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VMWARE, INC.
FORM 10-K
(Annual Report)
Filed 02/28/11 for the Period Ending 12/31/10
Address 3401 HILLVIEW AVENUE
PALO ALTO, CA 94304
Telephone (650) 427-5000
CIK 0001124610
Symbol VMW
SIC Code 7372 - Prepackaged Software
Industry Software & Programming
Sector Technology
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2011, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    ...-K (Annual Report) Filed 02/28/11 for the Period Ending 12/31/10 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 3401 HILLVIEW AVENUE PALO ALTO, CA 94304 (650) 427-5000 0001124610 VMW 7372 - Prepackaged Software Software & Programming Technology 12/31 http://www.edgar-online.com...

  • Page 2
    ... sale price of such shares on the New York Stock Exchange on June 30, 2010) was approximately $4,563,264,652. Shares of the registrant's Class A common stock and Class B common stock held by each executive officer and director and by each entity or person, other than investment companies, that...

  • Page 3
    ...our future operations; our plans for meeting product development objectives and introducing new products; our revenue outlook and mix; customer demand for our products; trends in enterprise license agreement ("ELA") size and renewals and information technology ("IT") spending in general; projections...

  • Page 4
    ... professional services revenues, including training. For additional financial information on our business by product and geographic area, see Note N to the consolidated financial statements included elsewhere in this filing. Our corporate headquarters are located at 3401 Hillview Avenue, Palo Alto...

  • Page 5
    ... application development, automate application lifecycle processes and manage to application performance service levels. Infrastructure management products help companies automate business continuity processes, manage capacity more efficiently and provide financial cost information for internal...

  • Page 6
    ...centralized point of control for cluster level networking. In 2010 we announced VMware vShield, a new family of security products designed specifically for virtual data centers and cloud environments. Key vShield products include VMware vShield Edge provides perimeter network and security services...

  • Page 7
    ... of infrastructure resources, accelerate application development, manage application performance service levels and streamline IT processes. Key VMware virtualization and cloud management products include the following: • VMware vCenter Server provides the central management and control point for...

  • Page 8
    ... packages backed by industry-leading expertise. We offer four support and subscription programs that allow customers to pay a set amount over an annual or multi-year basis: Basic, Production, Business Critical and Mission Critical. Basic Support includes VMware technical support along with access...

  • Page 9
    ... courses that provide extensive hands-on labs, case study examples and course materials. Customers work in teams of two on servers located offsite using a variety of remote access technologies. Customers can enroll in these courses directly through VMware or though Value Added Training Partners...

  • Page 10
    ... obtain software licenses and software support from our distributors and market and sell them to our end-user customers. These resellers are part of our VMware Partner Network ("VPN"), which offers these resellers sales and product training and pricing incentives and rebates and access to the...

  • Page 11
    ... purchases to meet their immediate needs or through the adoption of enterprise license agreements ("ELAs"). ELAs are comprehensive volume license offerings that provide for multi-year maintenance and support at discounted prices. ELAs enable us to build longterm relationships with our customers...

  • Page 12
    ...markets include the level of reliability and new functionality of product offerings; the ability to provide comprehensive solutions, including management capabilities; the ability to offer products that support multiple hardware platforms, operating systems, applications and application development...

  • Page 13
    ... clustering, workload management and resource management. We also expect to compete with new entrants to the cloud computing, end-user computing and virtualization markets, which may include parties currently selling our products and/or our current technology partners. Existing and future...

  • Page 14
    ... from time to time of material news including SEC filings, investor events, press releases and corporate blogs on our Investor Relations website. The contents of these web sites are not intended to be incorporated by reference into this report or in any other report or document we file. None...

  • Page 15
    ... has gained acceptance for enterprise-level applications, the extent to which adoption of virtualization for cloud computing and end-user computing remains uncertain. As the markets for our products mature and the scale of our business increases, the rate of growth in our product sales will likely...

  • Page 16
    ... sales cycles, affecting the size of enterprise license agreements ("ELAs") that customers will commit to, lowering prices for our products and services, reducing unit sales, reducing the rate of adoption of our products by new customers and the willingness of current customers to purchase upgrades...

  • Page 17
    ... others general economic conditions in our domestic and international markets and the effect that these conditions have on our customers' capital budgets and the availability of funding for software purchases; fluctuations in demand, adoption rates, sales cycles and pricing levels for our products...

  • Page 18
    ... and technical requirements; the timing of the announcement or release of upgrades or new products by us or by our competitors; our ability to maintain scalable internal systems for reporting, order processing, license fulfillment, product delivery, purchasing, billing and general accounting, among...

  • Page 19
    ... and management markets. Our February 2010 acquisition of Zimbra extended our footprint to cloud-based email and collaboration services-a part of VMware's strategy to extend into the emerging SaaS market. We also recently announced our vCenter family of products to more fully manage virtualized and...

  • Page 20
    ... impact on our results of operations until such time as we arrange to replace these distribution services with the services of existing or new distributors. The concentration of our product sales among a limited number of distributors and the weakness in credit markets increases our potential...

  • Page 21
    ... business plan in a timely manner. Our success depends largely upon the continued services of our existing management. We are also substantially dependent on the continued service of our key development personnel for product innovation. We generally do not have employment or non-compete agreements...

  • Page 22
    ... of our market share. We provide access to our hypervisor and other selected source code to partners, which creates additional risk that our competitors could develop products that are similar or better than ours. Our success and ability to compete depend substantially upon our internally developed...

  • Page 23
    ... 50 of our partners for co-development, as well as for open APIs, formats and protocols. Though we generally control access to our source code and other intellectual property, and enter into confidentiality or license agreements with such partners, as well as with our employees and consultants, our...

  • Page 24
    ... license. Actions to protect and maintain ownership and control over our intellectual property could adversely affect our standing in the open source community, which in turn could limit our ability to continue to rely on this community, upon which we are dependent, as a resource to help develop...

  • Page 25
    ... new budget constraints in the first nine months of the following year; and seasonal influences. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, our results could fall short of public expectations and our business, financial condition...

  • Page 26
    ...products for our customers, the migration of servers to quad-core and greater multi-core microprocessor technology also allows an end-user with a given number of licensed copies of our software to more than double the number of virtualization machines run per server socket without having to purchase...

  • Page 27
    ...our sales and results of operations. Once our products are integrated within our customers' hardware and software systems, our customers may depend on our support organization to resolve any issues relating to our products. A high level of support is critical for the successful marketing and sale of...

  • Page 28
    ...accounts receivable, and longer payment cycles, especially in emerging markets; • difficulties in delivering support, training and documentation in certain foreign markets; • tariffs and trade barriers and other regulatory or contractual limitations on our ability to sell or develop our products...

  • Page 29
    ... of our Class A common stock from the New York Stock Exchange and the inability of registered broker-dealers to make a market in our Class A common stock, which could reduce our stock price. Problems with our information systems could interfere with our business, and our website may be subject...

  • Page 30
    ... of accounting for business combinations, changes in our international organization, and changes in overall levels of income before tax. For example, during 2010, the IRS announced and finalized Schedule UTP, Uncertain Tax Positions Statement. This schedule is an annual disclosure of certain federal...

  • Page 31
    ...and to interruption by man-made problems, such as computer viruses, unanticipated disruptions in local infrastructure or terrorism, which could result in delays or cancellations of customer orders or the deployment of our products. Our corporate headquarters are located in the San Francisco Bay Area...

  • Page 32
    ... Risks Related to Our Relationship with EMC As long as EMC controls us, other holders of our Class A common stock will have limited ability to influence matters requiring stockholder approval. As of December 31, 2010, EMC owned 33,012,000 shares of our Class A common stock and all 300,000,000 shares...

  • Page 33
    ... rights; the payment of dividends on our common stock; and the number of shares available for issuance under our stock plans for our prospective and existing employees. Our certificate of incorporation and the master transaction agreement entered into between us and EMC in connection with our...

  • Page 34
    ... for their shares over the then-current market price. EMC is not prohibited from selling a controlling interest in us to a third party and may do so without the approval of the holders of our Class A common stock and without providing for a purchase of any shares of Class A common stock held by...

  • Page 35
    ...our certificate of incorporation and the master transaction agreement we entered into with EMC, we must obtain the consent of EMC or its successor-in-interest, as the holder of our Class B common stock, to issue stock or other VMware securities, excluding pursuant to employee benefit plans (provided...

  • Page 36
    ... of our directors are executive officers and/or directors of EMC, and EMC, as the sole holder of our Class B common stock, is entitled to elect 7 of our 8 directors. Ownership of EMC common stock, restricted shares of EMC common stock and equity awards to purchase EMC common stock by our directors...

  • Page 37
    ... these corporate functions to VMware personnel, in certain geographic regions where we do not have an established legal entity, we contract with EMC subsidiaries for support services and EMC employees who are managed by VMware personnel. The costs incurred by EMC on VMware's behalf related to these...

  • Page 38
    ...markets in a short period of time, the market price of our Class A common stock may decline. Additionally, broad market and industry factors may decrease the market price of our Class A common stock, regardless of our actual operating performance. The stock market in general and technology companies...

  • Page 39
    ...2007, Intel had a one-time right to designate a director acceptable to our board of directors for an initial term of service. Pursuant to that right, we appointed an Intel executive to our board of directors. Cisco, pursuant to its purchase of our Class A common stock from EMC, also has an ownership...

  • Page 40
    ... 31, 2010, we owned or leased the facilities described below: Approximate Location Sq. Ft.* Principal Use(s) Palo Alto, CA owned: leased: 462,000 427,000 534,000 ** 346,000 295,000 Executive and administrative offices, sales and marketing, R&D, and data center Administrative offices, sales and...

  • Page 41
    ... SharePoint Portal Server. Before serving as corporate vice president, Mr. McAniff served as general manager of the Visual Basic development system. T. Tod Nielsen was appointed Co-President, Application Platform of VMware in January 2011. Mr. Nielsen served as VMware's Chief Operating Officer from...

  • Page 42
    ... of positioning product solutions. S. Dawn Smith has been the Senior Vice President, General Counsel and Secretary at VMware since September 2009 and Chief Compliance Officer since August 2010. Prior to joining VMware, she was a partner at Morrison & Foerster LLP, a law firm, since January 2008 and...

  • Page 43
    ... FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our Class A common stock, par value $0.01 per share, trades on the New York Stock Exchange under the symbol VMW. The following table sets forth the range of high and low sales...

  • Page 44
    .... Includes 1,335,202 shares purchased by EMC in open market transactions. In the first quarter of 2010, EMC announced a stock purchase program of VMware's Class A common stock to maintain its approximate level of ownership in VMware over the long term. Inclusion of EMC's purchases in the above table...

  • Page 45
    ... for the period beginning on August 14, 2007 (the date our Class A common stock commenced trading on the New York Stock Exchange) through December 31, 2010, assuming an initial investment of $100. While the IPO price of our common stock was $29.00 per share, the graph assumes the initial value of...

  • Page 46
    ...we purchased our new headquarters facilities from EMC for $132.6 million, which is equal to the cost expended by EMC through the date of purchase. We also repaid $350.0 million of principal on the note payable to EMC. Also in August 2007, we sold 9,500,000 shares of our Class A common stock to Intel...

  • Page 47
    ...technology and product portfolio, increasing product awareness, promoting the adoption of virtualization and building long-term relationships with our customers through the adoption of enterprise license agreements ("ELAs"). Since the introduction in 2009 of VMware vSphere and VMware View 4, we have...

  • Page 48
    ...of employer payroll taxes on employee stock transactions, amortization of intangible assets and acquisition-related items. We believe this measure reflects our ongoing business in a manner that allows meaningful periodto-period comparisons. We are not currently focused on short-term operating margin...

  • Page 49
    ...filing for further information. In the fourth quarter of 2010, we paid $10.6 of contingent amounts to EMC in accordance with the asset purchase agreement. Pursuant to the ongoing reseller arrangement with EMC that commenced in 2009, EMC bundles our products and services with EMC's hardware and sells...

  • Page 50
    ... the years ended December 31, 2010, 2009 and 2008, respectively. In certain geographic regions where we do not have an established legal entity, we contract with EMC subsidiaries for support services and EMC employees who are managed by our personnel. The costs incurred by EMC on our behalf related...

  • Page 51
    ... or server processors on which our software runs. Certain products are licensed on a subscription basis. Effective September 1, 2010, our management solutions are priced on a per-virtual-machine basis. The new model for management products better aligns with our customer's need to manage the number...

  • Page 52
    ...and related overhead costs to support the overall business. These expenses include the costs associated with our facilities, finance, human resources, IT infrastructure and legal departments. Results of Operations Revenues Our revenues for the years ended 2010, 2009 and 2008 are as follows: 2010 For...

  • Page 53
    ...than other types of license sales. In 2010, we observed an increase in the volume of our ELAs as compared with 2009 and 2008, due in part to growing international customer interest as well as the improving economic environment. In addition, in 2010, customers generally renewed their ELAs at a dollar...

  • Page 54
    ....6 $ 219.3 10.8% Core Operating Expenses (1) For the Year Ended December 31, 2008 StockCapitalized Based Software CompenDevelopment Other Expenses Costs, net sation Total Operating Expenses Cost of license revenue Cost of services revenue Research and development Sales and marketing General and...

  • Page 55
    ..., and we reinstated a budget for merit pay increases effective in the second quarter of 2010. A portion of our core operating expenses, primarily the cost of personnel to deliver technical support on our products and professional services, marketing, and research and development, are denominated in...

  • Page 56
    ...of $16.5 in corporate and legal expenses and contractor costs due to the austerity measures we introduced at the end of 2008 in response to the global economic downturn. Sales and Marketing Expenses Core operating expenses for sales and marketing increased by $256.2 or 38% in 2010 compared with 2009...

  • Page 57
    ... status. In 2009, stock-based compensation increased over 2008 primarily due to an increase of $36.1 from restricted stock unit awards to certain international employees who were not eligible to participate in the September 2008 offer to exchange certain employee stock options issued under VMware...

  • Page 58
    ... decrease was partially offset by an increase of $14.5 related to the development of version 4.1 of VMware vSphere, which was released in the third quarter of 2010. In 2010, 2009 and 2008, amortization expense from capitalized software development costs was $99.5, $82.9 and $51.6. These amounts are...

  • Page 59
    ... the consolidated return of such year and for any subsequently determined deficiency thereon. Should EMC's ownership fall below 80% of the total voting power or value of our outstanding stock in any period, then we would no longer be included in the EMC consolidated group for U.S. federal income tax...

  • Page 60
    ... additional information. Our non-GAAP operating cash flows and free cash flows for 2010, 2009 and 2008 were as follows: For the Year Ended December 31, 2010 2009 2008 Net cash provided by operating activities Capitalized software development costs Excess tax benefits from stock-based compensation...

  • Page 61
    ... by strong sales volume. The increase in cash collections was partially offset by increases in our core operating expenses, primarily related to incremental headcount from strategic hiring and business acquisitions as well as an increase in the excess tax benefit from stock-based compensation due to...

  • Page 62
    ... from the issuance of our Class A common stock from the exercise of stock options and the purchase of shares under the VMware Employee Stock Purchase Plan ("ESPP"), were $431.3, $227.7 and $190.1 in 2010, 2009 and 2008, respectively. In 2009, the timing of purchases under our ESPP was amended...

  • Page 63
    ... businesses on a predictable cycle. • • Non-GAAP operating cash flows and free cash flows We define non-GAAP operating cash flows as net cash provided by operating activities less capitalized software development costs plus the excess tax benefits from stock-based compensation. We define free...

  • Page 64
    ... with GAAP. Additionally, in the case of stock-based compensation, if we did not pay out a portion of compensation in the form of stock-based compensation and related employer payroll taxes, the cash salary expense included in costs of revenues and operating expenses would be higher which would...

  • Page 65
    ... individual being or having been a director or executive officer. We also indemnify certain employees who provide service with respect to employee benefits plans, including the members of the Administrative Committee of the VMware 401(k) Plan. In connection with certain acquisitions, we have agreed...

  • Page 66
    .... As of December 31, 2010, we had $107.9 of non-current net unrecognized tax benefits under generally accepted accounting guidance. We are not able to provide a reasonably reliable estimate of the timing of future payments relating to these obligations. Critical Accounting Policies Our consolidated...

  • Page 67
    ...and amount of revenue we report. With limited exceptions, VMware's return policy does not allow product returns for a refund. Certain distributors and resellers may rotate stock when new versions of a product are released. We estimate future product returns at the time of sale. Our estimate is based...

  • Page 68
    ... Accounting for Stock Options Generally accepted accounting principles require recognizing compensation costs for all share-based payment awards made to employees based upon the awards' estimated grant date fair value. We elected to estimate the fair value of employee stock option awards and options...

  • Page 69
    ... difference between the income taxes payable that is calculated on a separate return basis and the amount actually paid to EMC pursuant to our tax sharing agreement with EMC is presented as a component of additional paid-in capital. New Accounting Pronouncements Revenue Recognition In September 2009...

  • Page 70
    ...in their respective regions. Additionally, a portion of our operating expenses, primarily the cost of personnel to deliver technical support on our products and professional services, sales and sales support and research and development, are denominated in foreign currencies, primarily the Euro, the...

  • Page 71
    ... information. Note Payable to EMC As of December 31, 2010, $450.0 million was outstanding on our consolidated balance sheet in relation to the note payable with EMC. The interest rate on the note payable was 0.84% as of both December 31, 2010 and 2009 and 4.43% as of December 31, 2008. In 2010...

  • Page 72
    ... AND SCHEDULE Report of Independent Registered Public Accounting Firm Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008 Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008 Consolidated Balance Sheets at December 31, 2010 and...

  • Page 73
    ...three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set...

  • Page 74
    ...) 2010 For the Year Ended December 31, 2009 2008 Operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation, excluding amounts capitalized Excess tax benefits from stock-based compensation...

  • Page 75
    ... share amounts) 2010 For the Year Ended December 31, 2009 2008 Revenues: License Services Operating expenses (1) : Cost of license revenues Cost of services revenues Research and development Sales and marketing General and administrative Operating income Investment income Interest expense with EMC...

  • Page 76
    Table of Contents VMware, Inc. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) December 2010 2009 ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Due from EMC, net Deferred tax asset, current portion Other current assets Total ...

  • Page 77
    ... benefits from stock- based compensation Credit from tax sharing arrangement (see Note A) Capital contribution by EMC (see Note A) Net income Balance, December 31, 2008 Proceeds from issuance of common stock Issuance of stock options in acquisition Issuance of restricted stock, net of cancellations...

  • Page 78
    ...2007. As of December 31, 2010, EMC holds approximately 80% of VMware's outstanding common stock, including 33.0 million shares of VMware's Class A common stock and all of VMware's Class B common stock. VMware is considered a "controlled company" under the rules of the New York Stock Exchange. VMware...

  • Page 79
    ... agreement, together with purchase orders or equivalent, on a transaction-by-transaction basis. With limited exceptions, VMware's return policy does not allow product returns for a refund. Certain distributors and resellers may rotate stock when new versions of a product are released. VMware...

  • Page 80
    ... support based on the level of support purchased. In the event specific features or functionality, entitlements, or the release number of an upgrade have been announced but not delivered, and customers will receive that upgrade as part of a current software maintenance contract, a specified upgrade...

  • Page 81
    ... equivalents and all highly liquid investments with maturities of greater than three months from date of purchase as short-term investments. VMware classifies its investments as available-for-sale. VMware may sell these securities at any time for use in current operations or for other purposes, such...

  • Page 82
    ... release. Generally accepted accounting principles require annual amortization expense of capitalized software development costs to be the greater of the amounts computed using the ratio of current gross revenue to a product's total current and anticipated revenues, or the straight-line method...

  • Page 83
    ... from EMC are accounted for as a business combination between entities under common control pursuant to generally accepted accounting principles. VMware includes the results of operations of the acquired businesses under common control, if material, in the period of acquisition as if it had occurred...

  • Page 84
    ..., are currently indefinitely reinvested in non-U.S. operations or will be remitted substantially free of additional tax. The difference between the income taxes payable that is calculated on a separate return basis and the amount actually paid to EMC pursuant to VMware's tax sharing agreement (see...

  • Page 85
    ... the Company's control. VMware restricted stock unit awards are valued based on the Company's stock price on the date of grant. VMware recognizes compensation cost on a straight-line basis over the awards' vesting periods for those awards which contain only a service vesting feature. New Accounting...

  • Page 86
    ... stock awards, other unvested restricted stock, and purchase options under VMware's employee stock purchase plan. Securities are excluded from the computations of diluted net income per share if their effect would be anti-dilutive. As of December 31, 2010, VMware had 116.4 million shares of Class...

  • Page 87
    ... STATEMENTS (continued) For the years ended December 31, 2010, 2009 and 2008, stock options to purchase 2.9 million, 20.6 million and 11.4 million shares, respectively, of VMware Class A common stock were excluded from the diluted earnings per share calculations because their effect would have...

  • Page 88
    ...,004 $ 753,370 776,635 112,870 $1,642,875 Generally accepted accounting principles provide that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is...

  • Page 89
    ..., Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) VMware's valuation inputs for foreign currency forward contracts are based on quoted prices and quoted pricing intervals from public data sources. These contracts are typically classified within Level 2 of the fair value hierarchy and are...

  • Page 90
    ... development efforts and expand its vCenter product family. EMC retained the Ionix brand and continues to offer customers the products acquired by VMware, pursuant to the ongoing reseller agreement between EMC and VMware. Additionally, contingent amounts totaling up to $25.0 million may be payable...

  • Page 91
    ... VMware stock options to purchase Class A common stock with a weighted-average exercise price of $4.87 per share. In addition, 572,492 shares of VMware Class A restricted common stock were issued to certain employees of SpringSource who agreed to accept shares of VMware Class A common stock subject...

  • Page 92
    ... estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions: i) market price of $40.00 per share, which was the closing price of VMware's Class A common stock on the acquisition date; ii) expected term of 1.6 years; iii) risk-free interest rate of 0.7%; iv...

  • Page 93
    ... 2008 On July 1, 2008, VMware acquired all of the outstanding capital stock of a privately-held application performance management software company. The aggregate consideration transferred in this acquisition was $60.8 million, which includes cash of $58.4 million and the fair value of stock options...

  • Page 94
    ...years) Gross Carrying Amount Accumulated Amortization Net Book Value 2010 Purchased technology Customer relationships and customer lists Trademarks...million in the years ended December 31, 2010, 2009 and 2008, respectively. Based on intangible assets recorded as of December 31, 2010 and assuming ...

  • Page 95
    ... 31, 2010 2009 Salaries, commissions, bonuses and benefits Accrued partner liabilities Other Total accrued expenses $242,180 94,676 122,957 $459,813 $174,207 77,264 83,052 $334,523 Accrued partner liabilities relate to rebates and marketing development fund accruals for channel partners, system...

  • Page 96
    ... (824) 4,044 3,220 18,592 (3,484) 15,108 $ 29,152 2010 For the Year Ended December 31, 2009 2008 Statutory federal tax rate State taxes, net of federal benefit Tax rate differential for international jurisdictions U.S. tax credits Permanent items and other Effective tax rate 93 35.0% 1.5% (17...

  • Page 97
    ...: Property, plant and equipment, net Intangible and other, net Stock-based compensation Unearned revenue Other non-current liabilities Tax credit and net operating loss carryforwards Valuation allowance Total non-current Total deferred tax assets and liabilities $ 30,673 82,557 292 (12,833) 100...

  • Page 98
    ... both non-qualified stock option exercises and from restricted stock when the restrictions lapsed. Under the tax sharing agreement with EMC, EMC is obligated to pay VMware an amount equal to the tax benefit generated by VMware that EMC will recognize on its consolidated tax return. The difference...

  • Page 99
    ... financial statements taken as a whole. Operating Lease Commitments VMware leases office facilities and equipment under various operating leases. Facility leases generally include renewal options. Rent expense for the years ended December 31, 2010, 2009 and 2008 was $46.4 million, $41.2 million...

  • Page 100
    ... of business with, among others, customers, distributors, resellers, system vendors and systems integrators. Most of these agreements require VMware to indemnify the other party against third-party claims alleging that a VMware product infringes or misappropriates a patent, copyright, trademark...

  • Page 101
    ... they vest. VMware's Compensation and Corporate Governance Committee determines the vesting schedule for all equity awards. VMware utilizes both authorized and unissued shares to satisfy all shares issued under the 2007 Plan. VMware Stock Repurchase Program In March 2010, VMware's Board of Directors...

  • Page 102
    ...exchanged for new, lower-priced stock options granted on a one-for-one basis. Executive officers and members of the Company's Board of Directors were excluded from participating in the 2008 Exchange Offer. Options for an aggregate of 4.1 million shares of VMware's Class A common stock were exchanged...

  • Page 103
    ...2008 for VMware and EMC stock options (shares in thousands): VMware Stock Options WeightedAverage Number of Exercise Price Shares (per share) EMC Stock Options WeightedAverage Number of Exercise Price Shares (per share) Outstanding, January 1, 2008 Options relating to employees transferred from EMC...

  • Page 104
    ... VMware's restricted stock activity since January 1, 2008 (shares in thousands): WeightedAverage Grant Date Fair Value (per share) Number of Shares Outstanding, January 1, 2008 Granted Vested Forfeited Outstanding, December 31, 2008 Restricted stock relating to employees transferred from EMC...

  • Page 105
    ... 31, 2010, 2009 and 2008 (table in thousands): 2010 For the Year Ended December 31, 2009 2008 Cost of license revenues Cost of services revenues Research and development Sales and marketing General and administrative Stock-based compensation expense Income tax benefit Total stock-based compensation...

  • Page 106
    ... of life cycle, size and financial leverage. The expected term was calculated based on the historical experience that VMware employees have had with EMC stock option grants as well as the expected term of similar grants of comparable companies. For all periods presented, VMware's expected dividend...

  • Page 107
    ...from EMC's Ionix IT management business for cash consideration of $175.0 million. EMC retained the Ionix brand and will continue to offer customers the products acquired by VMware, pursuant to the ongoing reseller agreement between EMC and VMware. During the three months ended December 31, 2010, $10...

  • Page 108
    ... 31, 2010, 2009 and 2008, respectively. In certain geographic regions where VMware does not have an established legal entity, VMware contracts with EMC subsidiaries for support services and EMC employees who are managed by VMware's personnel. The costs incurred by EMC on VMware's behalf related to...

  • Page 109
    ...end enablement of service providers and large enterprise customers. In addition to Cisco and EMC as the lead investors, the build-out of VCE's expanded capabilities in 2010 has also been capitalized by investments from VMware and Intel. VMware and Intel each have a minority ownership interest in the...

  • Page 110
    ... the products VMware View, VMware ThinApp, VMware Zimbra, VMware Workstation and VMware Fusion. Revenues by class of products or services were as follows (table in thousands): 2010 For the Year Ended December 31, 2009 2008 Cloud infrastructure & management Other products License revenues Services...

  • Page 111
    ...of VMware's Class A common stock. Stock repurchases may be made from time-to-time in open market transactions or privately negotiated transactions. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including VMware's stock price, corporate...

  • Page 112
    ...of VMware's Class A common stock. Stock repurchases may be made from time-to-time in open market transactions or privately negotiated transactions. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including VMware's stock price, corporate...

  • Page 113
    .... 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, including our executive officers. Our Business Conduct Guidelines (available on our website) satisfy the requirements set forth in Item...

  • Page 114
    ... and executive officers 2007 Equity and Incentive Plan, as amended December 13, 2010 Promissory Note between VMware, Inc. and EMC Corporation dated April 16, 2007 Form of Insurance Matters Agreement between VMware, Inc. and EMC Corporation Form of Option Agreement, as amended October 15, 2010 111...

  • Page 115
    ... Form/File Filed Herewith Date No. Exhibit Number Exhibit Description 10.13+ 10.14 10.15+ 10.16 10.17+ 10.18+ 10.19+ 10.20+ 10.21+ 21.1 23.1 31.1 Form of Restricted Stock Unit Agreement, as amended October 15, 2010 2007 Employee Stock Purchase Plan, as amended and restated December 10, 2007 and...

  • Page 116
    ... Chief Executive Officer VMWARE, INC. Dated: February 28, 2011 By: / S/ R OBYNNE D. S ISCO Robynne D. Sisco Chief Accounting Officer and Corporate Controller (Principal Accounting Officer and Duly Authorized Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report...

  • Page 117
    ... SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance at Beginning Allowance for Bad Debts of Period Allowance for Bad Debts Charged to Selling, General, and Administrative Expenses Charged to Other Accounts Bad Debts WriteOffs Balance at End of Period Year ended December 31, 2010...

  • Page 118
    ... stock options" and "non-qualified stock options"), and Other Stock-Based Awards, including but not limited to Restricted Stock, Restricted Stock Units, Stock Appreciation Rights (payable in shares) and Other Cash-Based Awards. The 2007 Equity and Incentive Plan shall become effective as of the date...

  • Page 119
    ... the Plan for awards of or with respect to the common stock of Parent held by certain employees of the Company and its Subsidiaries, as set forth in more detail in the Offer to Exchange expected to be filed by the Company and Parent. (m) "Fair Market Value" shall be the closing sales price per share...

  • Page 120
    ... per share growth; (xiv) operating margin or profit margin; (xv) common stock price or total stockholder return; (xvi) cost targets, reductions and savings, productivity and efficiencies; (xvii) strategic business criteria, consisting of one or more objectives based on meeting specified market...

  • Page 121
    ... to the disposal of a segment of a business or related to a change in accounting principles. (v) "Plan" means this VMware, Inc. 2007 Equity and Incentive Plan, as amended from time to time. (w) "Restricted Stock" means an Award of shares of Stock to a Grantee under Section 6(b)(ii) that is subject...

  • Page 122
    ... value of all classes of stock of the Company or Parent or a Subsidiary, unless the purchase price for the stock under such ISO shall be at least 110% of its Fair Market Value at the time such ISO is granted and the ISO, by its terms, shall not be exercisable more than five years from the date it is...

  • Page 123
    ... the Plan, (ii) the number and kind of shares of Stock or other property issued or issuable in respect of outstanding Awards, (iii) the exercise price, grant price or purchase price relating to any Award, (iv) the Performance Goals and (v) the individual limitations applicable to Awards; provided...

  • Page 124
    ... is authorized to grant Options to Grantees on the following terms and conditions: (A) The Award Terms evidencing the grant of an Option under the Plan shall designate the Option as an ISO or an NQSO. (B) The exercise price per share of Stock purchasable under an Option shall be determined by...

  • Page 125
    ...shares of Stock underlying such Restricted Stock Award. (E) Upon the termination of a Grantee's employment or service with the Company and its Subsidiaries or Affiliates, the Restricted Stock granted to such Grantee shall be subject to the terms and conditions specified in the applicable Award Terms...

  • Page 126
    ... shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, Stock, other Awards, notes or other property, as the Committee shall determine, subject to any required corporate action. (B) With respect to a Covered Employee, the...

  • Page 127
    ... or to be entitled to any remuneration or benefits not set forth in the Plan or the applicable Award Terms or to interfere with or limit in any way the right of the Company or any such Subsidiary or Affiliate to terminate such Grantee's employment or service. (d) Cancellation and Rescission of...

  • Page 128
    ... lapse or delivery date) of the Stock acquired upon such exercise, lapse or delivery minus the respective price paid upon exercise, lapse or delivery, if applicable or (iv) pay the Company an amount equal to any cash awarded with respect to an Award. The Company shall be entitled to set-off any such...

  • Page 129
    ...in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Committee. (iii) In the event that the disposition of Stock acquired pursuant to the Plan is not covered by a then current registration statement under...

  • Page 130
    ...number of shares of stock of the Company then subject to the Award is 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...

  • Page 131
    have any right except as herein expressly set forth. Notwithstanding the foregoing provisions of this Section 7(m), Awards subject to and intended to satisfy the requirements of Section 409A of the Code shall be construed and administered consistent with such intent. 14

  • Page 132
    ... the applicable long-term disability plan of the Company, Subsidiary, Parent or Affiliate or, if there is no such plan, as determined by the Committee), in which case the Option shall become 100% exercisable and may be exercised for three (3) years from the date of such termination of employment or...

  • Page 133
    ... exercise of the Option within the applicable time period set forth in this Section 1(c) is prevented by the provisions of Section 7(j) of the Plan, the Option shall remain exercisable until one (1) month after the date the Participant is notified by the Company that the Option is exercisable, but...

  • Page 134
    ... the exercise of the Option, the Participant shall be required to pay such amount to the Company prior to delivery of shares of Stock. 4. Plan . The Option is granted pursuant to the Plan, and the Option and this Agreement are in all respects governed by the Plan (the terms of which are incorporated...

  • Page 135
    Palo Alto, CA 94304 Attention: Stock Administrator 9. Complete Agreement . This Agreement, those documents expressly referred to herein, and the Plan embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by...

  • Page 136
    Unless the Participant notifies the Company within ten (10) days following receipt of this Agreement that he or she declines this Award, the Participant will be deemed to have accepted and agreed to the terms and conditions of this Agreement and the Plan. The Participant acknowledges receipt of a ...

  • Page 137
    ...right to receive one share of Stock, subject to the terms and conditions of this Notice of Grant, the Plan and this Agreement, as follows: Grant Number: Date of Grant: Vesting Commencement Date: Number of RSUs: Vesting Schedule : [VESTING SCHEDULE TO BE REVISED FOR EACH EMPLOYEE] [37.5% of the total...

  • Page 138
    ... to the terms of this Agreement, including without limitation Section 6 hereof, the Company shall cause to be issued (either in book-entry form or otherwise) to the Participant or the Participant's beneficiaries, as the case may be, that number of shares of Stock corresponding to the number of such...

  • Page 139
    ...sale and agrees to pay any costs associated therewith, including without limitation any applicable broker's fees. In addition, and to the maximum extent permitted by law, the Company... Award in accordance with the terms of the Plan, including adjustments in the number and kind of shares of Stock or...

  • Page 140
    ... or any Subsidiary right to terminate the Participant's employment at any time in accordance with applicable law, or (iii) entitle the Participant to pay additional rights under the Plan or under any other welfare or benefit plan of the Company, the Parent or any Subsidiary. 10. Black Out Periods...

  • Page 141
    ... certificates for Stock hereunder prior to fulfillment of all the following conditions: (a) the admission of such Stock to listing on all stock exchanges on which such class of stock is then listed; (b) the completion of any registration or other qualification of such Stock under any state, federal...

  • Page 142
    ...her address as shown on the Company's, Parent's or any Subsidiary's payroll records, or to such other address as the Participant, by notice to the Company, may designate in writing from time to time. To the Company: VMware, Inc. 3401 Hillview Avenue Palo Alto, CA 94304 Attention: Stock Administrator...

  • Page 143
    ...of Time-Vested RSU Agreement for US Employees Unless the Participant notifies the Company within ten (10) days following receipt of this Agreement that he or she declines this Award, the Participant will be deemed to have accepted and agreed to the terms and conditions of this Agreement and the Plan...

  • Page 144
    ...GmbH VMware Global, Inc. VMware Hong Kong Limited VMware International Limited VMware International Marketing Limited VMware Information Technology (China) Co. Ltd VMware Israel Ltd. VMware Italy S.r.l. VMware Marketing Austria GmbH VMware Netherlands B.V. VMware New Zealand Company VMware Singapore...

  • Page 145
    ... ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-145402, 333-152582, 333159747, 333-162079 and 333-169537) of VMware, Inc. of our report dated February 28, 2011 relating to the financial statements, financial statement schedule...

  • Page 146
    ... financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: / S / PAUL A. MARITZ Paul A. Maritz Chief Executive Officer (Principal Executive Officer) Date...

  • Page 147
    ... material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: / S / MARK S. PEEK Mark S. Peek Chief Financial Officer and Co-President, Business Operations (Principal Financial Officer) Date: February 28, 2011

  • Page 148
    ... Exchange Act of 1934 and the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of VMware, Inc. Date: February 28, 2011 By: / S / PAUL A. MARITZ Paul A. Maritz Chief Executive Officer (Principal Executive Officer...

  • Page 149
    ... Exchange Act of 1934 and the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of VMware, Inc. Date: February 28, 2011 By: / S / MARK S. PEEK Mark S. Peek Chief Financial Officer and Co-President, Business Operations...