and $22.4 million was paid in 2003. Remaining cash expenditures, relating to workforce reductions and contractual obligations, are expected to be substantially paid by the end of 2003. Amounts relating to the consolidation of facilities will be paid over the respective lease terms through 2015.

Other Restructuring Programs

In the third quarter of 2001, EMC implemented a restructuring program to reduce its cost structure. As a result of the program, EMC incurred restructuring and other special charges of $825.2 million. Additionally, during 1999, EMC recorded a charge of $223.6 million relating to restructuring, merger and other special charges primarily associated with its acquisition of Data General Corporation. As of March 31, 2003, the remaining accrued obligations associated with the 2001 and 1999 charges was $123.1 million. The amounts primarily relate to remaining lease obligations that will be paid through 2015. In addition, the amounts relate to executive severance obligations attributable to the acquisition of Data General.

15

Table of Contents

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our interim consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report and the MD&A contained in EMC’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 18, 2003. The following discussion contains forward-looking statements and should also be read in conjunction with “FACTORS THAT MAY AFFECT FUTURE RESULTS” beginning on page 22.

All dollar amounts in this MD&A are in millions.

Results of Operations—First Quarter of 2003 Compared to First Quarter of 2002

Revenues

Total revenues for the first quarter of 2003 were $1,384.2, compared to $1,302.0 for the first quarter of 2002, representing an increase of $82.2, or 6%.

Information storage systems revenues were $752.4 in the first quarter of 2003, compared to $741.6 in the first quarter of 2002, representing an increase of $10.8, or 1%. Information storage software revenues were $298.6 in the first quarter of 2003, compared to $282.3 in the first quarter of 2002, representing an increase of $16.3, or 6%. The increase in revenues for information storage systems was volume related, partially offset by price declines resulting from lower material costs, which we passed on to our customers. The increase in software revenues was due to revenue associated with licensing our technology and increased volume of software sales.

Information storage services revenues were $306.0 in the first quarter of 2003, compared to $238.5 in the first quarter of 2002, representing an increase of $67.5, or 28%. The increase was primarily due to a growth in maintenance revenues associated with a greater volume of software and hardware maintenance contracts. Additionally, a greater volume of professional services, largely to support and implement automated networked storage solutions, contributed to the increase.

Total information storage revenues were $1,357.0 in the first quarter of 2003, compared to $1,262.4 in the first quarter of 2002, representing an increase of $94.6, or 7%.

Other businesses revenues were $27.2 in the first quarter of 2003, compared to $39.5 in the first quarter of 2002, representing a decrease of $12.3, or 31%. Other businesses revenues consist of revenues from AViiON server maintenance services. During the third quarter of 2001, we stopped selling AViiON server products. Accordingly, other business revenues is comprised only of AViiON services revenues. These revenues are expected to continue to decline in future quarters.

Revenues on sales into the North American markets were $866.9 in the first quarter of 2003, compared to $768.8 in the first quarter of 2002, representing an increase of $98.1, or 13%. Revenues on sales into the European, Middle East and African markets were $343.4 in the first quarter of 2003, compared to $285.6 in the first quarter of 2002, representing an increase of $57.8, or 20%. Revenues on sales into the Asia Pacific markets were $148.0 in the first quarter of 2003, compared to $223.8 in the first quarter of 2002, representing a decrease of $75.8, or 34%. Revenues on sales into the Latin American markets were $25.8 in the first quarter of 2003, compared to $23.7 in the first quarter of 2002, representing an increase of $2.1, or 9%. The increase in revenues in the North American, European, Middle East and African and Latin American markets was attributable to greater demand for our products and services whereas the decrease in revenue in the Asia Pacific markets was due to several large non-recurring customer orders received in the first quarter of 2002.

16

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

Changes in exchange rates in the first quarter of 2003 compared to the first quarter of 2002 positively impacted revenues by approximately 2.5%. The impact was most significant in the European market, primarily Germany, the United Kingdom, Italy and France.

Gross Margins

Gross margin dollars increased to $597.8 in the first quarter of 2003 from $501.0 in the first quarter of 2002, an increase of $96.8, or 19.3%. The increase in gross margin dollars was attributable to our information storage products and information storage services segments.

The gross margin percentage for information storage products increased to 41.6% in the first quarter of 2003, compared to 38.0% in the first quarter of 2002. The gross margin percentage for the first quarter of 2002 was favorably impacted by $28.1, or 2.7%, resulting from a partial reduction of a provision for excess and obsolete inventory recorded in 2001. The reduction resulted primarily from the sale of previously identified obsolete inventory. The increase in the gross margin percentage in the first quarter of 2003 compared to the first quarter of 2002 was primarily attributable to increased sales volume, higher margin technology license revenue and a lower fixed cost component of cost of sales.

The gross margin percentage for information storage services increased to 47.9% in the first quarter of 2003, compared to 40.0% in the first quarter of 2002. The improvement in the gross margin percentage was attributable to a higher proportion of revenues being comprised of maintenance revenues than professional services revenues in the first quarter of 2003 compared to the first quarter of 2002. Maintenance revenues provide a higher margin than professional services revenues.

The gross margin percentage for other businesses increased to 50.0% in the first quarter of 2003, compared to 41.0% in the first quarter of 2002. The increase in the gross margin percentage resulted from reducing costs in this segment as the volume of maintenance contracts diminished.

Research and Development

Research and development (“R&D”) expenses were $180.4 and $201.0 in the first quarters of 2003 and 2002, respectively, a decline of 10%. As a percentage of revenues, R&D expenses were 13.0% and 15.4% in the first quarters of 2003 and 2002, respectively. In addition, we spent $26.6 and $28.8 in the first quarters of 2003 and 2002, respectively, on software development, which costs were capitalized. R&D spending levels reflect our efforts to continue to improve our long-term competitive position, offset in part by our continued cost cutting efforts. R&D spending includes enhancements to information storage software and information storage systems, including networked information storage systems. We will continue with our R&D efforts in 2003; however, the overall level of spending is expected to be slightly lower in 2003 compared to 2002 as we gain further efficiencies in our operating cost structure.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses were $384.6 and $454.7 in the first quarters of 2003 and 2002, respectively, a decrease of 15%. As a percentage of revenues, SG&A expenses were 27.8% and 34.9% in the first quarters of 2003 and 2002, respectively. The decrease in SG&A expenses was primarily due to a reduction in salary, benefits and related costs associated with our continued cost cutting efforts.

17

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

2002 Restructuring Program

In the fourth quarter of 2002, we implemented a restructuring program to further reduce our cost structure. As a result of the program, we incurred restructuring and other special charges. The restructuring charge included employee termination benefits, consolidation of excess facilities, impairment of long-lived assets and contractual and other obligations for which we will no longer derive an economic benefit. The activity for the first quarter of 2003 is presented below:

The $15.7 addition to the provision for workforce reduction was primarily attributable to finalizing severance packages for employees in foreign jurisdictions. The $4.8 addition to the provision for the consolidation of excess facilities represents additional charges for facilities being vacated.

The 2002 restructuring program includes a reduction in force of approximately 1,500 employees across all business functions and geographic regions. Approximately 64% of such employees are or were based in North America and the remainder are or were based in Europe, Latin America and the Asia Pacific region. As of March 31, 2003, approximately 1,100 employees had been terminated.

The 2002 restructuring program is expected to be substantially completed by June 30, 2003, although the ability to sublet facilities is subject to appropriate market conditions. The expected cash impact of the 2002 restructuring program is $130.0, of which $24.2 was paid in 2002 and $22.4 was paid in 2003. Remaining cash expenditures, relating to workforce reductions and contractual obligations, are expected to be substantially paid by the end of 2003. Amounts relating to the consolidation of facilities will be paid over the respective lease terms through 2015.

As a result of the 2002 restructuring program, we expect to reduce costs in all areas of our operations, favorably impacting cost of sales, SG&A expenses and R&D expenses. The 2002 restructuring program, once fully implemented, is expected to reduce costs by approximately $130.0 per year. We began to realize a portion of the benefits in the fourth quarter of 2002 and the first quarter of 2003.

Other Restructuring Programs

In the third quarter of 2001, we implemented a restructuring program to reduce our cost structure. As a result of the program, we incurred restructuring and other special charges of $825.2. Additionally, during 1999, we recorded a charge of $223.6 relating to restructuring, merger and other special charges primarily associated with our acquisition of Data General Corporation. As of March 31, 2003, the remaining accrued obligations associated with the 2001 and 1999 charges was $123.1. The amounts primarily relate to remaining lease obligations that will be paid through 2015. In addition, the amounts relate to executive severance obligations attributable to the acquisition of Data General.

18

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

Investment Income

Investment income decreased to $53.1 in the first quarter of 2003, from $55.5 in the first quarter of 2002. Investment income was earned from investments in cash equivalents, short and long-term investments and sales-type leases. Investment income decreased because of lower yields earned on outstanding investment balances. The weighted average return on investments, excluding realized gains, was 3.1% and 3.6% in the first quarters of 2003 and 2002, respectively.

Other Expense, net

Other expense, net was $5.7 in the first quarter of 2003, compared to $7.9 in the first quarter of 2002. The balance in 2003 consisted primarily of foreign currency losses. The balance in 2002 consisted primarily of foreign currency losses and losses on strategic investments.

Provision (Benefit) for Income Taxes

The provision for income taxes was $23.7 in the first quarter of 2003 compared to a benefit of $32.9 in the first quarter of 2002. The effective income tax rate was 40.3% in the first quarter of 2003 compared to an effective rate of benefit of 30.0% in the first quarter of 2002. The effective income tax rate is based upon the expected income (loss) for the year, the expected composition of that income (loss) in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of tax audits. Included in the tax provision for the first quarter of 2003 was a tax benefit of $1.7 associated with the $20.5 of restructuring and other special charges recognized in the quarter. The majority of the restructuring and other special charges is concentrated in jurisdictions with tax rates lower than the statutory rate, therefore leading to a disproportionate tax rate on these charges. The income tax rate for the remainder of 2003 is expected to be approximately 32.0%.

Financial Condition

Cash and cash equivalents and short and long-term investments were $5,676.5 and $5,685.6 at March 31, 2003 and December 31, 2002, respectively, a decrease of $9.1.

Cash provided by operating activities in the first three months of 2003 was $106.8, compared to $387.9 in the first three months of 2002. The decrease in the first three months of 2003 compared to the first three months of 2002 was primarily attributable to a reduction in working capital driven by an increase in inventories due to our Symmetrix product transition, decreased collections of accounts and notes receivable due to lower accounts and notes receivable balances and a $107.4 contribution to fund a portion of the Data General pension plan liability.

Cash used for investing activities was $294.9 in the first three months of 2003, compared to $684.0 in the first three months of 2002. Capital additions were $77.0 and $115.1 in the first three months of 2003 and 2002, respectively. The decrease in capital additions resulted from our cost containment measures. Net purchases and maturities of investments, consisting primarily of debt securities, were $191.2 and $540.1 in the first three months of 2003 and 2002, respectively.

Cash used for financing activities was $3.7 in the first three months of 2003, compared to cash provided from financing activities of $7.3 in the first three months of 2002. During the first three months of 2003, we repurchased 100,000 shares of our common stock, par value $.01 per share (“Common Stock”), at a cost of $0.7. As of March 31, 2003, we had repurchased 50.7 million of the 300.0 million shares of Common Stock authorized for repurchase by our Board of Directors. From time to time, we enter into Rule 10b5-1 plans to facilitate our share repurchases. Partially offsetting these uses in cash was cash generated of $5.8 and $12.8 in the first three months of 2003 and 2002, respectively, from the exercise of stock options.

19

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

We employ several strategies to enhance our liquidity and income. We derive revenues from both selling and leasing activity. We customarily sell the notes receivable resulting from our leasing activity. Generally, we do not retain any recourse on the sale of these notes. Additionally, from time to time we may sell accounts receivable when it is economically beneficial. We also lend certain fixed income securities to generate investment income. During the first three months of 2003, we entered into various agreements to loan fixed income securities generally on an overnight basis. Under these securities lending agreements, the value of the collateral is equal to 102% of the fair market value of the loaned securities. The collateral is generally cash, U.S. government-backed securities or letters of credit. At March 31, 2003, there were no outstanding securities lending transactions.

We have available for use credit lines of $50.0 in the United States and $50.0 in Brazil. As of March 31, 2003, we had no borrowings outstanding on either line of credit. The U.S. credit line bears interest at the bank’s base rate and requires us, upon utilization of the credit line, to meet certain financial covenants with respect to limitations on losses. The Brazilian credit line bears interest at the rate quoted by the lender and requires us to meet certain financial covenants with respect to limitations on losses and maintaining minimum levels of cash and investments. In the event the covenants are not met, the lender may require us to provide collateral to secure the outstanding balance. At March 31, 2003, we were in compliance with the covenants.

Based on our current operating and capital expenditure forecasts, we believe that the combination of funds currently available, funds generated from operations and our available lines of credit will be adequate to finance our ongoing operations for the next twelve months.

To date, inflation has not had a material impact on our financial results.

Critical Accounting Policies

Our consolidated financial statements are based on the selection and application of generally accepted accounting principles which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements. We believe that the policies set forth below may involve a higher degree of judgment and complexity in their application than our other accounting policies and represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. EMC’s significant accounting policies are presented within Note A to our Consolidated Financial Statements contained in our Annual Report on Form 10-K filed with the SEC on March 18, 2003.

Revenue Recognition

Revenue recognition is governed by various accounting principles, including the SEC’s Staff Accounting Bulletin, No. 101, “Revenue Recognition in Financial Statements”; Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition”; FAS No. 48, “Revenue Recognition When Right of Return Exists”; FAS No. 13, “Accounting for Leases”; and SOP No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” among others. The application of the appropriate accounting principle to our revenue is dependent upon the specific transaction and whether the sale or lease includes systems, software and services or a combination of these items. As our business evolves, the mix of products and services sold will impact the timing of when revenue and related costs are recognized. Additionally, revenue recognition involves judgments, including assessments of expected returns and the likelihood of nonpayment. We analyze various

20

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

factors, including a review of specific transactions, the credit-worthiness of our customers, our historical experience and market and economic conditions. Changes in judgments on these factors could materially impact the timing and amount of revenue and costs recognized.

Warranty Costs

We accrue for systems warranty costs at the time of shipment. While we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs. Should actual product failure rates, material usage or service delivery costs differ from our estimates, the amount of actual warranty costs could materially differ from our estimates.

Asset Valuation

Asset valuation includes assessing the recorded value of certain assets, including accounts and notes receivable, inventories and intangible assets. We use a variety of factors to assess valuation, depending upon the asset. Accounts and notes receivable are evaluated based upon the credit-worthiness of our customers, our historical experience, the age of the receivable and current market and economic conditions. The recoverability of inventories is based upon the types and levels of inventory held, forecasted demand, pricing, competition and changes in technology. Intangible assets are evaluated based upon the expected period the asset will be utilized, forecasted cash flows, changes in technology and customer demand. Changes in judgments on any of these factors could materially impact the value of the asset.

Restructuring Charges

We recognized restructuring charges in 2003, 2002 and 2001. The restructuring charges include, among other items, estimated losses on the sale of real estate, subletting of facilities and termination of various contracts. The amount of the actual obligations may be different than our estimates due to various factors, including market conditions and negotiations with third parties. Should the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.

Accounting for Income Taxes

As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our balance sheet. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is more likely than not, do not establish a valuation allowance. In the event that actual results differ from these estimates, our provision for income taxes could be materially impacted.

21

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

FACTORS THAT MAY AFFECT FUTURE RESULTS

Our prospects are subject to certain uncertainties and risks. This Quarterly Report on Form 10-Q also contains certain forward-looking statements within the meaning of the Federal securities laws. Our future results may differ materially from our 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 our other filings with the SEC.

Our business could continue to be materially adversely affected as a result of general economic and market conditions.

We are subject to the effects of general global economic and market conditions. Our operating results have been materially adversely affected as a result of unfavorable economic conditions and reduced information technology spending. If economic and market conditions do not improve, our business, results of operations or financial condition could continue to be materially adversely affected.

Our business could continue to be materially adversely affected as a result of a lessening demand in the information technology market.

Our revenue and profitability depend on the overall demand for information storage systems, software and services, particularly in the product segments in which we compete. During 2001 and 2002, we experienced a decrease in demand for information storage products as customers delayed or reduced their information technology expenditures. Further delays or reductions in information technology spending, domestically or internationally, could continue to materially adversely affect demand for our products and services which could result in decreased revenues or earnings.

We may be unable to keep pace with rapid industry, technological and market changes.

The markets in which we compete are characterized by rapid technological change, frequent new product introductions, evolving industry standards and changing needs of customers. There can be no assurance that our existing products will continue to be properly positioned in the market or that we will be able to introduce new or enhanced products into the market on a timely basis, or at all. We spend a considerable amount of money on research and development and introduce new products from time to time. There can be no assurance that enhancements to existing products or new products will receive customer acceptance. As competition in the storage industry increases, it may become increasingly difficult for us to maintain a technological advantage and to leverage that advantage toward increased revenues and profits.

Risks associated with the development and introduction of new products include delays in development and changes in data storage, networking and operating system technologies which could require us to modify existing products. Risks inherent in the transition to new products include the difficulty in forecasting customer preferences or 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, thereby causing a decline in sales of existing products and an excessive obsolete supply of inventory, 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. Our failure to introduce new or enhanced products on a timely basis, keep pace with rapid industry, technological or market changes or effectively manage the transitions to new products or new technologies could have a material adverse effect on our business, results of operations or financial condition.

22

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

The markets we serve are highly competitive, and we may be unable to compete effectively.

We compete with many established companies in the markets we serve and some of these companies (whether independently or by establishing alliances) may have substantially greater financial, marketing and technological resources, larger distribution capabilities, earlier access to customers and greater opportunity to address customers’ various information technology requirements than us. We also compete with many smaller, less established companies who may be able to focus more effectively on specific product segments or markets. Historically, we have competed primarily on the basis of our products’ features and performance. As product pricing becomes a more important criteria for our customers, we may experience increased competition from certain low-price competitors.

Companies may develop new technologies or products in advance of us or establish business models or technologies disruptive to us. Our business may be materially adversely affected by the announcement or introduction of new products, including hardware and software products, and services by our competitors, and the implementation of effective marketing or sales strategies by our competitors. In addition, as we increase our software and services businesses, we may face new competitive challenges.

We may have difficulty managing operations.

In October 2002, we announced a restructuring program to further reduce our cost structure. The restructuring program included a reduction in force of approximately 1,500 employees and the closure of certain facilities. Our future operating results will depend on the success of this restructuring program as well as on our overall ability to manage operations, which includes, among other things:

An unexpected further decline in revenues without a corresponding and timely reduction in expenses or a failure to manage other aspects of our operations could have a material adverse effect on our business, results of operations or financial condition.

Competitive pricing, component costs and sales volume could materially adversely affect our revenues, gross margins and earnings.

Competitive pricing pressures exist in the information storage market. There also has been and may continue to be a willingness on the part of certain competitors to reduce prices or provide information storage products or services, together with other products or services, at minimal or no additional cost in order to preserve or gain market share. We currently believe that pricing pressures are likely to continue.

To date, we have been able to manage our component and product design costs. However, there can be no assurance that we will be able to continue to achieve reductions in component and product design costs.

23

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

Our gross margins are impacted by a variety of factors, including competitive pricing, component and product design costs as well as the volume and relative mixture of information storage product and services revenues. Increased pricing pressures, increased component costs, the relative and varying rates of increases or decreases in product price and component costs, changes in product and services revenue mixture or decreased volume could have a material adverse effect on our revenues, gross margins or earnings.

If our suppliers are not able to meet our requirements, we could have decreased revenues and earnings.

We purchase or license many sophisticated components and products from one or a limited number of qualified suppliers, including some of our competitors. These components and products include disk drives, high density memory components, power supplies and software developed and maintained by third parties. We have experienced delivery delays from time to time because of high industry demand or the inability of some vendors to consistently meet our quality or delivery requirements. If any of our suppliers were to cancel or materially change contracts or commitments with us or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders, be unable to develop or sell certain products cost-effectively or on a timely basis, if at all, and have significantly decreased quarterly revenues and earnings, which would have a material adverse effect on our business, results of operations and financial condition.

Additionally, we periodically transition our product line to incorporate new technologies. The importance of transitioning our customers smoothly to new technologies, along with our historically uneven pattern of quarterly sales, intensifies the risk that a supplier who fails to meet our quality or delivery requirements will have a material adverse impact on our revenues and earnings.

Our business could be materially adversely affected as a result of war or acts of terrorism.

Terrorist acts or acts of war may cause damage or disruption to our employees, facilities, customers, partners, suppliers and distributors and resellers, which could have a material adverse effect on our business, results of operations or financial condition. Such conflicts may also cause damage or disruption to transportation and communication systems and to our ability to manage logistics in such an environment, including receipt of components and distribution of products.

Our business may suffer if we are unable to retain or attract key personnel.

Our business 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. There can be no assurance that we will be successful in retaining existing personnel or recruiting new personnel. The loss of one or more key or other employees, our inability to attract additional qualified employees or the delay in hiring key personnel could have a material adverse effect on our business, results of operations or financial condition.

Historically uneven sales patterns could significantly impact our quarterly revenues and earnings.

Our 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. We believe this uneven sales pattern is a result of many factors including:

24

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

Our uneven sales pattern also makes it extremely difficult to predict near-term demand and adjust manufacturing capacity accordingly. If predicted demand is substantially greater than orders, there will be excess inventory. Alternatively, if orders substantially exceed 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 materially adversely affect quarterly revenues and earnings.

In addition, our revenues in any quarter are substantially dependent on orders booked and shipped in that quarter and our backlog at any particular time is not necessarily indicative of future sales levels. This is because:

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 our business, results of operations and financial condition.

Risks associated with our distribution channels may materially adversely affect our financial results.

In addition to our direct sales force, we have agreements in place with many distributors, systems integrators, resellers and original equipment manufacturers to market and sell our products and services. We may, from time to time, derive a significant percentage of our revenues from such distribution channels. Our financial results could be materially adversely affected if our contracts with channel partners were terminated, if our relationship with channel partners were to deteriorate or if the financial condition of our channel partners were to weaken. In addition, as our market opportunities change, we may have an increased reliance on channel partners, which may negatively impact our gross margins. There can be no assurance that we will be successful in maintaining or expanding these channels. If we are not successful, we may lose sales opportunities, customers and market share. Furthermore, the partial reliance on channel partners may materially reduce the visibility to our management of potential customers and demand for products and services, thereby making it more difficult to accurately forecast such demand. In addition, there can be no assurance that our channel partners will not develop or market products or services in competition with us in the future.

Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments.

As part of our business strategy, we seek 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:

25

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION