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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1996 COMMISSION FILE NUMBER 1-9853
EMC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2680009
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF ORGANIZATION OR INCORPORATION) IDENTIFICATION NUMBER)
171 SOUTH STREET
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:
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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.
X
Yes ______ 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 $8,974,421,370 as of January 31, 1997.
The number of shares of Common Stock, $.01 par value, outstanding as of
January 31, 1997 was 245,752,403.
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 7, 1997.
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements as defined under
the Federal Securities Laws. Actual results could vary materially. Factors
that could cause actual results to vary materially are described herein and
in other documents. Readers should pay particular attention to the
considerations described in the section of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors that May Affect Future Results." Readers should also
carefully review the risk factors described in the other documents the
Company files from time to time with the Securities and Exchange Commission.
ITEM 1. BUSINESS
EMC Corporation and its subsidiaries ("EMC" or the "Company") design,
manufacture, market and support a wide range of storage-related hardware,
software and service products for the multi-billion dollar market for
mainframe, open systems and network attached storage systems. Since the
introduction of its first Symmetrix Integrated Cached Disk Array ("ICDA") in
1991, EMC has rapidly become a leading supplier of intelligent enterprise
storage and retrieval technology for both mainframe and open systems
environments. These products are sold as storage solutions for customers
utilizing a variety of the world's most popular computer system platforms,
including, but not limited to, International Business Machines Corporation
("IBM") and IBM-compatible mainframes, Unisys Corporation ("Unisys"),
Compagnie des Machines Bull S.A. ("Bull"), Hewlett-Packard Company ("HP"), NCR
Corporation ("NCR"), Sequent Computer Systems, Inc. ("Sequent") and other open
systems platforms. EMC's products provide solutions for a wide range of
customer storage requirements, from the highest performance mission critical
applications to extremely high capacity business support applications.
The Company's objective is to continue to be an enterprise storage solutions
leader in the Information Technology ("IT") industry. EMC develops its
products by integrating technologically advanced, industry standard components
and devices with Company-designed proprietary hardware and software
technology. The Company differentiates its products by incorporating hardware
and software features that provide competitive advantages for EMC customers
through high performance, high availability and heterogeneous connectivity.
In the late 1980's, open systems computing, frequently referred to as client
server computing, was emerging as a new, flexible and distributed model for
development of new business applications. This contrasted with mainframe
computing, characterized at that time by proprietary operating systems and
large scale, centralized high performance computing platforms. The flexibility
and distributed nature of open systems became the solution for customer
departments or divisions that required quick turn-around of application
changes to meet new market demands. Many customers considered open systems to
be the alternative to the mainframe approach they had been dependent upon for
years. A shift in focus toward development of new applications in the open
systems market began increasing the need for more robust storage solutions.
Historically, the use of both mainframe and open systems as key business
application development platforms were looked at from a Central Processing
Unit ("CPU")-centric approach, where the computing platform was placed at the
center of a customer's Information Systems ("IS") architecture with all other
required elements placed on the periphery. As the new applications became more
important to companies' businesses, the volume of information increased
significantly, as did the importance to such companies of managing such
information to gain competitive advantage. EMC believes that companies are re-
evaluating the way they manage information and have determined that a new
information-centric model is required to satisfy the protection, management
and sharing of mission critical information across the enterprise.
This information-centric computing model defines what EMC believes is a
significant growth opportunity, the Enterprise Storage market. An Enterprise
Storage system stores and retrieves data from all major computing platforms,
including mainframe and open systems environments. It acts as a shared central
repository for information, providing common management, protection and
information sharing capabilities. The product
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attributes provided by Enterprise Storage are expected to meet the demands of
emerging enterprise application developments, such as Data Warehousing and
Data Mining, Internet/Intranets, Year 2000 Compliance and European Currency
Conversion. These developments are all considered to be major storage growth
drivers for the IT industry.
Enterprise Storage encompasses delivering a full suite of integrated
products that combine EMC core competencies in the areas of hardware,
software, and services with complementary third party products from selected
partners and/or acquisitions. EMC believes it is highly qualified to meet its
customers' needs for consolidation and sharing of information across platforms
in an Enterprise Storage environment.
The Company's principal hardware products are based on ICDA technology,
which combines high-speed semiconductor cache memory managed by advanced
caching algorithms, with industry standard disk drives. These products include
two families of Symmetrix high speed ICDA-based storage systems, the Symmetrix
5000 family (introduced in 1992) and the Symmetrix 3000 family (introduced in
June 1995), for the IBM and IBM-compatible mainframe, Unisys and Bull
mainframe, IBM AS/400 and open systems storage markets.
The customers for the Company's products are located worldwide and represent
a cross section of industries and government agencies that range in size from
FORTUNE 1000 companies to small businesses, and national to local governments.
EMC products continue to be accepted widely by both existing customers and new
accounts, including the top telecommunications companies worldwide and the
largest banks in the United States. The Company has added more than 1,000 new
customers in each of the last two years.
The Company markets its products worldwide through a network of direct sales
representatives, resellers, distributors and original equipment manufacturers
("OEMs"), including HP, NCR and Sequent.
EMC, a Massachusetts corporation, was incorporated in 1979 and has its
corporate headquarters located at 171 South Street, Hopkinton, Massachusetts.
COMPANY STRATEGY
The Company's strategy incorporates the following key elements: innovative
architectural design, proprietary software technology, multi-channel
distribution focus and alliances.
Innovative Architectural Design
EMC believes its growth is partially the result of its ability to deliver
advanced technologies to market quickly while maintaining a consistent
platform upon which its customers can expand capacity, performance,
connectivity and intelligent functionality. The Company's common hardware
architecture on which its principal products are based, called MOSAIC:2000, is
based upon a modular design and industry standard interfaces that allow new
technologies to be incorporated more rapidly than with traditional
architectures. Since 1991, MOSAIC:2000 has enabled Symmetrix high-performance
storage to connect to an increasing variety of computer platforms, and
assisted in extending the useful life of customers' storage and other
computer-related assets, such as the CPU and networks. This architectural
hardware design has enabled the Company to expand its offerings in existing
markets and has enabled the Company to enter new, strategic markets quickly
with proven storage products and services.
Proprietary Software Technology
With intelligent storage systems taking an increasingly central role in
information-centric computing environments, a major strategic asset of the
Company is the proprietary software utilized to provide primary and extended
functionality for the Company's storage products. These software products are
either EMC controller-based or host-based software. Controller-based software
resides within the EMC system, while host-based software resides within the
customer's CPU. This proprietary software provides significant flexibility,
enabling the Company to scale hardware platforms for many customer application
requirements.
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The primary functionality provided by the controller-based core software is
advanced intelligence to the ICDA architecture; integrating industry standard
hardware components, such as high speed cache memory, disk drives and other
devices to enhance the performance, reliability, availability, connectivity
and functionality of the Company's storage systems.
Extended software technology is delivered via EMC's Intelligent Storage
Architecture ("ISA") overlay to the MOSAIC:2000 hardware design. The ISA
architecture enables an integration of controller and host-based software
products that provide enterprise wide storage solutions in the areas of
information sharing, business continuity, and information management
applications. Certain Application Programming Interface ("API") modules have
also been designed to allow further integration of EMC's Symmetrix family with
selected independent software products, thus allowing customers to leverage
and extend their software investments.
Controller-based software is offered in both the mainframe and open systems
storage markets. Examples of this software include: Symmetrix Remote Data
Facility ("SRDF"), providing customer solutions to significantly reduce or
eliminate the costs and business risk associated with planned and unplanned
outages; Symmetrix Data Migration Services ("SDMS"), which is a combined
software and services offering that enables customers to migrate mainframe
data non-disruptively from older technology disk devices to Symmetrix 5000
systems while applications remain on-line; Symmetrix Enterprise Storage
Platform ("Symmetrix ESP"), which the Company believes is the first step to
the ultimate sharing of information across platform boundaries, which enables
a single system from the Symmetrix 5000 family to simultaneously store both
mainframe and open systems data; and Symmetrix Multihost Transfer Facility
("SMTF") information sharing software, which enables high performance bulk
data transfer between mainframe and open systems platforms with minimal CPU
intervention and without using expensive and slower network resources.
The Company's host-based software products address the increasing complexity
of enterprise information management. These products, the Symmetrix Manager
and SRDF Host Component software for the mainframe and the Open Symmetrix
Manager for open systems, offer a variety of monitoring and configuration
control options for the Enterprise Storage environment. The Company also
offers turnkey software solutions to address high-performance network attached
storage backup and recovery requirements via EMC Data Manager ("EDM"),
introduced in March 1996.
Multi-Channel Distribution Focus
The Company's strategy is to continue to use multiple channels of
distribution to expand its worldwide markets for Enterprise Storage solutions.
Specific targeted storage markets include: the IBM and IBM-compatible
mainframe storage market, the open systems market, and the network attached
storage market. In addition, the Company has adopted a multi-channel
distribution approach to sell its products in those large geographic markets
of the world which the Company believes have a demand for its products.
Alliances
The Company has entered into and intends to continue to enter into alliances
with leading relational database companies, including, Oracle Corporation,
Informix Software, Inc. and Sybase, Inc., and major independent software
vendors in the applications arena. EMC's strategy is to work with leading
software companies to provide added value to its customers, enhancing
enterprise implementations and business effectiveness.
ENTERPRISE STORAGE MARKET
The Company intends to continue to focus on the three core sectors of the
Enterprise Storage market: mainframe, open systems and network-attached
storage.
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Mainframe Market
The mainframe storage market is estimated to be a multi-billion dollar
market, which the Company has penetrated with its ICDA-based products.
In 1991, EMC delivered the first Symmetrix series for the IBM and IBM-
compatible mainframe storage market. Mainframes play an important role as
enterprise information servers and are a key element of enterprise computing
due to the following factors: recent emergence of information-centric
computing models; the need for customers to leverage investments in legacy
applications, processes and personnel; and new developments in lower-cost
hardware technology. The Company believes this will increase the need for
enterprise storage solutions.
Symmetrix was the first commercially available intelligent disk storage
system for this marketplace that integrated highly sophisticated controller
software with large amounts of cache memory and arrays of industry standard
5.25", and more recently, 3.5" disk drives. This combination continues to
provide customers with unique advantages and capabilities including: high
performance disk storage; operating system independence for easy integration
into existing computer environments; built-in redundancy and availability
features allowing for higher data availability and continuous operations; and
small footprint and low environmental requirements for low cost of ownership.
Since the first Symmetrix model, with a maximum capacity of 24 gigabytes
("GB"), the Company has continued to enhance and increase the capabilities of
the Symmetrix family. The Company's current mainframe product offering is the
Symmetrix 5000 family which was expanded in January 1997. The Symmetrix 5000
family members share a common architecture and components, with the main
differentiator being capacity and host connectivity capabilities. The
Symmetrix 5000 family offers mainframe storage capacity from approximately 34
GB up to approximately 3 terabytes ("TB"). The Company believes that the
Symmetrix 5000 family offers the highest performance and availability storage
in the mainframe market.
A significant factor in Symmetrix market success has been the unique
controller-based software that all Symmetrix 5000 family members support.
These include SRDF and SDMS as business continuance solutions, Symmetrix ESP
for simultaneous support of mainframe and open systems computers, SMTF for
high performance file transfer between mainframe and open systems computers,
and application-specific software to satisfy unique computing needs of various
industries such as transportation and finance.
Additionally, EMC offers mainframe host-based software products, including
Symmetrix Manager and SRDF Host Component, that improve the management of
specific EMC systems and products.
In March 1996, EMC entered a new segment of the mainframe market with a
unique solution for high capacity applications that require disk-based storage
and better application response time than can be provided by traditional off-
line storage offerings. Extended-Online Storage ("EOS") has defined a new tier
in the storage hierarchy, between traditional online disk storage and offline
storage, such as tape or optical disk. EOS is targeted at specific business
support applications that previously had no appropriate online storage
platform. EOS provides over one TB of maximum capacity.
Revenues to the mainframe market represented approximately 55%, 74%, and
85%, respectively, of EMC's 1996, 1995 and 1994 revenues.
Open Systems Market
The multi-billion dollar open systems market continues to demonstrate rapid
growth in storage requirements primarily driven by continued deployment of new
client/server applications. This market is characterized by a broad mix of
computing platforms that offer customers the ability to quickly develop new
applications required for today's highly competitive business environment.
These computing platforms are offered by the largest computer manufacturers
worldwide, including IBM, HP, NCR and Sequent. In June of 1995, EMC
capitalized
5
on its MOSAIC:2000 architecture and quickly brought products to the open
systems market with the introduction of the Symmetrix 3000 family. The
Symmetrix 3000 family delivered the performance, capacity, availability and
features of mainframe-class storage to large-scale open database and other
applications such as Data Warehousing and Internet/Intranets. Through its
platform-independent technology, the Symmetrix 3000 family provides users of
large relational databases and demanding client/server applications with fast,
highly intelligent storage for multiple, heterogeneous UNIX, Windows NT,
AS/400 and other open systems platforms.
The Symmetrix 3000 family was expanded in January 1997 and supports storage
capacity from approximately 34 GB to approximately 3 TB. In August 1996, the
Company also made available EOS to satisfy the high-capacity requirements for
new and emerging business support applications being developed on open systems
platforms.
The Symmetrix 3000 family also supports the SRDF software for mission
critical information availability requirements, Symmetrix ESP for simultaneous
support of mainframe and open systems computers and SMTF for high performance
file transfer between mainframe and open systems computers. Additionally, EMC
offers open systems host-based software products that improve the management
of specific EMC systems and products, including Open Symmetrix Manager and the
SRDF Control Option. In March 1996, the Company introduced EDM, an integrated
network storage backup solution with intelligent proprietary software
providing resource management to integrated disk and automated tape library
hardware components. EDM offers high-performance, integrated network backup
and recovery.
EMC is currently engaging in research and development of software technology
for the combined mainframe and open systems market in the areas of intelligent
extracting and loading of customer databases. The Company believes that its
investment in core technologies related to logical data management will
accelerate adoption of the Company's Enterprise Storage model and facilitate
consolidation and sharing of customer information.
By late 1995, the new Symmetrix 3000 systems were quickly penetrating this
highly competitive open systems market. In November 1995, EMC announced
alliances with both HP and NCR (formerly AT&T Global Information Solutions),
under which these two leading UNIX-based server suppliers now market Symmetrix
3000 systems worldwide with their high-end servers.
In 1996, EMC expanded its existing reseller and OEM relationships with HP
and Bull. In January 1997, EMC signed an agreement with Sequent to market and
resell the Symmetrix 3000 family of products worldwide into its market. See
"Reseller and OEM Channels."
Revenues to the open systems market represented approximately 33% and 11% of
EMC's revenues in 1996 and 1995, respectively.
Network Attached Storage Market
The network attached storage market is estimated to have high potential for
storage requirements, which EMC's products have only recently begun to
penetrate. The proliferation of local and wide-area networks has resulted in
customers' reliance on networks for sharing large computer files (including
image and video). This practice has resulted in significant network
bottlenecks impacting companies' ability to effectively run business
applications and the inefficient use of expensive network resources.
In 1996, EMC announced availability of Symmetrix Network File Storage
("SNFS") and Symmetrix Network Media Server ("SNMS"), new high performance
network attached storage solutions. This combination of EMC developed
proprietary software, network director hardware components and the performance
and availability attributes of Symmetrix focus on breaking the information
bottlenecks that plague conventional CPU-based, general purpose file servers
and on meeting the need for faster access to large quantities of information
directly across the network.
6
EMC is currently engaging in research and development of products for the
network attached storage market in the areas of video storage and retrieval,
centralized backup repository and other network data access services, such as
the Internet.
In December 1995, the Company completed the acquisition of McDATA
Corporation ("McDATA"). McDATA designs, manufactures, markets and supports
high performance information switching products, delivering innovative
networking solutions for large-scale computing applications, including local,
metropolitan and wide-area connectivity. McDATA's primary product is the ESCON
Director, a high-speed fiber-optic-based network switch designed to connect
computers and peripherals within data center environments. The ESCON Director
is marketed by IBM under an exclusive OEM agreement with McDATA. The Company
continues to evaluate joint technology ventures with McDATA to help position
EMC at the center of the Enterprise Storage market, thereby permitting EMC to
play an even more critical role in helping EMC's customers establish
information-centric computing strategies.
MARKETING AND CUSTOMERS
EMC markets its products through multiple distribution channels, including
its direct sales force, selected distributors and OEMs. The Company has a
direct sales presence throughout North America, Europe, South Africa and the
Asia Pacific region and uses distributors as its primary distribution channel
in other areas of the world. Over the past two years, the Company has expanded
its sales and marketing organizations significantly in all major geographies
of the world. In the second half of 1996, EMC began selling direct in Israel
and established a subsidiary in Brazil, its first direct sales presence in
Latin America.
During 1996, the Company derived 59% of its product revenue from shipments
into North and South America, 32% from shipments into Europe, the Middle East
and Africa, and 9% from shipments into the Asia Pacific region. The Company
has dedicated personnel to support the needs of its customers in the mainframe
and open systems markets and also of its distributors and OEM customers, both
domestically and internationally.
RESELLER AND OEM CHANNELS
The Company believes that the MOSAIC:2000 architectural philosophy, and the
flexibility it provides, make its products well suited for sale by resellers
and OEMs in partnership with the Company. The Company believes that with its
new open systems capabilities introduced in 1995 and 1996, revenues from the
reseller and OEM market will increase. In response to the anticipated growth
in the open systems market, the Company increased its sales channel
capabilities by signing agreements with a number of Value Added Resellers
("VARs"), Systems Integrators ("SIs") and distributors during 1996. The
Company's products are maintained and serviced by the Company, the reseller,
distributor or OEM, or authorized third party providers.
Since January 1992, EMC has had an agreement with Unisys for the sale of
Unisys-compatible Symmetrix systems. Unisys has worldwide marketing rights to
the Symmetrix and certain other products for use with Unisys systems, subject
to certain terms and conditions.
In February 1993, the Company first entered into an OEM agreement with Bull,
granting Bull exclusive worldwide marketing rights, with the exception of
Japan, to certain Symmetrix products for use with Bull mainframe computers as
Bull's solution for all high speed disk requirements. In June 1995, certain
systems in the Symmetrix 5000 family were added to this agreement. In March
1996, the Company extended this agreement to add the Symmetrix ESP for Bull's
new generation of Sagister UNIX multiframe servers. In April 1996, an
agreement was entered into with Bull to sell EMC's Symmetrix 3000 family of
open systems products for connection to Bull's Escala and DPR/20 computers.
On October 31, 1995, the Company entered into a reseller agreement with HP
under which HP markets and resells the Symmetrix 3000 family of systems
worldwide for connection to HP's 9000 series computers. The agreement
currently extends to June 30, 1997. In August 1996, EMC expanded its reseller
agreement with HP to
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enable HP to market and sell EMC's Symmetrix 3000 family of open systems
products worldwide for connection to HP's 3000 series computers.
On November 2, 1995, the Company entered into an OEM agreement with NCR
under which NCR markets and sells the Symmetrix 3000 family of systems under
an NCR label worldwide for connection to NCR's WorldMark brand of enterprise
server systems. The agreement currently extends to November 2, 1998.
On January 29, 1997, the Company entered into a reseller agreement with
Sequent under which Sequent will market and resell the Symmetrix 3000 family
of systems worldwide for connection to Sequent's Symmetry series and NUMA-Q
series computers. The agreement currently extends to January 29, 1999.
The Company continues to maintain and grow long-standing relationships with
key resellers and OEMs on a worldwide basis. In addition, the Company will
continue to evaluate additional resellers and OEMs to satisfy business
expansion in targeted worldwide markets.
In 1996, the Company derived 19% of its product revenues from reseller and
OEM channels.
OPERATIONS
EMC's products utilize the Company's engineering designs, with industry
standard and semi-custom components and subsystems. EMC's products are
assembled and tested primarily at the Company's facilities in Massachusetts
and Cork, Ireland. Product components manufactured by subcontractors in the
U.S. and Europe are assembled in accordance with production standards and
quality controls established by EMC. The Company believes its present level of
manufacturing capacity, along with its current plans for expansion, will be
sufficient to accommodate its requirements.
The Company has implemented a Total Quality Management philosophy to ensure
the quality of its designs, manufacturing process and suppliers. The Company's
operations in Massachusetts currently hold an ISO 9001 Certificate of
Registration from National Quality Assurance, Ltd. This internationally
recognized endorsement of ongoing quality management represents the highest
level of certification available. The Company's Irish manufacturing operation
holds ISO 9002 registration. The Company's principal manufacturing operation
in Hopkinton, Massachusetts has also been awarded Class A MRP II status by an
independent evaluation organization.
COMPETITION
In the mainframe storage market, EMC competes primarily with IBM, and to a
lesser extent, Hitachi Data Systems and Amdahl Corporation. The Company
believes that it has a number of competitive advantages over these companies,
especially in the areas of product performance, value-added software
capabilities, time to market enhancements and cost of ownership.
In the open systems market, the Company's primary competition is provided by
systems vendors, including IBM, Digital Equipment Corporation ("DEC") and Sun
Microsystems Corporation ("Sun"). In the Company's opinion, the major
competitive advantage of the open systems vendors is their overall market
presence and ability to provide integrated CPU, storage and software packages.
The Company believes that its major independent storage competitors in the
open systems market are Data General Corporation and Symbios Logic, Inc. EMC
believes that it has advantages over its open systems competitors in
performance, capacity, availability, connectivity and software features.
BACKLOG
The Company manufactures its products on the basis of its forecast of near-
term demand and maintains inventory in advance of receipt of firm orders from
customers. Orders are generally shipped by the Company shortly after receipt
of the order. Customers may reschedule orders with little or no penalty. For
these reasons,
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the Company's backlog at any particular time is not meaningful, because it is
not necessarily indicative of future sales levels.
EMPLOYEES
As of January 31, 1997, EMC had approximately 4,800 employees worldwide
including temporary employees. None of the Company's domestic employees is
represented by a labor union, and the Company has never suffered an
interruption of business as a result of a labor dispute. The Company considers
its relations with its employees to be good.
ENVIRONMENT
The Company's manufacturing facilities are subject to numerous laws and
regulations designed to protect the environment, particularly from wastes
generated as a result of assembling certain EMC products. The cost of
compliance with such regulations has not to date involved a significant
expense or had a material effect on the capital expenditures, earnings or
competitive position of the Company.
PATENTS
EMC has been granted and/or owns by assignment nearly 100 United States
patents. The Company also has over 150 patent applications pending in the U.S.
relating to its products for the mainframe, midrange, open systems and
network-attached storage markets.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company is active in primarily one business segment: designing,
manufacturing and marketing high performance storage products. Information by
geographic area is presented below with exports shown in their area of origin.
Sales and marketing operations outside the U.S. are conducted through sales
subsidiaries and branches located principally in Europe and the Asia Pacific
region. In 1996, the U.S. market amounted to greater than 95% of the Company's
sales, income and identifiable assets in the North/South America segment.
Intercompany transfers between geographic areas are accounted for at prices
which are designed to be representative of unaffiliated party transactions.
(Amounts are in thousands.)
EUROPE,
NORTH/SOUTH MIDDLE EAST, ASIA CONSOLIDATED
AMERICA AFRICA PACIFIC ELIMINATIONS TOTAL
----------- ------------ -------- ------------ ------------
1996
Sales................... $1,441,935 $687,350 $144,367 $ -- $2,273,652
Transfers between
areas.................. 72,813 159,605 -- (232,418) --
---------- -------- -------- --------- ----------
Total Sales........... 1,514,748 846,955 144,367 (232,418) 2,273,652
Income (loss) from
operations............. 334,547 167,964 (3,851) (2,119) 496,541
Identifiable assets at
year end............... 1,749,221 703,929 104,210 (263,814) 2,293,546
1995
Sales................... $1,230,223 $567,303 $123,749 $ -- $1,921,275
Transfers between
areas.................. 134,073 141,003 10 (275,086) --
---------- -------- -------- --------- ----------
Total sales........... 1,364,296 708,306 123,759 (275,086) 1,921,275
Income from operations.. 264,168 176,293 1,805 (6,487) 435,779
Identifiable assets at
year end............... 1,669,928 144,081 77,923 (146,203) 1,745,729
1994
Sales................... $ 871,048 $449,467 $ 56,977 $ -- $1,377,492
Transfers between
areas.................. 123,587 61,577 110 (185,274) --
---------- -------- -------- --------- ----------
Total sales........... 994,635 511,044 57,087 (185,274) 1,377,492
Income (loss) from
operations............. 155,544 196,658 (97) (1,573) 350,532
Identifiable assets at
year end............... 1,230,883 171,233 36,437 (121,053) 1,317,500
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ITEM 2. PROPERTIES
The Company's operations are conducted at several locations in the United
States and abroad. The following table provides certain information on the
Company's principal offices and manufacturing facilities:
LOCATION USE APPROX. SQ. FT. PROPERTY INTEREST
-------- --- --------------- -----------------
171 South St. Marketing, Research and 285,000 owned
Hopkinton, MA Development,
Manufacturing
42 South St. Customer Demonstration 63,000 owned
Hopkinton, MA Center, Administration
35 Parkwood Corporate & 160,000 leased
Drive Administration
Hopkinton, MA
5-9 Technology Customer Service, OEM 265,000 leased
Dr. Sales, Quality, Research
Milford, MA and Development,
Manufacturing
45 South Street Manufacturing 36,000 leased
Hopkinton, MA
65 South Street Research and Development 26,000 leased
Hopkinton, MA
8-12 Avenue E Manufacturing 60,000 leased
Hopkinton, MA
80 South St. Manufacturing 156,000 owned
Hopkinton, MA
Cork, Ireland Manufacturing 180,000 owned
McDATA Research and 90,000 leased
Corporation Development,
Manufacturing
The Company is currently expanding its facility in Ireland by 20,000 square
feet for administrative use. The Company also leases space for its sales and
service offices and certain research and development facilities worldwide, and
owns land in the Hopkinton, Massachusetts area for possible expansion
purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company 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 the Company's business or
financial condition.
On September 16, 1996, the Company was served with civil investigative
demands by the Antitrust Division of the United States Department of Justice
in connection with the Department's investigation into the agreement dated
June 7, 1996 between IBM and Storage Technology Corporation (the "IBM/STK
Agreement"). The Justice Department is gathering evidence to determine whether
the IBM/STK Agreement has been, is, or may be in violation of the federal
Sherman Antitrust Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year covered by this report.
10
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Richard J. Egan............ 60 Chairman of the Board and Director
Michael C. Ruettgers....... 54 President, Chief Executive Officer and Director
L. Daniel Butler........... 58 Senior Vice President, Customer Service
Raymond Fortune............ 57 Senior Vice President, International Sales
Michael A. Klayko.......... 42 Senior Vice President, North American
Sales/Services
Richard P. Lehane.......... 49 Senior Vice President, Worldwide Manufacturing
Colin G. Patteson.......... 47 Senior Vice President, Chief Administrative
Officer and Treasurer
James B. Rothnie........... 48 Senior Vice President, Corporate Marketing
Paul T. Dacier............. 39 Vice President and General Counsel
William J. Teuber, Jr...... 45 Vice President and Chief Financial Officer
Richard J. Egan is a founder of the Company and has served as a Director
since the Company's inception in 1979. He was elected Chairman of the Board of
the Company in January 1988. Prior to January 1988, he was also President of
EMC. From 1979 to January 1992, he was Chief Executive Officer of the Company.
He is also a director of Cognition Corporation, a CAD/CAM software supplier.
Michael C. Ruettgers served as Executive Vice President, Operations of EMC
from July 1988 to October 1989, when he became President. From October 1989 to
January 1992, Mr. Ruettgers served as Chief Operating Officer of EMC. In
January 1992, he became Chief Executive Officer and in May 1992, he was
elected a Director of the Company. Before joining EMC, he was Chief Operating
Officer at Technical Financial Services, Incorporated, a high technology
consulting company, from February 1987 to July 1988. He is also a director of
Cross Comm, Inc., a manufacturer of computer network products, and
Commonwealth Energy System, a public utility company.
L. Daniel Butler joined EMC in August 1990 as Vice President of Customer
Service and became Senior Vice President of Customer Service in February 1993.
Prior to joining EMC, Mr. Butler was the founder and President of DMX, Inc.,
an electronic board assembling company, from October 1989 to August 1990. From
October 1987 to September 1989, he was Director of Logistics Planning at Data
General Corporation, a computer manufacturer.
Raymond Fortune joined EMC in July 1994 as Senior Vice President,
International Sales. From November 1989 to March 1991, Mr. Fortune was
Executive Vice President of Commercial Products, and from May 1993 to June
1994 he was Chief Operating Officer, at Kendall Square Research Corporation, a
computer manufacturer. From May 1991 to April 1993, Mr. Fortune was Chief
Executive Officer at Ultra Network Technologies, Incorporated, a high speed
networking products manufacturer.
Michael A. Klayko joined EMC in March 1996 as Senior Vice President, North
American Sales and became Senior Vice President, North American Sales/Services
in January 1997. From August 1992 to February 1996, Mr. Klayko was Worldwide
Marketing Manager, Computer Systems Organization at Hewlett-Packard Company, a
computer manufacturer. From 1979 to 1992, Mr. Klayko held various positions in
marketing and sales at IBM Corporation, a computer manufacturer.
Richard P. Lehane joined EMC in February 1988 as General Manager of EMC's
manufacturing facility in Cork, Ireland and became Senior Vice President,
Worldwide Manufacturing of EMC in November 1996. Prior
11
to joining EMC, Mr. Lehane held several senior level management positions in
manufacturing at Wang Laboratories, Inc., a computer manufacturer.
Colin G. Patteson served as European Controller of EMC from January 1989 to
March 1991 and as Corporate Controller from March 1991 to April 1995. From
April 1995 to February 1997, Mr. Patteson was Vice President, Chief Financial
Officer and Treasurer of EMC, when he became Senior Vice President, Chief
Administrative Officer and Treasurer. Mr. Patteson has been a Vice President
of EMC since February 1993.
James B. Rothnie joined EMC in October 1995 as Senior Vice President,
Corporate Marketing. Previously, he was Vice President of Software Development
at Data General Corporation, a computer manufacturer, from October 1994 to
October 1995. From 1987 to 1994, Mr. Rothnie served in several executive
capacities at Kendall Square Research Corporation, a computer manufacturer,
most recently as Executive Vice President.
Paul T. Dacier joined EMC in March 1990 as General Counsel and became Vice
President and General Counsel in February 1993. Prior to joining EMC he was
Senior Counsel, Corporate Operations at Apollo Computer Inc., a computer
manufacturer, from January 1987 to January 1990.
William J. Teuber, Jr. joined EMC in August 1995 as Vice President and
Controller and became Vice President and Chief Financial Officer in February
1997. From 1988 to August 1995, Mr. Teuber was a partner at Coopers & Lybrand
L.L.P., an accounting firm.
----------------
Richard J. Egan, Chairman of the Board and a Director, is the husband of
Maureen E. Egan, a Director of the Company. He also is the brother-in-law of
W. Paul Fitzgerald, a Director of the Company. W. Paul Fitzgerald is the
brother of Maureen E. Egan. John R. Egan, a Director of the Company, is the
son of Richard J. and Maureen E. Egan.
----------------
The President and Treasurer are elected annually to serve until the first
meeting of the Board of Directors following the next annual meeting of
stockholders and until their successors are elected and qualified. The other
executive officers are appointed to serve in such positions and serve at the
pleasure of the Board of Directors.
----------------
EMC/2/, EMC, Symmetrix, ICDA, MOSAIC: 2000, SRDF, SDMS, EDM and SMTP are
trademarks of EMC Corporation. WorldMark is a trademark of NCR Corporation.
IBM and ESCON are trademarks of IBM Corporation. Escala is a trademark of
Bull. Symmetry and NUMA-Q are trademarks of Sequent.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
EMC's common stock $0.01 par value (the "Common Stock") began trading on the
over-the-counter market on April 4, 1986 under the NASDAQ symbol EMCS. On
March 22, 1988, the Company's stock began trading on the New York Stock
Exchange under the symbol EMC.
The following stock splits were effected in the form of stock dividends in
the following amounts and at the following dates: a three-for-two stock split
effective November 24, 1992, for stockholders of record on November 9, 1992, a
two-for-one stock split effective June 8, 1993, for stockholders of record on
May 24, 1993, and a two-for-one stock split effective December 10, 1993, for
stockholders of record on November 26, 1993.
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.
FISCAL 1996 HIGH LOW
----------- ------ ------
First Quarter............................................. $22.00 $15.50
Second Quarter............................................ 23.13 18.00
Third Quarter............................................. 23.13 17.00
Fourth Quarter............................................ 34.63 22.00
FISCAL 1995 HIGH LOW
----------- ------ ------
First Quarter............................................. $23.25 $14.75
Second Quarter............................................ 25.88 16.63
Third Quarter............................................. 27.38 17.75
Fourth Quarter............................................ 19.13 13.13
As of January 31, 1997, there were approximately 4,480 holders of record of
the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock. While subject
to periodic review, the current policy of its Board of Directors is to retain
all earnings primarily to provide funds for the continued growth of the
Company.
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
EMC CORPORATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED
------------------------------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 31, JANUARY 1, JANUARY 2,
1996 1995 1994 1994 1993
------------ ------------ ------------ ---------- ----------
SUMMARY OF OPERATIONS:
Revenues................ $2,273,652 $1,921,275 $1,377,492 $782,621 $385,706
Operating income........ 496,541 435,779 350,532 180,428 48,575
Net income.............. 386,229 326,845 250,668 127,122 29,508
Net income per weighted
average common share
(fully diluted)(1)..... $ 1.56 $ 1.34 $ 1.10 $ 0.60 $ 0.16
Weighted average common
shares
(fully diluted)(1)..... 251,431 248,296 234,255 217,225 190,548
BALANCE SHEET DATA:
Working capital......... $1,336,634 $ 959,595 $ 600,341 $516,876 $149,335
Total assets............ 2,293,546 1,745,729 1,317,500 829,646 338,780
Long-term
obligations(2)......... 191,234 245,845 286,106 274,029 76,093
Stockholders' equity.... $1,636,789 $1,140,301 $ 727,641 $419,094 $168,266
- --------
(1) In addition to common stock equivalents, fully diluted earnings per share
for 1996, 1995, 1994 and 1993 reflect the dilutive effects of the
Company's 4 1/4% Convertible Subordinated Notes due 2001 (the "4 1/4%
Notes"). Fully diluted earnings per share for 1995 (through conversion
date), 1994, 1993 and 1992 reflect the dilutive effects of the Company's 6
1/4% Convertible Subordinated Debentures due 2002 (the "Debentures").
(2) Excludes current portion of long-term debt. Approximately $143 million of
the long-term obligations at December 31, 1996 were converted to equity on
January 2, 1997. See Note J to Notes to the Consolidated Financial
Statements in the Company's filing on Form 10-K for the year ended
December 31, 1996.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with "Factors that May Affect
Future Results" beginning on page 18.
The following table presents certain consolidated statement of operations
information stated as a percentage of total revenues.
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
REVENUES
Mainframe........................... 54.9% 74.3% 85.4%
Open Systems........................ 33.3 10.6 1.8
McDATA(1)........................... 8.0 8.3 --
Other............................... 1.4 4.6 10.3
----- ----- -----
Net sales........................... 97.6 97.8 97.5
Service and rental income........... 2.4 2.2 2.5
----- ----- -----
TOTAL REVENUE....................... 100.0 100.0 100.0
COST AND EXPENSES
Cost of sales and service........... 54.9 52.2 47.9
Research and development............ 7.1 8.5 8.6
Selling, general and
administrative..................... 16.2 16.6 18.1
----- ----- -----
OPERATING INCOME.................... 21.8 22.7 25.4
Investment income and interest
expense, net....................... 1.0 0.6 0.5
Other income/(expense), net......... -- 0.2 (0.1)
----- ----- -----
Income before income taxes.......... 22.8 23.5 25.8
Provision for income taxes.......... 5.8 6.5 7.6
----- ----- -----
NET INCOME.......................... 17.0% 17.0% 18.2%
===== ===== =====
- --------
(1) The Company acquired McDATA in December 1995. Financial statements for
periods prior to 1995 were not restated due to immateriality.
REVENUES
Total revenues for 1996 were $2,273,652,000 compared to $1,921,275,000 for
1995, an increase of $352,377,000 or 18%. The increase in revenues was due
primarily to the continued strong demand for the Company's series of ICDA
based products, particularly the open systems products which include the
Symmetrix 3000 series of products. Total revenues for 1995 compare to
$1,377,492,000 for 1994, an increase of $543,783,000 or 39%. Software revenues
are included in the product revenues for the respective mainframe and open
systems markets.
Revenues from products sold directly and through OEMs into the mainframe
storage market were $1,248,138,000 in 1996, $1,428,379,000 in 1995 and
$1,177,014,000 in 1994; a decrease of $180,241,000 or 13% from 1995 to 1996,
and an increase of $251,365,000 or 21% from 1994 to 1995. The decrease in
mainframe revenues in 1996 reflects price erosion for storage-related products
in this market partially offset by increased unit sales. The Company expects
further declines in the mainframe revenue levels and revenue as a percentage
of total revenues in 1997.
Revenues from products sold into the open systems storage market, which
include the Symmetrix products operating in an open systems environment and
other products, were $757,662,000 in 1996, $200,981,000 in 1995
15
and $24,323,000 in 1994. Revenues in this market in 1996 increased to
approximately 3.8 times 1995 revenues. The open systems market represented 33%
of the Company's total revenue in 1996, compared to 11% in 1995. The Company
expects further growth in open systems revenue levels and revenue as a
percentage of total revenues in this market throughout 1997.
Revenues from products sold by McDATA, which include the ESCON Director
series of products, were $180,540,000 in 1996 and $160,205,000 in 1995, an
increase of $20,335,000 or 13%.
Revenues from all other products, which include the midrange series of
products, were $31,952,000 in 1996, $88,650,000 in 1995 and $141,728,000 in
1994; a decrease of $56,698,000 or 64% from 1995 to 1996, and a decrease of
$53,078,000 or 37% from 1994 to 1995. These decreases are primarily
attributable to the declines in midrange series revenues.
Revenues from service and rental income were $55,360,000 in 1996,
$43,060,000 in 1995 and $34,427,000 in 1994; an increase of $12,300,000 or 29%
from 1995 to 1996, and an increase of $8,633,000 or 25% from 1994 to 1995.
In October 1995, the Company entered into a reseller agreement with HP under
which HP markets and resells the Symmetrix 3000 series of systems worldwide
for connection to HP's 9000 series computers. This agreement was expanded to
enable HP to also market and resell this family of systems for connection to
HP's 3000 series of computers. The current agreement extends to June 30, 1997.
Revenues for 1996 under this agreement were $287,352,000 or 12.6% of total
revenues. Revenues for 1995 were not significant.
Revenues on sales into the markets of North and South America were
$1,346,222,000 in 1996 compared to $1,148,237,000 in 1995, an increase of
$197,985,000 or 17%. This increase was primarily due to growth in sales of the
Company's products in the open systems storage market. Total revenues for 1995
compare to $865,687,000 in 1994, an increase of $282,550,000 or 33%. The U.S.
market amounted to greater than 95% of the Company's revenues in the North and
South America segment.
International revenues were $942,781,000 or 41% of total revenues in 1996
compared to $773,038,000 or 40% of total revenues in 1995. The Company expects
further increases in international sales as a percentage of total revenues
throughout 1997.
Revenues on sales into the markets of Europe, Africa and the Middle East
were $720,792,000 in 1996 compared to $631,378,000 in 1995, an increase of
$89,414,000 or 14%. This increase was primarily due to growth in sales of the
Symmetrix series of products in the open systems storage market. During 1996
the Company opened a sales office in Israel. During 1995, the Company opened
sales offices in South Africa, Sweden, Denmark, Norway and Finland. Total
revenues for 1995 compare to $439,524,000 in 1994, an increase of $191,854,000
or 44%.
Revenues on sales into the markets in the Asia Pacific region were
$206,638,000 in 1996 compared to $141,660,000 in 1995, an increase of
$64,978,000 or 46%. This increase is primarily due to growth in sales of the
Symmetrix series of products in the mainframe storage market. During 1995, the
Company opened sales offices in Korea and Singapore. Total revenues for 1995
compare to $72,281,000 in 1994, an increase of $69,379,000 or 96%.
GROSS MARGINS
Gross margins decreased to 45.1% in 1996, compared to 47.8% in 1995 and
52.1% in 1994. These decreases are primarily attributable to the impact of
price declines in the mainframe and open systems storage markets being greater
than the impact of cost declines in raw material components. During the second
half of 1996, the rate of price declines moderated which, together with total
revenue growth, increased software revenues and revenues from new Symmetrix
products, resulted in an increased gross margin percentage for that period as
16
compared to the first half of 1996. Software revenues were approximately
$76,438,000 in 1996. Software revenues were not significant in 1995. In 1995,
cost of goods sold included one-time charges of approximately $31,000,000, net
of tax, relating to end-of-life products and other inventory. The Company
currently believes that price declines will continue.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $161,088,000, $162,611,000
and $117,922,000 in 1996, 1995 and 1994, respectively. As a percentage of
revenues, R&D expenses were 7.1%, 8.5% and 8.6% in 1996, 1995 and 1994,
respectively. The decrease in R&D spending levels in 1996 over 1995 reflects
the consolidation of domestic development efforts and the capitalization of
software development costs primarily related to specific software products.
The decrease was partially offset by the cost of additional technical staff,
especially to support development for products in the open systems storage
market, and depreciation expenses associated with capital equipment acquired
to facilitate development. The Company expects to continue to spend
substantial amounts for R&D in 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses were $367,073,000,
$320,009,000 and $249,004,000 in 1996, 1995 and 1994, respectively. As a
percentage of revenues, SG&A expenses were 16.2%, 16.6% and 18.1% in 1996,
1995 and 1994, respectively. The dollar increase in 1996 over 1995 is due
primarily to costs associated with additional sales and support personnel and
their related overhead costs, both domestically and internationally, in
connection with the Company's increased revenue levels and the Company's
initiative to capture market share for its open systems storage products. The
Company has expanded the international direct sales force, particularly in the
Asia Pacific region, as well as OEM, alliance and partnership programs with
applications, systems and database vendors. Expenses in 1995 include
approximately $8,000,000 of costs related to the acquisition of McDATA. SG&A
expenses are expected to increase in dollar terms during 1997.
INVESTMENT INCOME AND INTEREST EXPENSE
Investment income increased to $34,476,000 in 1996 from $23,620,000 in 1995
and $21,619,000 in 1994. Interest income was earned primarily from investments
in cash equivalents and investments. Investment income increased in 1996 over
1995 primarily due to higher average cash and investment balances primarily
generated from operations.
Interest expense decreased to $11,967,000 in 1996, from $12,857,000 in 1995
and $15,311,000 in 1994. The decrease in 1996 from 1995 is primarily due to
conversions of the Debentures in April 1995. Interest expense in 1996 was
primarily due to the 4 1/4% Notes, all of which were converted to Common Stock
by January 2, 1997.
PROVISION FOR TAXES
The provision for income taxes was $133,245,000 in 1996, $123,976,000 in
1995 and $104,716,000 in 1994, respectively, which resulted in effective tax
rates of 25.7%, 27.5% and 29.5% in 1996, 1995 and 1994, respectively. The
decrease in the effective tax rate is mainly attributable to the realization
of benefits associated with the continued progress on the Company's various
tax strategies and benefits related to offshore manufacturing.
FINANCIAL CONDITION
Cash and cash equivalents and short and long-term investments were
$840,858,000 and $504,904,000 at December 31, 1996 and December 30, 1995,
respectively, an increase of $335,954,000. In 1996, cash and cash equivalents
increased by $116,749,000.
Cash provided by operating activities was $483,375,000. This was primarily
generated from net income and working capital management. Cash used by
investing activities was $374,763,000 principally for additions to
17
property, plant and equipment and the purchase of investments. Cash provided
by financing activities was $8,718,000, principally due to proceeds from stock
option exercises offset by repurchases of Common Stock. In November 1996, the
Board of Directors rescinded the program under which Common Stock had been
repurchased during 1996.
In November 1996, the Company announced that it would redeem on January 1,
1997 all outstanding 4 1/4% Notes. The aggregate principal amount of the 4
1/4% Notes outstanding at the time of announcement was $229,498,000. The 4
1/4% Notes, issued by EMC in December 1993 and January 1994 in an amount
totaling $230 million, were generally convertible into shares of Common Stock
of the Company at any time prior to the redemption date at a conversion price
of $19.84 per share. At December 31, 1996, the holders of approximately $87
million principal amount had elected to convert the 4 1/4% Notes to Common
Stock. On January 2, 1997, the Company paid approximately $65,000 to redeem 4
1/4% Notes outstanding and the remainder converted into Common Stock.
The Company has available for use its credit line of $50,000,000 and may
elect to borrow at any time. In February 1997, the Company announced its
intention to issue and offer for sale up to approximately $517,500,000
Convertible Subordinated Notes due 2002 in an offering exempt from the
registration requirements of the Federal Securities Laws. Based on its current
operating and capital expenditure forecasts, the Company believes funds
currently available, funds generated from operations and its available line of
credit and the net proceeds to the Company from the sale of the Notes
described above will be adequate to finance its operations as well as
potential acquisitions.
To date, inflation has not had a material impact on the Company's financial
results.
The Company will adopt Statement of Financial Accounting Standards No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" in 1997. This Statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The Statement also provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The Company believes that adoption will
not have a material effect on its financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the Federal Securities Laws. Actual results could differ
materially from those projected in the forward-looking statements as a result
of certain risk factors, including but not limited to those set forth below,
other one-time events and other important factors disclosed previously and
from time to time in EMC's other filings at the U.S. Securities and Exchange
Commission.
UNEVEN PATTERN OF QUARTERLY RESULTS
There has been a historic and recurring "hockey stick" pattern of the
Company's quarterly sales, by which a disproportionate percentage of a
quarter's total sales occur in the last month and weeks and days of each
quarter, making prediction of revenues, earnings and working capital for each
financial period especially difficult and uncertain and increasing the risk of
unanticipated variations in quarterly results and financial condition.
This pattern of sales is itself believed to be the 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; 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;
and, at times, seasonal influences, as well as the fourth quarter influence of
customers' spending their remaining capital budget authorization prior to new
budget constraints in the next year's first quarter.
The "hockey stick" pattern of the Company's sales also makes it extremely
difficult to predict near-term demand and adjust manufacturing capacity
accordingly. Substantial variance of orders from the predicted
18
demand may limit the Company's ability to assemble, test and ship orders
received in the last weeks and days of each quarter, which could adversely
affect quarterly revenues and earnings.
In addition, revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter and the Company's backlog at any particular
time is not necessarily indicative of future sales levels. This is because the
Company manufactures its products on the basis of its forecast of near-term
demand and maintains inventory in advance of receipt of firm orders from
customers; orders are generally shipped by the Company shortly after receipt
of the order; and customers may reschedule orders with little or no penalty.
These are additional factors making the prediction of revenues extremely
difficult. Further, any unexpected decline in revenues without a corresponding
and timely slowdown in expenses could have a material adverse effect on the
Company's business, results of operations or financial condition.
COMPETITION
There is strong competition in the computer data storage industry. EMC
competes with many companies in the mainframe and open systems markets,
certain of which have substantially greater financial and technological
resources, larger distribution capabilities, earlier access to customers and
greater overall customer loyalty than EMC. In the mainframe market, EMC
competes primarily with IBM. In the open systems market, the Company's primary
competition is provided by systems vendors, including IBM, DEC and Sun. In the
Company's opinion, the major competitive advantage of the open systems vendors
is their overall market presence and ability to provide integrated CPU,
storage and software packages. EMC's business may be adversely affected by the
announcement or introduction of new products by its competitors, price
reductions of its competitors' equipment or services and the implementation of
certain marketing strategies by its competitors. As a significant number of
EMC's products are designed to be fully compatible with IBM computers and IBM
operating systems, EMC's business could also be adversely affected by
modifications in the design or configuration of IBM computer systems.
PRICING
Competitive pricing pressures exist in the computer storage market, and have
had and may in the future have an adverse effect on the Company's revenues and
earnings. There also has been and may continue to be a willingness on the part
of certain large competitors to reduce prices in order to preserve or gain
market share, which cannot be foreseen by the Company. The Company believes
that pricing pressures are likely to continue as competitors develop more
competitive product offerings.
To date, the Company has been able to manage its component and product
design costs. However, there can be no assurance that the Company 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 the Company's earnings.
DEPENDENCE ON SUPPLIERS
The Company purchases certain components and products from suppliers who EMC
believes are currently the only suppliers of those components or products that
meet EMC's requirements. Among the most important components that EMC uses are
disk drives and high density memory components ("DRAMs"). Disk drives are a
key component of the Company's products and the Company currently purchases
substantially all of its disk drives from a single supplier. EMC purchases
DRAMs from a small number of qualified suppliers. A failure by any supplier of
disk drives, high density DRAMs or other components to meet EMC's delivery or
quality requirements for an extended period of time could have a material
adverse effect on EMC. The Company is currently transitioning its product line
from use of 5.25^ 9 GB disk drives to new 3.5^ 9 GB and 5.25^ 23 GB disk drive
technologies. This transition may intensify the above risks. From time to
time, because of high industry demand and/or the inability of certain vendors
to consistently meet on a timely basis the Company's component quality
standards, the Company has experienced delays in deliveries of disk drives and
high density
19
DRAMs needed to satisfy orders for its ICDA products. The Company is currently
working with such vendors to proactively maintain and/or improve component
quality standards and also continues to seek alternative sources of supply. If
such shortages and/or performance problems were to intensify, the Company
could lose some time-sensitive customer orders which could adversely affect
quarterly revenues and earnings. The adverse effect of a supplier's failure to
meet EMC's requirements may be intensified by the "hockey stick" pattern of
the Company's sales and the necessity of meeting critical manufacturing
schedules.
NEW PRODUCTS
Technology and user needs change rapidly in the computer data storage
industry, which requires ongoing technological development and introduction of
new products. Sales of the Symmetrix series of products constitute the
principal source of revenues for EMC and such sales are expected to continue
to be the principal source of its revenues in the near future. EMC expects
competition in the sale of ICDA products to increase, and there can be no
assurance that the Symmetrix series of products will continue to achieve
market acceptance. Significant delays in the development of ICDA technology
for future products or product enhancements would be to the advantage of EMC's
competitors. Furthermore, the continued development of ICDA technology and its
incorporation into EMC's future generations of products cannot be assured even
with significant additional investments.
Further risks inherent in new product introductions include the uncertainty
of price-performance relative to products of competitors, including
competitors' responses to the introductions, and the desire by customers to
evaluate new, more expensive products for longer periods of time.
CHANGE IN REGULATIONS
The Company's business, results of operations and financial condition could
be adversely affected if laws, regulations or standards relating to the
Company or its products were newly implemented or changed.
MANUFACTURING RISKS
EMC's products operate near the limits of electronic and physical
performance and are designed and manufactured with relatively small
tolerances. If flaws in design, production, assembly or testing occur on the
part of EMC or its suppliers, EMC may experience a rate of failure in its
products that results in substantial repair or replacement costs and potential
damage to EMC's reputation. Continued improvement in manufacturing
capabilities and control of material and manufacturing quality and costs will
be critical factors in the future growth of EMC. EMC frequently revises and
updates manufacturing and test processes to address engineering and component
changes to its products and evaluates the reallocation of manufacturing
resources among its facilities. There can be no assurance that EMC's efforts
to monitor, develop and implement appropriate test and manufacturing processes
for its products, especially the Symmetrix series of 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
substantial adverse effect on EMC's operations and ultimately on its financial
results.
INDIRECT CHANNELS OF DISTRIBUTION
In 1996, the Company derived a significant percentage of its product
revenues from reseller and OEM channels. A substantial portion of these
reseller and OEM revenues stems from the Company's reseller agreement with HP,
which currently expires in June of 1997. The Company's financial results could
be adversely affected if such contracts were terminated, if the Company's
relationship with such resellers or OEMs were to deteriorate or if the
financial condition of its resellers and OEMs were to weaken. In addition, the
Company is currently experiencing growth in the transition from the mainframe
to the open systems market. In this regard, the Company may have an increased
reliance on indirect channels of distribution. There can be no assurance that
the Company will be successful in maintaining or expanding these indirect
channels of distribution. If the Company is not successful, the Company may
lose certain sales opportunities. Furthermore, the partial reliance on
indirect channels of distribution may materially reduce the visibility to
management of potential orders.
20
ALLIANCES
Many of the Company's products are marketed in conjunction with the products
of other vendors, and the Company plans to continue its strategy of developing
key alliances. There can be no assurance that the Company will be successful
in its ongoing strategic partnerships or that the Company will be able to find
further suitable business relationships as it develops new products. Any
failure to continue or expand such relationships could have a material adverse
effect on the Company's business, financial condition and results of
operation.
There can be no assurance that the Company's distributors and strategic
partners, many of which have significantly greater financial and marketing
resources than the Company, will not develop and market products in
competition with the Company in the future, discontinue their relationships
with the Company, or form competing arrangements with the Company's
competitors.
INTERNATIONAL SALES
A substantial portion of the Company's revenues is derived from sales
outside the United States. In addition, a substantial portion of the Company's
products are manufactured outside of the United States. Accordingly, the
Company'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.
MANAGEMENT OF GROWTH
The Company has a history of rapid growth. The Company's future operating
results will depend on management's ability to manage growth, continuously
hire and retain significant numbers of qualified employees, forecast revenues
and control expenses. An unexpected decline in the growth rate of revenues
without a corresponding and timely reduction in expense growth could have a
material adverse effect on the Company's business, results of operations or
financial condition.
DEPENDENCE UPON KEY PERSONNEL
The Company's continued growth and success depends to a significant extent
on the continued service of senior management and other key employees 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 the
Company will be successful in continuously recruiting new personnel and in
retaining existing personnel. The loss of one or more key employees or the
Company's inability to attract additional qualified employees or retain other
employees could have a material adverse effect on the Company's business,
results of operations or financial condition.
ENFORCEMENT OF THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS
No assurance can be given that the Company's patent applications will issue
as patents or that any patents that may issue will provide the Company with
adequate protection for the covered products or technology. Additionally,
there can be no assurance that the Company's confidentiality agreements will
adequately protect its trade secrets, know-how or other proprietary
information. Further, there can be no assurance that the Company's activities
will not infringe on the patents or proprietary rights of others or that the
Company 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. Although the Company has significantly
increased its patents and patent applications, the rapidly changing technology
of the computer industry makes EMC's future success dependent upon the
technical competence and creative skills of its personnel rather than on
existing patent protection.
21
RISKS ASSOCIATED WITH FUTURE ACQUISITIONS
As part of its business strategy, the Company may make acquisitions of, or
significant investments in, businesses that offer complementary products,
services and technologies. Any such future acquisitions or investments would
be accompanied by the risks commonly encountered in an acquisition of a
business. Such risks include, among other things, the difficulty of
assimilating the operations and personnel of the acquired business, the
inability of management to maximize the financial and strategic position of
the Company through the successful incorporation of acquired personnel and
customers, the maintenance of uniform standards, controls, procedures and
policies and the impairment of relationships with employees and customers as a
result of any integration of new management personnel. These factors could
have a material adverse effect on the Company's business, results of
operations or financial condition. The Company expects that the consideration
paid for future acquisitions, if any, could be in the form of cash, stock,
rights to purchase stock or a combination thereof. Dilution to existing
stockholders and to earnings per share may result to the extent that shares of
stock or other rights to purchase stock are issued in connection with any such
future acquisitions.
VOLATILITY OF STOCK PRICE
The Company's stock price, like that of other technology companies, is
subject to significant volatility. The announcement of new products, services
or technological innovations by the Company or its competitors, quarterly
variations in the Company's results of operations, changes in revenue or
earnings estimates by the investment community and speculation in the press or
investment community are among the factors affecting the Company's stock
price. In addition, the stock price may be affected by general market
conditions and domestic and international economic factors unrelated to the
Company's performance. Because of these reasons, recent trends should not be
considered reliable indicators of future stock prices or financial results.
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the
Board of Directors of EMC Corporation:
We have audited the accompanying consolidated balance sheets of EMC
Corporation as of December 31, 1996 and December 30, 1995, and the related
consolidated statements of income, cash flows and stockholders' equity and the
financial statement schedule for each of the three years in the period ended
December 31, 1996. 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 the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of EMC
Corporation as of December 31, 1996 and December 30, 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 23, 1997
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, DECEMBER 30,
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................... $ 496,377 $ 379,628
Short-term investments.............................. 230,981 --
Trade and notes receivable less allowance for
doubtful accounts of $7,368 and $7,062,
respectively....................................... 627,409 550,473
Inventories......................................... 336,581 330,160
Deferred income taxes............................... 43,421 44,061
Other assets........................................ 19,367 14,633
---------- ----------
Total current assets................................. 1,754,136 1,318,955
Long-term investments................................ 113,500 125,276
Notes receivable, net................................ 20,013 26,497
Property, plant and equipment, net................... 276,387 218,901
Deferred income taxes................................ 16,664 9,200
Intangible assets, net............................... 52,382 20,078
Other assets......................................... 60,464 26,822
---------- ----------
Total assets...................................... $2,293,546 $1,745,729
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations............ $ 7,058 $ 915
Accounts payable.................................... 172,871 111,721
Accrued expenses.................................... 122,562 130,596
Income taxes payable................................ 104,899 107,717
Deferred revenue.................................... 10,112 8,411
---------- ----------
Total current liabilities............................ 417,502 359,360
Deferred revenue..................................... 2,019 223
Deferred income taxes................................ 46,002 --
Long-term obligations:
4 1/4% convertible subordinated notes due 2001...... 142,720 229,598
Notes payable and other noncurrent liabilities...... 48,514 16,247
---------- ----------
Total liabilities.................................... 656,757 605,428
---------- ----------
Commitments and contingencies
Stockholders' equity:
Series Preferred Stock, par value $.01; authorized
25,000,000 shares, none outstanding................ -- --
Common Stock, par value $.01; authorized 500,000,000
shares; issued 238,239,672 and 232,517,845, in 1996
and 1995, respectively............................. 2,382 2,325
Additional paid-in capital.......................... 463,687 350,989
Deferred compensation............................... (7,027) (2,140)
Retained earnings................................... 1,172,828 786,599
Cumulative translation adjustment................... 4,919 3,766
Treasury stock, at cost, none and 2,646,453 shares
in 1996 and 1995, respectively..................... -- (1,238)
---------- ----------
Total stockholders' equity........................ 1,636,789 1,140,301
---------- ----------
Total liabilities and stockholders' equity...... $2,293,546 $1,745,729
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
24
EMC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
Revenues:
Net sales............................ $2,218,292 $1,878,215 $1,343,065
Service and rental................... 55,360 43,060 34,427
---------- ---------- ----------
2,273,652 1,921,275 1,377,492
Costs and expenses:
Cost of sales and service............ 1,248,950 1,002,876 660,034
Research and development............. 161,088 162,611 117,922
Selling, general and administrative.. 367,073 320,009 249,004
---------- ---------- ----------
Operating income....................... 496,541 435,779 350,532
Investment income...................... 34,476 23,620 21,619
Interest expense....................... (11,967) (12,857) (15,311)
Other income/(expense), net............ 424 4,279 (1,456)
---------- ---------- ----------
Income before taxes.................... 519,474 450,821 355,384
Income tax provision................... 133,245 123,976 104,716
---------- ---------- ----------
Net income............................. $ 386,229 $ 326,845 $ 250,668
========== ========== ==========
Net income per weighted average share,
primary............................... $ 1.57 $ 1.36 $ 1.18
========== ========== ==========
Net income per weighted average share,
fully diluted......................... $ 1.56 $ 1.34 $ 1.10
========== ========== ==========
Weighted average shares, primary....... 249,295 245,386 218,046
Weighted average shares, fully
diluted............................... 251,431 248,296 234,255
The accompanying notes are an integral part of the consolidated financial
statements.
25
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net income.............................. $ 386,229 $ 326,845 $ 250,668
Adjustments to reconcile net income to
net cash provided/(used) by operating
activities:
Depreciation and amortization.......... 86,949 53,617 32,728
Deferred income taxes, net............. 39,178 (6,587) (18,267)
Net loss on disposal of property and
equipment............................. 1,125 635 262
Tax benefit from stock options
exercised............................. 17,746 11,165 26,698
Changes in assets and liabilities:
Trade and notes receivable............ (69,103) (156,719) (221,708)
Inventories........................... (6,480) (74,351) (133,159)
Other assets.......................... (24,433) (30,984) (19,526)
Accounts payable...................... 61,458 (16,061) 78,698
Accrued expenses...................... (9,955) 22,432 46,448
Income taxes payable.................. (2,836) 49,275 34,629
Deferred revenue...................... 3,497 (1,889) (65)
--------- --------- ---------
Net cash provided by operating
activities.......................... 483,375 177,378 77,406
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and
equipment.............................. (125,973) (92,200) (108,968)
Proceeds from sales of property and
equipment.............................. 1,441 39 445
Capitalized software development costs.. (24,693) (5,000) --
Purchase of patents..................... (6,333) -- --
Maturity of short-term and long-term
investments............................ 206,061 67,284 18,478
Purchase of short-term and long-term
investments............................ (425,266) (16,929) (143,717)
--------- --------- ---------
Net cash used by investing
activities.......................... (374,763) (46,806) (233,762)
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock................ 33,181 19,438 9,596
Purchase of treasury stock.............. (27,457) (415) (320)
Issuance of 4 1/4% convertible
subordinated notes due 2001, net of
issuance costs......................... -- -- 29,350
Payment of long-term and short-term
obligations............................ (1,295) (10,735) (1,272)
Issuance of long-term and short-term
obligations............................ 4,289 545 11,715
--------- --------- ---------
Net cash provided by financing
activities.......................... 8,718 8,833 49,069
--------- --------- ---------
Effect of exchange rate changes on cash.. (581) (283) 2,493
Net increase/(decrease) in cash and cash
equivalents............................. 117,330 139,405 (107,287)
Cash and cash equivalents at beginning of
period.................................. 379,628 240,506 345,300
--------- --------- ---------
Cash and cash equivalents at end of
period.................................. $ 496,377 $ 379,628 $ 240,506
========= ========= =========
Non-cash activity--conversions of
debentures and notes.................... $ 85,636 $ 39,535 $ 19,726
--patents acquired by notes and
other payables................... $ 37,416 -- --
The accompanying notes are an integral part of the consolidated financial
statements.
26
EMC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------------------------------
COMMON STOCK TREASURY STOCK
------------------ ADDITIONAL DEFERRED CUMULATIVE -------------------- TOTAL
PAR PAID-IN COMPEN- RETAINED TRANSLATION STOCKHOLDERS'
SHARES VALUE CAPITAL SATION EARNINGS ADJUSTMENT SHARES COST EQUITY
----------- ------ ---------- -------- ---------- ----------- ---------- -------- -------------
Balance January 1,
1994................. 189,936,120 $1,899 $226,668 $(3,552) $ 193,045 $1,537 2,607,996 $ (503) $ 419,094
Exercise of stock
options............. 5,361,342 54 8,548 -- -- -- -- -- 8,602
Tax benefit from
stock options
exercised........... -- -- 26,698 -- -- -- -- -- 26,698
Grant of stock
options............. -- -- 49 (49) -- -- -- -- --
Issuance of common
stock pursuant to
bond and note
conversions......... 6,440,580 64 19,662 -- -- -- -- -- 19,726
Amortization of
deferred
compensation........ -- -- -- 994 -- -- -- -- 994
Purchase of treasury
stock............... -- -- -- -- -- -- 19,471 (320) (320)
Cumulative
translation
adjustment.......... -- -- -- -- -- 2,179 -- -- 2,179
Net income........... -- -- -- -- 250,668 -- -- -- 250,668
----------- ------ -------- ------- ---------- ------ ---------- -------- ----------
Balance, December 31,
1994................. 201,738,042 2,017 281,625 (2,607) 443,713 3,716 2,627,467 (823) 727,641
----------- ------ -------- ------- ---------- ------ ---------- -------- ----------
Pooling of interests
with McDATA
Corporation......... 13,567,112 136 1,794 -- 16,041 -- -- -- 17,971
----------- ------ -------- ------- ---------- ------ ---------- -------- ----------
Balance as restated.. 215,305,154 2,153 283,419 (2,607) 459,754 3,716 2,627,467 (823) 745,612
----------- ------ -------- ------- ---------- ------ ---------- -------- ----------
Exercise of stock
options............. 4,303,305 43 16,454 -- -- -- -- -- 16,497
Tax benefit from
stock options
exercised........... -- -- 11,165 -- -- -- -- -- 11,165
Grant of stock
options............. -- -- 545 (545) -- -- -- -- --
Issuance of common
stock pursuant to
bond conversions.... 12,909,386 129 39,406 -- -- -- -- -- 39,535
Amortization of
deferred
compensation........ -- -- -- 1,012 -- -- -- -- 1,012
Purchase of treasury
stock............... -- -- -- -- -- -- 18,986 (415) (415)
Cumulative
translation
adjustment.......... -- -- -- -- -- 50 -- -- 50
Net income........... -- -- -- -- 326,845 -- -- -- 326,845
----------- ------ -------- ------- ---------- ------ ---------- -------- ----------
Balance, December 30,
1995................. 232,517,845 2,325 350,989 (2,140) 786,599 3,766 2,646,453 (1,238) 1,140,301
----------- ------ -------- ------- ---------- ------ ---------- -------- ----------
Exercise of stock
options............. 1,342,896 13 2,422 -- -- -- (3,946,453) 28,695 31,130
Tax benefit from
stock options
exercised........... -- -- 17,746 -- -- -- -- -- 17,746
Grant of stock
options............. -- -- 6,938 (6,938) -- -- -- -- --
Issuance of common
stock pursuant to
bond conversions.... 4,378,931 44 85,592 -- -- -- -- -- 85,636
Amortization of
deferred
compensation........ -- -- -- 2,051 -- -- -- -- 2,051
Purchase of treasury
stock............... -- -- -- -- -- -- 1,300,000 (27,457) (27,457)
Cumulative
translation
adjustment.......... -- -- -- -- -- 1,153 -- -- 1,153
Net income........... -- -- -- -- 386,229 -- -- -- 386,229
----------- ------ -------- ------- ---------- ------ ---------- -------- ----------
Balance, December 31,
1996................. 238,239,672 $2,382 $463,687 $(7,027) $1,172,828 $4,919 -- -- $1,636,789
=========== ====== ======== ======= ========== ====== ========== ======== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
27
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. COMPANY
EMC Corporation and its subsidiaries ("EMC" or the "Company") design,
manufacture, market and support a wide range of storage-related hardware and
software products and related services for the mainframe, open systems and
network attached computer storage markets worldwide. These products are sold
as storage solutions for customers utilizing a variety of computer system
platforms including, but not limited to, International Business Machines
Corporation ("IBM") and IBM-compatible mainframe, Unisys Corporation
("Unisys"), Compagnie des Machines Bull S.A. ("Bull"), Hewlett-Packard Company
("HP"), NCR Corporation ("NCR"), Sequent Computer Systems, Inc. ("Sequent")
and other open systems platforms.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated.
Basis of Presentation
On September 23, 1996, EMC elected to change its fiscal year end from a
fiscal basis which would have ended on December 28, 1996 to a calendar year
end basis ending on December 31, 1996. This change was reported on Form 8-K on
October 4, 1996. The effect on the Company's results of operations was not
material.
Certain prior year amounts have been reclassified to conform with the 1996
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.
Acquisitions
In December 1995, EMC exchanged 13,567,112 shares of EMC common stock, $.01
par value (the "Common Stock") for all of the outstanding stock and stock
options exercisable as of the closing date of McDATA Corporation ("McDATA"), a
leader in data network switching solutions. The business combination was
accounted for as a pooling of interests. The accompanying financial statements
for periods prior to 1995 do not include the amounts for this acquisition as
they were deemed to be immaterial. Only 1995 financial information has been
restated as if the transaction had occurred as of January 1, 1995.
Separate company results for 1995 before the combinations were consummated
were as follows:
PERIOD ENDED DECEMBER 6, 1995
-------------------------------
REVENUES NET INCOME
--------------- ---------------
EMC.......................................... $ 1,402,059,000 $ 197,303,000
McDATA....................................... 148,253,000 41,748,000
--------------- -------------
Total...................................... $ 1,550,312,000 $ 239,051,000
=============== =============
The Company acquired several other companies in the last three years, all
accounted for using the purchase method, which were not significant to its
financial position or results of operations. Under the purchase method,
28
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
At December 31, 1996 and December 30, 1995 the net book value of goodwill
associated with acquisitions was $12,870,000 and $15,070,000, respectively.
Goodwill is being amortized on a straight line basis over five years and is
included in intangible assets, net. Accumulated amortization was $6,996,000
and $3,186,000 on December 31, 1996 and December 30, 1995, respectively.
The Company implemented Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" in 1996. This standard prescribes the method for asset
impairment evaluation for long-lived assets and certain identifiable
intangibles that are either held and used or to be disposed of based upon the
excess of the carrying amount of such assets over their fair values. The
Company was generally in conformance with this standard prior to adoption and
therefore the implementation did not have a material effect on its financial
statements.
Revenue Recognition
The Company generally recognizes revenue from product sales at the time the
products are shipped provided no significant vendor obligations remain and the
resulting receivable is deemed collectible by management. Upon shipment, the
Company provides for estimated product returns and the estimated cost that may
be incurred for product warranties. Revenue from rentals is recorded on a
monthly basis over the life of the contracts. 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.
Foreign Currency Translation
The local currency is the functional currency of sales operations in Canada,
South America, Europe, South Africa and the Asia Pacific region (except Hong
Kong). Assets and liabilities of these operations are translated into U.S.
dollars at exchange rates in effect at the balance sheet date and income and
expense items are translated at average rates for the period, except for
inventories and property, plant and equipment which are translated at
historical exchange rates. The Company's operations in Ireland, Israel and
Hong Kong are generally dependent on the U.S. dollar. Consolidated transaction
results included in other income/(expense), net were gains of $1,044,000 in
1996 and $1,667,000 in 1995, and losses of $1,072,000 in 1994.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with a
remaining maturity of ninety days or less at the time of purchase. These
investments are stated at cost plus accrued interest, which approximates
market.
Investments
The Company's investments are comprised primarily of debt securities which
are held-to-maturity. 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.
29
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Statement of Cash Flows Supplemental Information
1996 1995 1994
----------- ----------- -----------
Cash paid for:
Income taxes......................... $78,651,000 $70,389,000 $76,539,000
Interest............................. 11,428,000 12,965,000 10,854,000
Inventories
Inventories are stated at the lower of cost (first in, first out) or market,
not in excess of net realizable value.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is computed
on a straight-line basis over the estimated useful lives of the assets, as
follows:
Furniture and fixtures.................................. 7 years
Equipment............................................... 3-7 years
Transportation equipment................................ 5-10 years
Improvements............................................ 5 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 operations.
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
detailed program design. Such costs are amortized on a straight-line basis
over two years. Unamortized software development costs were approximately
$22,508,000 and $5,000,000 at December 31, 1996 and December 30, 1995,
respectively, and are included in other assets, noncurrent. In 1996
amortization expense was $7,185,000. No amortization expense was recorded in
1995.
Income Taxes
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse (see Note H). Tax credits are
generally recognized as reductions of income tax provisions in the year in
which the credits arise.
The Company does not provide for U.S. income tax liability on undistributed
earnings of its foreign subsidiaries, except Puerto Rico. All income and
tollgate tax obligations for the Company's Puerto Rican subsidiary ("EMC
Caribe") were settled in 1996. 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. Accordingly, no material provision has been made for taxes that might be
payable upon remittance of such non-U.S. earnings.
30
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Income Per Share
Net income per share was computed on the basis of weighted average common
and dilutive common share equivalents outstanding. Weighted average shares
outstanding and earnings used in the per share computations reflect the
dilutive effects of stock options, the Company's 4 1/4% Convertible
Subordinated Notes due 2001 (the "Notes") and 6 1/4% Convertible Subordinated
Debentures due 2002 (the "Debentures"). Net income for computation of earnings
per share includes an add back of $5,296,000, $6,224,000 and $7,620,000 for
fully diluted and $5,296,000, $5,855,000 and $5,838,000 for primary, in 1996,
1995 and 1994, respectively, representing interest expense on the Notes and
Debentures, net of its tax effect.
C. INVESTMENTS
The following tables summarize the composition of the Company's short and
long-term investments and includes cash equivalents of $256,943,000 and
$168,614,000 at December 31, 1996 and December 30, 1995, respectively.
DECEMBER 31, 1996
-------------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
------------ ------------
U.S. corporate debt securities....................... $412,318,000 $412,137,000
U.S. government and agencies......................... 100,231,000 100,418,000
Foreign debt securities.............................. 88,875,000 89,617,000
------------ ------------
Total.............................................. $601,424,000 $602,172,000
============ ============
DECEMBER 30, 1995
-------------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
------------ ------------
U.S. corporate debt securities....................... $259,288,000 $260,171,000
U.S. government and agencies......................... 24,602,000 24,653,000
Foreign debt securities.............................. 10,000,000 10,075,000
------------ ------------
Total.............................................. $293,890,000 $294,899,000
============ ============
The contractual maturities of investments and cash equivalents held at
December 31, 1996 and December 30, 1995 are as follows:
DECEMBER 31, 1996
-------------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
------------ ------------
Due within one year.................................. $487,924,000 $488,220,000
Due after one year through five years................ 111,648,000 112,104,000
Due after five years through ten years............... -- --
Due after ten years.................................. 1,852,000 1,848,000
------------ ------------
Total.............................................. $601,424,000 $602,172,000
============ ============
31
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 30, 1995
-------------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
------------ ------------
Due within one year.................................. $168,614,000 $168,614,000
Due after one year through five years................ 109,424,000 110,412,000
Due after five years through ten years............... 14,102,000 14,027,000
Due after ten years.................................. 1,750,000 1,846,000
------------ ------------
Total.............................................. $293,890,000 $294,899,000
============ ============
The net unrealized gain of $748,000 at December 31, 1996 consisted of gross
unrealized gains of $1,241,000 and gross unrealized losses of $493,000. The
net unrealized gain of $1,009,000 at December 30, 1995 consisted of gross
unrealized gains of $1,372,000 and gross unrealized losses of $363,000.
Investment income consists principally of interest income, including
interest on notes receivable from sales-type leases.
D. INVENTORY
Inventories consist of:
DECEMBER 31, DECEMBER 30,
1996 1995
------------ ------------
Purchased parts.................................. $ 16,610,000 $ 22,870,000
Work-in-process.................................. 210,445,000 150,216,000
Finished goods................................... 109,526,000 157,074,000
------------ ------------
$336,581,000 $330,160,000
============ ============
The Company wrote off approximately $31,000,000, net of tax, of inventory in
the fourth quarter of 1995, primarily relating to end-of-life products and
other inventory, and other inventory-related adjustments.
E. LEASING TRANSACTIONS
Notes receivable are primarily from installment sales of the Company's
products. The payment schedule for such notes at December 31, 1996 is as
follows:
1997.......................................................... $19,845,000
1998.......................................................... 12,224,000
1999.......................................................... 10,501,000
2000.......................................................... 3,220,000
2001.......................................................... 967,000
-----------
Face value.................................................... 46,757,000
Less amounts representing interest............................ 5,863,000
-----------
Present value................................................. 40,894,000
Current portion............................................... 20,881,000
-----------
Long-term portion............................................. $20,013,000
===========
Implicit interest rates range from approximately 8% to 9%.
32
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Actual cash collections may differ, however, due to customer early buyouts,
upgrades and refinancings.
The Company receives proceeds for its sales-type leases through third-party
financing arrangements with various financial institutions on a nonrecourse
basis, which may be either collateralized by a lien on the equipment, which is
returned to the Company at the end of the lease, or title to the equipment may
pass to the funding source at the time of financing. Residuals values recorded
by the Company for equipment under leases at December 31, 1996 and December
30, 1995 were $24,602,000 and $10,871,000, respectively, and are included in
other assets, noncurrent.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
DECEMBER 31, DECEMBER 30,
1996 1995
------------ ------------
Furniture and fixtures......................... $ 11,498,000 $ 8,950,000
Equipment...................................... 313,283,000 260,882,000
Transportation equipment....................... 8,821,000 873,000
Buildings and improvements..................... 76,427,000 53,748,000
Land........................................... 2,964,000 1,870,000
Construction in progress....................... 43,988,000 20,273,000
------------ ------------
456,981,000 346,596,000
Accumulated depreciation....................... (180,594,000) (127,695,000)
------------ ------------
$276,387,000 $218,901,000
============ ============
G. ACCRUED EXPENSES
Accrued expenses consist of:
DECEMBER 31, DECEMBER 30,
1996 1995
------------ ------------
Salaries and benefits........................... $ 62,617,000 $ 67,007,000
Warranty........................................ 20,870,000 17,798,000
Other........................................... 39,075,000 45,791,000
------------ ------------
$122,562,000 $130,596,000
============ ============
H. INCOME TAXES
The Company's provision for income taxes consists of:
1996 1995 1994
------------ ------------ ------------
Federal and state
Current...................... $ 88,208,000 $123,927,000 $108,459,000
Deferred..................... 39,394,000 (5,867,000) (18,421,000)
------------ ------------ ------------
127,602,000 118,060,000 90,038,000
------------ ------------ ------------
Foreign
Current...................... 5,859,000 6,636,000 14,524,000
Deferred..................... (216,000) (720,000) 154,000
------------ ------------ ------------
5,643,000 5,916,000 14,678,000
------------ ------------ ------------
Total provision for income
taxes......................... $133,245,000 $123,976,000 $104,716,000
============ ============ ============
33
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net undistributed earnings of foreign subsidiaries at December 31, 1996 and
December 30, 1995 approximated $545,945,000 and $388,411,000, respectively.
Based on the Company's policy of indefinite reinvestment in non-U.S.
operations, it is not currently practicable to determine the tax liability
associated with the repatriation of these earnings. Income before income taxes
for foreign operations for 1996, 1995 and 1994 approximated $163,177,000,
$172,933,000 and $152,363,000, respectively.
A reconciliation of the Company's income tax provision to the statutory
federal tax rate is as follows:
1996 1995 1994
----- ---- ----
Statutory federal tax rate.............................. 35.0% 35.0% 35.0%
State taxes, net of federal tax benefits................ 3.0 3.6 2.6
International tax benefits.............................. (10.8) (8.5) (7.2)
Tax credits............................................. (.8) (1.4) (.7)
Other................................................... (.7) (1.2) (.2)
----- ---- ----
25.7% 27.5% 29.5%
===== ==== ====
The Company's manufacturing facility in Ireland incurs a 10% tax rate on
income from manufacturing operations until the year 2010. The Company's Puerto
Rico operation ("EMC Caribe") benefited from a ten year exemption which
expired in 1995, on up to 90% of its income as a result of the Company's Grant
of Industrial Tax Exemption issued by the Commonwealth of Puerto Rico. EMC
Caribe ceased manufacturing operations in February 1994 and was liquidated in
January 1997.
The components of the current and noncurrent deferred tax assets and
liabilities as of December 31, 1996 and December 30, 1995 were as follows:
1996 1995
------------ -----------
Current deferred tax assets/(liabilities):
Accounts receivable........................... $ 11,517,000 $10,499,000
Inventory..................................... 16,336,000 27,580,000
Other liabilities............................. 7,440,000 5,793,000
Other assets.................................. 8,128,000 8,273,000
Puerto Rico tollgate tax...................... -- (8,084,000)
------------ -----------
Total current deferred tax assets........... $ 43,421,000 $44,061,000
============ ===========
Noncurrent deferred tax assets:
Fixed assets.................................. 4,852,000 2,756,000
Intangible assets............................. 4,069,000 --
Net operating loss carryforwards.............. 10,933,000 9,984,000
Research and development credit carryforward.. 1,342,000 1,144,000
Other......................................... 2,830,000 2,113,000
Valuation reserve............................. (7,362,000) (6,797,000)
------------ -----------
Subtotal...................................... 16,664,000 9,200,000
------------ -----------
Deferral of lease revenue..................... (37,082,000) --
Software development costs.................... (8,920,000) --
------------ -----------
Subtotal...................................... (46,002,000) --
------------ -----------
Total noncurrent deferred tax
assets/(liabilities)....................... $(29,338,000) $ 9,200,000
============ ===========
34
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The valuation allowance on December 31, 1996 and December 30, 1995 provided
reserves against non-U.S. operating loss carryforwards which may expire before
the Company can utilize them. The realization of the remaining deferred tax
assets is more likely than not.
The Company has net operating loss carryforwards as of December 31, 1996
which are summarized as follows:
CARRYFORWARD PERIOD
APPROXIMATE VALUE DURING WHICH LOSSES
COUNTRY IN U.S. DOLLARS WILL EXPIRE
------- ----------------- -------------------
France............................... $15,867,000 5 years/1997-1999
Japan................................ 2,756,000 5 years/1999-2000
United States........................ 9,155,000 15 years/2002-2008
The U.S. losses relate to the pre-acquisition losses of companies acquired.
The losses in France relate to a wholly-owned subsidiary of EMC in France and
the losses of Japan relate to a 95% owned subsidiary of EMC in Japan.
The Company is currently undergoing an examination of its 1992, 1993 and
1994 tax returns by the Internal Revenue Service. The Company believes its
financial position appropriately reflects its income tax obligations.
I. EMPLOYEE COMPENSATION PLANS
The Company has established a deferred compensation program for certain
employees which is qualified under Section 401(k) of the federal tax laws.
The Company intends, at the end of each calendar quarter, to make a
contribution that matches 100% of the employee's contribution up to a maximum
of 2% of the employee's quarterly compensation. Additionally, provided that
certain quarterly profit goals are attained, the Company in succeeding
quarters, will provide an additional matching contribution of 1% of the
employee's quarterly compensation up to a maximum quarterly matching
contribution not to exceed 5% of compensation. However, the Company's matching
contribution per participant has a quarterly limit of $500. The Company's
contribution amounted to approximately $3,836,000 in 1996, $3,124,000 in 1995
and $2,277,000 in 1994, pursuant to this formula.
Costs associated with certain postretirement or postemployment benefit plans
other than plans that exist in certain foreign subsidiaries as required by law
are not significant.
J. COMMITMENTS AND LONG-TERM OBLIGATIONS
Operating Lease Commitments
The Company leases office and warehouse facilities under various operating
leases. Facilities rent expense amounted to $12,196,000, $11,095,000, and
$10,277,000 in 1996, 1995 and 1994, respectively. The Company's commitments
under its operating leases are as follows:
OPERATING
FISCAL YEAR LEASES
----------- ------------
1997......................................................... $ 43,690,000
1998......................................................... 33,722,000
1999......................................................... 14,242,000
2000......................................................... 4,418,000
2001......................................................... 3,397,000
Thereafter................................................... 10,686,000
------------
Total minimum lease payments................................. $110,155,000
============
35
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Lines of Credit
EMC has a line of credit providing a maximum of $50,000,000 at LIBOR plus 30
basis points. At December 31, 1996 and December 30, 1995, there were no
borrowings outstanding. The Company must maintain certain minimum financial
ratios including a minimum level of working capital and tangible net worth
upon utilization of the line of credit.
4 1/4% Notes
In November 1996, the Company announced that it would redeem on January 1,
1997 all outstanding 4 1/4% convertible subordinated notes due 2001 (the
"Notes"). The aggregate principal amount of the Notes at the time of
announcement was $229,498,000. The Notes, issued by EMC in December 1993 and
January 1994 in an amount totaling $230 million, were generally convertible
into shares of Common Stock of the Company at any time prior to the redemption
date at a conversion price of $19.84 per share.
At December 31, 1996, the holders of approximately $87 million principal
amount had elected to convert the Notes to common stock. On January 2, 1997,
the Company paid approximately $65,000 to redeem Notes outstanding and the
remainder converted into Common Stock.
Long-Term Obligations
The Company has a $14,000,000 mortgage collateralized by the Company's
primary U.S. manufacturing facility. The mortgage is payable in monthly
installments, calculated on a 30 year amortization schedule at 10.5%, with a
lump sum payment of approximately $12,835,000 due on April 1, 1999.
IDA Grant
The Industrial Development Authority ("IDA") of Ireland has granted the
Company a total of $5,189,000 towards the purchase price and improvements to
the Company's facility in Ireland. The grants are included in long-term
obligations and are amortized over the related estimated useful lives of the
assets purchased of twenty-five years for building improvements and seven
years for purchase equipment. Remaining unamortized grants at December 31,
1996 are $4,555,000, of which $324,000 is current and $4,231,000 is long-term.
Purchase of Patent Portfolio
In February 1996, the Company acquired a patent portfolio valued at $40
million. Payments of $5 million have been made to date with the remainder due
in annual installments over five years. The asset is being amortized over the
estimated useful life of five years and is included in intangible assets, net.
Accumulated amortization at December 31, 1996 was approximately $7,333,000.
36
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Payments remaining on the above commitments and other noncurrent liabilities
(excluding the IDA grant) are as follows:
FISCAL YEAR
-----------
1997.......................................................... $ 8,169,000
1998.......................................................... 11,746,000
1999.......................................................... 20,140,000
2000.......................................................... 7,010,000
2001.......................................................... 7,000,000
-----------
Total minimum payments........................................ 54,065,000
Less amounts representing interest............................ 3,048,000
-----------
Present value of net payments................................. 51,017,000
Current portion............................................... 6,734,000
-----------
Long-term portion............................................. $44,283,000
===========
K. STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Series Preferred Stock may be issued from time to time in one
or more series, with such terms as the Board of Directors may determine,
without further action by the stockholders of the Company.
Common Stock Repurchase Program
In January 1996, the Company's Board of Directors authorized the repurchase
of up to 15 million shares of the Company's Common Stock over a five year
period. As of December 31, 1996, the Company had repurchased 1,300,000 shares
of Common Stock for approximately $27,000,000, all of which has been reissued
in connection with stock option exercises.
In November 1996, the Company announced that its Board of Directors had
rescinded the program to avoid any potential issues regarding pooling of
interests treatment.
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) to
provide qualified incentive stock options and nonqualified stock options to
key employees. A total of 8,000,000 and 36,000,000 shares of Common Stock have
been reserved for issuance under the 1993 Plan and the 1985 Plan,
respectively.
Under the terms 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 at 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 at the time of grant. Since May
1995, no new incentive stock options have been available for grant under the
1985 Plan.
37
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1996, an officer was granted options to purchase 250,000 shares of Common
Stock at $9.25, representing 50% of the per share fair market value at the
date of grant and vesting over five years. In 1994, an employee was granted
options to purchase 5,000 shares of Common Stock at $9.94, representing 50% of
the per share fair market value at the date of grant and vesting over five
years. Discounts from fair market value have been recorded as deferred
compensation and are being amortized over the respective vesting periods of
the options.
The 1992 EMC Corporation Stock Option Plan for Directors (the "Directors
Plan") was adopted by the stockholders in May 1992. A total of 1,800,000
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 at the date
of grant.
In 1996, a director was granted options to purchase 500,000 shares of Common
Stock at $9.25, representing 50% of the per share fair market value at the
date of grant. In 1995, two directors were granted options to purchase 80,000
shares of Common Stock at $6.81, representing 50% of the per share fair market
value at the date of grant. The discounts from fair market value have been
recorded as deferred compensation and are being amortized over the three year
vesting period of the options.
Generally, when shares acquired pursuant to the exercise of incentive stock
options are sold within one year of exercise or within two years from the date
of grant, the Company derives a tax deduction measured by the amount that the
fair market value exceeds the option price at the date the options are
exercised. When nonqualified stock options are exercised, the Company derives
a tax deduction measured by the amount that the fair market value exceeds the
option price at the date the options are exercised.
As of December 31, 1996, options exercisable under the 1993 Plan, the 1985
Plan and the Directors Plan (the "Plans") approximated 2,279,997 and shares
available for future option grants approximated 1,864,420. In general, options
become exercisable in equal annual installments over the first five years
after the date of grant and expire after ten years. The vesting schedule has
been amended for newly granted formula options under the Directors Plan to a
period of three years instead of five years so as to conform to a director's
period of election to the Board of Directors. Formula options granted
subsequent to the amendment will be exercisable in increments of 33 1/3% for
the shares covered thereby on each of the first through third anniversaries of
the grant.
38
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Supplemental Disclosures for Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the Plans. 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. The Company elected to
continue to apply the accounting provisions of APB Opinion No. 25 for stock
options. The required disclosures under SFAS 123 as if the Company had applied
the new method of accounting are made below.
Activity under the Plans for the year ended December 31, 1996 is as follows:
WTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
---------- ---------
Outstanding, January 1, 1994......................... 19,003,271 $ 4.05
Granted.............................................. 2,647,260 16.31
Canceled............................................. (891,200) 13.16
Exercised............................................ (4,974,124) 2.06
---------- ------
Outstanding, December 31, 1994....................... 15,785,207 6.24
Options Relating to McDATA Merger.................... 493,387 0.86
Granted.............................................. 2,814,503 21.33
Canceled............................................. (1,415,043) 12.55
Exercised............................................ (4,163,707) 2.58
---------- ------
Outstanding, December 30, 1995....................... 13,514,347 9.66
Granted.............................................. 4,213,969 17.28
Canceled............................................. (685,561) 17.37
Exercised............................................ (4,610,172) 4.71
---------- ------
Outstanding, December 31, 1996....................... 12,432,583 $13.61
========== ======
Summarized information about stock options outstanding at December 31, 1996
is as follows:
EXERCISABLE
------------------
WEIGHTED
AVG. WEIGHTED WEIGHTED
NUMBER OF REMAINING AVG. AVG.
RANGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
--------------- ----------- ----------- -------- --------- --------
$ 0.29- 3.71 2,615,064 5.6 $ 2.03 914,225 $ 1.93
6.47-11.42 1,744,863 7.7 8.05 231,913 7.34
12.44-18.50 5,090,346 8.5 16.75 725,035 14.61
18.75-26.50 2,982,310 8.6 21.57 408,824 21.59
Options exercisable at December 30, 1995 and December 31, 1994 were
2,509,050 and 1,957,632, respectively.
39
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option granted during 1996 and 1995 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
1996 1995
----- ----
Dividend yield................................................ none none
Expected volatility........................................... 45.0% 50.0%
Risk-free interest rate....................................... 6.5% 6.3%
Expected life................................................. 5.0 5.0
Weighted average fair value of options granted at fair value dur-
ing:
1996............................................................ $ 9.17
======
1995............................................................ $11.04
======
Weighted average fair value of options granted below fair value at
date of grant during:
1996............................................................ $12.63
======
1995............................................................ $ 9.39
======
Had compensation cost for the Company's 1996 and 1995 stock option grants
been determined consistent with SFAS 123, the Company's net income and net
income per share would approximate the pro forma amounts below:
NET INCOME PER
NET INCOME FULLY DILUTED SHARE
------------ -------------------
As reported:
1996.................................... $386,229,000 $1.56
1995.................................... 326,845,000 1.34
Pro forma:
1996.................................... $378,336,000 $1.53
1995.................................... 323,200,000 1.33
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
In January 1989, the Board of Directors adopted the 1989 Employee Stock
Purchase Plan (the "1989 Plan"). Under the 1989 Plan, eligible employees of
the Company may purchase shares of Common Stock, through payroll deductions,
at the lower of 85% of fair market value of the stock at the time of grant or
85% of fair market value at the time of exercise. A total of 4,900,000 shares
have been reserved for issuance under the 1989 Plan. Shares are granted twice
yearly, on January 1 and July 1, and are exercisable on the succeeding June 30
or December 31. The Company issued 679,177 and 139,598 shares in 1996 and
1995, respectively. The weighted average fair values of options granted at
fair value under the 1989 Plan during 1996 and 1995 were $4.64 and $6.54,
respectively.
L. LITIGATION
The Company 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 the Company's business or
financial condition.
40
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
M. FINANCIAL INSTRUMENTS
Off-Balance-Sheet Risk
The Company enters into forward exchange and foreign currency option
contracts to hedge foreign currency cash flows on a continuing basis for
periods consistent with its committed exposures. The Company does not engage
in currency speculation. The Company's foreign exchange contracts do not
subject the Company to risk due to exchange rate movements because gains and
losses on these contracts offset losses and gains on the underlying
transactions being hedged. The maximum amount of foreign currency contracts
outstanding during 1996 and 1995 was $257,401,000 and $228,750,000,
respectively. At December 31, 1996 and December 30, 1995, the Company had
$257,401,000, and $202,031,000 of forward exchange contracts outstanding,
respectively. At December 30, 1995, the Company had $10,000,000 of foreign
currency options outstanding.
Fair Value
The carrying amounts reflected in the consolidated balance sheets for cash
and cash equivalents, investments, accounts receivable, current portion of
long term debt, and accounts payable approximate fair value due to the short
maturities of these instruments.
N. RISKS AND UNCERTAINTIES
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating
results and cause actual results to vary materially from expectations include,
but are not limited to, the uneven pattern of quarterly results, competition,
competitive pricing pressures, dependence on suppliers, new products, changes
in regulations, manufacturing risks, reliance on indirect channels of
distribution, strategic relationships, international sales, management of
growth, dependence upon key personnel, enforcement of the Company's
intellectual property rights and future acquisitions.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments, long-term investments and trade and notes receivable. The Company
places its temporary cash investments and long-term investments in investment
grade instruments and limits the amount of investment with any one financial
institution. The credit risk associated with trade receivables is minimal due
to the large number of customers and their broad dispersion over many
different industries and geographic areas.
In 1996, Hewlett-Packard Company represented 12.6% of the Company's total
revenues. During 1995 and 1994, no single customer accounted for greater than
10% of the Company's revenues.
O. SEGMENT INFORMATION
The Company is active in primarily one business segment: designing,
manufacturing and marketing a wide range of storage-related hardware and
software products and related services. Information by geographic area is
presented below with exports shown in their area of origin. Sales and
marketing operations outside the U.S. are conducted through sales subsidiaries
and branches located principally in Europe and the Asia Pacific region. The
U.S. market amounted to greater than 95% of the Company's sales, income and
identifiable assets in the North/South America segment.
41
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intercompany transfers between geographic areas are accounted for at prices
which are designed to be representative of unaffiliated party transactions.
(in thousands)
EUROPE
NORTH/SOUTH MIDDLE EAST, ASIA CONSOLIDATED
AMERICA AFRICA PACIFIC ELIMINATIONS TOTAL
----------- ------------ -------- ------------ ------------
1996
Sales................... $1,441,935 $687,350 $144,367 $ -- $2,273,652
Transfers between
areas.................. 72,813 159,605 -- (232,418) --
---------- -------- -------- --------- ----------
Total sales............. 1,514,748 846,955 144,367 (232,418) 2,273,652
Income (loss) from
operations............. 334,547 167,964 (3,851) (2,119) 496,541
Identifiable assets at
year end............... 1,749,221 703,929 104,210 (263,814) 2,293,546
1995
Sales................... $1,230,223 $567,303 $123,749 $ -- $1,921,275
Transfers between
areas.................. 134,073 141,003 10 (275,086) --
---------- -------- -------- --------- ----------
Total sales............. 1,364,296 708,306 123,759 (275,086) 1,921,275
Income from operations.. 264,168 176,293 1,805 (6,487) 435,779
Identifiable assets at
year end............... 1,669,928 144,081 77,923 (146,203) 1,745,729
1994
Sales................... $ 871,048 $449,467 $ 56,977 $ -- $1,377,492
Transfers between
areas.................. 123,587 61,577 110 (185,274) --
---------- -------- -------- --------- ----------
Total sales............. 994,635 511,044 57,087 (185,274) 1,377,492
Income (loss) from
operations............. 155,544 196,658 (97) (1,573) 350,532
Identifiable assets at
year end............... 1,230,883 171,233 36,437 (121,053) 1,317,500
P. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share amounts)
Q1 1996 Q2 1996 Q3 1996 Q4 1996
-------- -------- -------- --------
1996
Net sales, service and rental.............. $521,487 $545,017 $550,754 $656,394
Gross profit............................... 228,323 240,076 244,316 311,987
Net income................................. 84,545 87,054 90,347 124,283
Net income per share, (fully diluted)...... $ 0.35 $ 0.36 $ 0.37 $ 0.50
Q1 1995 Q2 1995 Q3 1995 Q4 1995
-------- -------- -------- --------
1995
Net sales, service and rental.............. $448,116 $478,553 $475,460 $519,146
Gross profit............................... 230,008 246,791 235,183 206,417
Net income................................. 85,449 94,111 85,158 62,127
Net income per share, (fully diluted)...... $ 0.35 $ 0.38 $ 0.35 $ 0.26
The first three quarters of 1995 have been restated to reflect the
acquisition of McDATA, accounted for as a pooling of interests.
On September 23, 1996, EMC elected to change its fiscal year end from a
fiscal basis which would have ended on December 28, 1996 to a calendar basis
ending on December 31, 1996. The effect on the Company's results of operations
was not material.
42
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company will furnish to the Securities and Exchange Commission a
definitive Proxy Statement (the "Proxy Statement") not later than 120 days
after the close of the fiscal year ended December 31, 1996. 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.
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)
1. Financial Statements
The financial statements listed in the accompanying Index to Consolidated
Financial Statements and Schedule on page 47 are filed as part of this
report.
2. Schedule
The schedule listed in the accompanying Index to Consolidated Financial
Statements and Schedule on page 47 is filed as part of this report.
3. Exhibits
See Index to Exhibits page 48 of this report.
The exhibits are filed with or incorporated by reference in this report.
(b) Reports on Form 8-K.
On October 4, 1996, the registrant filed a report (Date of Report: October
4, 1996) on Form 8-K reporting, under Item 8, a change in its fiscal year end
from December 28, 1996 to December 31, 1996.
On October 10, 1996, the registrant filed a report (Date of Report: October
10, 1996) on Form 8-K reporting, under Item 5, that it was served with civil
investigative demands by the Antitrust Division of the United States
Department of Justice in connection with the Department's investigation into
the agreement dated June 7, 1996 between International Business Machines
Corporation and Storage Technology Corporation. The Justice Department is
gathering evidence to determine whether the IBM/STK Agreement has been, is, or
may be in violation of the federal Sherman Antitrust Act.
On December 12, 1996, the registrant filed a report (Date of Report:
November 25, 1996) on Form 8-K reporting, under Item 5, that on January 1,
1997 it would redeem all of its outstanding 4 1/4% convertible subordinated
notes due 2001. The registrant also reported that its Board of Directors had
rescinded the Company's Common Stock repurchase program due to the Securities
and Exchange Commission's issuance of Staff Accounting Bulletin 96.
44
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 FEBRUARY 27,
1997.
EMC CORPORATION
/s/ Richard J. Egan
By: _________________________________
RICHARD J. EGAN
CHAIRMAN OF THE BOARD
45
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES ON THE DATE INDICATED AS OF FEBRUARY 27, 1997.
SIGNATURE TITLE
/s/ Richard J. Egan Chairman of the Board (Principal
- ------------------------------------- Executive Officer) and Director
RICHARD J. EGAN
/s/ Michael C. Ruettgers President and Chief Executive Officer
- ------------------------------------- and Director
MICHAEL C. RUETTGERS
/s/ Colin G. Patteson Senior Vice President, Chief
- ------------------------------------- Administrative Officer and Treasurer
COLIN G. PATTESON (Principal Financial Officer)
/s/ William J. Teuber, Jr. Vice President and Chief Financial
- ------------------------------------- Officer (Principal Accounting Officer)
WILLIAM J. TEUBER, JR.
/s/ Michael J. Cronin Director
- -------------------------------------
MICHAEL J. CRONIN
/s/ John F. Cunningham Director
- -------------------------------------
JOHN F. CUNNINGHAM
/s/ John R. Egan Director
- -------------------------------------
JOHN R. EGAN
/s/ Maureen E. Egan Director
- -------------------------------------
MAUREEN E. EGAN
/s/ W. Paul Fitzgerald Director
- -------------------------------------
W. PAUL FITZGERALD
/s/ Joseph F. Oliveri Director
- -------------------------------------
JOSEPH F. OLIVERI
46
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. 23
Consolidated Balance Sheets at December 31, 1996 and December 30,
1995................................................................ p. 24
Consolidated Statements of Income for the years ended December 31,
1996, December 30, 1995, and December 31, 1994...................... p. 25
Consolidated Statements of Cash Flows for the years ended December
31, 1996, December 30, 1995, and December 31, 1994.................. p. 26
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, December 30, 1995, and December 31, 1994......... p. 27
Notes to Consolidated Financial Statements........................... pp. 28-42
Schedule:
Schedule II--Valuation and Qualifying Accounts..................... p. 49
Note: All other financial statement schedules are omitted because they are not
applicable or the required information is included in the financial
statements or notes thereto.
47
The exhibits listed below are filed with or incorporated by reference in this
report.
3.1 Articles of Organization of EMC Corporation./1/
3.2 Articles of Amendment filed February 26, 1986./1/
3.3 Articles of Amendment filed April 2, 1986./1/
3.4 Articles of Amendment filed May 13, 1987./2/
3.5 Articles of Amendment filed June 19, 1992./3/
3.6 Articles of Amendment filed May 12, 1993./4/
3.7 Articles of Amendment filed November 12, 1993./5/
3.8 Articles of Amendment filed May 10, 1995./6/
3.9 By-laws of EMC Corporation, as amended on July 21, 1995./7/
4.1 Form of Stock Certificate./8/
10.1 EMC Corporation 1985 Stock Option Plan, as amended (filed herewith).
10.2 EMC Corporation 1989 Employee Stock Purchase Plan, as amended./9/
10.3 EMC Corporation 1992 Stock Option Plan for Directors, as amended (filed
herewith).
10.4 EMC Corporation 1993 Stock Option Plan, as amended (filed herewith).
10.5 McDATA 1990 Class A Stock Option Plan./10/
10.6 McDATA 1990 Class B Stock Option Plan./10/
10.7 EMC Corporation Profit-Sharing Plan./1/
10.7 Mortgage Agreement with and Note Payable to John Hancock Mutual Life
Insurance Company./1/
11.1 Computation of net income (loss) per share (filed herewith).
22.1 Subsidiaries of Registrant (filed herewith).
23.1 Consent of Independent Accountants dated February 27, 1997 (filed
herewith).
- --------
/1/ Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (No. 33-3656).
/2/ Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (No. 33-17218).
/3/ Incorporated herein from Annual Report on Form 10-K of EMC Corporation
filed February 12, 1993.
/4/ Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (No. 33-67224).
/5/ Incorporated herein from Current Report on Form 8-K of EMC Corporation
filed November 19, 1993.
/6/ Incorporated herein from Current Report on Form 8-K of EMC Corporation
filed May 26, 1995.
/7/ Incorporated herein from Quarterly Report on Form 10-K of EMC Corporation
filed August 11, 1995.
/8/ Incorporated herein from Annual Report on Form 10-K of EMC Corporation
filed March 31, 1988.
/9/ Incorporated herein from Annual Report on Form 10-K of EMC Corporation
filed March 29, 1995.
/10/ Incorporated herein from Annual Report on Form 10-K of EMC Corporation
filed March 26, 1996.
48
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,
1996
Allowance for doubtful
accounts.............. $7,062,000 $1,927,000 -- $(1,621,000) $7,368,000
Year ended December 30,
1995
Allowance for doubtful
accounts.............. $6,272,000 $2,435,000 -- $(1,645,000) $7,062,000
Year ended December 31,
1994
Allowance for doubtful
accounts.............. $5,262,000 $2,223,000 -- $(1,213,000) $6,272,000
49