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Table of Contents
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Overview and Basis of Presentation
Company and Background
VMware, Inc. (“VMware” or the “Company”) is the leader in virtualization and virtualization-based cloud infrastructure solutions utilized
by businesses to help them transform the way they build, deliver and consume information technology ("IT") resources in a manner that is
evolutionary and based on their specific needs. VMware’s virtualization infrastructure software solutions run on industry-standard desktop
computers and servers and support a wide range of operating system and application environments, as well as networking and storage
infrastructures.
Accounting Principles
The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United
States of America.
Basis of Presentation
VMware was incorporated as a Delaware corporation in 1998, was acquired by EMC Corporation (“EMC”)
in 2004 and conducted its initial
public offering of VMware’s Class A common stock in August 2007. As of December 31, 2011 , EMC holds approximately 79.7% of VMware’
s
outstanding common stock, including 37.6 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 historically has received, and
continues to receive, certain administrative services from EMC, and VMware and EMC engage in certain intercompany transactions. Costs
incurred by EMC for the direct benefit of VMware, such as salaries, benefits, travel and rent, plus a mark-up intended to approximate third-party
costs, are included in VMware’s consolidated financial statements. In addition, beginning in the second quarter of 2011
, VMware incurs costs to
operate the Mozy service on behalf of EMC. These costs, plus a mark-up intended to approximate third-party costs, are reimbursed to VMware
by EMC and recorded as an offset to the costs VMware incurred on the consolidated statements of income.
Management believes the assumptions underlying the consolidated financial statements are reasonable. However, the amounts recorded for
VMware’s intercompany transactions with EMC may not be considered arm’s length with an unrelated third party by nature of EMC’s majority
ownership of VMware. Therefore, the financial statements included herein may not necessarily reflect the cash flows, results of operations and
financial condition had VMware engaged in such transactions with an unrelated third party during all periods presented. Accordingly, VMware’
s
historical financial information is not necessarily indicative of what the Company’s cash flows, results of operations and financial condition will
be in the future if and when VMware contracts at arm’s length with unrelated third parties for past and current services the Company receives
from and provides to EMC.
Prior period financial statements have been reclassified to conform to current period presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of VMware and its subsidiaries. All intercompany transactions and balances
between VMware and its subsidiaries have been eliminated. All intercompany transactions with EMC in the consolidated statements of cash
flows will be settled in cash, and changes in the intercompany balances are presented as a component of cash flows from operating activities.
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
periods, and the disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, capitalized
software development costs, trade receivable valuation, certain accrued liabilities, useful lives of fixed assets and intangible assets, valuation of
acquired intangibles, revenue reserves, income taxes, stock-based compensation and contingencies. Actual results could differ from those
estimates.
Revenue Recognition
VMware derives revenues from the licensing of software and related services. VMware recognizes revenues when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable.
The following summarizes the major terms of VMware’s contractual relationships with customers and the manner in which
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