-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CAPlHSyHIGYl/X6ySmQuKwpY03Nxh3GZRQTORYng84u7tOEJEb5CqdCwIZ7ffzdY uLCRAlDwRW9PjD6eV9akAg== 0000927016-99-000921.txt : 19990312 0000927016-99-000921.hdr.sgml : 19990312 ACCESSION NUMBER: 0000927016-99-000921 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMC CORP CENTRAL INDEX KEY: 0000790070 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 042680009 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09853 FILM NUMBER: 99563462 BUSINESS ADDRESS: STREET 1: 35 PARKWOOD DRIVE CITY: HOPKINTON STATE: MA ZIP: 01748-9103 BUSINESS PHONE: 5084351000 MAIL ADDRESS: STREET 1: 35 PARKWOOD DRIVE CITY: HOPKINTON STATE: MA ZIP: 01748-9103 10-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1998 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)
35 Parkwood Drive Hopkinton, Massachusetts 01748 (Address of principal executive offices, including zip code) (508) 435-1000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Name of Each Exchange on Which Registered: -------------------- ------------------------------------------ Common Stock, $.01 par value New York Stock Exchange 3 1/4% Convertible Subordinated Notes due 2002 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. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the registrant was $54,029,635,090 as of January 31, 1999. The number of shares of Common Stock, $.01 par value, outstanding as of January 31, 1999 was 504,154,616. DOCUMENTS INCORPORATED BY REFERENCE The information required in response to Part III of Form 10-K is hereby incorporated by reference to the specified portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 5, 1999. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's prospects are subject to certain uncertainties and risks. This Annual Report on Form 10-K also contains certain forward-looking statements within the meaning of the Federal Securities Laws. The Company's future results may differ materially from its current results and actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. Readers should pay particular attention to the considerations described in the section of this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations-Factors that May Affect Future Results." Readers should also carefully review the risk factors described in the other documents the Company files from time to time with the Securities and Exchange Commission. PART I ITEM 1. BUSINESS General EMC Corporation and its subsidiaries ("EMC" or the "Company") design, manufacture, market and support a wide range of hardware, software and service products for the enterprise storage market. EMC introduced its first Symmetrix system, which provided storage for mainframe computers, in 1991. Since then, EMC has become the leading supplier of enterprise storage systems and software. These products are sold as integrated storage solutions for customers utilizing a variety of the world's most popular computing platforms, including but not limited to those shown below. These platforms include those of the Company's resellers and a variety of other platforms, including UNIX, Windows NT and mainframe. [GRAPH APPEARS HERE] [THE GRAPH DEPICTS A PICTURE OF SYMMETRIX UNITS SURROUNDED BY THE FOLLOWING PLATFORMS: HP, SILICON GRAPHICS, SIEMENS, BULL, NEC, ICL, UNISYS, SEQUENT, NCR, STRATUS, EMC CELERRA, IBM, DATA GENERAL, INTEL, COMPAQ, SUN, FUJITSU AND HITACHI.] Over the past decade, corporate computing environments have evolved from the use of a single proprietary system to numerous systems in a network running a variety of third party software applications. These disparate systems, including servers using UNIX and Windows NT operating systems and mainframes, continue to grow in number and scope, requiring corporations to simultaneously manage, share and protect ever increasing amounts of mission critical information from a wide range of computing platforms. Rather than placing the server at the center of their information systems environment, customers are now focusing on the information and the ability to access and use that information, regardless of platform or location. The consolidated information- centric computing model shown above defines the enterprise storage market, a market which EMC believes to have significant growth opportunities. An enterprise storage system stores and retrieves data from all major computing platforms and acts as a central information repository. To address the market opportunity defined above, in November 1998, the Company announced EMC's Enterprise Storage Network ("EMC ESN"). An EMC ESN is a dedicated network connecting enterprise storage systems to all major computing platforms. An EMC ESN extends the benefits and capabilities of the storage provided by a Symmetrix system beyond the data center, by consolidating a variety of different types of information technology ("IT") resources from remote locations within the enterprise and in the data center. It also provides customers flexibility by allowing them the option to keep servers and applications close to the user. The Company believes that its Connectrix systems (introduced in March 1999) combined with its Symmetrix systems with fibre channel connectivity facilitate the implementation of the EMC ESN. Through development of these storage networks, EMC is helping to build environments in which a single pool of storage will handle all information storage requirements of even the largest, most complex organizations. The Company's objective is to extend its position as the enterprise storage solutions leader in the IT industry and to establish the EMC ESN as the standard for networked storage. EMC develops its products by integrating technologically advanced, industry standard components with Company-designed hardware and software. The Company differentiates its products by incorporating hardware and software that the Company believes provide competitive advantage for its customers. These products feature high performance, high availability, heterogeneous connectivity and centralized management, sharing and protection of information. 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 100 companies to small businesses, and national to local governments. EMC products continue to be accepted widely by both existing customers and new accounts in all major industries worldwide. EMC, a Massachusetts corporation, was incorporated in 1979 and has its corporate headquarters at 35 Parkwood Drive, Hopkinton, Massachusetts. Company Strategies The Company's business is focused on four major strategies: 1) Products and Offerings; 2) Markets and Channels; 3) New Business Development; and 4) Operational Effectiveness and Efficiency. Products and Offerings The objective of the Company's Products and Offerings Strategy is to identify and deliver superior enterprise storage solutions that the Company believes will widen its lead over its competitors. The Company believes that competitive advantages in its products directly result from a combination of its innovative hardware and software. Enterprise Storage Hardware The Company's common hardware architecture on which its principal products are based, called MOSAIC:2000, is based upon a modular design and interfaces that allow new technologies to be incorporated more rapidly than with traditional architectures. This hardware architecture enables the Company to deliver advanced technologies to market quickly while maintaining a consistent platform upon which its customers can expand capacity, performance, connectivity and functionality. This architectural hardware design has enabled the Company to expand its products into existing markets and to enter new, strategic markets quickly with proven storage products and services. EMC delivered the first Symmetrix series for the IBM and IBM-compatible mainframe storage market in 1991. 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 2 standard 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 introduction of the first Symmetrix model, EMC has continued to enhance and increase the capabilities of the Symmetrix family of enterprise storage systems, including increasing the host connectivity capabilities. The various models in this family of products share a common architecture and components, with the main differentiator being capacity. The Company believes that the Symmetrix enterprise storage systems offer storage with the highest performance and availability in the enterprise storage market. The Company intends to continue to introduce new versions of the Symmetrix system with increased performance and other capabilities. The Company furthermore continues to engage in research and development of new hardware technology for the enterprise storage market. McDATA Corporation, a subsidiary of the Company ("McDATA"), designs, manufactures, markets and supports high performance fibre channel information switching products, which are key components of the EMC ESN. McDATA also produces the ESCON Director series of products, high-speed fiber-optic-based network switches that connect computers and peripherals within the data center. The ESCON Director series is marketed by International Business Machines Corporation ("IBM") under an exclusive original equipment manufacturer ("OEM") agreement with McDATA. Revenues from enterprise storage hardware represented approximately 79.7%, 85.0% and 86.3% of EMC's revenues in 1998, 1997 and 1996, respectively. Enterprise Storage Software A major strategic asset of the Company is its highly innovative software that provides customers with superior information management, sharing and protection through an information-centric model. Software-based capabilities include enhanced backup/restore, disaster recovery, business continuance, data migration and data movement. The Company's enterprise storage software is intended to be used with all Symmetrix models. EMC's information management software includes: EMC PowerPath, EMC Volume Logix and Symmetrix Manager. Examples of information sharing software are Symmetrix Enterprise Storage Platform (ESP), EMC InfoMover and DataReach. The Company's information protection software includes: Symmetrix Remote Data Facility (SRDF), EMC TimeFinder and EMC Data Manager (EDM). In August 1998, the Company acquired Conley Corporation of Cambridge, Massachusetts ("Conley"), a leader in high-availability, high-performance storage management software for UNIX, Windows NT and other platforms. The Company expects that these acquired technologies will contribute to the further development and deployment of the EMC ESN. Conley's operations have become the EMC Cambridge Software Development Center. EMC continues to engage in research and development of software for the enterprise storage market in the areas of information management, sharing and protection. During 1998, the Company introduced several new software products and enhancements to existing products. The Company believes that its investment in software development will accelerate adoption of EMC's enterprise storage and Enterprise Storage Network models and facilitate consolidation and sharing of information. Revenues from enterprise storage software represented approximately 11.2%, 6.0% and 3.4% of EMC's revenues in 1998, 1997 and 1996, respectively. 3 Network Attached Storage Network attached storage systems connect directly to local and wide area networks without the use of a host computer. These systems combine EMC- developed proprietary software and network director hardware components with Symmetrix. This enables users on disparate systems to access and use central files of information, including video and audio. EMC has introduced several network attached storage products and is currently engaging in research and development of additional features for the network attached storage market. Manufacturing and Quality 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 United States and Europe are assembled in accordance with production standards and quality controls established by EMC. During 1998, the Company consolidated its North American manufacturing operations into a new, state-of-the-art, 715,000 square foot manufacturing facility in Franklin, Massachusetts and more than doubled the size of its manufacturing facility in Cork, Ireland, to a total of 470,000 square feet. See "Properties." The Company employs a corporate-wide Total Quality Management philosophy to ensure the quality of its designs, manufacturing processes and suppliers. The Company's manufacturing operations in Massachusetts currently hold an ISO 9001 Certificate of Registration. This internationally recognized endorsement of ongoing quality management represents the highest level of certification available. The Company's manufacturing operations in Ireland currently hold an ISO 9002 Certificate of Registration and ISO 14001 Environmental Management Standard Certification. In addition, EMC sites in the United Kingdom, Italy, France, Australia, New Zealand and South Africa hold ISO certifications. Markets and Channels The Company's Markets and Channels strategy is focused on developing and implementing a highly differentiated corporate identity and enhancing marketing and sales channels to grow the Company's worldwide enterprise storage market leadership. Specific targeted storage markets include the UNIX and Windows NT market segments, the IBM and IBM-compatible mainframe storage 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. Enterprise Storage Market During 1998, the Company focused on the three major sectors of the enterprise storage market described below: UNIX, Windows NT and mainframe. UNIX Market The UNIX 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. Windows NT Market The Company believes that the storage requirements are growing rapidly for systems running the Windows NT operating system in enterprise computing environments. This market is characterized by a wide-range of servers, typically with their own storage devices, that enable users to perform numerous large and small computing tasks. As the information generated by these servers continues to grow, the Company believes that customers will centralize the information from different systems to simplify its management, sharing and protection. 4 Mainframe Market The Company's enterprise storage products have achieved a significant presence in the mainframe storage market. The Company believes that mainframes will continue to play an important role as enterprise information servers and are a key element of enterprise computing due to the 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 products in this market. Enterprise Storage Services Professional Services EMC's Enterprise Storage Professional Services business, formed in 1997, designs and delivers world-class professional services to its global customer base. Such professional services assist customers in assessing, designing and implementing enterprise storage solutions customized to maximize their return on information assets. Internet Services EMC's Internet Services Group, formed in 1997, provides a comprehensive Web site management service, leveraging the Company's resources, including its Symmetrix systems and its suite of enterprise storage software. Through this service, the Company develops, implements, maintains and monitors all the technical aspects of a customer's internet presence, including management of internet-based electronic commerce and database applications as well as Web and online advertising. Marketing and Customers EMC markets its products through multiple distribution channels, including its direct sales force and selected distributors, resellers and OEMs. The Company has a direct sales presence throughout North America, Latin America, Europe, the Middle East, South Africa and the Asia Pacific region and uses distributors as its primary distribution channel in other areas of the world. Over the past three years, the Company has expanded its sales and marketing organizations significantly in all major geographies of the world. During 1998, the Company established a direct sales presence in Eastern Europe, strengthened its direct sales in Latin America and continued broadening its direct sales presence worldwide. The Company increased its sales channel capabilities by signing agreements with a number of resellers, value added resellers and distributors during 1998. During 1998, the Company derived 60.5% of its revenue from North America; 1.3% from Latin America; 31.0% from Europe, the Middle East and Africa; and 7.2% from the Asia Pacific region. In 1998, the Company initiated a new marketing campaign, focusing on "The EMC Effect," to communicate the strategic impact of EMC's information management solutions to senior business and technology executives around the world. This program includes a series of new sponsorships, advertising campaigns and marketing programs designed to increase the Company's worldwide visibility. Reseller and OEM Channels The Company believes its products are well suited for sale by resellers and OEMs and that its revenues from resellers and OEMs will continue to represent a significant portion of its total revenues. The Company has reseller or OEM agreements with nine systems vendors. These agreements enable the reseller or OEM to market and resell certain of the Company's Symmetrix systems worldwide, subject to certain terms and conditions, for connection to certain of the reseller or OEM's respective computing platforms. The Company's principal reseller and OEM agreements are with Hewlett-Packard Company ("HP"), NEC Corporation ("NEC"), Siemens Nixdorf Informationssysteme AG, Unisys Corporation, Sequent Computer Systems, Inc. and Compagnie des Machines Bull S.A. 5 In May 1998, EMC and HP expanded their reseller relationship, enabling HP to resell Symmetrix enterprise storage systems with its Windows NT systems, in addition to its UNIX-based platforms. In January 1999, EMC and HP extended their reseller agreement for another three years. In November 1998, the Company entered into a reseller agreement with NEC, under which NEC markets and resells Symmetrix enterprise storage systems for connection to its UNIX and Windows NT systems. Revenues from reseller and OEM channels represented approximately 28%, 27% and 19% of EMC's product revenues in 1998, 1997 and 1996, respectively. Alliances The Company has alliances with leading software, relational database and enterprise application companies, including BMC Software, Inc., Microsoft Corporation, SAP AG, Oracle Corporation and other major independent software applications vendors. EMC intends to continue to form additional strategic alliances. EMC's strategy is to work closely with leading software companies to provide added value to its customers by integrating enterprise storage with software applications that customers rely on to manage their day-to-day business operations. Customer Service EMC's Customer Service organization, which includes over 1,500 technical, field and support personnel, monitors 24 hours a day, seven days a week, 365 days a year, the Company's Symmetrix products and enterprise storage software sold to its customers. Such EMC products contain remote support capabilities, thereby enabling EMC customer service personnel to continuously monitor, diagnose and resolve issues, wherever the product is located, often without the need for on-site service. New Business Development The Company's New Business Development Strategy's focus is to develop new business aligned to the enterprise storage market. This will be accomplished by maintaining a long-term view on the storage industry's potential and continually assessing the market. Key objectives are to identify and close significant business development opportunities (mergers, acquisitions and investments) that are aligned with the Company's strategic direction, including businesses with technologies that complement and augment the Company's hardware and software, and to manage and integrate such new businesses into EMC. Operational Effectiveness and Efficiency The Company's Operational Effectiveness and Efficiency Strategy provides EMC's business with focused attention on service-related functions within the Company, including Finance, Legal, Human Resources, Information Systems and Facilities. Collectively, these functions provide a flexible infrastructure that supports EMC's highly evolutionary business model that the Company believes has enabled its continued financial and operational excellence. ---------------- Raw Materials EMC's products utilize the Company's engineering designs, with industry standard and semi-custom components and subsystems. Among the most important components that EMC uses are disk drives, high density memory components and power supplies. See "Factors that May Affect Future Results-Dependence on Suppliers." Patents EMC has been granted or owns by assignment over 200 patents. The Company also has approximately 400 patent applications pending relating to its hardware and software products for the enterprise storage market. 6 Backlog The Company manufactures its products on the basis of its forecast of near- term demand and maintains inventory in advance of receipt of firm orders from customers. Products are configured to customer specifications and are generally shipped by the Company shortly after receipt of the order. Customers may reschedule orders with little or no penalty. For these reasons, the Company's backlog at any particular time is not meaningful because it is not necessarily indicative of future sales levels. Competition In the UNIX market, EMC competes primarily with Sun Microsystems, Inc. ("Sun"), IBM and Compaq Computer Corporation ("Compaq"). In the Windows NT market, the Company competes primarily with Compaq. In the mainframe market, EMC competes primarily with IBM and Hitachi, Limited ("Hitachi"). In the Company's opinion, these companies compete based on their overall market presence and their ability to sell both computer systems and storage systems. The Company believes that its major independent storage competitor in the UNIX and Windows NT markets is Data General Corporation ("DG"). The Company believes that it has a number of competitive advantages over these companies, encompassing product, distribution and customer service. The Company believes the advantages in its products include performance, capacity, availability, connectivity, value-added software, time to market enhancements and total cost of ownership. The Company believes its advantages in distribution include its direct sales force, its reseller or OEM agreements with most of the major server vendors and its broad network of distributors. The Company believes its advantages in customer service include its ability to effectively monitor and provide service (which is often remote and without interruption to a company's business) for its Symmetrix products and enterprise storage software 24 hours a day, seven days a week, 365 days a year. 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. Employees As of January 31, 1999, EMC had approximately 9,700 employees worldwide. None of the Company's domestic employees is represented by a labor union, and the Company has never suffered an interruption of business as a result of a labor dispute. The Company considers its relations with its employees to be good. Financial Information About Segments, Foreign and Domestic Operations and Export Sales The Company is active in primarily one business segment: designing, manufacturing and marketing high performance enterprise storage products. Sales and marketing operations outside the United States are conducted through sales subsidiaries and branches located principally in Europe and the Asia Pacific region. The Company has two manufacturing facilities, one in Massachusetts which provides product to the North American markets and one in Ireland which provides product to markets in the rest of the world. Total exports, in millions, from both of these facilities amounted to approximately $1,634, $1,306 and $985 in 1998, 1997 and 1996, respectively. (See Note O to the Company's Consolidated Financial Statements.) 7 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 - --------------------- --------------------------------- --------------- ----------------- 50 Constitution Blvd. Manufacturing 715,000 Owned Franklin, MA 35 Parkwood Dr. Corporate, Administration, Sales 160,000 Leased Hopkinton, MA and Marketing 42 South St. Customer Briefing Center, 125,000 Owned Hopkinton, MA Administration, Marketing 80 South St. Research and Development, 155,000 Owned Hopkinton, MA Manufacturing 171 South St. Research and Development, 285,000 Owned Hopkinton, MA Manufacturing 5-9 Technology Dr. Customer Service, Research and 265,000 Leased Milford, MA Development, Administration, Manufacturing Cork, Ireland Manufacturing 470,000 Owned McDATA Corporation Research and Development, 90,000 Leased Manufacturing
The Company is currently constructing a 165,000 square foot building in Hopkinton, MA for research and development use. The Company also leases space for its sales and services offices and certain research and development facilities worldwide, and owns land in the Hopkinton, Massachusetts area for possible expansion purposes. The Company believes its present level of manufacturing and other capacity, along with its plans for expansion, will be sufficient to accommodate its requirements. ITEM 3. LEGAL PROCEEDINGS In August 1997, TM Patents, L.P. ("TM") filed suit against the Company in the United States District Court for the Southern District of New York alleging that the Company is infringing two patents and seeking unspecified damages. The Company filed a motion to transfer the case to the United States District Court for the District of Massachusetts and a motion to dismiss the suit. The Company's motion to transfer was granted with leave for the plaintiff to amend the complaint to overcome the grounds for dismissal. In the amended complaint filed by TM and TM Creditors, L.L.C., the plaintiffs alleged infringement as to only one of the two patents originally at issue. Trial of this matter began in February 1999. The parties reached a negotiated resolution of this matter in February 1999, during the second week of trial. As part of the resolution, EMC will obtain a license under the one patent at issue and a covenant from the plaintiffs not to sue under any and all patents owned or controlled by either of the plaintiffs. All claims in the lawsuit will be dismissed with prejudice as a result of this agreement. In December 1997, NewFrame Corporation Ltd. ("NewFrame") filed suit against the Company in the United States District Court for the District of Massachusetts. The suit contains a variety of allegations relating to the Company's use of NewFrame's software developments, including various contract claims and breach of fiduciary duty, and seeks monetary damages relating primarily to lost future profits. The Company filed a motion to dismiss the complaint, which was granted in part. The Company believes NewFrame's claims are without merit. 8 In January 1998, Storage Technology Corporation ("STK") filed suit against the Company in the United States District Court for the Northern District of California alleging that the Company was infringing a patent covering virtual tape and seeking preliminary and permanent injunctions and unspecified damages. The Company's response raised as an affirmative defense that EMC was licensed to promote the use of, market, sell and make virtual tape products pursuant to a patent license agreement between EMC and STK dated April 11, 1996 (the "License Agreement"). After a trial held in August 1998, the court ruled that EMC is licensed to promote the use of, market, sell and make virtual tape products pursuant to the License Agreement. The Court found that STK's suit was without foundation and awarded costs to EMC. In October 1998, STK filed an appeal of the Court's ruling. The Company is a party to other litigation which it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material adverse effect on the Company's business, results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's stockholders during the fourth quarter of the fiscal year covered by this report. 9 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
Name Age Position ---- --- -------- Richard J. Egan.................. 63 Chairman of the Board of Directors Michael C. Ruettgers............. 56 President, Chief Executive Officer and Director Robert M. Dutkowsky.............. 44 Executive Vice President, Markets and Channels Paul E. Noble, Jr................ 43 Executive Vice President, Products and Offerings Colin G. Patteson................ 50 Senior Vice President, Chief Administrative Officer and Treasurer Paul T. Dacier................... 41 Vice President and General Counsel William J. Teuber, Jr............ 47 Vice President and Chief Financial Officer
Richard J. Egan is a founder of the Company and has served as a Director of the Company since its inception in 1979. He was elected Chairman of the Board of the Company in January 1988. Prior to January 1988, he was also President of EMC. From 1979 to January 1992, he was Chief Executive Officer of the Company. He is also a Director of BEC Energy Company, a public utility. 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 Commonwealth Energy System, a public utility, and EG&G Inc., a diversified technology company. Robert M. Dutkowsky joined EMC in October 1997 as Executive Vice President, Markets and Channels. Prior to joining EMC, he held several senior level management positions at IBM, a computer manufacturer, from 1977 to 1997, most recently as Vice President of Worldwide Sales and Marketing for IBM's RS/6000 business. Paul E. Noble, Jr. served as Vice President of Customer Service of EMC from March 1987 through May 1989, Vice President of Sales Operations from June 1989 through May 1992, Vice President and General Manager of OEM Operations from June 1992 to January 1998 and Senior Vice President, New Business Development of EMC from January 1998 to September 1998. In September 1998, Mr. Noble became Executive Vice President, Products and Offerings of the Company. Colin G. Patteson served as European Controller of EMC from January 1989 to March 1991, Corporate Controller from March 1991 to February 1993, Vice President and Corporate Controller from February 1993 to April 1995, and Vice President, Chief Financial Officer and Treasurer from April 1995 to February 1997. In February 1997, Mr. Patteson became Senior Vice President, Chief Administrative Officer and Treasurer of the Company. 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 of Directors, is the husband of Maureen E. Egan, a Director of the Company. He is also the brother-in-law of W. Paul Fitzgerald, a Director of the Company. W. Paul Fitzgerald is 10 the brother of Maureen E. Egan. John R. Egan, a Director of the Company, is the son of Richard J. and Maureen E. Egan. Paul E. Noble, Jr., Executive Vice President, Products and Offerings of the Company, is the nephew of Richard J. and Maureen E. Egan and of W. Paul Fitzgerald. ---------------- The President and Treasurer are elected annually to serve until the first meeting of the Board of Directors following the next annual meeting of stockholders and until their successors are elected and qualified. The other executive officers are appointed to serve in such positions and serve at the pleasure of the Board of Directors. ---------------- EMC/2/, EMC, Celerra, Connectrix, DataReach, EDM, The EMC Effect, InfoMover, MOSAIC:2000, PowerPath, Symmetrix, SRDF, TimeFinder and Volume Logix are either registered trademarks or trademarks of the Company. Other trademarks and logos are either registered trademarks or trademarks of their respective owners. 11 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 (the "NYSE") under the symbol EMC. During the last five fiscal years, the following stock split was effected in the form of a stock dividend: a two-for-one stock split effective November 17, 1997, for stockholders of record on October 31, 1997. On February 24, 1999, the Company's Board of Directors approved a two-for- one stock split, subject to stockholder approval of an increase in the number of shares of authorized common stock at the Company's Annual Meeting of Stockholders to be held on May 5, 1999. If stockholder approval is received, the stock split will be payable on or about May 28, 1999 to stockholders of record as of the close of business on May 14, 1999. Because stockholder approval is pending, financial information contained in this Annual Report on Form 10-K has not been adjusted to reflect the impact of the proposed stock split. The following table sets forth the range of high and low prices on the NYSE for the past two years during the fiscal periods shown, adjusted to reflect the effect of the November 17, 1997 stock split.
Fiscal 1998 High Low ----------- ------ ------ First Quarter........................... $38.69 $25.19 Second Quarter.......................... 46.94 36.00 Third Quarter........................... 61.88 44.50 Fourth Quarter.......................... 85.00 45.19 Fiscal 1997 High Low ----------- ------ ------ First Quarter........................... $19.81 $16.06 Second Quarter.......................... 20.31 16.25 Third Quarter........................... 30.88 19.59 Fourth Quarter.......................... 32.50 23.63
As of January 31, 1999, there were approximately 5,400 holders of record of Common Stock. The Company has never paid cash dividends on its Common Stock. While subject to periodic review, the current policy of its Board of Directors is to retain all earnings primarily to provide funds for the continued growth of the Company. 12 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 31, December 31, December 30, December 31, 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ Summary of Operations: Revenues................ $3,973,735 $2,937,860 $2,273,652 $1,921,275 $1,377,492 Operating income........ 981,804 661,912 496,541 435,779 350,532 Net income.............. 793,363 538,528 386,229 326,845 250,668 Net income per weighted average share, basic... $ 1.59 $ 1.09 $ 0.83 $ 0.73 $ 0.65 Net income per weighted average share, diluted(1) ............ $ 1.49 $ 1.04 $ 0.79 $ 0.67 $ 0.55 Weighted average shares, basic.................. 499,978 493,698 463,548 450,629 387,939 Weighted average shares, diluted(1)............. 539,176 525,500 498,590 496,537 467,177 Balance Sheet Data: Working capital......... $2,451,620 $2,121,156 $1,336,634 $ 959,595 $ 600,341 Total assets............ 4,568,571 3,490,109 2,293,546 1,745,729 1,317,500 Long-term obligations(2)......... 538,896 558,454 191,234 245,845 286,106 Stockholders' equity.... $3,324,136 $2,376,301 $1,636,789 $1,140,301 $ 727,641
- -------- (1) In addition to common stock equivalents, diluted earnings per share reflects the dilutive effects of the Company's debt securities as outstanding for the respective periods reported above. All share and per share amounts have been restated to reflect the stock split effective November 17, 1997 for all periods presented. (2) Excludes current portion of long-term debt. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with "Factors that May Affect Future Results" beginning on page 18. All dollar amounts in this MD&A and in Item 7A are in millions. The following table presents certain consolidated statement of operations information stated as a percentage of total revenues.
Fiscal Year Ended -------------------------------------- December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ Revenues Enterprise storage hardware............ 79.7% 85.0% 86.3% Enterprise storage software............ 11.2 6.0 3.4 Enterprise switching products (McDATA).............................. 4.5 6.4 7.9 Service and rental..................... 4.6 2.6 2.4 ----- ----- ----- Total revenue.......................... 100.0% 100.0% 100.0% Cost and expenses Cost of sales and service.............. 48.6 53.5 54.9 Research and development............... 7.9 7.5 7.1 Selling, general and administrative.... 18.8 16.5 16.2 ----- ----- ----- Operating income....................... 24.7 22.5 21.8 Investment income and interest expense, net................................... 2.0 1.9 1.0 ----- ----- ----- Income before income taxes............. 26.7 24.4 22.8 Provision for income taxes............. 6.7 6.1 5.8 ----- ----- ----- Net income............................. 20.0% 18.3% 17.0% ===== ===== =====
Revenues Total revenues were $3,973.7, $2,937.9 and $2,273.7 in 1998, 1997 and 1996, respectively; an increase of $1,035.8 or 35% from 1997 to 1998, and $664.2 or 29% from 1996 to 1997. Enterprise systems revenues from products sold directly and through OEMs and resellers were $3,167.1, $2,496.7 and $1,961.3 in 1998, 1997 and 1996, respectively; an increase of $670.4 or 27% from 1997 to 1998, and $535.4 or 27% from 1996 to 1997. The increase in enterprise systems revenues was primarily due to the continued strong demand for the Company's Symmetrix series of products. These products address the growing demand for enterprise- wide storage solutions, allowing users to move, store and protect mission critical information in UNIX, Windows NT and mainframe environments. Enterprise software revenues from products sold directly and through OEMs and resellers were $445.4, $176.9 and $76.4 in 1998, 1997 and 1996, respectively; an increase of $268.5 or 152% from 1997 to 1998, and an increase of $100.5 or 131% from 1996 to 1997. The increase in software revenues was primarily due to increased licenses of enterprise storage software on Symmetrix systems, both newly shipped and already installed, and the successful introduction of new software products. Revenues from products sold by McDATA, primarily the ESCON Director series of products, were $178.8, $189.1 and $180.5 in 1998, 1997 and 1996, respectively; a decrease of $10.3 or 5% from 1997 to 1998, and an increase of $8.6 or 5% from 1996 to 1997. The decrease from 1997 to 1998 was primarily due to the product transition from ESCON-based to fibre-channel-based directors. 14 Service and rental revenues were $182.4, $75.2 and $55.4 in 1998, 1997 and 1996, respectively; an increase of $107.2 or 143% from 1997 to 1998, and an increase of $19.8 or 36% from 1996 to 1997. The increase from 1997 to 1998 was primarily a result of the growth in EMC professional services and the acquisitions of the professional services businesses Groupe MCI and Millennia III, Inc. in the second and third quarters of 1998, respectively. In May 1998, EMC and HP expanded their reseller relationship, enabling HP to resell Symmetrix enterprise storage systems with its Windows NT systems, in addition to its UNIX-based platforms. In January 1999, EMC and HP extended their worldwide reseller agreement for another three years. Revenues for 1998, 1997 and 1996 under the Company's reseller agreement with HP were $718.0, $504.1 and $287.4, respectively, representing 18%, 17% and 13% of total revenues, respectively. In November 1998, the Company entered into a reseller agreement with NEC, under which NEC markets and resells Symmetrix enterprise storage systems worldwide for connection to its UNIX and Windows NT computers. Revenues on sales into the North American markets were $2,403.9, $1,682.1 and $1,330.9 in 1998, 1997 and 1996, respectively; an increase of $721.8 or 43% from 1997 to 1998, and $351.2 or 26% from 1996 to 1997. The revenue growth reflects continued strong demand for the Company's products and services. Revenues on sales into the markets of Europe, the Middle East and Africa were $1,231.7, $951.8 and $720.8 in 1998, 1997 and 1996, respectively; an increase of $279.9 or 29% from 1997 to 1998, and $231.0 or 32% from 1996 to 1997. The Company incorporated direct sales subsidiaries in Spain and Poland during 1998, in Austria during 1997, and in Israel during 1996. Revenues on sales into the markets in the Asia Pacific region were $284.8, $279.5 and $206.6 in 1998, 1997 and 1996, respectively; an increase of $5.3 or 2% from 1997 to 1998, and $72.9 or 35% from 1996 to 1997. The reduced growth rate in 1998 was principally attributable to a downturn in economic trends in the Asia Pacific market. Revenues on sales into the markets of Latin America were $53.3, $24.4 and $15.4 in 1998, 1997 and 1996, respectively; an increase of $28.9 or 118% from 1997 to 1998, and $9.0 or 59% from 1996 to 1997. The increase in both periods was primarily due to the Company's efforts to expand its business in this region. The Company incorporated a direct sales subsidiary in Brazil during 1996. Gross Margins Gross margins increased to 51.5% in 1998, compared to 46.5% in 1997 and 45.1% in 1996. The increase in both periods is primarily attributable to increased licensing of the Company's enterprise software, which has higher gross margins than sales of enterprise systems. Software revenue as a percentage of total revenues increased to 11.2% in 1998 from 6.0% in 1997 and 3.4% in 1996. Other factors affecting gross margins in 1998 include the impact of component cost declines being greater than the impact of product price declines. The Company currently believes that product price declines will continue. Research and Development Research and development ("R&D") expenses were $315.2, $220.9 and $161.1 in 1998, 1997 and 1996, respectively. As a percentage of revenues, R&D expenses were 7.9%, 7.5% and 7.1% in 1998, 1997 and 1996, respectively. The increase in R&D spending levels from 1997 to 1998 reflects the Company's ongoing research and development efforts in a variety of areas, including EMC ESN technologies, enhancements to the Symmetrix family of products, new enterprise storage software products and fibre channel connectivity. R&D for 1998 also includes costs associated with the integration of Conley, acquired in August 1998, which became the EMC Cambridge Software Development Center. The increase in R&D spending levels from 1996 to 1997 reflects the cost of technical staff and equipment to support a variety of projects, including both fibre channel connectivity and enterprise storage software. 15 Selling, General and Administrative Selling, general and administrative ("SG&A") expenses were $747.5, $484.1 and $367.1 in 1998, 1997 and 1996, respectively. As a percentage of revenues, SG&A expenses were 18.8%, 16.5% and 16.2% in 1998, 1997 and 1996, respectively. The increase in spending levels in both periods is primarily due to continued investment in additional sales and support personnel and their related overhead costs, both domestically and internationally, in connection with the Company's increased revenue levels. The increase from 1997 to 1998 primarily reflects the Company's objective of building an infrastructure to achieve broader coverage and greater account depth around the world and to expand its technical sales organization to support the current and expected growth in software sales. The increase from 1996 to 1997 primarily reflects the Company's expansion of its international direct sales force, particularly in the Asia Pacific region, as well as OEM, reseller, alliance and partnership programs. Investment Income and Interest Expense Investment income increased to $101.4 in 1998, from $70.5 in 1997 and $34.5 in 1996. Investment income was earned primarily from investments in cash equivalents and short and long-term investments. Investment income increased in 1998 and 1997 primarily due to higher average cash and investment balances which were derived from operations and proceeds from the Company's 3 1/4% Convertible Subordinated Notes due 2002 issued in March of 1997 (the "3 1/4% Notes"). Interest expense increased to $20.2 in 1998, from $15.5 in 1997 and $12.0 in 1996. The increase in 1998 from 1997 and in 1997 from 1996 is primarily due to the 3 1/4% Notes. Interest expense in 1996 was primarily due to the Company's 4 1/4% Convertible Subordinated Notes due 2001 (the "4 1/4% Notes"), all of which were redeemed or converted into Common Stock by January 1997. Other Income/(Expense), Net The net other expense was $5.2 in 1998 compared with the net other income of $1.1 in 1997 and $0.4 in 1996. The increase in the net expense from 1997 to 1998 is primarily attributable to costs associated with a bond offering which was cancelled during the third quarter, gains and losses on foreign exchange transactions and losses on sales of fixed assets. Provision for Income Taxes The provision for income taxes was $264.5 in 1998, $179.5 in 1997 and $133.2 in 1996, which resulted in effective tax rates of 25.0%, 25.0% and 25.7% in 1998, 1997 and 1996, respectively. The effective tax rate is mainly attributable to the realization of benefits associated with the Company's various tax strategies and benefits related to offshore manufacturing. Financial Condition Cash and cash equivalents and short and long-term investments were $2,092.8 and $1,650.6 at December 31, 1998 and 1997, respectively, an increase of $442.2. In 1998, cash and cash equivalents decreased by $249.4 and short and long-term investments increased by $691.6. This reflects the Company's continued efforts to invest excess cash in short and long-term investments, which generate a higher yield than cash and cash equivalents. Cash provided by operating activities was $855.2. This was primarily generated from net income, offset by an increase in working capital, primarily attributed to an increase in accounts receivable and an increase in inventory, consistent with the growth of the business. Cash used by investing activities was $1,156.0, principally for additions to property, plant and equipment and the purchase of short and long-term investments. The year-over-year increase in additions to property, plant and equipment is primarily attributable to the construction of manufacturing facilities in Franklin, Massachusetts and Cork, Ireland. Cash provided by financing activities was $54.9, principally from the issuance of Common Stock from stock option exercises. 16 The Company has available for use a credit line of $50.0 and may elect to borrow at any time. In March 1997, the Company sold $517.5 of the 3 1/4% Notes. The 3 1/4% Notes are generally convertible into shares of Common Stock at any time prior to the redemption date at a conversion price of $22.655 per share. As of December 31, 1998, none of the 3 1/4% Notes have been converted into Common Stock. Based on its current operating and capital expenditure forecasts, the Company believes that the combination of funds currently available, funds generated from operations and its available line of credit will be adequate to finance its ongoing operations. To date, inflation has not had a material impact on the Company's financial results. New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in either current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in fair value of an asset, liability or firm commitment, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the fair value of the hedged item. For cash-flow hedge transactions, in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current earnings. The Company adopted SFAS 133 as of January 1, 1999. The Company believes that the adoption of this Statement will not have a material effect on its financial statements. In connection with the adoption of SFAS 133, the Company intends to reclassify its held-to-maturity securities to available for sale securities. 17 FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's prospects are subject to certain uncertainties and risks. This Annual Report on Form 10-K also contains certain forward-looking statements within the meaning of the Federal Securities Laws. The Company's future results may differ materially from its current results and actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including but not limited to those set forth below, other one-time events and other important factors disclosed previously and from time to time in EMC's other filings with the Securities and Exchange Commission. Dependence on Suppliers The Company purchases certain components and products from one or a limited number of qualified suppliers that meet its requirements. In addition, certain of the Company's suppliers are competitors of the Company. Among the most important components that EMC uses are disk drives, high density memory components and power supplies. A failure by any supplier of components to meet EMC's delivery or quality requirements for an extended period of time could have a material adverse effect on the Company's business, results of operations or financial condition. The Company periodically transitions its product line to new disk drive technologies. These transitions may intensify the above risks. From time to time, because of high industry demand 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 components needed to satisfy orders for its products. The Company is currently working with such vendors to proactively maintain or improve component quality standards and also continues to seek alternative sources of supply. If such shortages or performance problems were to intensify, the Company could lose some time-sensitive customer orders which could adversely affect quarterly revenues or earnings. The adverse effect of a supplier's failure to meet EMC's requirements may be intensified by the uneven 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 storage industry, which requires ongoing market research, development of highly complex hardware and software 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. There is strong competition in the computer storage market and there can be no assurance that the Symmetrix series of products will continue to be properly positioned in the market or receive customer acceptance. Furthermore, there can be no assurance that EMC will be able to continue to develop new hardware or software on a timely basis even with significant additional investments. Risks inherent in the transition to new products include the difficulty in forecasting customer demand accurately, the Company's inability to expand production capacity fast enough to meet customer demand, the impact of customer demand for new products on the products being replaced and delays in initial shipments of new products. Further risks inherent in new product introductions include the uncertainty of price-performance relative to products of competitors, competitors' responses to the introductions and the desire by customers to evaluate new products for longer periods of time. There can be no assurance that the Company will be able to effectively manage the transitions to new products or new technologies. Competition There is strong competition in the computer storage industry. EMC competes with many companies, certain of which have substantially greater financial, marketing and technological resources, larger distribution capabilities, earlier access to customers and a greater overall market presence than EMC. In the UNIX market, EMC competes primarily with Sun, IBM and Compaq. In the Windows NT market, the Company competes primarily with Compaq. In the mainframe market, EMC competes primarily with IBM and Hitachi. In the Company's opinion, these companies compete based on their overall market presence and their ability to sell 18 both computer systems and storage systems. The Company believes that its major independent storage competitor in the UNIX and Windows NT markets is DG. 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 competitors to reduce prices in order to preserve or gain market share, which cannot be foreseen by the Company. The Company currently believes that pricing pressures are likely to continue. 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 a material adverse effect on the Company's earnings. 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. Indirect Channels of Distribution The Company derives 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. The Company's financial results could be adversely affected if its contracts with HP or other resellers or OEMs were terminated, if the Company's relationship with such resellers or OEMs were to deteriorate or if the financial condition of its resellers or OEMs were to weaken. In addition, as the Company's business grows, 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, thereby making it more difficult to accurately forecast such orders. Uneven Pattern of Quarterly Sales There has been a historic and recurring uneven 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. These include 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 19 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 first quarter of the following year. The uneven 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 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. Management of Growth The Company's continued growth and future operating results will depend on management's ability to manage such growth, including but not limited to hiring and retaining significant numbers of qualified employees, forecasting revenues, controlling expenses, managing its manufacturing capacity and other assets and executing on its plans. An unexpected decline in the growth rate of revenues without a corresponding and timely reduction in expense growth or a failure to manage other aspects of growth could have a material adverse effect on 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, the development of additional management personnel and the hiring of new qualified employees. Competition for highly-skilled personnel is intense in the high technology industry. There can be no assurance that the Company will be successful in recruiting new personnel or in retaining existing personnel. The loss of one or more key employees or other employees or the Company's inability to attract additional qualified employees could have a material adverse effect on the Company's business, results of operations or financial condition. Manufacturing EMC's products operate near the limits of electronic and physical performance and are designed and manufactured with relatively small tolerances. If flaws in design, production, assembly or testing were to occur by EMC or its suppliers, EMC could experience a rate of failure in its products that would result in substantial repair or replacement costs and potential damage to EMC's reputation. Continued improvement in manufacturing capabilities and control of material and manufacturing quality and costs are critical factors in the future growth of EMC. EMC frequently revises and updates manufacturing and test processes to address engineering and component changes to its products and evaluates the reallocation of manufacturing resources among its facilities. There can be no assurance that the Company'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 material adverse effect on the Company's business, results of operations or financial condition. 20 Acquisitions As part of its business strategy, the Company makes acquisitions of, and investments in, businesses that offer complementary products, services or technologies. Any such acquisitions or investments are accompanied by the risks commonly encountered in an acquisition of a business. Such risks include, among other things, the failure of such acquired business to further the Company's strategies, the difficulty of integrating the acquired business with EMC, the effect of such acquisition on the financial and strategic position of the Company, the maintenance of uniform company-wide standards, procedures and policies and the impairment of relationships with employees and customers of the acquired business. 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. Alliances The Company has alliances with leading software, relational database and enterprise application companies, and the Company plans to continue its strategy of developing key alliances. The Company works with these companies to integrate its enterprise storage systems with their software applications. There can be no assurance that the Company will be successful in its ongoing strategic alliances 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, results of operations or financial condition. There can be no assurance that the Company's distributors and companies with which it has strategic alliances, certain of which have substantially greater financial, marketing and technological resources than the Company, will not develop or market products in competition with the Company in the future, discontinue their alliances with the Company or form competing alliances with the Company's competitors. Enforcement of the Company's Intellectual Property Rights The Company generally relies upon patent, copyright, trademark and trade secret laws and contract rights in the United States and in other countries to establish and maintain its proprietary rights in its technology and products. However, there can be no assurance that any of such proprietary rights of the Company will not be challenged, invalidated or circumvented. In addition, the laws of certain countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Therefore, there can be no assurance that the Company will be able to adequately protect its proprietary technology against unauthorized third party copying or use, which could adversely affect the Company's competitive position. Further, there can be no assurance 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. From time to time, the Company receives notices from third parties claiming infringement by the Company's products of third party patent or other intellectual property rights. Responding to any such claim, regardless of its merit, could be time-consuming, result in costly litigation, divert management's attention and resources and cause the Company to incur significant expenses. In the event there is a temporary or permanent injunction entered prohibiting the Company from marketing or selling certain of its products or a successful claim of infringement against the Company requiring the Company to pay royalties to a third party, and the Company fails to develop or license a substitute technology, the Company's business, results of operations or financial condition could be materially adversely affected. Year 2000 Issues The information provided below constitutes a "Year 2000 Readiness Disclosure" under the Year 2000 Information and Readiness Disclosure Act. 21 Certain computer hardware and software is unable to appropriately interpret the upcoming calendar year 2000. These systems and software refer to years in terms of their final two digits only and may interpret the year 2000 as the year 1900 in error. Therefore, they will need to be modified prior to the year 2000 in order to remain functional. The Company has established a Year 2000 program that involves assessing the Company's key hardware and software, assessing Year 2000 compliance by third parties with which the Company has a material relationship, assessing Year 2000 compliance of the Company's products, and modifying and testing hardware and software in the Company's internal systems and products, where necessary. The Company has completed an assessment of the hardware and software in its core business information systems and has substantially completed the necessary modifications. The Company has extended the assessment and remediation process to the hardware and software in other information systems used in its operations. The Company has also extended its assessment and remediation to other areas of its business to include hardware and software not supported by the Company's information systems department. The Company has designated certain individuals within key business organizations to ensure that the assessment of such hardware and software is complete within their respective organizations. The Company has contacted key vendors and suppliers and other third parties whose systems failures could potentially have a significant impact on the Company's operations. The Company has received certifications of Year 2000 compliance from certain key vendors and suppliers. The Company continues to make progress in receiving certifications of Year 2000 compliance from other key vendors and suppliers and in assessing questionnaire responses and related information from such third parties. The Company has designed and tested the current versions of its Symmetrix series of products and the current versions of its other products to be Year 2000 compliant. Some of the Company's customers are running earlier versions of its Symmetrix series of products and other products that have not been tested for Year 2000 compliance. The Company has made upgrades available for the older versions of its Symmetrix series of products and for certain other of its older products so that such products will test as Year 2000 compliant. The Company currently anticipates that the assessment and remediation phases of its Year 2000 conversion program will be substantially complete by the middle of 1999, although the testing phase and the contingency planning phase, if any, will continue extensively throughout 1999. The Company does not anticipate that the total cost of such program will have a material effect on its business, results of operations or financial condition. The most reasonably likely worst case scenarios regarding the Year 2000 issue would include a hardware failure, the corruption or loss of data contained in the Company's internal information systems, a failure affecting the Company's key vendors, suppliers or customers, the failure of infrastructure services provided by government agencies or other third parties, and customer dissatisfaction related to the performance of the Company's products. The Company continues to assess the need for a Year 2000 contingency plan. However, the Company anticipates that its Year 2000 conversion program will be completed far enough in advance of January 1, 2000 so as to formulate a contingency plan at such time, if necessary. The Company expects its contingency plan, if developed, would include, among other things, manual "work-arounds" for hardware and software failures, as well as substitution of systems, if required. Further information about the Company's Year 2000 readiness is available at the Company's website at http://www.emc.com/challenges/supplmts/complnc/y2k_comp.htm. There can be no assurance that conversion of the Company's hardware and software will be successful, that key third parties will have successful conversion programs, that the Company's products do not contain undetected errors or defects associated with Year 2000 date functions, or that other factors relating to Year 2000 compliance, including but not limited to litigation, will not have a material adverse effect on the Company's business, results of operations or financial condition. 22 Euro Conversion On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the Euro. The Euro is currently the common legal currency in such countries. The Euro trades on currency exchanges and is available for non-cash transactions. The participating countries are issuing sovereign debt exclusively in Euros, and have redenominated outstanding sovereign debt. The participating countries no longer control their own monetary policies by directing independent interest rates for the legacy currencies. Instead, the authority to direct monetary policy, including money supply and official interest rates for the Euro, is exercised by the European Central Bank. The legacy currencies will remain legal tender in the participating countries as denominations of the Euro between January 1, 1999 and January 1, 2002 ( the "transition period"). During the transition period, public and private parties may pay for goods and services using either the Euro or the participating country's legacy currency on a "no compulsion, no prohibition" basis. However, conversion rates are no longer computed directly from one legacy currency to another. Instead, a triangular process is applied whereby an amount denominated in one legacy currency is first converted into the Euro. The resultant Euro-denominated amount is then converted into the third legacy currency. The Company has developed and implemented the necessary modifications for the technical adaptation of its internal IT and other systems to accommodate Euro-denominated transactions. The Company is currently assessing certain business implications of conversion to the Euro, including the long term competitive implications of the conversion and the impact on market risk with respect to financial instruments. At this time, management is also in the process of evaluating other impacts of this conversion on the Company, including the potential actions which may or may not be taken by the Company's competitors and suppliers. Litigation In the ordinary course of its business, the Company may become involved in certain litigation, administrative proceedings and governmental proceedings. Such matters can be time-consuming, divert management's attention and resources and cause the Company to incur significant expenses. Furthermore, there can be no assurance that the results of any of these actions will not have a material adverse effect on the Company's business, results of operations or financial condition. Change in Regulations The Company's business, results of operations or financial condition could be adversely affected if laws, regulations or standards relating to the Company or its products were newly implemented or changed. 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. 23 ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk The Company is exposed to market risk, including changes in interest rates and currency exchange rates. To manage the volatility relating to these exposures, the Company enters into various derivative transactions pursuant to the Company's policies to hedge against known or forecasted market exposures. Foreign Exchange Risk Management As a multinational corporation, the Company is exposed to changes in foreign exchange rates. As the Company's international sales grow, exposure to volatility in exchange rates could have a material adverse impact on the Company's financial results. The Company's risk from exchange rate changes is primarily related to non-dollar denominated sales in Europe and Japan. The Company uses foreign currency forward and option contracts to manage the risk of exchange rate fluctuations. The Company uses these derivative instruments to reduce its foreign exchange risk by essentially creating offsetting market exposures. The instruments held by the Company are not leveraged and are not held for trading purposes. The Company uses forward exchange contracts to hedge its net asset (balance sheet) position and uses a combination of option and forward contracts to hedge a portion of anticipated but not committed cash flows and firm commitments. The Company employs a variance/covariance model to calculate value-at-risk for its combined foreign exchange position. The model measures the potential loss in fair value or earnings that could arise from changes in market conditions, using a 95% confidence level and assuming a one day holding period. The value-at-risk on the combined foreign exchange position as of December 31, 1998 was $4.7. The success of the hedging program depends on forecasts of transaction activity in the various currencies. To the extent that these forecasts are over or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. Interest Rate Risk The Company maintains an investment portfolio consisting of debt securities of various issuers, types and maturities. A portion of the securities are classified as held-to-maturity, and consequently are recorded on the balance sheet at amortized cost. The remainder of the investments are classified as available for sale. These securities are recorded on the balance sheet at market value, with any unrealized gain or loss recorded in comprehensive income. These instruments are not leveraged, and are not held for trading purposes. The Company employs a variance/covariance model to calculate value- at-risk for its combined investment portfolios (held-to-maturity and available for sale). The model measures the potential loss in fair value that could arise from changes in market conditions, using a 95% confidence level and assuming a one day holding period. The value at risk on the investment portfolios as of December 31, 1998 was $2.2. 24 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. 26 Consolidated Balance Sheets at December 31, 1998 and 1997............ p. 27 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996................................................. p. 28 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996............................................. p. 29 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996.................................... p. 30 Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, 1997 and 1996.................................... p. 31 Notes to Consolidated Financial Statements........................... pp. 32-50 Schedule: Schedule II--Valuation and Qualifying Accounts..................... p. S-1
Note: All other financial statement schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto. 25 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and the Board of Directors of EMC Corporation: In our opinion, the consolidated financial statements listed in the accompanying index on page 25 present fairly in all material respects, the financial position of EMC Corporation at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the accompanying index on page 25 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts January 22, 1999 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EMC CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
December 31, December 31, 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents.......................... $ 705,177 $ 954,595 Short-term investments............................. 825,298 419,262 Trade and notes receivable less allowance for doubtful accounts of $6,562 and $6,773, in 1998 and 1997, respectively............................ 984,412 788,869 Inventories........................................ 485,844 404,660 Deferred income taxes.............................. 49,682 37,095 Other assets....................................... 54,400 22,545 ---------- ---------- Total current assets................................. 3,104,813 2,627,026 Long-term investments................................ 562,360 276,776 Notes receivable, net................................ 34,870 20,013 Property, plant and equipment, net................... 637,534 396,511 Deferred income taxes................................ 7,974 14,174 Intangible and other assets, net..................... 221,020 155,609 ---------- ---------- Total assets..................................... $4,568,571 $3,490,109 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations........... $ 29,361 $ 7,665 Accounts payable................................... 173,285 187,117 Accrued expenses................................... 246,894 151,216 Income taxes payable............................... 167,580 151,088 Deferred revenue................................... 36,073 8,784 ---------- ---------- Total current liabilities............................ 653,193 505,870 Deferred income taxes................................ 50,591 45,353 Long-term obligations: 3 1/4% convertible subordinated notes due 2002..... 517,500 517,500 Notes payable...................................... 21,396 40,954 Other liabilities.................................... 1,755 4,131 ---------- ---------- Total liabilities................................ 1,244,435 1,113,808 ---------- ---------- Commitments and contingencies Stockholders' equity: Series Preferred Stock, par value $.01; authorized 25,000,000 shares, none outstanding............... -- -- Common Stock, par value $.01; authorized 750,000,000 shares; issued 503,633,490 and 496,792,608, in 1998 and 1997, respectively....... 5,036 4,968 Additional paid-in capital......................... 830,238 670,297 Deferred compensation.............................. (17,022) (12,738) Retained earnings.................................. 2,504,719 1,711,356 Unrealized gain/(loss) on investments............. 979 (9) Cumulative translation adjustment................. 186 2,427 ---------- ---------- Accumulated other comprehensive income............. 1,165 2,418 ---------- ---------- Total stockholders' equity....................... 3,324,136 2,376,301 ---------- ---------- Total liabilities and stockholders' equity..... $4,568,571 $3,490,109 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 27 EMC CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
Year Ended -------------------------------------- December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ Revenues: Net sales............................ $3,791,291 $2,862,646 $2,218,292 Service and rental................... 182,444 75,214 55,360 ---------- ---------- ---------- 3,973,735 2,937,860 2,273,652 Costs and expenses: Cost of sales and service............ 1,929,208 1,571,012 1,248,950 Research and development............. 315,188 220,884 161,088 Selling, general and administrative.. 747,535 484,052 367,073 ---------- ---------- ---------- Operating income....................... 981,804 661,912 496,541 Investment income...................... 101,420 70,506 34,476 Interest expense....................... (20,191) (15,463) (11,967) Other income/(expense), net............ (5,215) 1,082 424 ---------- ---------- ---------- Income before taxes.................... 1,057,818 718,037 519,474 Income tax provision................... 264,455 179,509 133,245 ---------- ---------- ---------- Net income............................. $ 793,363 $ 538,528 $ 386,229 ========== ========== ========== Net income per weighted average share, basic................................. $ 1.59 $ 1.09 $ .83 ========== ========== ========== Net income per weighted average share, diluted............................... $ 1.49 $ 1.04 $ .79 ========== ========== ========== Weighted average shares, basic......... 499,978 493,698 463,548 Weighted average shares, diluted....... 539,176 525,500 498,590
The accompanying notes are an integral part of the consolidated financial statements. 28 EMC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the Year Ended -------------------------------------- December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income............................. $ 793,363 $538,528 $386,229 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Depreciation and amortization.......... 203,289 136,257 86,949 Deferred income taxes.................. (1,149) 8,167 39,178 Net loss on disposal of property and equipment............................. 868 728 1,125 Tax benefit from stock options exercised............................. 43,670 18,540 17,746 Minority interest...................... (499) (337) -- Changes in assets and liabilities: Trade and notes receivable............ (208,516) (161,066) (69,103) Inventories........................... (81,210) (68,239) (6,480) Other assets.......................... (19,089) (52,997) (24,433) Accounts payable...................... (13,289) 14,382 61,458 Accrued expenses...................... 95,722 28,757 (9,955) Income taxes payable.................. 16,512 46,434 (2,836) Deferred revenue...................... 25,499 (2,132) 3,497 ---------- -------- -------- Net cash provided by operating activities.......................... 855,171 507,022 483,375 ---------- -------- -------- Cash flows from investing activities: Additions to property, plant and equipment............................. (372,657) (210,797) (125,973) Proceeds from sales of property and equipment............................. 6 313 1,441 Capitalized software development costs................................. (38,794) (27,185) (24,693) Purchase of patents.................... -- -- (6,333) Purchase of short and long-term held- to-maturity securities................ (782,969) (696,049) (425,266) Maturity of short and long-term held- to-maturity securities................ 686,213 534,711 206,061 Purchase of short and long-term available for sale securities......... (1,758,564) (192,818) -- Sales of short and long-term available for sale securities................... 1,164,688 2,590 -- Business acquisitions.................. (53,903) -- -- ---------- -------- -------- Net cash used by investing activities.......................... (1,155,980) (589,235) (374,763) ---------- -------- -------- Cash flows from financing activities: Issuance of common stock............... 52,789 34,049 33,181 Purchase of treasury stock............. -- -- (27,457) Redemption of 4 1/4% convertible subordinated notes due 2001........... -- (65) -- Proceeds from investment in new McDATA................................ -- 10,000 -- Issuance of 3 1/4% convertible subordinated notes due 2002, net of issuance costs -- 506,671 -- Payment of long-term and short-term obligations........................... (12,413) (11,683) (1,295) Issuance of long-term and short-term obligations........................... 14,551 4,730 4,289 ---------- -------- -------- Net cash provided by financing activities.......................... 54,927 543,702 8,718 ---------- -------- -------- Effect of exchange rate changes on cash................................... (3,536) (3,271) (581) Net (decrease)/increase in cash and cash equivalents............................ (245,882) 461,489 117,330 Cash and cash equivalents at beginning of period.............................. 954,595 496,377 379,628 ---------- -------- -------- Cash and cash equivalents at end of period................................. $ 705,177 $954,595 $496,377 ========== ======== ======== Non-cash activity-conversions of debentures and notes................... -- $140,682 $ 85,636 -patents acquired by notes and other payables................... -- -- $ 37,416 -business acquisitions............ $ 51,755 -- --
The accompanying notes are an integral part of the consolidated financial statements. 29 EMC CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share amounts)
For the three years ended December 31, 1998 -------------------------------------------------------------------------------------------------------------- Common Stock Unrealized Treasury Stock ------------------ Additional Deferred Gain/(Loss) Cumulative ------------------- Total Par Paid-in Compen- on Retained Translation Stockholders' Shares Value Capital sation Investments Earnings Adjustment Shares Cost Equity ----------- ------ ---------- -------- ------------ ---------- ----------- ---------- ------- ------------- Balance, December 30, 1995........ 465,035,690 $4,650 $348,664 $ (2,140) -- $ 786,599 $3,766 5,292,906 $(1,238) $1,140,301 Exercise of stock options.. 2,685,792 27 2,408 -- -- -- -- (7,892,906) 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.... 8,757,862 88 85,548 -- -- -- -- -- -- 85,636 Amortization of deferred compensation... -- -- -- 2,051 -- -- -- -- -- 2,051 Purchase of treasury stock.......... -- -- -- -- -- -- -- 2,600,000 (27,457) (27,457) Cumulative translation adjustment..... -- -- -- -- -- -- 1,153 -- -- 1,153 Net income...... -- -- -- -- -- 386,229 -- -- -- 386,229 ----------- ------ -------- -------- ---- ---------- ------ ---------- ------- ---------- Balance, December 31, 1996........ 476,479,344 4,765 461,304 (7,027) -- 1,172,828 4,919 -- -- 1,636,789 ----------- ------ -------- -------- ---- ---------- ------ ---------- ------- ---------- Exercise of stock options.. 5,932,618 59 33,990 -- -- -- -- -- -- 34,049 Tax benefit from stock options exercised...... -- -- 18,540 -- -- -- -- -- -- 18,540 Grant of stock options........ -- -- 9,300 (9,300) -- -- -- -- -- -- Issuance of common stock pursuant to bond conversions.... 14,380,646 144 140,538 -- -- -- -- -- -- 140,682 Amortization of deferred compensation... -- -- -- 3,589 -- -- -- -- -- 3,589 Proceeds in excess of minority interest in new McDATA......... -- -- 6,625 -- -- -- -- -- -- 6,625 Unrealized gain/(loss) on investments.... -- -- -- -- (9) -- -- -- -- (9) Cumulative translation adjustment..... -- -- -- -- -- -- (2,492) -- -- (2,492) Net income...... -- -- -- -- -- 538,528 -- -- -- 538,528 ----------- ------ -------- -------- ---- ---------- ------ ---------- ------- ---------- Balance, December 31, 1997........ 496,792,608 4,968 670,297 (12,738) (9) 1,711,356 2,427 -- -- 2,376,301 ----------- ------ -------- -------- ---- ---------- ------ ---------- ------- ---------- Exercise of stock options.. 5,733,716 57 52,732 -- -- -- -- -- -- 52,789 Tax benefit from stock options exercised...... -- -- 43,670 -- -- -- -- -- -- 43,670 Grant of stock options........ -- -- 12,353 (12,353) -- -- -- -- -- -- Amortization of deferred compensation... 8,069 8,069 Business acquisitions... 1,107,166 11 51,186 -- -- -- -- -- -- 51,197 Unrealized gain/(loss) on investments.... -- -- -- -- 988 -- -- -- -- 988 Cumulative translation adjustment..... -- -- -- -- -- -- (2,241) -- -- (2,241) Net income...... -- -- -- -- -- 793,363 -- -- -- 793,363 ----------- ------ -------- -------- ---- ---------- ------ ---------- ------- ---------- Balance, December 31, 1998........ 503,633,490 $5,036 $830,238 $(17,022) $979 $2,504,719 $ 186 -- -- $3,324,136 =========== ====== ======== ======== ==== ========== ====== ========== ======= ==========
The accompanying notes are an integral part of the consolidated financial statements. 30 EMC CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
For the Year Ended -------------------------------------- December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ Net income............................... $793,363 $538,528 $386,229 Other comprehensive income net of tax: Foreign currency translation adjustments, net of tax of ($560), ($623), and $296...................... (1,681) (1,869) 857 Unrealized gains/losses on securities: Unrealized holding gain/(loss) arising during the period, net of tax of $247, ($2), and $0.......................... 741 (7) 0 -------- -------- -------- Other comprehensive income............... (940) (1,876) 857 -------- -------- -------- Comprehensive income..................... $792,423 $536,652 $387,086 ======== ======== ========
31 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) A. Company EMC Corporation and its subsidiaries ("EMC" or the "Company") design, manufacture, market and support a wide range of enterprise systems and software products and related services for the worldwide enterprise storage market. EMC's products provide solutions for a wide range of customer information storage requirements, from the highest performance mission critical applications to extremely high capacity business support applications. EMC's solutions integrate with major open systems operating systems as well as major mainframe operating systems. EMC's products are sold as storage solutions for customers utilizing a variety of computer system platforms including, but not limited to, IBM and IBM-compatible mainframe, Hewlett-Packard Company ("HP"), NEC Corporation, Siemens Nixdorf Informationssysteme AG, Unisys Corporation, Sequent Computer Systems, Inc., Compagnie des Machines Bull S.A., and other open systems and mainframe 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. The Company treats gains/losses on sales of subsidiary stock of development stage companies as equity transactions. 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 1998 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 The Company has acquired several companies, which have been accounted for using the purchase method, and are not significant to its financial position or results of operations. Under the purchase method, the results of operations of acquired companies are included prospectively from the date of acquisition, and the acquisition cost is allocated to the acquirees' assets and liabilities based upon their fair market values at the date of acquisition. At December 31, 1998 and 1997, the net book value of goodwill associated with all acquisitions was $102,610 and $7,830, respectively. Goodwill is being amortized on a straight-line basis over periods ranging from five to ten years and is included in intangible and other assets, net. Accumulated amortization was $18,925 and $8,234 on December 31, 1998 and 1997, respectively. 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 32 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) 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 the majority of the Company's operations. Their assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the period, except for property, plant and equipment which is translated at historical exchange rates. The Company's operations in Ireland, Israel and Hong Kong are generally dependent on the U.S. dollar and therefore, their functional currency is the U.S. dollar. Consolidated foreign currency transaction results included in other income/(expense), net were gains of $5,746 in 1998, $2,959 in 1997, and $1,044 in 1996. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments with a maturity of ninety days or less at the time of purchase. These investments are stated at amortized cost plus accrued interest, which approximates market. Total cash equivalents were $484,090 and $749,693 at December 31, 1998 and 1997, respectively. Cash equivalents consist primarily of commercial paper and money market securities. Investments The Company's investments are comprised primarily of debt securities which are classified as either held-to-maturity or available for sale at purchase. 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. Derivatives The Company enters into foreign currency forward and option contracts to hedge foreign currency cash flows on a continuing basis for periods consistent with its committed and anticipated exposures. Hedging contracts generally mature within six months. The Company uses forward exchange contracts to hedge its net asset (balance sheet) position, and a portion of its firm commitments. The Company uses option contracts to hedge a portion of anticipated but not committed cash flows. The gains or losses arising from forward contracts hedging the Company's net asset position are recorded in other income or expense as offsets to the gains or losses resulting from the revaluation of the underlying hedged transactions. The gains or losses from forward contracts hedging a portion of firm commitments are deferred until the underlying hedged transaction is realized. Gains or losses from option contracts hedging a portion of anticipated but not committed cash flows are also deferred until the underlying hedged transaction is realized. Gains and losses from contracts hedging a portion of firm commitments or anticipated cash flows are recognized in net sales in the same periods in which the related revenues are recognized. The Company may, from time to time, enter into derivative instruments to hedge against known or forecasted market exposures. Statement of Cash Flows Supplemental Information
1998 1997 1996 -------- -------- ------- Cash paid for: Income taxes................................. $211,091 $106,677 $78,651 Interest..................................... 20,007 15,401 11,428
33 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) Inventories Inventories are stated at the lower of cost (first in, first out) or market, not in excess of net realizable value. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, as follows: Furniture and fixtures.................................. 7 years Equipment............................................... 3-10 years Improvements............................................ 5-10 years Buildings............................................... 25-31 1/2 years
When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed from the accounts and the related gains or losses are included in the statement of income. Capitalized Software Development Costs Research and development costs are expensed as incurred. Software development costs incurred subsequent to establishment of technological feasibility through the general release of the software products are capitalized. Technological feasibility is demonstrated by the completion of a product design and a working model. Capitalized costs are amortized on a straight-line basis over two years. Unamortized software development costs were $41,036 and $30,099 at December 31, 1998 and 1997, respectively, and are included in intangible and other assets. Amortization expense was $27,857, $19,594 and $7,185 in 1998, 1997 and 1996, respectively. Income Taxes Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the 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. 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. Earnings Per Share The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") beginning with the fiscal year ended December 31, 1997. This Statement requires the presentation of basic and diluted net income per share. Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and convertible debt. The Company has restated all prior period per-share data presented as required by SFAS 128. Accounting for Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" ("SFAS 123"), issued in 1995, defined a fair value method of accounting for stock options and other equity 34 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. As provided for in SFAS 123, the Company elected to apply Accounting Principles Board ("APB") Opinion No. 25 and related Interpretations in accounting for its stock-based compensation plans. The required disclosures under SFAS 123 as if the Company had applied the new method of accounting are included in Note K. New Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" in 1998. This Statement establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This Statement requires the classification of items of comprehensive income by their nature in a financial statement and the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). This Statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. This Statement establishes standards for reporting information about operating segments in annual financial statements. Operating segments are defined as components of an enterprise evaluated regularly by the Company's senior management in deciding how to allocate resources and in assessing performance. The Company adopted SFAS 131 for the fiscal year ended December 31, 1998, and has provided the required disclosures in Note O. The Company adopted Statement of Position 97-2 "Software Revenue Recognition" in 1998. This Statement supersedes Statement of Position 91-1 on software revenue recognition. This Statement establishes revenue recognition criteria for arrangements to deliver software that do not require significant production, modification or customization of the software. This Statement also establishes guidelines for recognizing revenue when multiple elements exist in a software arrangement. The Company believes that the adoption of this Statement did not have a material effect on its financial statements for 1998. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in either current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in fair value of an asset, liability or firm commitment, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the fair value of the hedged item. For cash- flow hedge transactions, in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current earnings. The Company has adopted SFAS 133 as of January 1, 1999. The Company believes that the adoption of this Statement will not have a material effect on its financial statements. However, in connection with this change, the Company intends to reclassify its held-to-maturity securities to available for sale securities. 35 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) C. Investments The Company's investment portfolio includes held-to-maturity and available for sale securities. The following tables summarize the composition of the Company's held-to-maturity short and long-term investments at December 31, 1998 and 1997, respectively.
December 31, 1998 --------------------- Amortized Aggregate Cost Basis Fair Value ---------- ---------- U.S. corporate debt securities............................ $493,003 $492,448 U.S. government and agencies.............................. 88,184 88,035 Foreign debt securities................................... 21,388 21,221 -------- -------- Total................................................. $602,575 $601,704 ======== ========
December 31, 1997 --------------------- Amortized Aggregate Cost Basis Fair Value ---------- ---------- U.S. corporate debt securities............................ $320,264 $320,186 U.S. government and agencies.............................. 124,415 125,040 Foreign debt securities................................... 61,140 61,201 -------- -------- Total................................................. $505,819 $506,427 ======== ========
The contractual maturities of held-to-maturity investments at December 31, 1998 and 1997 are as follows:
December 31, 1998 --------------------- Amortized Aggregate Cost Basis Fair Value ---------- ---------- Due within one year....................................... $602,575 $601,704 ======== ========
December 31, 1997 --------------------- Amortized Aggregate Cost Basis Fair Value ---------- ---------- Due within one year....................................... $413,278 $413,231 Due after one year through five years..................... 92,541 93,196 -------- -------- Total................................................. $505,819 $506,427 ======== ========
The net unrealized loss for held-to-maturity securities of $871 at December 31, 1998 consisted of gross unrealized gains of $160 and gross unrealized losses of $1,031. The net unrealized gain of $608 at December 31, 1997 consisted of gross unrealized gains of $928 and gross unrealized losses of $320. 36 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) The following tables summarize the composition of the Company's available for sale short and long-term investments at December 31, 1998 and 1997, respectively.
December 31, 1998 --------------------- Amortized Aggregate Cost Basis Fair Value ---------- ---------- Asset and mortgage-backed securities...................... $411,098 $411,251 U.S. government and agencies.............................. 218,855 218,996 U.S. corporate debt securities............................ 153,140 153,823 Foreign debt securities................................... 1,011 1,013 -------- -------- Total................................................. $784,104 $785,083 ======== ======== December 31, 1997 --------------------- Amortized Aggregate Cost Basis Fair Value ---------- ---------- U.S. government and agencies.............................. $140,218 $140,209 U.S. corporate debt securities............................ 30,772 30,772 Asset and mortgage-backed securities...................... 19,238 19,238 -------- -------- Total................................................. $190,228 $190,219 ======== ======== The contractual maturities of available-for-sale investments held at December 31, 1998 and 1997 are as follows: December 31, 1998 --------------------- Amortized Aggregate Cost Basis Fair Value ---------- ---------- Due within one year....................................... $222,998 $222,723 Due after one year through five years..................... 561,106 562,360 -------- -------- Total................................................. $784,104 $785,083 ======== ======== December 31, 1997 --------------------- Amortized Aggregate Cost Basis Fair Value ---------- ---------- Due within one year....................................... $ 6,036 $ 6,036 Due after one year through five years..................... 184,192 184,183 -------- -------- Total................................................. $190,228 $190,219 ======== ========
The net unrealized gain on available for sale securities at December 31, 1998 was $979, which consisted of gross unrealized gains of $2,888 and gross unrealized losses of $1,909. The gross unrealized loss at December 31, 1997 was nine thousand dollars. Investment income consists principally of interest income, including interest on notes receivable from sales-type leases. 37 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) D. Inventory Inventories consist of:
December 31, December 31, 1998 1997 ------------ ------------ Purchased parts................................. $ 29,562 $ 24,641 Work-in-process................................. 283,815 240,845 Finished goods.................................. 172,467 139,174 -------- -------- $485,844 $404,660 ======== ========
E. Notes Receivable Notes receivable are primarily from installment sales and sales type leases of the Company's products. The payment schedule for such notes at December 31, 1998 is as follows: 1999............................................................. $35,505 2000............................................................. 18,154 2001............................................................. 13,303 2002............................................................. 3,736 2003............................................................. 2,093 ------- Face value....................................................... 72,791 Less amounts representing interest............................... 5,843 ------- Present value.................................................... 66,948 Current portion.................................................. 32,078 ------- Long-term portion................................................ $34,870 =======
Implicit interest rates range from approximately 7% to 8%. Actual cash collections may differ from amounts shown on the table due to early customer buyouts, upgrades or refinancings. The Company may receive proceeds for its sales-type leases through third- party financing arrangements with various financial institutions on a nonrecourse basis, which may either be collateralized by a lien on the equipment, which is returned to the Company at the end of the lease, or title to the equipment may pass to the funding source at the time of financing. Residual values recorded by the Company for equipment under leases at December 31, 1998 and 1997 were $21,878 and $34,372, respectively, and are included in intangible and other assets. F. Property, Plant and Equipment Property, plant and equipment consists of:
December 31, December 31, 1998 1997 ------------ ------------ Furniture and fixtures.......................... $ 29,016 $ 16,978 Equipment....................................... 640,411 459,756 Buildings and improvements...................... 269,092 121,541 Land............................................ 18,700 15,085 Construction in progress........................ 41,023 38,056 --------- --------- 998,242 651,416 Accumulated depreciation........................ (360,708) (254,905) --------- --------- $ 637,534 $ 396,511 ========= =========
Depreciation expense was $130,757, $89,631 and $65,921 in 1998, 1997 and 1996, respectively. 38 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) G. Accrued Expenses Accrued expenses consist of:
December 31, December 31, 1998 1997 ------------ ------------ Salaries and benefits.......................... $105,172 $ 76,387 Warranty....................................... 36,084 25,315 Other.......................................... 105,638 49,514 -------- -------- $246,894 $151,216 ======== ========
H. Income Taxes The Company's provision for income taxes consists of:
1998 1997 1996 -------- -------- -------- Federal and state Current................................... $254,074 $162,323 $ 88,208 Deferred.................................. (1,811) 7,790 39,394 -------- -------- -------- 252,263 170,113 127,602 -------- -------- -------- Foreign Current................................... 11,530 9,019 5,859 Deferred.................................. 662 377 (216) -------- -------- -------- 12,192 9,396 5,643 -------- -------- -------- Total provision for income taxes............ $264,455 $179,509 $133,245 ======== ======== ========
Net undistributed earnings of foreign subsidiaries at December 31, 1998 and 1997 approximated $1,063,806 and $805,236, respectively. Based on the Company's policy of indefinite reinvestment in non-U.S. operations, it is not currently practicable to determine the tax liability associated with the repatriation of these earnings. The Company's manufacturing facility in Ireland incurs a 10% tax rate on income from manufacturing operations until the year 2010. Income before income taxes for foreign operations for 1998, 1997 and 1996 approximated $381,031, $269,157 and $163,177, respectively. A reconciliation of the Company's income tax provision to the statutory federal tax rate is as follows:
1998 1997 1996 ----- ----- ---- Statutory federal tax rate............................ 35.0% 35.0% 35.0% State taxes, net of federal tax benefits.............. 1.8 1.9 2.2 International tax benefits............................ (11.4) (11.3) (9.0) Tax credits........................................... (0.4) (0.7) (0.8) Other................................................. -- 0.1 (1.7) ----- ----- ---- 25.0% 25.0% 25.7% ===== ===== ====
39 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) The components of the current and noncurrent deferred tax assets and liabilities are as follows:
December 31, December 31, 1998 1997 ------------ ------------ Current deferred tax assets: Accounts receivable.......................... $ 10,352 $ 10,819 Inventory.................................... 24,507 16,166 Other liabilities............................ 11,900 6,382 Other assets................................. 2,923 3,728 -------- -------- Total current deferred tax assets.......... $ 49,682 $ 37,095 ======== ======== Noncurrent deferred tax assets/(liabilities): Fixed assets................................. (10,256) (66) Intangible assets............................ 11,963 7,922 Net operating loss carryforwards............. 4,830 6,552 Research and development credit carryforward................................ 1,196 1,342 Other........................................ 5,071 3,096 Valuation reserve............................ (4,830) (4,672) -------- -------- Deferred tax assets.......................... 7,974 14,174 -------- -------- Deferral of lease revenue.................... (33,536) (35,565) Software development costs................... (14,055) (9,788) Other........................................ (3,000) -- -------- -------- Deferred tax liabilities..................... (50,591) (45,353) -------- -------- Total noncurrent deferred tax liabilities, net....................................... $(42,617) $(31,179) ======== ========
The valuation allowance at December 31, 1998 and 1997 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 considered more likely than not. The Company has net operating loss carryforwards as of December 31, 1998 of $11,912, all of which are non-U.S. and primarily relate to a wholly-owned subsidiary of EMC in France. 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. At the end of each calendar quarter, the Company makes 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, provides an additional matching contribution of 1% of the employee's quarterly compensation up to a maximum quarterly matching contribution not to exceed 5% of compensation. However, the Company's total matching contribution per participant has a quarterly limit of $500. The Company's contribution amounted to approximately $6,880 in 1998, $4,990 in 1997 and $3,836 in 1996, pursuant to this formula. Costs associated with certain postretirement or postemployment benefit plans that exist in certain foreign subsidiaries as required by law are not significant. 40 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) J. Commitments and Long-Term Obligations Operating Lease Commitments The Company leases office and warehouse facilities and other equipment under various operating leases. Facilities rent expense amounted to $25,832, $14,432, and $12,196 in 1998, 1997 and 1996, respectively. The Company's commitments under its operating leases are as follows:
Operating Fiscal Year Leases ----------- --------- 1999............................................................ $ 75,772 2000............................................................ 44,988 2001............................................................ 24,818 2002............................................................ 19,297 2003............................................................ 15,047 Thereafter...................................................... 8,840 -------- Total minimum lease payments.................................... $188,762 ========
Lines of Credit EMC has a line of credit providing a maximum of $50,000. There were no borrowings outstanding at either December 31, 1998 or 1997. The Company must maintain certain minimum financial ratios, including a minimum level of working capital and tangible net worth, upon utilization of the line of credit. 3 1/4% Notes In March 1997, the Company sold $517,500 of 3 1/4% convertible subordinated notes due 2002 (the "3 1/4% Notes"). The 3 1/4% Notes are generally convertible into shares of Common Stock, $.01 par value, of the Company (the "Common Stock") at a conversion price of $22.655 per share, subject to adjustment in certain events. Interest is payable semiannually and the 3 1/4% Notes are redeemable at the option of the Company at set redemption prices (which range from 100.65% to 101.30% of principal), plus accrued interest, commencing March 15, 2000. 4 1/4% Notes 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 at any time prior to the redemption date at a conversion price of $9.92 per share. On January 2, 1997, the Company paid approximately sixty-five thousand dollars to redeem the 4 1/4% Notes outstanding and converted the remainder into Common Stock. Current Portion of Long-Term Obligations The Company has a $14,000 mortgage collateralized by a U.S. 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 due on April 1, 1999. IDA Grant The Industrial Development Authority ("IDA") of Ireland has granted the Company a total of $5,189 towards the purchase price and improvements to the Company's facility in Ireland. The grants are included in 41 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) long-term obligations and are amortized over the related estimated useful lives of the assets purchased of twenty-five years for building improvements and seven years for equipment. Remaining unamortized grants at December 31, 1998 are $3,906, of which $324 is current and $3,582 is long-term. Purchase of Patent Portfolio In February 1996, the Company acquired a patent portfolio valued at $40 million. Payments of $19 million have been made to date with the remainder due in annual installments over five years. The asset is being amortized over the remaining estimated useful life of approximately one year and is included in intangible and other assets, net. Accumulated amortization at December 31, 1998 and 1997 was approximately $28,333 and $16,333, respectively. Payments remaining on the above commitments and other noncurrent liabilities (excluding the IDA grant and the 3 1/4% Notes) are as follows:
Fiscal Year ----------- 1999............................................................. $31,463 2000............................................................. 9,422 2001............................................................. 8,232 2002............................................................. 304 2003............................................................. -- ------- Total minimum payments........................................... 49,421 Less amounts representing interest............................... 2,570 ------- Present value of net payments.................................... 46,851 Current portion.................................................. 29,037 ------- Long-term portion................................................ $17,814 =======
Minority Interest On October 1, 1997, the Company reorganized McDATA Corporation ("McDATA"), acquired by the Company in 1995, into a new McDATA Corporation ("New McDATA") and McDATA Holdings Corporation ("McDATA Holdings"). New McDATA designs, develops and markets fibre channel solutions for switched enterprise environments. McDATA Holdings, a wholly-owned subsidiary of EMC, is currently the majority shareholder in New McDATA. New McDATA is also currently performing services under the ESCON OEM Agreement with IBM on behalf of McDATA Holdings. The minority interest amounts are included in other liabilities and other income/(expense), net. K. Stockholders' Equity Stock Split On October 21, 1997, the Company announced a 2-for-1 stock split in the form of a 100% stock dividend with a record date of October 31, 1997 and a distribution date of November 17, 1997. Share and per share amounts have been restated to reflect the stock split for all periods presented. 42 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) Net Income Per Share Calculation of per share earnings is as follows:
1998 1997 1996 ------------ ------------ ------------ Basic: Net income.......................... $ 793,363 $ 538,528 $ 386,229 Weighted average common shares outstanding........................ 499,978,198 493,697,926 463,547,582 Net income per share, basic......... $ 1.59 $ 1.09 $ 0.83 ============ ============ ============ Diluted: Net income.......................... $ 793,363 $ 538,528 $ 386,229 Add back of interest expense on convertible notes.................. 16,819 13,502 8,827 Less tax effect of interest expense on convertible notes............... (6,728) (5,401) (3,531) ------------ ------------ ------------ Net income for calculating diluted earnings per share................. $ 803,454 $ 546,629 $ 391,525 Weighted average common shares outstanding........................ 499,978,198 493,697,926 463,547,582 Weighted common stock equivalents... 39,198,107 31,801,719 35,042,840 ------------ ------------ ------------ Total weighted average shares....... 539,176,305 525,499,645 498,590,422 Net income per share, diluted....... $ 1.49 $ 1.04 $ 0.79 ============ ============ ============
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 30 million shares of Common Stock over a five-year period. In November 1996, the Company's Board of Directors announced a rescission of the program. During 1996, the Company repurchased 2.6 million shares of Common Stock for approximately $27,000, all of which has been reissued in connection with stock option exercises. 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 of the Company. In 1998, the Board of Directors and stockholders approved an amendment to the 1993 Plan to increase the number of shares available for grant under such plan by 3.5 million shares. A total of 31.5 million and 72 million 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 43 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) 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. In 1998, options to purchase an aggregate of 212,222 shares of Common Stock at $.01 per share were granted to an executive officer and certain other employees. Also in 1998, an executive officer was granted options to purchase 125,000 shares at $25.94 per share, representing 50% of the per share fair market value at the date of grant. In 1997, options to purchase 500,000 shares at $12.23 per share and 400,000 shares at $27.56 per share were granted to executive officers, representing 50% and 90%, respectively, of the per share fair market value at the date of grant. In 1996, options to purchase 500,000 shares of Common Stock at $4.625 per share were granted to an executive officer, representing 50% of the per share fair market value at the date of grant. Discounts from fair market value have been recorded as deferred compensation and are being amortized over the vesting periods of the options, which range from eighteen months to five years. The EMC Corporation 1992 Stock Option Plan for Directors (the "Directors Plan") was adopted by the Board of Directors and stockholders. A total of 3.6 million shares of Common Stock have been reserved for issuance under the Directors Plan. The exercise price for each option granted under the Directors Plan will be at a price per share determined at the time the option is granted, but not less than 50% of the per share fair market value of Common Stock at the date of grant. In 1998, options to purchase 120,000 shares of Common Stock at $21.125 per share were granted to three directors, representing 50% of the per share fair market value at the date of grant. In 1997, options to purchase 160,000 shares of Common Stock at $12.23 per share were granted to two directors, representing 50% of the per share fair market value at the date of grant. In 1996, options to purchase one million shares of Common Stock at $4.625 per share were granted to a director, representing 50% of the per share fair market value at the date of grant. Discounts from fair market value have been recorded as deferred compensation and are being amortized over the three-year vesting period of the options. Generally, when shares acquired pursuant to the exercise of incentive stock options are sold within one year of exercise or within two years from the date of grant, the Company derives a tax deduction measured by the amount that the fair market value exceeds the option price at the date the options are exercised. When nonqualified stock options are exercised, the Company derives a tax deduction measured by the amount that the fair market value exceeds the option price at the date the options are exercised. As of December 31, 1998, options exercisable under the 1993 Plan, the 1985 Plan and the Directors Plan (the "Plans") approximated 8,472,348 and shares available for future option grants approximated 7,521,973. Options generally become exercisable in equal annual installments over either three or five years after the date of grant and expire after ten years. The Company has, in connection with the acquisition of various companies, assumed the stock option plans of these companies. 44 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) Supplemental Disclosures for Stock-Based Compensation Activity under the Plans and option activity relating to business acquisitions for the three years ended December 31, 1998 is as follows:
Wtd. Avg. Number of Exercise Shares Price ---------- --------- Outstanding, December 30, 1995...................... 27,028,694 $ 4.83 Granted........................................... 8,427,938 8.64 Canceled.......................................... (1,371,122) 8.68 Exercised......................................... (9,220,344) 2.35 ---------- ------ Outstanding, December 31, 1996...................... 24,865,166 6.80 Granted........................................... 8,406,194 23.42 Canceled.......................................... (930,650) 9.66 Exercised......................................... (5,329,276) 4.95 ---------- ------ Outstanding, December 31, 1997...................... 27,011,434 12.24 ---------- ------ Options relating to business acquisitions......... 214,366 13.33 Granted........................................... 4,898,358 47.19 Canceled.......................................... (398,417) 20.39 Exercised......................................... (5,287,431) 7.23 ---------- ------ Outstanding, December 31, 1998...................... 26,438,310 $19.60 ========== ======
Summarized information about stock options outstanding at December 31, 1998 is as follows:
Exercisable -------------------- Weighted Avg. Weighted Weighted Range of Number of Remaining Avg. Avg. Exercise Options Contractual Exercise Number of Exercise Prices Outstanding Life Price Options Price - -------------- ----------- ----------- -------- --------- -------- $ 0.01 - 5.72 3,537,691 5.43 $ 2.54 2,646,754 $ 2.27 6.21 - 10.44 7,867,718 6.59 8.78 3,596,663 8.45 10.66 - 17.75 3,410,970 6.96 11.70 1,164,333 11.37 18.13 - 27.56 6,424,026 8.37 23.77 904,596 23.89 29.69 - 42.25 1,406,877 8.83 32.94 160,002 30.56 50.76 - 61.50 3,791,028 9.45 53.09 -- --
Options exercisable at December 31, 1998, 1997 and 1996 were 8,472,348, 7,402,806 and 4,559,994, respectively. The fair value of each option granted during 1998, 1997 and 1996 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
1998 1997 1996 ---- ---- ---- Dividend yield.......................................... none none none Expected volatility..................................... 52.0% 45.0% 45.0% Risk-free interest rate................................. 5.4% 6.1% 6.5% Expected life........................................... 5.0 5.0 5.0
45 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) Weighted average fair value of options granted at fair market value during: 1998................................................................. $26.08 ====== 1997................................................................. $11.53 ====== 1996................................................................. $ 4.58 ====== Weighted average fair value of options granted below fair market value during: 1998................................................................. $33.64 ====== 1997................................................................. $16.17 ====== 1996................................................................. $ 6.32 ======
Had compensation cost for the Company's 1998, 1997 and 1996 stock option grants and employee stock purchase plan issuances been determined consistent with SFAS 123, the Company's net income and net income per share would approximate the pro forma amounts below:
Net income per Net income per Net income share, diluted share, basic ---------- -------------- -------------- As reported: 1998........................... $793,363 $1.49 $1.59 1997........................... $538,528 $1.04 $1.09 1996........................... $386,229 $0.79 $0.83 Pro forma: 1998........................... $759,508 $1.43 $1.52 1997........................... $520,506 $1.01 $1.05 1996........................... $378,336 $0.77 $0.82
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards made prior to 1995. Additional awards in future years are anticipated. Employee Stock Purchase Plan The Board of Directors and stockholders adopted the 1989 Employee Stock Purchase Plan (the "1989 Plan"). Under the 1989 Plan, eligible employees of the Company may purchase shares of Common Stock, through payroll deductions, at the lower of 85% of fair market value of the stock at the time of grant or 85% of fair market value at the time of exercise. A total of 9.8 million shares have been reserved for issuance under the 1989 Plan. Options to purchase shares are granted twice yearly, on January 1 and July 1, and are exercisable on the succeeding June 30 or December 31. The Company issued 489,438, 603,342 and 1,358,354 shares in 1998, 1997 and 1996, respectively. The weighted average fair values of options granted under the 1989 Plan during 1998, 1997 and 1996 were $10.65, $5.15 and $2.32, respectively. L. Litigation In August 1997, TM Patents, L.P. ("TM") filed suit against the Company in the United States District Court for the Southern District of New York alleging that the Company is infringing two patents and seeking unspecified damages. The Company filed a motion to transfer the case to the United States District Court for the District of Massachusetts and a motion to dismiss the suit. The Company's motion to transfer was granted with leave for the plaintiff to amend the complaint to overcome the grounds for dismissal. In the amended complaint filed by TM and TM Creditors, L.L.C., the plaintiffs alleged infringement as to only one of the two patents originally at issue. Trial of this matter began in February 1999. The parties reached a negotiated resolution of 46 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) this matter in February 1999, during the second week of trial. As part of the resolution, EMC will obtain a license under the one patent at issue and a covenant from the plaintiffs not to sue under any and all patents owned or controlled by either of the plaintiffs. All claims in the lawsuit will be dismissed with prejudice as a result of this agreement. In December 1997, NewFrame Corporation Ltd. ("NewFrame") filed suit against the Company in the United States District Court for the District of Massachusetts. The suit contains a variety of allegations relating to the Company's use of NewFrame's software developments, including various contract claims and breach of fiduciary duty, and seeks monetary damages relating primarily to lost future profits. The Company filed a motion to dismiss the complaint, which was granted in part. The Company believes NewFrame's claims are without merit. In January 1998, Storage Technology Corporation ("STK") filed suit against the Company in the United States District Court for the Northern District of California alleging that the Company was infringing a patent covering virtual tape and seeking preliminary and permanent injunctions and unspecified damages. The Company's response raised as an affirmative defense that EMC was licensed to promote the use of, market, sell and make virtual tape products pursuant to a patent license agreement between EMC and STK dated April 11, 1996 (the "License Agreement"). After a trial held in August 1998, the court ruled that EMC is licensed to promote the use of, market, sell and make virtual tape products pursuant to the License Agreement. The Court found that STK's suit was without foundation and awarded costs to EMC. In October 1998, STK filed an appeal of the Court's ruling. The Company is a party to other litigation which it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material adverse effect on the Company's business, results of operations or financial condition. M. Financial Instruments Off-Balance-Sheet Risk The Company enters into foreign currency forward and option contracts to hedge foreign currency cash flows on a continuing basis for periods consistent with its committed and anticipated exposures. The Company does not engage in currency speculation. The maximum amount of foreign currency contracts outstanding during 1998 and 1997 was $499,714 and $531,166, respectively. The Company uses forward exchange contracts to hedge its net asset (balance sheet) position and a portion of its firm commitments. At December 31, 1998 and 1997, the Company had $389,049 and $309,970, respectively, of forward exchange contracts outstanding. The Company uses option contracts to hedge a portion of anticipated but not committed cash flows. The Company defers the recording of any gain or loss from these hedges until the underlying transaction has been realized. Deferred unrealized losses were not material at December 31, 1998. At December 31, 1998 and 1997, the Company had $10,000 and $90,000, respectively, of foreign currency options outstanding. Fair Value The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, current portion of long-term debt and accounts payable approximate fair value due to the short maturities of these instruments. 47 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) The carrying and estimated fair values of the 3 1/4% Notes at December 31, 1998 were $517,500 and $1,941,570, respectively. The fair value of the 3 1/4% Notes was based on the closing price of the Common Stock as of December 31, 1998. 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, dependence on suppliers, new products, competition, competitive pricing pressures, international sales, reliance on indirect channels of distribution, the uneven pattern of quarterly sales, management of growth, dependence upon key personnel, manufacturing risks, acquisitions, alliances, enforcement of the Company's intellectual property rights, Year 2000 issues, conversion to the Euro, litigation and changes in regulations. Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments, short and long-term investments and trade and notes receivable. The Company places its temporary cash investments and short and long-term investments in investment grade instruments and limits the amount of investment with any one financial institution. The credit risk associated with trade receivables is minimal due to the large number of customers and their broad dispersion over many different industries and geographic areas. HP represented 18%, 17% and 13% of the Company's total revenues in 1998, 1997 and 1996, respectively. O. Segment Information The Company has adopted SFAS 131 for the fiscal year ended December 31, 1998. The Company operates exclusively in the enterprise storage market. Substantially all of the Company's revenues are generated from the sale of storage-related hardware and software products and related services. The classes of products and services are included in the following table:
1998 1997 1996 ---------- ---------- ---------- Enterprise storage hardware............. $3,167,125 $2,496,697 $1,961,315 Enterprise storage software............. 445,350 176,859 76,437 Enterprise switching products........... 178,816 189,090 180,540 Service and rental...................... 182,444 75,214 55,360 ---------- ---------- ---------- Total revenue........................... $3,973,735 $2,937,860 $2,273,652 ========== ========== ==========
48 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) The Company's reportable segments are based on geographic area and sales are attributed to the geographic areas according to the location of the customers. Intercompany transfers between geographic areas are accounted for at prices which are designed to be representative of unaffiliated party transactions.
Europe, Middle North/Latin East, Asia Intercompany Consolidated America Africa Pacific Eliminations Total ----------- ---------- -------- ------------ ------------ 1998 Sales................... $2,457,232 $1,231,701 $284,802 $ -- $3,973,735 Transfers between areas.................. 27,895 214,218 -- (242,113) -- ---------- ---------- -------- -------- ---------- Total sales............. 2,485,127 1,445,919 284,802 (242,113) 3,973,735 Identifiable assets at year end............... 3,162,263 1,437,871 147,379 (178,942) 4,568,571 1997 Sales................... $1,706,551 $ 951,831 $279,478 $ -- $2,937,860 Transfers between areas.................. 49,494 155,214 -- (204,708) -- ---------- ---------- -------- -------- ---------- Total sales............. 1,756,045 1,107,045 279,478 (204,708) 2,937,860 Identifiable assets at year end............... 2,653,063 977,996 124,075 (265,025) 3,490,109 1996 Sales................... $1,346,222 $ 720,792 $206,638 $ -- $2,273,652 Transfers between areas.................. 72,813 159,605 -- (232,418) -- ---------- ---------- -------- -------- ---------- Total sales............. 1,419,035 880,397 206,638 (232,418) 2,273,652 Identifiable assets at year end............... 1,749,221 703,929 104,210 (263,814) 2,293,546
P. Selected Quarterly Financial Data (unaudited)
Q1 1998 Q2 1998 Q3 1998 Q4 1998 -------- -------- ---------- ---------- 1998 Net sales, service and rental.......... $828,351 $952,002 $1,002,541 $1,190,841 Gross profit........................... 397,215 484,522 524,354 638,436 Net income............................. 146,115 189,496 201,290 256,462 Net income per share, (diluted)........ $ 0.28 $ 0.36 $ 0.38 $ 0.48 Q1 1997 Q2 1997 Q3 1997 Q4 1997 -------- -------- ---------- ---------- 1997 Net sales, service and rental.......... $618,437 $713,461 $ 732,570 $ 873,392 Gross profit........................... 282,452 328,916 341,292 414,188 Net income............................. 110,868 128,799 132,622 166,239 Net income per share, (diluted)........ $ 0.22 $ 0.25 $ 0.25 $ 0.32
Q. Subsequent Event (unaudited) On February 24, 1999, the Company's Board of Directors approved a two-for- one stock split in the form of a 100% stock dividend. Implementation of the stock split is subject to stockholder approval of an increase in the number of shares of authorized common stock from 750,000,000 shares to 3,000,000,000 shares at the Company's Annual Meeting of Stockholders to be held on May 5, 1999. If stockholder approval is received, the stock split will be payable on or about May 28, 1999 to stockholders of record as of the close of business on 49 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) May 14, 1999. Because stockholder approval is pending, financial information contained elsewhere in this Annual Report on Form 10-K has not been adjusted to reflect the impact of the proposed stock split. Earnings per share amounts, after giving retroactive effect to the two-for- one stock split, are presented below for all of the per share amounts disclosed in the financial statements and the notes to the financial statements (full-year information).
1998 1997 1996 ------------- ------------- ------------- Annual Data Net income per weighted average share, basic........................ $0.79 $0.55 $0.42 Net income per weighted average share, diluted...................... $0.75 $0.52 $0.39 Weighted average shares, basic....... 999,956,396 987,395,852 927,095,164 Weighted average shares, diluted..... 1,078,352,610 1,050,999,290 997,180,844 Q1 1998 Q2 1998 Q3 1998 Q4 1998 ------------- ------------- ------------- ------------- Quarterly Data Net income per weighted average share, basic.. $0.15 $0.19 $0.20 $0.25 Net income per weighted average share, diluted............... $0.14 $0.18 $0.19 $0.24 Weighted average shares, basic......... 994,468,994 997,295,858 1,002,221,654 1,005,750,512 Weighted average shares, diluted........ 1,070,239,220 1,075,099,288 1,080,597,672 1,085,629,360
50 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, 1998. 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. 51 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) 1. Financial Statements The financial statements listed in the Index to Consolidated Financial Statements and Schedule on page 25 are filed as part of this report. 2. Schedule The schedule listed in the Index to Consolidated Financial Statements and Schedule on page 25 is filed as part of this report. 3. Exhibits See Index to Exhibits on page 55 of this report. The exhibits are filed with or incorporated by reference in this report. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the fourth quarter of the fiscal year covered by this report. 52 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, EMC Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 11, 1999. EMC CORPORATION By: /s/ Richard J. Egan _______________________________ Richard J. Egan Chairman of the Board of Directors 53 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of EMC Corporation and in the capacities indicated as of March 11, 1999.
Signature Title --------- ----- /s/ Richard J. Egan Chairman of the Board of Directors - -------------------------------------------- (Principal Executive Officer) 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
54 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 Articles of Amendment filed May 7, 1997./7/ 3.10 Amended and Restated By-laws of EMC Corporation (filed herewith). 4.1 Form of Stock Certificate./8/ 4.2 Indenture, dated as of March 11, 1997 between EMC Corporation and State Street Bank and Trust Company, Trustee./9/ 4.3 Form of 3 1/4% Convertible Subordinated Note due 2002./9/ 10.1 EMC Corporation 1985 Stock Option Plan, as amended (filed herewith). 10.2 EMC Corporation 1992 Stock Option Plan for Directors, as amended (filed herewith). 10.3 EMC Corporation 1993 Stock Option Plan, as amended (filed herewith). 21.1 Subsidiaries of Registrant (filed herewith). 23.1 Consent of Independent Accountants dated March 11, 1999 (filed herewith). 27.1 Financial Data Schedule (filed herewith).
- -------- /1/ Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-3656). /2/ Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-17218). /3/ Incorporated by reference to the Company's Annual Report on Form 10-K filed February 12, 1993. /4/ Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-67224). /5/ Incorporated by reference to the Company's Current Report on Form 8-K filed November 19, 1993. /6/ Incorporated by reference to the Company's Current Report on Form 8-K filed May 26, 1995. /7/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed May 14, 1997. /8/ Incorporated by reference to the Company's Annual Report on Form 10-K filed March 31, 1988. /9/ Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 333-24901). 55 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, 1998 Allowance for doubtful accounts..... $6,773 $2,502 -- $(2,713) $6,562 Year ended December 31, 1997 Allowance for doubtful accounts..... $7,368 $1,842 -- $(2,437) $6,773 Year ended December 31, 1996 Allowance for doubtful accounts..... $7,062 $1,927 -- $(1,621) $7,368
S-1 EX-3.10 2 AMENDED AND RESTATED BYLAWS EXHIBIT 3.10 AMENDED AND RESTATED BYLAWS --------------------------- of EMC CORPORATION (as amended 2-26-86, 3-10-86, 10-28-86, 1-26-87, 9-19-89, 10-16-92, 7-21-95, 7-22-98 and 1-20-99) SECTION 1. ARTICLES OF ORGANIZATION The name and purposes of the corporation shall be as set forth in the articles of organization. These bylaws, the powers of the corporation and of its directors and stockholders, or of any class of stockholders if there shall be more than one class of stock, and all matters concerning the conduct and regulation of the business and affairs of the corporation shall be subject to such provisions in regard thereto, if any, as are set forth in the articles of organization as from time to time in effect. SECTION 2. STOCKHOLDERS 2.1. Annual Meeting. The annual meeting of stockholders of the -------------- corporation for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on such date and at such time as shall be determined by the board of directors each year, which date and time may subsequently be changed at any time, including the year any such determination occurs. 2.2. Special Meetings. Except as provided in the articles of organization ---------------- with respect to the ability of holders of preferred stock to call a special meeting in certain circumstances, special meetings of the stockholders may be called by the president at the direction of the chairman of the board or by a majority of the directors, and shall be called by the clerk, or in case of the death, absence, incapacity or refusal of the clerk, by any other officer upon the written application of stockholders who hold eighty-five percent (85%) in interest of the capital stock of the corporation entitled to be voted at the proposed meeting. Such request shall state the purpose or purposes of the proposed meeting and may designate the place, date and hour of such meeting; provided, however, that no such request shall designate a date not a full business day or an hour not within normal business hours as the date or hour of such meeting. As used in these bylaws, the expression "business day" means a day other than a day which, at a particular place, is a public holiday or a day other than a day on which banking institutions at such place are allowed or required, by law or otherwise, to remain closed. 2.3. Place of Meeting; Adjournment. Meetings of the stockholders may be ----------------------------- held at the principal office of the corporation in the Commonwealth of Massachusetts, or at such places within or without the Commonwealth of Massachusetts as may be specified in the notices of such meetings; provided, that, when any meeting is convened, the chairman of the board or other presiding officer may adjourn the meeting for a period of time not to exceed 30 days if (a) no quorum is present for the transaction of business or (b) the chairman of the board or other presiding officer determines that adjournment is necessary or appropriate to enable the stockholders (i) to consider fully information which such officer determines has not been made sufficiently or timely available to stockholders or (ii) otherwise to exercise effectively their voting rights. The chairman of the board or other presiding officer in such event shall announce the adjournment and date, time and place of reconvening and shall cause notice thereof to be posted at the place of meeting designated in the notice which was sent to the stockholders, and if such date is more than 10 days after the original date of the meeting, the clerk shall give notice thereof in the manner provided in Section 2.4. 2.4. Notice of Meetings. A written or electronic notice of each meeting ------------------ of stockholders, stating the place, date and hour and the purposes of the meeting, shall be given at least seven days before the meeting to each stockholder entitled to vote thereat and to each stockholder who, by law, by the articles of organization or by these bylaws, is entitled to notice, by leaving such notice with him or at his residence or usual place of business, by mailing it, postage prepaid, addressed to such stockholder at his address as it appears in the records of the corporation or by sending such notice electronically to such stockholder's e-mail address as it appears in the records of the corporation. Such notice shall be given by the clerk or an assistant clerk or by an officer designated by the directors. Whenever notice of a meeting is required to be given to a stockholder under any provision of the Business Corporation Law of the Commonwealth of Massachusetts or of the articles of organization or these bylaws, a written waiver thereof, executed before or after the meeting by such stockholder or his attorney thereunto authorized and filed with the records of the meeting, shall be deemed equivalent to such notice. No business may be transacted at a meeting of the stockholders except that (a) specified in the notice thereof, or in a supplemental notice given also in compliance with the provisions hereof, (b) brought before the meeting by or at the direction of the board of directors or the presiding officer, or (c) properly brought before the meeting by or on behalf of any stockholder who shall have been a stockholder of record at the time of giving of notice provided for in this Section 2.4 and who shall continue to be entitled to vote thereat and who complies with the notice procedures set forth in this Section 2.4 or, with respect to the election of directors, Section 3.2 of these bylaws. In addition to any other applicable requirements, for business to be properly brought before a meeting by a stockholder (other than a stockholder proposal included in the corporation's proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the stockholder must have given timely notice thereof in writing to the clerk of the corporation. In order to be timely given, a 2 stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation (a) not less than 95 nor more than 125 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the corporation or (b) in the case of a special meeting or in the event that the annual meeting is called for a date (including any change in a date determined by the board pursuant to Section 2.1) not within 30 days before or after such anniversary date, notice by the stockholder to be timely given must be so received not later than the close of business on the 10th day following the day on which notice of the date of such meeting was mailed or public disclosure of the date of such meeting was made, whichever first occurs. Such stockholder's notice to the clerk shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and record address of the stockholder proposing such business, (c) the class and number of shares of capital stock of the corporation held of record, owned beneficially and represented by proxy by such stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and as of the date of such notice by the stockholder, and (d) all other information which would be required to be included in a proxy statement or other filings required to be filed with the Securities and Exchange Commission if, with respect to any such item of business, such stockholder were a participant in a solicitation subject to Regulation 14A under the Exchange Act (the "Proxy Rules"). Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any meeting except in accordance with the procedures set forth in this Section 2.4; provided, however, that nothing in this Section 2.4 shall -------- ------- be deemed to preclude discussion by any stockholder of any business properly brought before such meeting. The chairman of the board or other presiding officer of the meeting may, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the foregoing procedures, and if he or she should so determine, he or she shall so declare to the meeting and that business shall be disregarded. 2.5. Quorum of Stockholders. At any meeting of the stockholders, a quorum ---------------------- shall consist of a majority in interest of all stock issued and outstanding and entitled to vote at the meeting, except when a larger quorum is required by law, by the articles of organization or by these bylaws. Stock owned directly or indirectly by the corporation, if any, shall not be deemed outstanding for this purpose. Any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. 3 2.6. Action by Vote. When a quorum is present at any meeting, a plurality -------------- of the votes properly cast for election to any office shall elect to such office, and a majority of the votes properly cast upon any question other than an election to an office shall decide the question, except when a larger vote is required by law, by the articles of organization or by these bylaws. No ballot shall be required for any election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election. 2.7. Voting. Stockholders entitled to vote shall have one vote for each ------ share of stock entitled to vote held by them of record according to the records of the corporation, unless otherwise provided by the articles of organization. The corporation shall not, directly or indirectly, vote any share of its own stock. 2.8. Action by Writing. Any action required or permitted to be taken at ----------------- any meeting of the stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders. Such consents shall be treated for all purposes as a vote at a meeting. 2.9. Proxies. To the extent permitted by law, stockholders entitled to ------- vote may vote either in person or by proxy (which proxy may be authorized in writing, by telephone or by electronic means). No proxy dated more than six months before the meeting named therein shall be valid. Unless otherwise specifically limited by their terms, such proxies shall entitle the holders thereof to vote at any adjournment of such meeting but shall not be valid after the final adjournment of such meeting. SECTION 3. BOARD OF DIRECTORS 3.1. Number. The number of directors shall be fixed at any time or from ------ time to time only by the affirmative vote of a majority of the directors then in office, but shall be not less than three, except that whenever there shall be only two stockholders the number of directors shall be not less than two and whenever there shall be only one stockholder there shall be at least one director; no decrease in the number of directors shall shorten the term of any incumbent director. No director need be a stockholder. 3.2. Nominations for Director. Only persons who are nominated in ------------------------ accordance with the following procedures shall be eligible for election as directors, except as provided in the articles of organization with respect to nominations by holders of preferred stock in certain circumstances. Nominations of persons for election to the board of directors at the annual meeting may be made at the annual meeting of stockholders (a) by or at the direction of the board of directors by any nominating committee or person appointed by the board or (b) by any stockholder of record at the time of giving of notice provided for in this Section 3.2 and who shall continue to be entitled to vote thereat and who complies 4 with the notice procedures set forth in this Section 3.2. Nominations by stockholders shall be made only after timely notice in writing to the clerk of the corporation. In order to be timely given, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 95 nor more than 125 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the corporation; provided, however, that in the event that the meeting is called for -------- ------- a date, including any change in a date determined by the board pursuant to Section 2.1, not within 30 days before or after such anniversary date, notice by the stockholder to be timely given must be so received no later than the close of business on the 10th day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever first occurs. Such stockholder's notice to the clerk shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the corporation, if any, which are beneficially owned by the person, (iv) any other information regarding the nominee as would be required to be included in a proxy statement or other filings required to be filed pursuant to the Proxy Rules, and (v) the consent of each nominee to serve as a director of the corporation if so elected; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder, (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and as of the date of such notice, (iii) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (iv) a representation that the stockholder (and any party on whose behalf such stockholder is acting) is qualified at the time of giving such notice to have such individual serve as the nominee of such stockholder (and any party on whose behalf such stockholder is acting) if such individual is elected, accompanied by copies of any notification or filings with, or orders or other actions by, and governmental authority which are required in order for such stockholder (and any party on whose behalf such stockholder is acting) to be so qualified, (v) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder, and (vi) such other information regarding such stockholder as would be required to be included in a proxy statement or other filings required to be filed pursuant to the Proxy Rules. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as director. No person shall be eligible for election as a director unless nominated in accordance with the provisions set forth herein. 5 The chairman of the board or other presiding officer of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. 3.3. Powers. Except as reserved to the stockholders by law, by the ------ articles of organization or by these bylaws, the business of the corporation shall be managed by the directors who shall have and may exercise all the powers of the corporation. In particular, and without limiting the generality of the foregoing, the directors may at any time issue all or from time to time any part of the unissued capital stock of the corporation from time to time authorized under the articles of organization and may determine, subject to any requirements of law, the consideration for which stock is to be issued and the manner of allocating such consideration between capital and surplus. 3.4 Resignation and Removal. Any director may resign at any time by ----------------------- delivering his resignation in writing to the president, the treasurer or the clerk or to a meeting of the directors. Such resignation shall be effective upon receipt unless specified to be effective at some other time. Any director or directors or the entire board of directors may be removed from office (a) only for Cause (as defined in Section 50A of the Business Corporation Law of the Commonwealth of Massachusetts) by the affirmative vote of a majority of the shares entitled to vote at an election of directors and (b) only after reasonable notice and an opportunity to be heard by the stockholders. No director resigning, and (except where a right to receive compensation shall be expressly provided in a duly authorized written agreement with the corporation) no director removed, shall have the right to any compensation as such director for any period following his removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise, unless in the case of a resignation, the directors, or in case of a removal, the stockholders, shall in their discretion provide for compensation. 3.5 Vacancies. Vacancies and newly created directorships, whether --------- resulting from an increase in the size of the board of directors, the death, resignation, disqualification or removal of a director or otherwise, shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the board of directors. Any director elected in accordance with this Section 3.5 shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred or the new directorship was created and until such director's successor shall have been elected and qualified. 3.6. Committees. The directors may, by vote of a majority of the ---------- directors then in office, elect from their number an executive committee and other committees and delegate to any such committee or committees some or all of the power of the directors except those which by law, by the articles of organization or by these bylaws they are prohibited from delegating. Except as the directors may otherwise determine, any such 6 committee may make rules for the conduct of its business, but unless otherwise provided by the directors or such rules, its business shall be conducted as nearly as may be in the same manner as is provided by these bylaws for the conduct of business by the directors. 3.7. Regular Meetings. Regular meetings of the directors may be held ---------------- without call or notice at such places and at such times as the directors may from time to time determine, provided that reasonable notice of the first regular meeting following any such determination shall be given to absent directors. A regular meeting of the directors may be held without call or notice immediately after and at the same place as the annual meeting of the stockholders. 3.8. Special Meetings. Special meetings of the directors may be held ---------------- at any time and at any place designated in the call of the meeting, when called by the president or the treasurer or by two or more directors, reasonable notice thereof being given to each director by the secretary or an assistant secretary, or, if there be none, by the clerk or an assistant clerk, or by the officer or one of the directors calling the meeting. 3.9. Notice. It shall be sufficient notice to a director to send notice ------ by mail or express overnight courier at least forty-eight hours or by facsimile at least twenty-four hours before the meeting addressed to him at this usual or last known business or residence address or to give notice to him in person or by telephone at least twenty-four hours before the meeting. Notice of a meeting need not be given to any director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting. 3.10. Quorum. At any meeting of the directors a majority of the directors ------ then in office shall constitute a quorum. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. 3.11. Action by Vote. When a quorum is present at any meeting, a -------------- majority of the directors present may take any action, except when a larger vote is required by law, by the articles of organization or by these bylaws. 3.12. Action by Writing. Unless the articles of organization otherwise ----------------- provide, any action required or permitted to be taken at any meeting of the directors may be taken without a meeting if all the directors consent to the action in writing and the written consents are filed with the records of the meetings of the directors. Such consents shall be treated for all purposes as a vote taken at a meeting. 3.13. Presence Through Communications Equipment. Unless otherwise ----------------------------------------- provided by law or by the articles of organization, members of the board of directors may participate in a meeting of such board by means of a conference telephone or similar 7 communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting. SECTION 4. OFFICERS AND AGENTS 4.1. Enumeration; Qualification. The officers to the corporation shall -------------------------- be a president, a treasurer, a clerk, and such other officers, if any, as the incorporators at their initial meeting, or the directors from time to time, may in their discretion elect or appoint. The corporation may also have such agents, if any, as the incorporators at their initial meeting, or the directors from time to time, may in their discretion appoint. Any officer may be but none need be a director or stockholder. The clerk shall be a resident of Massachusetts unless the corporation has a resident agent appointed for the purpose of service of process. Any two or more offices may be held by the same person. Any officer may be required by the directors to give bond for the faithful performance of his duties to the corporation in such amount and with such sureties as the directors may determine. 4.2. Powers. Subject to law, to the articles of organization and to ------ the other provisions of these bylaws, each officer shall have, in addition to the duties and powers herein set forth, such duties and powers as are commonly incident to his office and such duties and powers as the directors may from time to time designate. 4.3. Election. The president, the treasurer and the clerk shall be -------- elected annually by the directors at their first meeting following the annual meeting of the stockholders. Other officers, if any, may be elected or appointed by the board of directors at said meeting or at any other time. 4.4. Tenure. Except as otherwise provided by law or by the articles ------ of organization or by these bylaws, the president, the treasurer and the clerk shall hold office until the first meeting of the board of directors following the next annual meeting of the stockholders and until their respective successors are chosen and qualified, and each other officer shall hold office until the first meeting of the directors following the next annual meeting of the stockholders unless a shorter period shall have been specified by the terms of his election or appointment, or in each case until he sooner dies, resigns, is removed or becomes disqualified. Each agent shall retain his authority at the pleasure of the directors. 4.5 Resignation and Removal. Any officer may resign at any time by ----------------------- delivering his resignation in writing to the president, the treasurer or the clerk or to a meeting of the directors. Such resignation shall be effective upon receipt unless specified to be effective at some other time. The directors may remove any officer elected by them with or without cause by the vote of the majority of the directors then in office. An 8 officer may be removed for cause only after reasonable notice and an opportunity to be heard before the directors. No officer resigning, and (except where a right to receive compensation shall be expressly provided in a duly authorized written agreement with the corporation) no officer removed, shall have the right to any compensation as such officer for any period following his removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise, unless the directors in their discretion provide for compensation. 4.6. Vacancies. If the office of any officer becomes vacant, the --------- directors may elect or appoint a successor by vote of a majority of the directors present. Each such successor shall hold office for the unexpired term, and in the case of the president, the treasurer and the clerk, until his successor is chosen and qualified, or in each case until he sooner dies, resigns, is removed or becomes disqualified. 4.7. Chief Executive Officer. The chief executive officer of the ----------------------- corporation shall be the president or such other officer as is designated by the directors and shall, subject to the control of the directors, have general charge and supervision of the business of the corporation and, except as the directors shall otherwise determine, preside at all meetings of the stockholders and of the directors. If no such designation is made, the president shall be the chief executive officer. 4.8. President and Vice President. The president shall have the duties ---------------------------- and powers specified in these bylaws and shall have such other duties and powers as may be determined by the directors. Any vice presidents shall have such duties and powers as shall be designated from time to time by the directors. 4.9. Treasurer and Assistant Treasurers. Except as the directors shall ---------------------------------- otherwise determine, the treasurer shall be the chief financial and accounting officer of the corporation and shall be in charge of its funds and valuable papers, books of account and accounting records, and shall have such other duties and powers as may be designated from time to time by the directors. Any assistant treasurers shall have such duties and powers as shall be designated from time to time by the directors. 4.10. Clerk and Assistant Clerks. The clerk shall record all -------------------------- proceedings of the stockholders in a book or series of books to be kept therefor, which book or books shall be kept at the principal office of the corporation or at the office of its transfer agent or of its clerk and shall be open at all reasonable times to the inspection of any stockholder. In the absence of the clerk from any meeting of stockholders, an assistant clerk, or if there be none or he is absent, a temporary clerk chosen at the meeting, shall record the proceedings thereof in the aforesaid book. Unless a transfer agent has been appointed the clerk shall keep or cause to be kept the stock and transfer records of the corporation, 9 which shall contain the names and record addresses of all stockholders and the amount of stock held by each. If no secretary is elected, the clerk shall keep a true record of the proceedings of all meetings of the directors and in his absence from any such meeting an assistant clerk, or if there be none or he is absent, a temporary clerk chosen at the meeting, shall record the proceedings thereof. Any assistant clerks shall have such other duties and powers as shall be designated from time to time by the directors. 4.11. Secretary and Assistant Secretaries. If a secretary is elected, ----------------------------------- he shall keep a true record of the proceedings of all meetings of the directors and in his absence from any such meeting an assistant secretary, or if there be none or he is absent, a temporary secretary chosen at the meeting, shall record the proceedings thereof. Any assistant secretaries shall have such other duties and powers as shall be designated from time to time by the directors. SECTION 5. CAPITAL STOCK 5.1. Number and Par Value. The total number of shares and the par -------------------- value, if any, of each class of stock which the corporation is authorized to issue shall be as stated in the articles of organization. 5.2. Stock Certificates. Each stockholder shall be entitled to a ------------------ certificate stating the number and the class and the designation of the series, if any, of the shares held by him, in such form as shall, in conformity to law, be prescribed from time to time by the directors. Such certificate shall be signed by the president or a vice president and by the treasurer or an assistant treasurer. Such signatures may be facsimiles if the certificate is signed by a transfer agent, or by a registrar, other than a director, officer or employee of the corporation. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the time of its issue. 5.3. Loss of Certificates. In the case of the alleged loss or -------------------- destruction or the mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such conditions as the directors may prescribe. SECTION 6. TRANSFER OF SHARES OF STOCK 6.1. Transfer on Books. Subject to the restrictions, if any, stated ----------------- or noted on the stock certificates, shares of stock may be transferred on the books of the corporation 10 by the surrender to the corporation or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with necessary transfer stamps affixed, and with such proof of the authenticity of signature as the directors or the transfer agent of the corporation may reasonably require. Except as may otherwise be required by law, by the articles of organization or by these bylaws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to receive notice and to vote with respect thereto, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the corporation in accordance with the requirements of these bylaws. It shall be the duty of each stockholder to notify the corporation of his post office address. 6.2. Record Date and Closing Transfer Books. The directors may fix in -------------------------------------- advance a time, which shall not be more than sixty days before the date of any meeting of stockholders or the date for the payment of any dividend or making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution or the right to give such consent or dissent, and in such case only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the corporation after the record date; or without fixing such record date the directors may for any of such purposes close the transfer books for all or any part of such period. If no record date is fixed and the transfer books are not closed: (1) The record date for determining stockholders having the right to notice of and to vote at a meeting of stockholders shall be at the close of business on the date next preceding the date on which notice is given; and (2) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors acts with respect thereto. SECTION 7. INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the extent legally permissible, indemnify each of its directors and officers (including persons who act at its request as directors, officers or trustees of another organization or in any capacity with respect to any employee benefit plan) against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by him in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which he may be involved or with which he may be threatened, while in office or thereafter, by reason of his being or having been such a director or officer, except with respect to any matter as to which he shall have been 11 adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation (any person serving another organization in one or more of the indicated capacities at the request of the corporation who shall have acted in good faith in the reasonable belief that his action was in the best interests of such other organization to be deemed as having acted in such manner with respect to the corporation) or, to the extent that such matter relates to service with respect to any employee benefit plan, in the best interest of the participants or beneficiaries of such employee benefit plan; provided, however, that as to any matter disposed of by a compromise payment by such director or officer, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless such compromise shall be approved as in the best interests of the corporation, after notice that it involves such indemnification: (a) by a disinterested majority of the directors then in office; or (b) by a majority of the disinterested directors then in office, provided that there has been obtained an opinion in writing of independent legal counsel to the effect that such director or officer appears to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation; or (c) by the holders of a majority of the outstanding stock at the time entitled to vote for directors, voting as a single class, exclusive of any stock owned by any interested director or officer. Expenses, including counsel fees, reasonably incurred by any director or officer in connection with the defense or disposition of any such action, suit or other proceeding may be paid from time to time by the corporation in advance of the final disposition thereof upon receipt of an undertaking by such director or officer to repay the amounts so paid to the corporation if it is ultimately determined that indemnification for such expenses is not authorized under this Section 7. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any director or officer may be entitled. As used in this Section, the terms, "director" and "officer" include their respective heirs, executors and administrators, and an "interested" director or officer is one against whom in such capacity the proceedings in question or another proceeding on the same or similar grounds is then pending. Nothing contained in this Section shall affect any rights to indemnification to which corporate personnel other than directors or officers may be entitled by contract or otherwise under law. Section 8. CORPORATE SEAL The seal of the corporation shall, subject to alteration by the directors, consist of a flat-faced circular die with the word "Massachusetts", together with the name of the corporation and the year of its organization, cut or engraved thereon. SECTION 9. EXECUTION OF PAPERS Except as the directors may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, 12 notes, checks, drafts and other obligations made, accepted or endorsed by the corporation shall be signed by the president or by one of the vice presidents or by the treasurer. SECTION 10. FISCAL YEAR The fiscal year of the corporation shall end on December 31. SECTION 11. AMENDMENTS These bylaws may be altered, amended or repealed at any annual or special meeting of the stockholders called for the purpose, of which the notice shall specify the subject matter of the proposed alteration, amendment or repeal or the sections to be affected thereby, by vote of the stockholders. These bylaws may also be altered, amended or repealed by vote of a majority of the directors then in office, except that the directors shall not take any action which provides for indemnification of directors nor any action to amend this Section 11, and except that the directors shall not take any action unless permitted by law. Any bylaw so altered, amended or repealed by the directors may be further altered or amended or reinstated by the stockholders in the above manner. SECTION 12. MASSACHUSETTS CONTROL SHARE ACQUISITIONS ACT The provisions of Chapter 110D shall not apply to control share acquisitions of the corporation. If the provisions of Chapter 110D shall become applicable to control share acquisitions of the corporation through amendment of these bylaws or otherwise, the following provisions shall apply: (a) The corporation is authorized to redeem shares acquired in a control share acquisition to the extent and in accordance with the procedures specified in Section 6 of Chapter 110D and in this Section. (b) The additional procedures for redemption specified in this Section are as follows: (i) Fair value shall be determined by the board of directors or a committee of the board of director of the corporation, and the amount so determined shall be included in the notice of redemption given by the corporation pursuant to Section 6 of Chapter 110D. 13 (ii) The person whose shares are being redeemed (the "Holder") may within ten days after the date of the notice of redemption advise the corporation in writing that the Holder believes that the value so determined is not fair, and in the event the corporation shall, within the 30-day period following its receipt of the Holder's notice, permit the Holder to submit such written and oral evidence of value as the Holder may wish and the board of directors or committee considers appropriate. The board of directors or committee shall affirm or revise its determination of fair value within fifteen days after the completion of the 30-day period, and shall promptly advise the Holder in writing of its decision. (iii) The notice of redemption shall specify a redemption date, which shall be 30 days after the date of the notice (or the first business day after the 30-day period), and a redemption office, which shall be the principal office of the corporation or an office of a commercial bank specified by the corporation in the notice. The redemption date so fixed shall not be deferred by a request of the Holder for a redetermination of fair value. The Holder shall cause the certificate or certificates representing the shares being redeemed to be delivered to the redemption office not later than the redemption date, duly endorsed or assigned for transfer, with signature guaranteed, if such an endorsement or assignment is required in the notice of redemption. (iv) The certificate or certificates representing the shares being redeemed having been deposited in accordance with item (iii) above, the redemption price shall be paid by the corporation on the redemption date specified in its notice of redemption or such later date as the redemption price may be determined if the Holder has duly requested a redetermination of fair value. (v) Notice of redemption having been given, from and after the redemption date the shares being redeemed shall no longer be deemed to be outstanding, and all rights of the holder or holders thereof as a stockholder or stockholders of the corporation shall cease, except the right to receive the redemption price. If the corporation shall default in payment of the redemption price, interest shall accrue thereon from the date of default at the base or prime rate of the corporation's principal lending bank or if none, the base or prime rate of Fleet Bank, as in effect from time to time during the period of default. 14 (vi) Notice given by the corporation by first class mail or delivered in person on the basis of a good faith determination by the corporation of the identity and address of the person who had made a control share acquisition shall be deemed to have been duly given. (vii) Any person who makes a control share acquisition of the corporation shall be deemed to have consented to and shall be bound by the provisions of this Section and shall indemnify and hold the corporation harmless from and against any damage, loss or expense which the corporation may suffer as a result of any non-compliance with the provisions of this Section. References in this Section to Chapter 110D mean Chapter 110D of the Massachusetts General Laws as in effect from time to time. SECTION 13. MASSACHUSETTS BUSINESS COMBINATION ACT The provisions of Chapter 110F of the Massachusetts General Laws shall not apply to "business combinations" (as defined therein) involving the corporation. 15 EX-10.1 3 1985 STOCK OPTION PLAN EXHIBIT 10.1 EMC CORPORATION 1985 STOCK OPTION PLAN, as amended July 1, 1998 1. PURPOSE. ------- The purpose of the EMC Corporation 1985 Stock Option Plan is to enable EMC Corporation to provide a special incentive to a limited number of key employees of the Company and its Subsidiaries, if any, who are in a position to have a significant effect upon the Company's business and earnings. In order to accomplish this purpose, the Plan authorizes the grant to such key employees of options to purchase Common Stock of the Company. Increased ownership of Common Stock will provide such key employees with an additional incentive to take into account the long-term interests of the Company. 2. DEFINITIONS. ----------- As used herein, the following words or terms have the meanings set forth below. The masculine gender is used throughout the Plan but is intended to apply to members of both sexes. 2.1 "Board of Directors" means the Board of Directors of the Company. 2.2 "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. 2.3 "Committee" means the Committee appointed by the Board of Directors to administer the Plan or the Board of Directors as a whole if no appointment is made. 2.4 "Common Stock" means the Common Stock of the Company. 2.5 "Company" means EMC Corporation, a corporation established under the laws of The Commonwealth of Massachusetts. 2.6 "Fair Market Value" in the case of a share of Common Stock on a particular day, means the fair market value as determined from time to time by the Board of Directors or, where appropriate, by the Committee, taking into account all information which the Board of Directors, or the Committee, considers relevant. 2.7 "Incentive Stock Option" means a stock option that satisfies the requirements of Section 422 of the Code. 2.8 "Participant" means an individual holding a stock option or stock options granted to him under the Plan. 2.9 "Plan" means the EMC Corporation 1985 Stock Option Plan set forth herein. 2.10 "Subsidiary" or "Subsidiaries" means a corporation or corporations in which the Company owns, directly or indirectly, stock possessing 50 percent or more of the total combined voting power of all classes of stock. 2.11 "Ten Percent Stockholder" means any person who, at the time an option is granted, owns or is deemed to own stock (as determined in accordance with Sections 422 and 424 of the Code) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parent or a subsidiary. 3. ADMINISTRATION. -------------- 3.1 The Plan shall be administered by the Committee and, to the extent provided herein, the Board of Directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. 3.2 Subject to the provisions set forth herein, each of the Committee and the Board of Directors shall have full authority to determine the provisions of options to be granted under the Plan. Subject to the provisions set forth herein, the Committee shall have full authority to interpret the terms of the Plan and of options granted under the Plan, to adopt, amend and rescind rules and guidelines for the administration of the Plan and for its own acts and proceedings and to decide all questions and settle all controversies and disputes which may arise in connection with the Plan; provided, however, that -------- ------- any change to the terms of an option granted hereunder shall be approved by the Board of Directors to the extent such change would be deemed to be a new option grant or such terms relate to a subsequent transaction that would not be exempt from Section 16(b) of the Securities Exchange Act of 1934 in the absence of such approval. 2 3.3 The decision of the Committee or the Board of Directors, as applicable, on any matter as to which the Committee or the Board of Directors, as applicable, is given authority under subsection 3.2 shall be final and binding on all persons concerned. 3.4 Nothing in the Plan shall be deemed to give any officer or employee, or his legal representatives or assigns, any right to participate in the Plan, except to such extent, if any, as the Committee or the Board, as applicable, may have determined or approved pursuant to the provisions of the Plan. 4. SHARES SUBJECT TO THE PLAN. -------------------------- 4.1 The maximum number of shares of Common Stock that may be delivered upon the exercise of options granted under the Plan shall be 72,000,000, subject to adjustment in accordance with the provisions of Section 8. 4.2 If any option granted under the Plan terminates without having been exercised in full (including an option which terminates by agreement between the Company and the Participant), the number of shares of Common Stock as to which such option has not been exercised prior to termination shall be available for future grants within the limits set forth in subsection 4.1. 4.3 Shares of Common Stock delivered upon the exercise of options shall consist of shares of authorized and unissued Common Stock, except that the Board of Directors may from time to time in its discretion determine in any case the shares to be so delivered shall consist of shares of authorized and issued Common Stock reacquired by the Company and held in its Treasury. No fractional shares of Common Stock shall be delivered upon the exercise of an option. 5. ELIGIBILITY FOR OPTIONS. ----------------------- Employees eligible to receive options under the Plan shall be those key employees of the Company and its Subsidiaries, if any, who, in the opinion of the Committee, are in a position to have a significant effect upon the Company's business and earnings. Members of the Board of Directors of the Company or a Subsidiary who are not employed as regular salaried officers or employees of the Company or a Subsidiary may not participate in the Plan. 3 6. GRANT OF OPTIONS. ---------------- 6.1 From time to time while the Plan is in effect, each of the Committee and the Board of Directors may, in its absolute discretion, select from among the persons eligible to receive options (including persons to whom options were previously granted) those persons to whom options are to be granted. 6.2 Each of the Committee and the Board of Directors shall, in its absolute discretion, determine the number of shares of Common Stock to be subject to each option granted by it under the Plan. 6.3 No Incentive Stock Option may be granted under the Plan after May 16, 1995, but options theretofore granted may extend beyond that date. 7. PROVISIONS OF OPTIONS. --------------------- 7.1 Incentive Stock Options or Other Options. Options granted under the ---------------------------------------- Plan may be either Incentive Stock Options or options which do not qualify as Incentive Stock Options, as the Committee or the Board of Directors shall determine at the time of each grant of options hereunder. 7.2 Stock Option Certificates or Agreements. Options granted under the --------------------------------------- Plan shall be evidenced by certificates or agreements in such form as the Committee shall from time to time approve. Such certificates or agreements shall comply with the terms and conditions of the Plan and may contain such other provisions not inconsistent with the terms and conditions of the Plan as the Committee shall deem advisable. In the case of options intended to qualify as Incentive Stock Options, the certificates or agreements shall contain such provisions relating to exercise and other matters as are required of incentive stock options under the Code. 7.3 Terms and Conditions. All options granted under the Plan shall be -------------------- subject to the following terms and conditions to the extent applicable and to such other terms and conditions not inconsistent therewith as the Committee or the Board of Directors shall determine: 7.3.1 Exercise Price. The exercise price per share of Common Stock with respect to each option shall be as determined by the Committee but in the case of an Incentive Stock Option not less than 100% (110% in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) of the Fair Market Value per share at the time the option is granted. In the case of an option 4 which does not qualify as an Incentive Stock Option, the exercise price per share of Common Stock shall be not less than par value. However, for those employees subject to Section 16 of the Securities Exchange Act of 1934, the per share exercise price for an option which does not qualify as an Incentive Stock Option shall not be less than 50% of the Fair Market Value at the time the option is granted. 7.3.2 Value of Shares of Common Stock Subject to Incentive Stock ----------------------------------------------------------- Options. Each eligible employee may be granted Incentive Stock Options only ------- to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any related corporation, such Incentive Stock Options do not become exercisable for the first time by such employee during any calendar year in a manner which would entitle the employee to purchase more than $100,000 in fair market value (determined at the time the Incentive Stock Options were granted) of Common Stock in that year. Any options granted to any employee in excess of such amount will be granted as Non-Qualified Options. 7.3.3 Period of Options. An option shall be exercisable during such ----------------- period of time as the Committee or the Board of Directors may specify (subject to subsection 7.4 below), but in the case of an Incentive Stock Option not after the expiration of ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from the date the option is granted. 7.3.4 Exercise of Options. ------------------- 7.3.4.1 Each option shall be made exercisable at such time or times as the Committee or the Board of Directors shall determine. In the case of an option made exercisable in installments, the Committee or the Board of Directors may later determine to accelerate the time at which one or more of such installments may be exercised. 7.3.4.2 Any exercise of an option shall be in writing signed by the proper person and delivered or mailed to the General Counsel of the Company, accompanied by an option exercise notice and payment in full for the number of shares in respect to which the option is exercised. 7.3.4.3 In the event an option is exercised by the executor or administrator of a deceased Participant, or by the person or persons to whom the option has been transferred by the Participant's will or the applicable laws of 5 descent and distribution, the Company shall be under no obligation to deliver stock thereunder until the Company is satisfied that the person or persons exercising the option is or are the duly appointed executor or administrator of the deceased Participant or the person or persons to whom the option has been transferred by the Participant's will or by the applicable laws of descent and distribution. 7.3.4.4 The Committee or the Board of Directors may at the time of grant condition the exercise of an option upon agreement by the Participant to subject the Common Stock to any restrictions on transfer or repurchase rights in effect on the date of exercise, upon representations of continued employment and upon other terms not inconsistent with this Plan. Any such conditions shall be set forth in the option certificate or other document evidencing the option. 7.3.4.5 In the case of an option that is not an Incentive Stock Option, the Committee shall have the right to require that the individual exercising the option to remit to the Company an amount sufficient to satisfy any federal, state, or local withholding tax requirements (or makes other arrangements satisfactory to the Company with regard to such taxes) prior to the delivery of any Common Stock pursuant to the exercise of the option. In the case of an Incentive Stock Option, if at the time the Incentive Stock Option is exercised the Committee determines that under applicable law and regulations the Company could be liable for the withholding of any federal or state tax with respect to a disposition of the Common Stock received upon exercise, the Committee may require as a condition of exercise that the individual exercising the Incentive Stock Option agree (i) to inform the Company promptly of any disposition (within the meaning of Section 422 (a) (1) of the Code and the regulations thereunder) of Common Stock received upon exercise, and (ii) to give such security as the Committee deems adequate to meet the potential liability of the Company for the withholding of tax, and to augment such security from time to time in any amount reasonably deemed necessary by the Committee to preserve the adequacy of such security. 7.3.4.6 In the case of an option that is exercised by an individual that is subject to taxation in a foreign jurisdiction, the Committee shall have the right to require the individual exercising the option to remit to the Company an amount 6 sufficient to satisfy any federal or withholding requirement of that foreign jurisdiction (or make other arrangements satisfactory to the Company with regard to such taxes prior to the delivery of any Common Stock pursuant to the exercise of the option). 7.3.5 Payment for and Delivery of Stock. The shares of stock --------------------------------- purchased on any exercise of an option granted hereunder shall be paid for in full in cash or, if permitted by the terms of the option, in shares of unrestricted Common Stock at the time of such exercise or, if so permitted, a combination of such cash and Common Stock. A Participant shall not have the rights of a stockholder with respect to awards under the Plan except as to stock actually issued to him. 7.3.6 Listing of Stock, Withholding and Other Legal Requirements. The ---------------------------------------------------------- Company shall not be obligated to deliver any stock until all federal and state laws and regulations which the Company may deem applicable have been complied with, nor, in the event the outstanding Common Stock is at the time listed upon any stock exchange, until the stock to be delivered has been listed or authorized to be added to the list upon official notice of issuance to such exchange. In addition, if the shares of stock subject to any option have not been registered in accordance with the Securities Act of 1933, as amended, the Company may require the person or persons who wishes or wish to exercise such option to make such representation or agreement with respect to the sale of stock acquired on exercise of the option as will be sufficient, in the opinion of the Company's counsel, to avoid violation of said Act, and may also require that the certificates evidencing said stock bear an appropriate restrictive legend. 7.3.7 Non-transferability of Options. No option may be transferred ------------------------------ by the Participant otherwise than by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order, and during the Participant's lifetime the option may be exercised only by him or her; provided, however, that the Board of Directors or the Committee, as -------- ------- applicable, in its discretion, may allow for transferability of non- qualified stock options by the Participant to "Immediate Family Members". Immediate Family Members means children, grandchildren, spouse or common law spouse, siblings or parents of the Participant or to bona fide trusts, partnerships or other entities controlled by and of which the beneficiaries are Immediate Family Members of the Participant. Any option grants that are transferable are further conditioned on the Participant and Immediate Family Members 7 agreeing to abide by the Company's then current stock option transfer guidelines. 7.3.8 Death. If a Participant dies at a time when he is entitled to ----- exercise an Incentive Stock Option, then at any time or times within three years after his death such Incentive Stock Option may be exercised, as to all or any of the shares which the Participant was entitled to purchase thereunder immediately prior to his death, by his executor or administrator or the person or persons to whom the Incentive Stock Option is transferred by will or the applicable laws of descent and distribution, and except as so exercised such Incentive Stock Option shall expire at the end of such three-year period. In no event, however, may any Incentive Stock Option granted under the Plan be exercised after the expiration of ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from the date the Incentive Stock Option was granted. 7.3.9 Termination of Employment. If the employment of a Participant ------------------------- terminates for any reason other than his death, all options held by the Participant shall thereupon expire on the date of termination unless the option by its terms, or the Committee or the Board of Directors by resolution, shall allow the Participant to exercise any or all of the options held by him after termination. In the case of an Incentive Stock Option, the Incentive Stock Option shall in any event expire at the end of three months after such termination of employment, or after the expiration of ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from the date the Incentive Stock Option was granted, whichever occurs first. If the Committee or the Board of Directors so decides, an option may provide that a leave of absence granted by the Company or Subsidiary is not a termination of employment for the purpose of this subsection 7.3.9, and in the absence of such a provision the Committee may in any particular case determine that such a leave of absence is not a termination of employment for such purpose. The Committee shall also determine all other matters relating to continuous employment. 7.3.10 Claw-back for Detrimental Activity. The following provisions ---------------------------------- of this Section 7.3.10 shall apply to options granted on or after July 1, 1998 to (i) Participants who are classified by the Company or a Subsidiary as an executive officer, senior officer, or officer (collectively, an "Officer") of the Company or a Subsidiary; and (ii) certain other Participants designated by the Committee or the Board of Directors to be subject to the terms of 8 this Section 7.3.10 (such designated Participants together with Officers referred to collectively as "Senior Participants"). The Committee or the Board of Directors may cancel, rescind, suspend or otherwise limit or restrict any unexpired option at any time if the Senior Participant engages in "Detrimental Activity" (as defined below). Furthermore, in the event a Senior Participant engages in Detrimental Activity at any time prior to or during the six months after any exercise of an option, such exercise may be rescinded until the later of (i) two years after such exercise or (ii) two years after such Detrimental Activity . Upon such rescission, the Company at its sole option may require the Senior Participant to (i) deliver and transfer to the Company the shares of Common Stock received by the Senior Participant upon such exercise, (ii) pay to the Company an amount equal to any realized gain received by the Senior Participant from such exercise, or (iii) pay to the Company an amount equal to the market price (as of the exercise date) of the Common Stock acquired upon such exercise minus the respective exercise price. The Company shall be entitled to set-off any such amount owed to the Company against any amount owed to the Senior Participant by the Company. As used in this subsection 7.3.10, "Detrimental Activity" shall include: (i) the failure to comply with the terms of the Plan or certificate or agreement evidencing the option, (ii) the failure to comply with any term set forth in the Company's Key Employee Agreement (irrespective of whether the Senior Participant is a party to the Key Employee Agreement), (iii) any activity that results in termination of the Senior Participant's employment for cause; (iv) a violation of any rule, policy, procedure or guideline of the Company; (v) the Senior Participant being convicted of, or entering a guilty plea with respect to a crime whether or not connected with the Company; or (vi) any other conduct or act determined to be injurious, detrimental or prejudicial to any interest of the Company. 7.4 Authority of the Committee. The Committee shall have the -------------------------- authority, either generally or in particular instances, to waive compliance by a Participant with any obligation to be performed by him under an option and to waive any condition or provision of an option, except that the Committee may not (i) increase the total number of shares covered by any Incentive Stock Option (except in accordance with Section 8), (ii) reduce the option price per share of any Incentive Stock Option (except in accordance with Section 8) or (iii) extend the term of any Incentive Stock Option to more than ten years, subject, however, to the provisions of Section 10. 9 8. CHANGES IN STOCK. ---------------- In the event of a stock dividend, stock split or other change in corporate structure or capitalization affecting the Common Stock that becomes effective after the adoption of the Plan by the Board of Directors, the Committee shall make appropriate adjustments in (i) the number and kind of shares of stock on which options may thereafter be granted hereunder, (ii) the number and kind of shares of stock remaining subject to each option outstanding at the time of such change and (iii) the option price. The Committee's determination shall be binding on all persons concerned. Subject to any required action by the stockholders, if the Company shall be the surviving corporation in any merger or consolidation (other than a merger or consolidation in which the Company survives but in which a majority of its outstanding shares are converted into securities of another corporation or are exchanged for other consideration), any option granted hereunder shall pertain and apply to the securities which a holder of the number of shares of stock of the Company then subject to the option would have been entitled to receive, but a dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving corporation or in which a majority of its outstanding shares are so converted or exchanged shall cause every option hereunder to terminate; provided that if any such dissolution, liquidation, merger or consolidation is contemplated, the Company shall either arrange for any corporation succeeding to the business and assets of the Company to issue to the Participants replacement options (which, in the case of Incentive Stock Options, satisfy, in the determination of the Committee, the requirements of Section 424 of the Code) on such corporation's stock which will to the extent possible preserve the value of the outstanding options or shall make the outstanding options fully exercisable at least 20 days before the effective date of any such dissolution, liquidation, merger or consolidation. The existence of the Plan shall not prevent any such change or other transaction and no Participant thereunder shall have any right except as herein expressly set forth. 9. EMPLOYMENT RIGHTS. ----------------- Neither the adoption of the Plan nor any grant of options confers upon any employee of the Company or a Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor does it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. 10 10. DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION. ------------------------------------------------------- The Committee or the Board of Directors may at any time discontinue granting options under the Plan and, with the consent of the Participant, may at any time cancel an existing option in whole or in part and grant another option to the Participant for such number of shares as the Committee or the Board of Directors specifies. The Board of Directors may at any time or times amend the Plan for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law or may at any time terminate the Plan as to any further grants of options, provided that no such amendment shall without the approval of the stockholders of the Company (a) increase the maximum number of shares available under the Plan, (b) change the group of employees eligible to receive options under the Plan, (c) reduce the exercise price of outstanding incentive options or reduce the price at which incentive options may be granted, (d) extend the time within which options may be granted, (e) alter the Plan in such a way that incentive options granted or to be granted hereunder would not be considered incentive stock options under Section 422 of the Code, or (f) amend the provisions of this Section 10, and no such amendment shall adversely affect the rights of any employee (without his consent) under any option previously granted. 11. EFFECTIVE DATE. -------------- The Plan shall become effective upon its adoption by the Board of Directors, and options may be granted under the Plan from and after the date of such adoption; provided, however, that if prior to May 16, 1986 the stockholders of the Company have not approved the Plan, the Plan shall terminate to the extent that it relates to the issuance of Incentive Stock Options and all Incentive Stock Options theretofore granted shall terminate and cease to be of any force or effect. No Incentive Stock Option granted hereunder shall be exercisable unless and until the Plan has been so approved. 11 EX-10.2 4 1992 STOCK OPTION PLAN EXHIBIT 10.2 EMC CORPORATION 1992 EMC CORPORATION STOCK OPTION PLAN FOR DIRECTORS, as amended July 1, 1998 1. PURPOSE ------- The purpose of this 1992 Stock Option Plan for Directors (the "Plan") is to advance the interests of EMC Corporation (the "Company") by enhancing the ability of the Company to attract and retain directors who are in a position to make significant contributions to the success of the Company and to reward directors for such contributions through ownership of shares of the Company's Common Stock (the "Stock"). 2. ADMINISTRATION -------------- The Plan shall be administered by the Board of Directors (the "Board") of the Company and the Executive Compensation and Stock Option Committee (the "Committee") of the Board, as set forth herein. The Board and the Committee shall each have authority, not inconsistent with the express provisions of the Plan to grant options in accordance with the Plan to such directors as are eligible to receive options. The Committee shall in addition have authority, not inconsistent with the express provisions of the Plan, (a) to prescribe the form or forms of instruments evidencing options and any other instruments required under the Plan and to change such forms from time to time; (b) to adopt, amend and rescind rules and regulations for the administration of the Plan; and (c) to interpret the Plan and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations of the Committee or the Board, as the case may be, shall be conclusive and shall bind all parties. Subject to Section 7, the Committee shall also have the authority, both generally and in particular instances, to waive compliance by a director with any obligation to be performed by him or her under an option and to waive any condition or provision of an option. Notwithstanding the preceding two sentences, any change to the terms of an option granted hereunder shall be approved by the Board to the extent such change would be deemed to be a new option grant or such terms relate to a subsequent transaction that would not be exempt from Section 16(b) of the Securities Exchange Act of 1934 in the absence of such approval. 3. EFFECTIVE DATE AND TERM OF PLAN ------------------------------- The Plan shall become effective on the date on which the Plan is approved by the stockholders of the Company. No option shall be granted under the Plan after the completion of ten years from the date on which the Plan was adopted by the Board, but options granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN -------------------------- (a) Number of Shares. Subject to adjustment as provided in Section 4(c), the aggregate number of shares of Stock that may be delivered upon the exercise of options granted under the Plan shall be 3,600,000. If any option granted under the Plan terminates without having been exercised in full, the number of shares of Stock as to which such option was not exercised shall be available for future grants within the limits set forth in this Section 4(a). (b) Shares to be Delivered. Shares delivered under the Plan shall be authorized but unissued Stock or, if the Board so decides in its sole discretion, previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock shall be delivered under the Plan. (c) Changes in Stock. In the event of a stock dividend, stock split or other change in corporate structure or capitalization affecting the Stock, the number and kind of shares of stock or securities of the Company to be subject to options then outstanding or to be granted under the Plan, and the option price, and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. 5. ELIGIBILITY FOR OPTIONS ----------------------- Directors eligible to receive options under the Plan ("Eligible Directors") shall be those directors who (i) are not employees of the Company; and (ii) are not holders of more than 5% of the outstanding shares of the Stock or persons in control of such holders. 6. TERMS AND CONDITIONS OF OPTIONS ------------------------------- (a) Formula Options. Eligible Directors who are directors on the date of stockholder approval of the Plan shall be awarded options to purchase up to 40,000 shares of Stock. Following stockholder approval of the plan, each newly elected Eligible Director shall be awarded options to purchase up to 40,000 shares of Stock on the date of his or her first election. (b) Discretionary Options. In addition to the formula options provided for above, the Committee or the Board may award options to purchase shares of Stock to Eligible Directors on such terms as it may determine not inconsistent with this Plan. (c) Exercise Price. The exercise price of each option shall be not less than 50% of the fair market value per share of the Stock at the time of the grant. For this purpose "fair market value" shall mean the last sales price of the Stock as reported on the New York Stock Exchange on the date of the grant (based on The Wall Street Journal report of composite transactions) or, if the 2 Stock is no longer listed on such Exchange, it shall have the same meaning as it does in the provisions of the Internal Revenue Code of 1986 (the "Code") and the regulations thereunder applicable to incentive options. (d) Duration of Options. The latest date on which an option may be exercised (the "Final Exercise Date") shall be the date which is ten years from the date the option was granted. (e) Exercise of Options. (1) Each formula option shall become exercisable in increments of 33 1/3% of the shares covered thereby on each of the first through third anniversaries of the grant. Each discretionary option shall become exercisable at such time or times as the Committee or the Board shall determine. (2) Any exercise of an option shall be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (a) an option exercise notice and any other documents required by the Committee; and (b) payment in full for the number of shares for which the option is exercised. (3) If any option is exercised by the executor or administrator of a deceased director, or by the person or persons to whom the option has been transferred by the director's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of the person or persons exercising the option. (4) The Company shall have the right to settle any option, and to terminate the rights of the holder thereof, by paying to the option holder the difference between the fair market value of the Stock at the time of settlement and the purchase price. (f) Payment for and Delivery of Stock. Stock purchased under the Plan shall be paid for as follows: (i) in cash or by certified check, bank draft or money order payable to the order of the Company; (ii) through the delivery of shares of Stock having a fair market value on the last business day preceding the date of exercise equal to the purchase price; or (iii) by a combination of cash and Stock as provided in clauses (i) and (ii) above. An option holder shall not have the rights of a stockholder with regard to awards under the Plan except as to Stock actually received by him or her under the Plan. The Company shall not be obligated to deliver any shares of Stock (a) until, in the opinion of the Company's counsel, all applicable Federal and state laws and regulations have been complied with; and (b) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance; and (c) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been 3 registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the option, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. (g) Nontransferability of Options/Exceptions. No option may be transferred by a director otherwise than by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order, and during the director's lifetime the option may be exercised only by him or her; provided, however, that -------- ------- the Board of Directors or the Committee, as applicable, in its discretion, may allow for transferability of options by the Participant to "Immediate Family Members." Immediate Family Members means children, grandchildren, spouse or common law spouse, siblings or parents of the Participant or to bona fide trusts, partnerships or other entities controlled by and of which the beneficiaries are Immediate Family Members of the Participant. Any option grants that are transferable are further conditioned on the Participant and Immediate Family Members agreeing to abide by the Company's then current stock option transfer guidelines. (h) Death. If a director dies at the time he or she is entitled to exercise an option, then the portion formerly exercisable by the director may be exercised by the director's executor or administrator, or by the person to whom the option is transferred under the applicable laws of descent and distribution, within three years of the death of the director, subject to earlier termination of an option pursuant to Section 6(d). (i) Other Termination of Status of Director. All previously unexercised options terminate and are forfeited automatically upon the termination of the director's service with the Company, unless the Committee or the Board of Directors specifies otherwise. (j) Mergers, etc. In the event of a dissolution, liquidation, consolidation or merger in which the Company is not the surviving corporation, or which results in the acquisition of substantially all of the Company's stock by a single person or entity or by a group of persons and entities acting in concert all outstanding options will thereupon terminate, provided at least twenty days prior to the effective date of any such dissolution, liquidation, consolidation or merger, the Committee or the Board may either (i) make all outstanding options immediately exercisable or (ii) arrange to have the surviving corporation grant replacement options for the option holders. (k) Claw-back for Detrimental Activity. The following provisions of this Section 6(k) shall apply to options granted on or after July 1, 1998: The Committee or the Board of Directors may cancel, rescind, suspend or otherwise limit or restrict any unexpired option at any time if the director engages in "Detrimental Activity" (as defined below). Furthermore, in the event a director engages in Detrimental Activity at any time prior to or during the six months after any exercise of an option, such exercise may be rescinded until the later of (i) two years after such exercise or (ii) two years after such Detrimental Activity. Upon such rescission, the Company at its sole option may require the director to (i) deliver and transfer to the Company the shares of Stock received by the director upon such exercise, (ii) pay to the Company an amount equal to 4 any realized gain received by the director from such exercise, or (iii) pay to the Company an amount equal to the market price (as of the exercise date) of the Stock acquired upon such exercise minus the respective exercise price. The Company shall be entitled to set-off any such amount owed to the Company against any amount owed to the director by the Company. As used in this Section 6(k), "Detrimental Activity" shall include: (i) the failure to comply with the terms of the certificate or agreement evidencing the option or the Plan, (ii) the failure to comply with any term set forth in the Key Employee Agreement (irrespective of whether the director is a party to the Company's Key Employee Agreement), (iii) any activity that results in removal of the director for cause; (iv) a violation of any rule, policy, procedure or guideline of the Company; (v) the director being convicted of, or entering a guilty plea with respect to a crime whether or not connected with the Company; or (vi) any other conduct or act determined to be injurious, detrimental or prejudicial to any interest of the Company. 7. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION ---------------------------------------------------------------- Neither adoption of the Plan nor the grant of options to a director shall affect the Company's right to grant to such director or any director options that are not subject to the Plan, to issue to such directors Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued to directors. The Committee or the Board may at any time discontinue granting options under the Plan. The Board may at any time, or times, amend the Plan for the purpose of satisfying any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of options, provided that (except to the extent expressly required or permitted herein above) no such amendment shall, without the approval of the stockholders of the Company, (a) increase the maximum number of shares available under the Plan; (b) increase the number of options to be granted to Eligible Directors; (c) amend the definition of Eligible Directors so as to enlarge the group of directors eligible to receive options under the Plan; (d) reduce the price at which options may be granted other than as permitted in the Plan; or (e) amend the provisions of this Section 7. 5 EX-10.3 5 1993 STOCK OPTION PLAN EXHIBIT 10.3 EMC CORPORATION 1993 STOCK OPTION PLAN, as amended January 20, 1999 1. PURPOSE. ------- The purpose of the EMC Corporation 1993 Stock Option Plan is to enable EMC Corporation to provide a special incentive to a limited number of key employees of the Company and its Subsidiaries, if any, who are in a position to have a significant effect upon the Company's business and earnings. In order to accomplish this purpose, the Plan authorizes the grant to such key employees of options to purchase Common Stock of the Company. Increased ownership of Common Stock will provide such key employees with an additional incentive to take into account the long-term interests of the Company. 2. DEFINITIONS. ----------- As used herein, the following words or terms have the meanings set forth below. The masculine gender is used throughout the Plan but is intended to apply to members of both sexes. 2.1 "Board of Directors" means the Board of Directors of the Company. 2.2 "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. 2.3 "Committee" means the Committee appointed by the Board of Directors to administer the Plan or the Board of Directors as a whole if no appointment is made. 2.4 "Common Stock" means the Common Stock of the Company. 2.5 "Company" means EMC Corporation, a corporation established under the laws of The Commonwealth of Massachusetts. 2.6 "Fair Market Value" in the case of a share of Common Stock on a particular day, means the fair market value as determined from time to time by the Board of Directors or, where appropriate, by the Committee, taking into account all information which the Board of Directors, or the Committee, considers relevant. Page 1 of 11 2.7 "Incentive Stock Option" means a stock option that satisfies the requirements of Section 422 of the Code. 2.8 "Participant" means an individual holding a stock option or stock options granted to him under the Plan. 2.9 "Plan" means the EMC Corporation 1993 Stock Option Plan set forth herein. 2.10 "Subsidiary" or "Subsidiaries" means a corporation or corporations in which the Company owns, directly or indirectly, stock possessing 50 percent or more of the total combined voting power of all classes of stock. 2.11 "Ten Percent Stockholder" means any person who, at the time an option is granted, owns or is deemed to own stock (as determined in accordance with Sections 422 and 424 of the Code) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parent or a subsidiary. 3. ADMINISTRATION. -------------- 3.1 The Plan shall be administered by the Committee and, to the extent provided herein, the Board of Directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. 3.2 Subject to the provisions set forth herein, each of the Committee and the Board of Directors shall have full authority to determine the provisions of options to be granted under the Plan. Subject to the provisions set forth herein, the Committee shall have full authority to interpret the terms of the Plan and of options granted under the Plan, to adopt, amend and rescind rules and guidelines for the administration of the Plan and for its own acts and proceedings and to decide all questions and settle all controversies and disputes which may arise in connection with the Plan; provided, however, that -------- ------- any change to the terms of an option granted hereunder shall be approved by the Board of Directors to the extent such change would be deemed to be a new option grant or such terms relate to a subsequent transaction that would not be exempt from Section 16(b) of the Securities Exchange Act of 1934 in the absence of such approval. Page 2 of 11 3.3 The decision of the Committee or the Board of Directors, as applicable, on any matter as to which the Committee or the Board of Directors, as applicable, is given authority under subsection 3.2 shall be final and binding on all persons concerned. 3.4 Nothing in the Plan shall be deemed to give any officer or employee, or his legal representatives or assigns, any right to participate in the Plan, except to such extent, if any, as the Committee or the Board, as applicable, may have determined or approved pursuant to the provisions of the Plan. 4. SHARES SUBJECT TO THE PLAN. -------------------------- 4.1 The maximum number of shares of Common Stock that may be delivered upon the exercise of options granted under the Plan shall be 40,000,000*, subject to adjustment in accordance with the provisions of Section 8. 4.2 If any option granted under the Plan terminates without having been exercised in full (including an option which terminates by agreement between the Company and the Participant), or if shares of Common Stock are reacquired by the Company upon the rescission of an exercise of an option, the number of shares of Common Stock as to which an option has not been exercised prior to termination, or have been reacquired upon the rescission of an option, shall be available for future grants within the limits set forth in subsection 4.1. 4.3 Shares of Common Stock delivered upon the exercise of options shall consist of shares of authorized and unissued Common Stock, except that the Board of Directors may from time to time in its discretion determine in any case the shares to be so delivered shall consist of shares of authorized and issued Common Stock reacquired by the Company and held in its Treasury. No fractional shares of Common Stock shall be delivered upon the exercise of an option. 5. ELIGIBILITY FOR OPTIONS. ----------------------- Employees eligible to receive options under the Plan shall be those key employees of the Company and its Subsidiaries, if any, who, in the opinion of the Committee, are in a position to have a significant effect upon the Company's business and earnings. Members of the Board of Directors of the Company or a Subsidiary who are not employed as regular salaried officers or employees of the Company or a Subsidiary may not participate in the Plan. *Subject to stockholder approval Page 3 of 11 6. GRANT OF OPTIONS. ---------------- 6.1 From time to time while the Plan is in effect, each of the Committee and the Board of Directors may, in its absolute discretion, select from among the persons eligible to receive options (including persons to whom options were previously granted) those persons to whom options are to be granted. 6.2 Each of the Committee and the Board of Directors shall, in its absolute discretion, determine the number of shares of Common Stock to be subject to each option granted by it under the Plan. 6.3 No Incentive Stock Option may be granted under the Plan after May 12, 2003, but options theretofore granted may extend beyond that date. 7. PROVISIONS OF OPTIONS. --------------------- 7.1 Incentive Stock Options or Other Options. Options granted under the ---------------------------------------- Plan may be either Incentive Stock Options or options which do not qualify as Incentive Stock Options, as the Committee or the Board of Directors shall determine at the time of each grant of options hereunder. 7.2 Stock Option Certificates or Agreements. Options granted under the --------------------------------------- Plan shall be evidenced by certificates or agreements in such form as the Committee shall from time to time approve. Such certificates or agreements shall comply with the terms and conditions of the Plan and may contain such other provisions not inconsistent with the terms and conditions of the Plan as the Committee shall deem advisable. In the case of options intended to qualify as Incentive Stock Options, the certificates or agreements shall contain such provisions relating to exercise and other matters as are required of incentive stock options under the Code. 7.3 Terms and Conditions. All options granted under the Plan shall be -------------------- subject to the following terms and conditions to the extent applicable and to such other terms and conditions not inconsistent therewith as the Committee or the Board of Directors shall determine: 7.3.1 Exercise Price. The exercise price per share of Common Stock -------------- with respect to each option shall be as determined by the Committee but in the case of an Incentive Stock Option not less than 100% (110% in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) of the Fair Market Value per share at the time the option is granted. In the case of an option Page 4 of 11 which does not qualify as an Incentive Stock Option, the exercise price per share of Common Stock shall be not less than par value. 7.3.2 Value of Shares of Common Stock Subject to Incentive Stock ---------------------------------------------------------- Options. Each eligible employee may be granted Incentive Stock Options only ------- to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any related corporation, such Incentive Stock Options do not become exercisable for the first time by such employee during any calendar year in a manner which would entitle the employee to purchase more than $100,000 in fair market value (determined at the time the Incentive Stock Options were granted) of Common Stock in that year. Any options granted to an employee in excess of such amount will be granted as Non-Qualified Options. 7.3.3 Period of Options. An option shall be exercisable during such ----------------- period of time as the Committee or Board of Directors may specify (subject to subsection 7.4 below), but in the case of an Incentive Stock Option not after the expiration of ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from the date the option is granted. 7.3.4 Exercise of Options. ------------------- 7.3.4.1 Each option shall be made exercisable at such time or times as the Committee or the Board of Directors shall determine. In the case of an option made exercisable in installments, the Committee or the Board of Directors may later determine to accelerate the time at which one or more of such installments may be exercised. 7.3.4.2 Any exercise of an option shall be in writing signed by the proper person and delivered or mailed to the General Counsel of the Company, accompanied by an option exercise notice and payment in full for the number of shares in respect to which the option is exercised. 7.3.4.3 In the event an option is exercised by the executor or administrator of a deceased Participant, or by the person or persons to whom the option has been transferred by the Participant's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver stock thereunder until the Company is satisfied that the person or persons exercising the option is or are the duly appointed executor or administrator of the deceased Participant or the person or persons to whom the Page 5 of 11 option has been transferred by the Participant's will or by the applicable laws of descent and distribution. 7.3.4.4 The Committee or the Board of Directors may at the time of grant condition the exercise of an option upon agreement by the Participant to subject the Common Stock to any restrictions on transfer or repurchase rights in effect on the date of exercise, upon representations of continued employment and upon other terms not inconsistent with this Plan. Any such conditions shall be set forth in the option certificate or other document evidencing the option. 7.3.4.5 In the case of an option that is not an Incentive Stock Option, the Committee shall have the right to require that the individual exercising the option to remit to the Company an amount sufficient to satisfy any federal, state, or local withholding tax requirements (or makes other arrangements satisfactory to the Company with regard to such taxes) prior to the delivery of any Common Stock pursuant to the exercise of the option. In the case of an Incentive Stock Option, if at the time the Incentive Stock Option is exercised the Committee determines that under applicable law and regulations the Company could be liable for the withholding of any federal or state tax with respect to a disposition of the Common Stock received upon exercise, the Committee may require as a condition of exercise that the individual exercising the Incentive Stock Option agree (i) to inform the Company promptly of any disposition (within the meaning of Section 422 (a) (1) of the Code and the regulations thereunder) of Common Stock received upon exercise, and (ii) to give such security as the Committee deems adequate to meet the potential liability of the Company for the withholding of tax, and to augment such security from time to time in any amount reasonably deemed necessary by the Committee to preserve the adequacy of such security. 7.3.4.6 In the case of an option that is exercised by an individual that is subject to taxation in a foreign jurisdiction, the Committee shall have the right to require the individual exercising the option to remit to the Company an amount sufficient to satisfy any federal or withholding requirement of that foreign jurisdiction (or make other arrangements satisfactory to the Company with regard to such taxes prior to the delivery of any Common Stock pursuant to the exercise of the option). Page 6 of 11 7.3.5 Payment for and Delivery of Stock. The shares of stock --------------------------------- purchased on any exercise of an option granted hereunder shall be paid for in full in cash or, if permitted by the terms of the option, in shares of unrestricted Common Stock at the time of such exercise or, if so permitted, a combination of such cash and Common Stock. A Participant shall not have the rights of a stockholder with respect to awards under the Plan except as to stock actually issued to him. 7.3.6 Listing of Stock, Withholding and Other Legal Requirements. ---------------------------------------------------------- The Company shall not be obligated to deliver any stock until all federal and state laws and regulations which the Company may deem applicable have been complied with, nor, in the event the outstanding Common Stock is at the time listed upon any stock exchange, until the stock to be delivered has been listed or authorized to be added to the list upon official notice of issuance to such exchange. In addition, if the shares of stock subject to any option have not been registered in accordance with the Securities Act of 1933, as amended, the Company may require the person or persons who wishes or wish to exercise such option to make such representation or agreement with respect to the sale of stock acquired on exercise of the option as will be sufficient, in the opinion of the Company's counsel, to avoid violation of said Act, and may also require that the certificates evidencing said stock bear an appropriate restrictive legend. 7.3.7 Non-transferability of Options. No option may be transferred by ------------------------------ the Participant otherwise than by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order, and during the Participant's lifetime the option may be exercised only by him or her; provided, however, that the Board of Directors or the Committee, as -------- ------- applicable, in its discretion, may allow for transferability of non- qualified stock options by the Participant to "Immediate Family Members." Immediate Family Members means children, grandchildren, spouse or common law spouse, siblings or parents of the Participant or to bona fide trusts, partnerships or other entities controlled by and of which the beneficiaries are Immediate Family Members of the Participant. Any option grants that are transferable are further conditioned on the Participant and Immediate Family Members agreeing to abide by the Company's then current stock option transfer guidelines. 7.3.8 Death. If a Participant dies at a time when he is entitled to ----- exercise an Incentive Stock Option, then at any time or Page 7 of 11 times within three years after his death such Incentive Stock Option may be exercised, as to all or any of the shares which the Participant was entitled to purchase thereunder immediately prior to his death, by his executor or administrator or the person or persons to whom the Incentive Stock Option is transferred by will or the applicable laws of descent and distribution, and except as so exercised such Incentive Stock Option shall expire at the end of such three-year period. In no event, however, may any Incentive Stock Option granted under the Plan be exercised after the expiration of ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from the date the Incentive Stock Option was granted. 7.3.9 Termination of Employment. If the employment of a Participant ------------------------- terminates for any reason other than his death, all options held by the Participant shall thereupon expire on the date of termination unless the option by its terms, or the Committee or the Board of Directors by resolution, shall allow the Participant to exercise any or all of the options held by him after termination. In the case of an Incentive Stock Option, the Incentive Stock Option shall in any event expire at the end of three months after such termination of employment, or after the expiration of ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Stockholder) from the date the Incentive Stock Option was granted, whichever occurs first. If the Committee or the Board of Directors so decides, an option may provide that a leave of absence granted by the Company or Subsidiary is not a termination of employment for the purpose of this subsection 7.3.9, and in the absence of such a provision the Committee may in any particular case determine that such a leave of absence is not a termination of employment for such purpose. The Committee shall also determine all other matters relating to continuous employment. 7.3.10 Claw-back for Detrimental Activity. The following provisions ---------------------------------- of this Section 7.3.10 shall apply to options granted on or after July 1, 1998 to (i) Participants who are classified by the Company or a Subsidiary as an executive officer, senior officer, or officer (collectively, an "Officer") of the Company or a Subsidiary; and (ii) certain other Participants designated by the Committee or the Board of Directors to be subject to the terms of this Section 7.3.10 (such designated Participants together with Officers referred to collectively as "Senior Participants"). The Committee or the Board of Directors may cancel, rescind, suspend or otherwise limit or restrict any unexpired option at any time if the Senior Participant engages in "Detrimental Activity" (as defined below). Page 8 of 11 Furthermore, in the event a Senior Participant engages in Detrimental Activity at any time prior to or during the six months after any exercise of an option, such exercise may be rescinded until the later of (i) two years after such exercise or (ii) two years after such Detrimental Activity. Upon such rescission, the Company at its sole option may require the Senior Participant to (i) deliver and transfer to the Company the shares of Common Stock received by the Senior Participant upon such exercise, (ii) pay to the Company an amount equal to any realized gain received by the Senior Participant from such exercise, or (iii) pay to the Company an amount equal to the market price (as of the exercise date) of the Common Stock acquired upon such exercise minus the respective exercise price. The Company shall be entitled to set-off any such amount owed to the Company against any amount owed to the Senior Participant by the Company. As used in this subsection 7.3.10, "Detrimental Activity" shall include: (i) the failure to comply with the terms of the Plan or certificate or agreement evidencing the option, (ii) the failure to comply with any term set forth in the Company's Key Employee Agreement (irrespective of whether the Senior Participant is a party to the Key Employee Agreement), (iii) any activity that results in termination of the Senior Participant's employment for cause; (iv) a violation of any rule, policy, procedure or guideline of the Company; (v) the Senior Participant being convicted of, or entering a guilty plea with respect to a crime whether or not connected with the Company; or (vi) any other conduct or act determined to be injurious, detrimental or prejudicial to any interest of the Company. 7.4 Authority of the Committee. The Committee shall have the authority, -------------------------- either generally or in particular instances, to waive compliance by a Participant with any obligation to be performed by him under an option and to waive any condition or provision of an option, except that the Committee may not (i) increase the total number of shares covered by any Incentive Stock Option (except in accordance with Section 8), (ii) reduce the option price per share of any Incentive Stock Option (except in accordance with Section 8) or (iii) extend the term of any Incentive Stock Option to more than ten years, subject, however, to the provisions of Section 10. 8. CHANGES IN STOCK. ---------------- In the event of a stock dividend, stock split or other change in corporate structure or capitalization affecting the Common Stock that becomes effective after the adoption of the Plan by the Board of Directors, the Committee shall make appropriate adjustments in (i) the number and kind of shares of stock on which options may thereafter be granted Page 9 of 11 hereunder, (ii) the number and kind of shares of stock remaining subject to each option outstanding at the time of such change and (iii) the option price. The Committee's determination shall be binding on all persons concerned. Subject to any required action by the stockholders, if the Company shall be the surviving corporation in any merger or consolidation (other than a merger or consolidation in which the Company survives but in which a majority of its outstanding shares are converted into securities of another corporation or are exchanged for other consideration), any option granted hereunder shall pertain and apply to the securities which a holder of the number of shares of stock of the Company then subject to the option would have been entitled to receive, but a dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving corporation or in which a majority of its outstanding shares are so converted or exchanged shall cause every option hereunder to terminate; provided that if any such dissolution, liquidation, merger or consolidation is contemplated, the Company shall either arrange for any corporation succeeding to the business and assets of the Company to issue to the Participants replacement options (which, in the case of Incentive Stock Options, satisfy, in the determination of the Committee, the requirements of Section 424 of the Code) on such corporation's stock which will to the extent possible preserve the value of the outstanding options or shall make the outstanding options fully exercisable at least 20 days before the effective date of any such dissolution, liquidation, merger or consolidation. The existence of the Plan shall not prevent any such change or other transaction and no Participant thereunder shall have any right except as herein expressly set forth. 9. EMPLOYMENT RIGHTS. ----------------- Neither the adoption of the Plan nor any grant of options confers upon any employee of the Company or a Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor does it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. 10. DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION. ------------------------------------------------------- The Committee or the Board of Directors may at any time discontinue granting options under the Plan and, with the consent of the Participant, may at any time cancel an existing option in whole or in part and grant another option to the Participant for such number of shares as the Committee or the Board of Directors specifies. The Board of Directors may at any time or times amend the Plan for the purpose of Page 10 of 11 satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law or may at any time terminate the Plan as to any further grants of options, provided that no such amendment shall without the approval of the stockholders of the Company (a) increase the maximum number of shares available under the Plan, (b) change the group of employees eligible to receive options under the Plan, (c) reduce the exercise price of outstanding incentive options or reduce the price at which incentive options may be granted, (d) extend the time within which options may be granted, (e) alter the Plan in such a way that incentive options granted or to be granted hereunder would not be considered incentive stock options under Section 422 of the Code, or (f) amend the provisions of this Section 10, and no such amendment shall adversely affect the rights of any employee (without his consent) under any option previously granted. 11. EFFECTIVE DATE. -------------- The Plan became effective immediately upon its approval by the stockholders of the Company at the Annual Meeting on May 12, 1993. Page 11 of 11 EX-21.1 6 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1--SUBSIDIARIES OF REGISTRANT The following is a list of the Corporation's consolidated subsidiaries as of January 31, 1999. The Corporation owns, directly or indirectly, 100% of the voting securities of each subsidiary, unless noted otherwise and except for director's qualifying shares.
STATE OR JURISDICTION OF NAME ORGANIZATION - ---- ------------ Conley Corporation........................................................................... Delaware EMC (Benelux) B.V............................................................................ The Netherlands EMC Computer Storage Systems (Israel) Ltd.................................................... Israel EMC Computer Storage Systems (Sales and Services) Ltd........................................ Israel EMC Computer Systems AG...................................................................... Switzerland EMC Computer Systems Argentina S.A........................................................... Argentina EMC Computer-Systems A/S..................................................................... Denmark EMC Computer-Systems AS...................................................................... Norway EMC Computer Systems Austria GmbH............................................................ Austria EMC Computer Systems (Benelux) B.V........................................................... The Netherlands EMC Computer-Systems Brazil Ltda............................................................. Brazil EMC Computer Systems California, Inc......................................................... Delaware EMC Computer-Systems Deutschland GmbH........................................................ Germany EMC Computer Systems (F.E.) Ltd.............................................................. Hong Kong EMC Computer Systems France S.A.............................................................. France EMC Computer-Systems Ireland Limited......................................................... Ireland EMC Computer Systems Italia S.p.A............................................................ Italy EMC Computer-Systems OY...................................................................... Finland EMC Computer Systems Poland.................................................................. Poland EMC Computer Systems (S.A.) (Pty.) Ltd....................................................... South Africa EMC Computer Systems (South Asia) Pte. Ltd................................................... Singapore EMC Computer Systems Spain S.L............................................................... Spain EMC Computer-Systems Svenska AB.............................................................. Sweden EMC Computer Systems (U.K.) Limited.......................................................... United Kingdom EMC Computer Systems Venezuela, S.A.......................................................... Venezuela EMC Corporation of Canada.................................................................... Canada EMC Foreign Sales Corporation (F.S.C.)....................................................... Barbados EMC International Holdings, Inc.............................................................. Delaware EMC Japan K.K.*.............................................................................. Japan EMC Securities Corporation................................................................... Massachusetts Epoch, Inc................................................................................... Delaware Hankook EMC Computer Systems Chusik Hoesa.................................................... South Korea M.C.I. Management and Computer Consulting Canada, Inc........................................ Canada M.C.I. Management and Computer Consulting, Inc............................................... Canada M.C.I. Management and Computer Consulting International, Inc................................. Canada MCI S.A...................................................................................... France Management Consulting & Informatic Ltd....................................................... Israel McDATA Asia Pacific Pte. Ltd................................................................. Singapore McDATA Corporation**......................................................................... Delaware McDATA Holdings Corporation.................................................................. Delaware McDATA International......................................................................... U.S. Virgin Islands Millennia III, Inc........................................................................... Delaware P2i.......................................................................................... France
_____________________________ *95% owned by EMC Corporation **89% owned by McData Holdings Corporation. EX-23.1 7 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements of EMC Corporation on Form S-3 (File Nos. 333-24901, 333-41079 and 333-60177) and on Form S-8 (File Nos. 33-51800, 33-54860, 33-63665, 333-31471, 333-55801, 333-1375, 333-05133, 333-61113, 333-63045 and 333-57263) of our report dated January 22, 1999 on our audits of the consolidated financial statements and consolidated financial statement schedule of EMC Corporation as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts March 11, 1999 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EMC CORPORATION FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 DEC-31-1998 705,177 825,298 984,412 6,562 485,844 3,104,813 637,534 360,663 4,568,571 653,193 517,500 0 0 5,036 3,319,100 4,568,571 3,791,291 3,973,735 1,929,208 2,991,931 0 0 20,191 1,057,818 264,455 793,363 0 0 0 793,363 1.59 1.49
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