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EMC CORP (EMC)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 03/02/2004
Filed Period 12/31/2003

Table of contents

  • Page 1
    EMC CORP (EMC) 10-K Annual report pursuant to section 13 and 15(d) Filed on 03/02/2004 Filed Period 12/31/2003

  • Page 2
    ...Title of Each Class: Name of Each Exchange on Which Registered: Common Stock, par value $.01 per share 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...

  • Page 3
    ... after the date of this Annual Report. PART I ITEM 1. General EMC Corporation and its subsidiaries design, manufacture, market and support a wide range of networked storage products and information storage and management software that are designed to enable organizations of all sizes to extract...

  • Page 4
    ... to more cost-effectively manage, share and protect business-critical data; the Celerra NS (Network Server), our mid-tier NAS offering, which is integrated in a single enclosure with a CLARiiON storage system. In October 2003, we introduced three new Celerra NS models, the Celerra NS600G, NS600GS...

  • Page 5
    ...-end NAS connection for an externally attached Symmetrix or CLARiiON storage system. In February 2004, we introduced the Celerra CNS 514 Data Mover, offering customers improved performance. Our Celerra products allow users of an Internet Protocol (IP) network to store, access and update files. Our...

  • Page 6
    ...We also exchange technology and application programming interfaces (APIs) with other companies to improve heterogeneous management of storage and networked resources in a networked storage environment. In 2003, we agreed to exchange APIs with IBM Corporation, Veritas Software Corporation and Hitachi...

  • Page 7
    ... on our technology, our products and storage management job functions as part of the EMC Proven Professional Certification program. Courses and the certification program are available to our employees, customers, prospects and partners. Training is worldwide in scope and employs e-learning and...

  • Page 8
    ... and test facilities in Massachusetts, North Carolina and Ireland are certified to ISO 9001, the International Standard for quality management systems. We also hold 14 additional certifications worldwide covering ISO 9001, the ISO 14001 Environmental Management System Standard and Support Center...

  • Page 9
    ... EMC Investor Relations at 508-293-6313. None of the information posted on our website is incorporated by reference into this Annual Report. 10 ITEM 2. PROPERTIES As of December 31, 2003, we owned or leased the facilities described below: Location Approximate Sq. Ft.* Principal Use Hopkinton, MA...

  • Page 10
    ..., MA owned: leased: 285,700 740,000 research and development, sales and administrative offices Apex, NC owned: 387,900 manufacturing Research Triangle Park, NC owned: 170,900 research and development and customer service Other North American locations leased: 2,926,300 sales, customer...

  • Page 11
    ...Group at Hewlett-Packard Company, a provider of information technology products, services and solutions for enterprise customers, from May 2003 to August 2003 and Senior Vice President and General Manager of Network Storage Solutions from May 2002 to April 2003. Prior to HewlettPackard's acquisition...

  • Page 12
    ... President, New Ventures and Chief Technology Officer from July 2002 to July 2003. Prior to joining EMC, Mr. Lewis served as Vice President of Worldwide Marketing and Solutions in the Network Storage Solutions Group at Hewlett-Packard Company, a provider of information technology products, services...

  • Page 13
    ... to time, we use cash to repurchase our common stock. ISSUER PURCHASES OF EQUITY SECURITIES IN THE FOURTH QUARTER OF 2003 Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs Period Total Number of Shares Purchased (1) Average Price Paid per...

  • Page 14
    ...systems, software and services and further leveraging our existing fixed cost component of cost of sales. Additionally, we will further integrate the operations of LEGATO, Documentum and VMware into EMC to streamline operations and reduce costs. COMPARISON OF FISCAL 2003 AND 2002 The following table...

  • Page 15
    .... Software and hardware maintenance accounted for 54.4% of total information storage services revenues in 2003 compared to 50.0% in 2002. Professional services accounted for 45.6% of total information storage services revenues in 2003 compared to 50.0% in 2002. Our Documentum and LEGATO products and...

  • Page 16
    ... from the sale of software and hardware maintenance contracts compared to professional services revenues. Maintenance revenues provide a higher margin than professional services revenues. The gross margin percentage for the Documentum products and services segment was 86.1% in 2003. As a result...

  • Page 17
    ... relating to the acquisitions of LEGATO and Documentum. Included in the charges are employee termination benefits, write-off of a duplicative software project and consolidation of excess facilities, which aggregated $31.9. The 2003 restructuring program impacted our information storage products...

  • Page 18
    ...reduce our cost structure. As a result of the program, we incurred restructuring and other special charges of $825.1. The restructuring charges consisted of $111.5 for employee termination benefits, $104.5 related to the impairment of goodwill, purchased intangibles and other long-lived assets, $158...

  • Page 19
    ...associated with the 1999 and 1998 charges are $12.3. The amount relates to remaining lease obligations for vacated facilities that will be paid through 2015 and executive severance obligations attributable to the acquisition of Data General. • Cost Savings from the Restructuring Programs The 2003...

  • Page 20
    ...automated networked storage solutions. Additionally, the increase was due to a growth in maintenance revenues associated with a greater volume of both software and hardware maintenance contracts. Other businesses revenues consist of revenues from AViiON server products and related services. Included...

  • Page 21
    ... of $52.4. As a result of implementing Statement of Financial Accounting Standards ("FAS") No. 142, "Goodwill and Other Intangible Assets," in 2002, goodwill is no longer amortized. • Gross Margins The gross margin percentages for information storage products were 38.0% and 40.5% in 2002 and...

  • Page 22
    ....9 associated with the 2002 restructuring program, an $8.9 loss on assets associated with the 2002 restructuring program and $11.8 of additional restructuring costs associated with the 2001 restructuring program. Offsetting these costs in 2002 was a $61.6 benefit resulting primarily from the sale of...

  • Page 23
    ... within cost of sales in our statement of operations. 2002 Category Beginning Balance Inventory Scrapped and Charged Against the Reserve Reduction in Cost of Sales Inventory Sold Favorable Vendor Settlements Ending Balance Excess and obsolete EMC owned inventory Excess and obsolete purchase...

  • Page 24
    ... a result of our acquisition of LEGATO and Documentum, our cash position increased by $323.9. Cash used for financing activities was $40.1 in 2003 compared to $311.2 in 2002. In 2003, we repurchased 11.5 million shares of our common stock, par value $.01 per share ("Common Stock"), at a cost of $127...

  • Page 25
    ....7 of obligations associated with the Data General pension and post-retirement medical plans and $27.9 of long term lease obligations for excess facilities. The purchase orders are for manufacturing and non-manufacturing related goods and services. While the purchase orders are generally cancelable...

  • Page 26
    ...assumed a post-retirement benefit plan as part of the Data General acquisition that provides certain medical and life insurance benefits for retired former Data General employees. The plan's assets are invested primarily in common stock, bonds and cash equivalent securities. The market related value...

  • Page 27
    ...discounted cash flow analysis performed at the reporting unit level. The analysis factors in estimated revenue and expense growth rates. The estimates are based upon our historical experience and projections of future activity, factoring in customer demand, changes in technology and a cost structure...

  • Page 28
    ... of the risks associated with acquisitions and investments. As part of our business strategy, we seek to acquire businesses that offer complementary products, services or technologies. These acquisitions, including our acquisitions of LEGATO in October 2003, Documentum in December 2003 and VMware...

  • Page 29
    ... storage-related products or services, together with other IT products or services, at minimal or no additional cost in order to preserve or gain market share. We currently believe that pricing pressures are likely to continue. To date, we have been able to manage our component and product design...

  • Page 30
    ... the appropriate number of qualified employees enhancing, as appropriate, our infrastructure, including but not limited to, our information systems accurately forecasting revenues training our sales force to sell more software and services successfully integrating new acquisitions managing inventory...

  • Page 31
    .... Risks associated with our distribution channels may materially adversely affect our financial results. In addition to our direct sales force, we have agreements in place with many distributors, systems integrators, resellers and original equipment manufacturers to market and sell our products and...

  • Page 32
    ..., results of operations or financial condition could be materially adversely affected if laws, regulations or standards relating to us or our products are newly implemented or changed. Our stock price is volatile. Our stock price, like that of other technology companies, is subject to significant...

  • Page 33
    ... in market conditions, using a 95% confidence level and assuming a one-day holding period. The value-at-risk on the combined foreign exchange position was $0.5 million as of December 31, 2003 and $0.3 million as of December 31, 2002. The average, high and low value-at-risk amounts for 2003 and 2002...

  • Page 34
    ... our temporary cash investments and short and long-term investments primarily in investment grade instruments and limit the amount of investment in any one issuer. During 2003, we purchased bank loans with credit ratings below investment grade. The bank loans have a senior position to other debt...

  • Page 35
    ...of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. PricewaterhouseCoopers LLP Boston, Massachusetts February 2, 2004 51 EMC CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) December 31, 2003 2002 ASSETS...

  • Page 36
    ... notes are an integral part of the consolidated financial statements. 52 EMC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) For the Year Ended December 31, 2003 2002 2001 Revenues: Net sales Services $4,723,554 1,513,254 6,236,808 $4,219,156...

  • Page 37
    ... for sale securities Business acquisitions, net of cash acquired (used) Other Net cash used in investing activities Cash flows from financing activities: Issuance of common stock Purchase of treasury stock Cash portion of McData Corporation spinoff dividend Payment of long-term and short-term...

  • Page 38
    ...financial statements. 54 EMC CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) Common Stock Shares Balance, January 1, 2001 Stock issued through stock option and stock purchase plans Tax benefit from stock options exercised Grant of stock options Purchase of treasury stock...

  • Page 39
    ... financial statements. 56 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Summary of Significant Accounting Policies Company We design, manufacture, market and support a wide range of products and services for information lifecycle management. Our products and services are designed...

  • Page 40
    ... over the contract period. Training revenues are recognized upon completion of the training. Professional services revenues, which include information infrastructure design, integration and implementation, business continuity, data migration, networking storage and project management, are recognized...

  • Page 41
    ... of operations in other expense, net. Investment activity is accounted for using the average cost method. Statement of Cash Flows Supplemental Information (table in thousands): 2003 2002 2001 Cash paid (received) for: Income taxes Interest $(152,313) $(119,713) $175,541 3,067 11,797 10,978

  • Page 42
    ...include goodwill, purchased technology, trademarks and tradenames, customer relationships and customer lists, patents and contracts. Goodwill is carried at its historical cost. All other intangible assets are amortized over their useful lives, ranging from two to twelve years. We periodically review...

  • Page 43
    ...of our acquisition of Data General Corporation ("Data General") is generally funded on a pay-as-you-go basis to the extent that current cost is deductible for U.S. Federal tax purposes. 62 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accounting for Stock-Based Compensation FAS No. 123...

  • Page 44
    ... Assets Acquisition of LEGATO Systems, Inc. In October 2003, we acquired all of the shares of outstanding common stock of LEGATO Systems, Inc. ("LEGATO"). LEGATO develops, markets and supports software products and services for information protection and recovery, hierarchal storage management...

  • Page 45
    ... average cost of capital of 16%. The discount rate was determined after consideration of market rates of return on debt and equity capital, the weighted average return on invested capital and the risk associated with achieving forecast sales related to the technology and assets acquired from LEGATO...

  • Page 46
    ... cost of capital of 15%. The discount rate was determined after consideration of market rates of return on debt and equity capital, the weighted average return on invested capital and the risk associated with achieving forecasted sales related to the technology and assets acquired from Documentum...

  • Page 47
    ... useful life of four years. None of the goodwill is deductible for income tax purposes. 69 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATMENTS A summary of the assets acquired and liabilities assumed is as follows (table in thousands): Fair value of assets acquired Cash paid for stock...

  • Page 48
    ... taxes Adjusted net loss per share, diluted Intangible assets, excluding goodwill as of December 31, 2003 and 2002, consist of (tables in thousands): 2003 Category Gross Carrying Amount Accumulated Amortization Net Book Value $ (0.23) 0.02 (0.21) $ Purchased technology Patents Software licenses...

  • Page 49
    ... 31, 2003 Information Storage Products Information Storage Services LEGATO Products and Services Documentum Products and Services Other Businesses Total Balance, beginning of the year Goodwill acquired Tax deduction from exercise of stock options Finalization of purchase price allocations Balance...

  • Page 50
    ... present value of its estimated discounted cash flows. The impaired asset is classified within our information storage products segment. Elimination of excess facilities The 2003 restructuring program includes a charge of $2.8 million for the elimination of excess office space in the United Kingdom...

  • Page 51
    ... program to reduce our cost structure. As a result of the program, we incurred restructuring and other special charges of $825.1 million. The restructuring charges consisted of $111.5 million for employee termination benefits, $104.5 million related to the impairment of goodwill, purchased...

  • Page 52
    ... relating to restructuring, merger and other special charges primarily associated with our acquisition of Data General. In 1998, we recorded a charge of $135.0 million related to a Data General restructuring program and certain asset write-downs resulting from the program. During 2003, the Data...

  • Page 53
    ... our available for sale short and long-term investments at December 31, 2003 and 2002 (tables in thousands): December 31, 2003 Amortized Cost Basis Aggregate Fair Value U.S. government and agency obligations U.S. corporate debt securities Asset and mortgage-backed securities Bank loans Foreign debt...

  • Page 54
    ...999,033 79 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATMENTS The following table summarizes our strategic investments at December 31, 2003 and 2002 (table in thousands). The investments are classified within other assets, net in the balance sheet. December 31, 2003 Cost Market December 31...

  • Page 55
    ...322,460 948,357 $ 1,009,696 Product Warranties $ Systems sales include a standard product warranty. At the time of the sale, we accrue for systems' warranty costs. Upon expiration of the initial warranty, we may sell additional maintenance contracts to our customers. Revenue from these additional...

  • Page 56
    ... tax rate is as follows: 2003 2002 2001 Statutory federal tax rate State taxes (benefit), net of federal taxes (benefit) International related tax items Reduction of deferred tax assets due to liquidation of subsidiaries U.S. tax credits Valuation allowance Acquisition and merger contingencies...

  • Page 57
    ... common stock, bonds and cash equivalent securities. The measurement date for the plans is December 31. Our investment policy provides that no security, except issues of the U.S. Government, shall comprise more than 5% of total plan assets, measured at market. At December 31, 2003, the Data General...

  • Page 58
    ...,390 $ - (196) (125,029) - 143,680 124,194 $ 18,651 $ The components of net periodic benefit cost of the Pension Plans are as follows (table in thousands): 2003 2002 2001 Service cost Interest cost Expected return on plan assets $ - $ 732 $ 1,580 17,913 20,108 19,058 (21,954) (20,467) (20,969...

  • Page 59
    ...N/A EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The expected long-term rate of return on plan assets considers the current level of expected returns on risk free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes...

  • Page 60
    ..., 2001 Discount rate Expected long-term rate of return on plan assets Rate of compensation increase 88 6.1% 8.3% N/A 6.5% 9.0% N/A 7.3% 9.0% N/A EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted-average assumptions used in the plan to determine net pension benefit cost for...

  • Page 61
    ... in the assumed health care cost trend rates are as follows (table in thousands): 11.5% 5.0% 2013 9.0% 5.0% 2010 1% increase 1% decrease Effect on total service and interest cost components for 2003 Effect on year-end post retirement obligation The weighted average asset allocations are as...

  • Page 62
    ... corporate purposes, including for use in connection with stock option and employee stock purchase plans. We utilize the cost method to account for the purchase of treasury stock, which presents the aggregate cost of reacquired shares as a component of stockholders' equity. As of December 31, 2003...

  • Page 63
    ... approved the EMC Corporation 2003 Stock Plan (the "2003 Plan"). The 2003 Plan provides for the grant of stock options, restricted stock and restricted stock units. The exercise price for a stock option shall not be less than 100% of the fair market value of the Common Stock on the date of grant...

  • Page 64
    ... companies. We do not intend to make future grants under any of such plans. 94 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Activity under all stock option plans for the three years ended December 31, 2003 is as follows (shares in thousands): Number of Shares Wtd. Avg. Exercise Price...

  • Page 65
    ... in our filings with the SEC. 96 EMC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Q. Segment Information We operate in the following segments: information storage products, information storage services, Documentum products and services, LEGATO products and services and other businesses...

  • Page 66
    ... attributable to these segments are included in the following table (table in thousands): Information Storage Products Information Storage Services Documentum Products and Services LEGATO Products and Services Other Businesses 2003 Consolidated Revenues Gross profit Gross profit percentage 2002...

  • Page 67
    ...31, 2003. Certain 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 Annual Report on Form 10-K. We have a code of ethics that applies to all of our employees and non-employee directors. This...

  • Page 68
    ... closing of the acquisition of LEGATO Systems, Inc. On December 16, 2003, we filed a Current Report on Form 8-K pursuant to Item 5 regarding the press release relating to the announcement of a definitive agreement for EMC Corporation to acquire VMware, Inc. On December 19, 2003, we filed a Current...

  • Page 69
    ...Financial Officer (Principal Financial Officer) Vice President and Chief Accounting Officer (Principal Accounting Officer) Director Director Director Director Director Director Director Exhibit Index The exhibits listed below are filed with or incorporated by reference in this Annual Report...

  • Page 70
    ... Corporation's Annual Report of Form 10-K filed March 18, 2003 (No. 1-9853). 103 EMC CORPORATION AND SUBSIDIARIES SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (in thousands) Allowance for Bad Debts Charged to Selling, General and Administrative Expenses Description Balance at Beginning of Period...

  • Page 71
    ... OF MANAGEMENT RESPONSIBILITY REPORT OF INDEPENDENT AUDITORS EMC CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) EMC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) EMC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in...

  • Page 72

  • Page 73
    ... Limited Data General Hong Kong Sales and Services Limited Data General International, Inc. Data General Latin America, Inc. Data General New Zealand Limited Data General Singapore Pte. Ltd. Documentum Canada Company Documentum Canada Holdings, Inc. Documentum Consultoria De Informatica do Brazil...

  • Page 74
    ... EMC Information Systems Sweden AB EMC Information Systems (Thailand) Limited EMC International Holdings, Inc. EMC Investment Corporation EMC Japan K.K.* EMC Puerto Rico, Inc. EMC Ventures Pte Ltd eRoom Technology PTY, Ltd. FilePool S.a.r.l. Flanders Road Holdings LLC General Risk Insurance Company...

  • Page 75
    .... Legato Systems Schweiz GmbH Legato Systems UK Limited LGTO System AB Luminate Software, GmbH McDATA International, Inc. Nihon Documentum K.K O.R.P. Inc. OTG Software, Inc. OTG Software KK OTG Software UK Ltd. Prisa Networks Inc. Relevance Technologies, Inc. Smart Storage Global Ltd. Smart Storage...

  • Page 76

  • Page 77
    ..., 333-91342, 333-100584, 333-111838, 333-111395, 333-109845, 333-105057, and 333-104114) of EMC Corporation of our report dated February 2, 2004 relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Boston...

  • Page 78

  • Page 79
    ... EXECUTIVE OFFICER CERTIFICATION I, Joseph M. Tucci, President and Chief Executive Officer of EMC Corporation (the "Registrant"), certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of the Registrant; Based on my knowledge, this report does not contain any untrue statement of...

  • Page 80

  • Page 81
    ...OFFICER CERTIFICATION I, William J. Teuber, Jr., Executive Vice President and Chief Financial Officer of EMC Corporation (the "Registrant"), certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of the Registrant; Based on my knowledge, this report does not contain any untrue statement...

  • Page 82

  • Page 83
    ...Officer of EMC Corporation (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, as filed with the Securities...

  • Page 84

  • Page 85
    ...Officer of EMC Corporation (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, as filed with the Securities...