VMware 2007 Annual Report Download

Download and view the complete annual report

Please find the complete 2007 VMware annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 123

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123

VMWARE, INC.
FORM 10-K
(Annual Report)
Filed 02/29/08 for the Period Ending 12/31/07
Address 3401 HILLVIEW AVENUE
PALO ALTO, CA 94304
Telephone (650) 427-5000
CIK 0001124610
Symbol VMW
SIC Code 7372 - Prepackaged Software
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
    VMWARE, INC. FORM 10-K (Annual Report) Filed 02/29/08 for the Period Ending 12/31/07 Address Telephone CIK Symbol SIC Code Fiscal Year 3401 HILLVIEW AVENUE PALO ALTO, CA 94304 (650) 427-5000 0001124610 VMW 7372 - Prepackaged Software 12/31 http://www.edgar-online.com © Copyright 2011, EDGAR ...

  • Page 2
    ... Class A common stock began trading on the New York Stock Exchange on August 14, 2007. At September 30, 2007, the aggregate market value of the registrant's Class A common stock held by non-affiliates of the registrant (based upon the closing sale price of such shares on the New York Stock Exchange...

  • Page 3
    ...847 shares were Class A common stock and 300,000,000 were Class B common stock. ...Annual Meeting of Shareholders to be held in 2008. The Proxy Statement will be filed by the registrant with the Securities and Exchange Commission no later than 120 days after the end of the registrant's fiscal year...

  • Page 4
    ... Supplementary Data Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and...

  • Page 5
    ... filing. Our corporate headquarters are located at 3401 Hillview Avenue, Palo Alto, California and we have 54 offices worldwide. Overview of Virtualization Virtualization was first introduced in the 1970s to enable multiple business applications to share and fully harness the centralized computing...

  • Page 6
    ... virtualization enables the aggregation of multiple servers, storage infrastructure and networks into shared pools of resources that can be delivered dynamically, securely and reliably to applications as needed. This approach enables organizations to build a computing infrastructure with high levels...

  • Page 7
    ...customers may opt to pay an annual support and subscription fee if they would like the product supported in a production or test environment. VMware Server has been downloaded approximately 2.8 million times since it was made generally available in November 2006. VMware ESX Server. VMware ESX Server...

  • Page 8
    ...years to improve service levels delivered to their end users. Customers typically use VMware VMotion to perform zerodowntime planned hardware maintenance, non-disruptive server migration or dynamic resource repurposing. VMware DRS. VMware Distributed Resource Scheduler ("DRS") creates resource pools...

  • Page 9
    ...the setup, capture, storage and sharing of multi-machine software configurations for development and staging environments. Using VMware Lab Manager, development and test teams can access multiple software configurations and virtual machines on demand through a self-service portal. VMware ACE. VMware...

  • Page 10
    ... of our server customers purchase Platinum support. In addition to phone support, our customers have access to an online product support database for help with troubleshooting and operational questions. Our support teams, located in California, Denver, Canada, Ireland, India and Japan, provide first...

  • Page 11
    ...customers. The majority of these resellers are part of our VIP Partner Program, which offers these resellers sales and product training, pricing incentives and rebates, access to the worldwide network of VMware distributors and access to the VMware Partner Central Web portal. We offer several levels...

  • Page 12
    ... them from offering products or services that compete with ours. As of December 31, 2007, we had agreements with nearly 10,000 channel partners. We primarily sell our software under perpetual licenses, and our sales contracts generally require end-user customers to purchase maintenance for the...

  • Page 13
    ... offer limited support for heterogeneous operating system deployments. Furthermore, our VMware Infrastructure suite competes with products that provide high availability clustering, workload management and resource management. We also expect to compete with new entrants to the virtualization market...

  • Page 14
    ... and Japan covering the trademarks VMWARE for use in connection with computer software, clothing and reference materials, and VMWORLD for use in connection with educational seminars. VMWARE also is our registered trademark in Australia, Canada, India, Israel, the Republic of Korea, Mexico, Singapore...

  • Page 15
    ... offerings and has released a beta version of a product that will likely compete with our entry level enterprise-class products in the future. Microsoft's offerings are positioned to compete with our hypervisor offerings. We also face competition from other companies, including several recent market...

  • Page 16
    ... that lack the technical advantages of our own offerings. We also face potential competition from our partners. For example, third parties currently selling our products could build and market their own competing products and services or market competing products and services of third parties...

  • Page 17
    ... policies; the sale of our products in the timeframes we anticipate, including the number and size of orders in each quarter; our ability to develop, introduce and ship in a timely manner new products and product enhancements that meet customer demand, certification requirements and technical...

  • Page 18
    ... in systems and training, and those processes and procedures may become increasingly complex and difficult to manage. The time and expense required for sales and marketing organizations of our channel partners to become familiar with our product offerings, including our new product developments, may...

  • Page 19
    ... 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 20
    ...we may not be able to prevent our partners, employees or consultants from violating any agreements or licenses we may have in place or abusing their access granted to our source code. Improper disclosure or use of our source code could help competitors develop products similar to or better than ours...

  • Page 21
    ... involve educating our customers about the use and benefit of our products, including their technical capabilities, potential cost savings to an organization and advantages compared to lower-cost products offered by our competitors. Customers typically undertake a significant evaluation process that...

  • Page 22
    ... to develop new products and services, or to enhance and improve our products and support services in a timely manner or to position and/or price our products and services to meet market demand, customers may not buy new software licenses or renew software license updates and product support. In...

  • Page 23
    ... of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations; difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets...

  • Page 24
    ... changes to our products made by our channel partners. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and time-consuming and may divert management's attention...

  • Page 25
    ... have remediated the material weakness found in our internal controls as of December 31, 2006 by implementing additional formal policies, procedures and processes, hiring additional accounting personnel and increasing management review and oversight over the financial statement close process. Under...

  • Page 26
    ... in which we file and changes to tax laws. For example, renewal of the U.S. research and development tax credit which benefited our tax rate by approximately 4 percentage points in 2007 is uncertain from year to year and it currently stands repealed for 2008. From time to time, we are subject...

  • Page 27
    ... property 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 between us and EMC also contain provisions that...

  • Page 28
    ... Our business and that of EMC overlap, and EMC may compete with us, which could reduce our market share. EMC and we are both IT infrastructure companies providing products related to storage management, back-up, disaster recovery, security, system management and automation, provisioning and resource...

  • Page 29
    ... 37,950,000 shares of our Class A common stock at an issue price of $29.00 per share, we were a wholly-owned subsidiary of EMC and we relied on administrative and other resources of EMC to operate our business. In connection with our IPO, we entered into various service agreements with EMC to retain...

  • Page 30
    ... B common stock, to issue stock or other VMware securities, excluding pursuant to employee benefit plans (provided that we obtain Class B common stockholder approval of the aggregate annual number of shares to be granted under such plans), which could cause us to forgo capital raising or acquisition...

  • Page 31
    ... agreements if required on terms as favorable to us as those we would negotiate with an unaffiliated third party. Some of our directors and executive officers own EMC common stock, restricted shares of EMC common stock or options to acquire EMC common stock and hold management positions with EMC...

  • Page 32
    ... Risk Factors section and elsewhere in this annual report on Form 10-K. Substantial amounts of Class A common stock are held by our employees, EMC, Intel and Cisco, and all of the shares of our Class B common stock, which may be converted to Class A common stock upon request of the holder, are held...

  • Page 33
    ... and Intel in August 2008. Shares of Class A common stock held by EMC (including shares of Class A common stock that might be issued upon the conversion of Class B common stock) are eligible for sale subject to the volume, manner of sale and other restrictions of Rule 144 of the Securities Exchange...

  • Page 34
    ... the price that investors might be willing to pay for shares of our common stock. As a public company we incur costs and face demands on our management in addition to the costs and demands we faced prior to our initial public offering . As a public company, we incur significant legal, accounting and...

  • Page 35
    .... Ft* Principal Use(s) Palo Alto, CA North and Latin American region (excluding Palo Alto, CA) Europe, Middle East and Africa region Asia Pacific region * owned: leased: leased: leased: leased: 462,000 410,000 244,000 196,000 129,000 Executive and administrative offices, sales and marketing, and...

  • Page 36
    ...since January 2005. Ms. Greene is also a director of Intuit Inc., a provider of business, financial management and tax solutions for small businesses, consumers and accountants. Mark S. Peek has been the Chief Financial Officer at VMware since April 2007. Prior to joining VMware, he served as Senior...

  • Page 37
    ... PURCHASES OF EQUITY SECURITIES Market Information Our Class A common stock, par value $.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 prices of our common stock since August 14, 2007, the date our Class...

  • Page 38
    ... and cash that are classified as cash and cash equivalents on our December 31, 2007 balance sheet. There has been no material change in the actual or planned use of proceeds from the IPO as described in the final prospectus with respect to our IPO filed with the SEC pursuant to Rule 424(b). 34

  • Page 39
    ... August 14, 2007 (the date our Class A common stock commenced trading on the New York Stock Exchange) through December 31, 2007, assuming an initial investment of $100. While the initial public offering price of our common stock was $29.00 per share, the graph assumes the initial value of our common...

  • Page 40
    ...and capitalization of software development costs incurred in the research and development of new software products. Operating income in the table above includes stock-based compensation, acquisition-related intangible amortization and capitalized software development costs amortization, and excludes...

  • Page 41
    ... new headquarters facilities from EMC for $132.6 million, which is equal to the cost expended by EMC through the date of purchase. The Company also repaid $350.0 million of principal on the note payable to EMC. Also in August 2007, VMware sold 9.5 million shares of its Class A common stock to Intel...

  • Page 42
    ... scientists, software engineers, and employees involved in product development and maintenance and continue to enable choice for customers and drive standards. We believe that equity incentives tied directly to the performance of VMware will help us compete for top-level engineering and other talent...

  • Page 43
    ... quarter of 2007, the practice was changed to purchasing from EMC at a discount off of EMC's list price. The financial statements include expense allocations for certain corporate functions provided by EMC, including accounting, treasury, tax, legal and human resources. These allocations were based...

  • Page 44
    ... of product support based on the level of support purchased. Customers who are party to maintenance agreements with us are entitled to receive product updates and upgrades on a when-and-if-available basis. Professional services include design, implementation and training. Professional services are...

  • Page 45
    ... marketing expenses . Our sales and marketing expenses include the costs of the personnel and related overhead associated with the sale and marketing of our license and service offerings, as well as the cost of certain specific marketing initiatives, including our annual VMworld conference. General...

  • Page 46
    ... safely, securely and efficiently run multiple operating systems with their applications simultaneously while providing resource guarantees. These products provide the core functionality and the enabling capabilities for our second class of products, Virtual Infrastructure Automation and Management...

  • Page 47
    ... focus on our international sales and marketing efforts to address the global market of virtualization. Although many of the Company's products are available individually, they are generally sold in product bundles which encompass most of the Company's products. As we develop new products, they are...

  • Page 48
    ... For the Year Ended December 31, 2006 StockBased NonCompenGAAP, As sation GAAP Adjusted 2005 StockBased CompenGAAP sation NonGAAP, As Adjusted NonGAAP, As Adjusted Operating expenses: Cost of license revenues (1) Cost of services revenues Research and development Sales and marketing General and...

  • Page 49
    ... to support the growth of our business. The increase in R&D expenses consisted primarily of increased salaries, benefits expense, stock-based compensation expense and consulting fees, resulting from the deployment of additional resources to support new product development. Salaries, benefits expense...

  • Page 50
    .... At the IPO price of $29.00 per share, EMC's two-day volume-weighted average trading price prior to the consummation of the IPO for the two days ended August 10, 2007 of $17.74 per share and an exchange ratio of 0.6116, approximately 6.7 million options to purchase VMware Class A common stock, with...

  • Page 51
    ... as a percentage of revenue was a result of increased salaries and benefits as we expanded our research and development, sales and marketing and general and administrative spending to support our revenue growth and to expand future product offerings in what may be a substantially more competitive...

  • Page 52
    ... income tax benefit which was repealed by the American Jobs Creation Act of 2004. Our effective tax rate for 2008 is expected to be higher due in part to the repeal of the U.S. Federal R&D tax credit. The effective tax rate for 2008 is based upon the income for the year, the composition...

  • Page 53
    .... This was offset by increases in accounts receivable of $89.0 also due to the growth in our business and an increase in deferred income tax assets. As of December 31, 2007, our deferred revenue balance consisted of deferred license revenues of $54.3 and deferred service revenues of $498.5, of which...

  • Page 54
    ...our IPO and sale of 37,950,000 shares of our Class A common stock. The net proceeds of the IPO to us were $1,035.2 after deducting underwriters' discounts and offering expenses. Also in 2007, Intel Capital purchased 9.5 million shares of our Class A common stock at twenty-three dollars per share for...

  • Page 55
    ...of employee stock option awards and the ESPP using the Black-Scholes option pricing model. The determination of the fair value of our share-based payment awards on the date of grant using the Black-Scholes option pricing model is affected by our stock price, as well as assumptions regarding a number...

  • Page 56
    ... agreement. The revenue allocated to software license included in multiple element contracts represents the residual amount of the contract after the fair value of the other elements has been determined. Customers under maintenance agreements are entitled to receive product updates and upgrades...

  • Page 57
    ..., considering customer demand, changes in technology and a cost structure necessary to achieve the related revenues. Changes in judgments on any of these factors could materially impact the value of the asset. Accounting for Income Taxes In calculating our income tax expense, management judgment is...

  • Page 58
    ... case of a limited number of financial instruments that require retrospective application. We are currently evaluating the potential impact of FAS No. 157 on our financial position and results of operations. In February 2007, the FASB issued FAS No. 159, "The Fair Value Option for Financial Assets...

  • Page 59
    ...majority of our purchase contracts are denominated in U.S. dollars. A portion of our cost of revenues, primarily the cost of personnel to deliver technical support on our products, and a portion of our operating expense related to sales and sales support and research and development, are denominated...

  • Page 60
    ...STATEMENTS AND SUPPLEMENTARY DATA VMware, Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at December 31, 2007 and 2006 Consolidated Income Statements for the years ended December 31, 2007, 2006 and 2005...

  • Page 61
    ...for each of the three years in the period ended December 31, 2007 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...

  • Page 62
    ... tax liability Income taxes payable to EMC, net of current portion Commitments and contingencies (see Note I) Stockholder's equity (deficit): Class A common stock, par value $.01; authorized 2,500,000 shares; issued and outstanding 82,924 and 32,500 shares Class B convertible common stock, par value...

  • Page 63
    ... of Contents VMware, Inc. CONSOLIDATED INCOME STATEMENTS (in thousands, except per share amounts) For the Year Ended December 31, 2007 2006 2005 Revenues: License Services Operating expenses: Cost of license revenues Cost of services revenues Research and development Sales and marketing General and...

  • Page 64
    ...end of the period Supplemental disclosures of cash flow information Cash paid for interest Cash paid for taxes Non-cash items: Dividends declared via note payable to EMC Fair value of EMC stock options issued in acquisition $ 218,137 104,027 - 92,406 (167) (88,969) (977) 5,004 15,571 61,620 (17,812...

  • Page 65
    ... effect of change in accounting principle EMC stock options issued in acquisitions Charge from tax sharing arrangement (see Note A) Stock-based compensation Reclassification of deferred compensation Dividends declared Net income Balance, December 31, 2006 Issuance of Class A common stock in IPO, net...

  • Page 66
    ... capital stock of VMware. The acquisition was accounted for as a purchase. Accordingly, all assets and liabilities were adjusted to their fair market value. On July 3, 2007, VMware's certificate of incorporation was amended to authorize shares of Class A and Class B common stock. After a conversion...

  • Page 67
    ... valuation, useful lives of fixed assets, valuation of acquired intangibles, income taxes, stock-based compensation and contingencies. Actual results could differ from those estimates. Revenue Recognition VMware derives revenue from the licensing of software and related services. VMware recognizes...

  • Page 68
    ... policy does not allow end-users to return products for a refund. Certain distributors and resellers may rotate stock when new versions of a product are released. VMware estimates future product returns at the time of sale. VMware's estimate is based on historical return rates, levels of inventory...

  • Page 69
    ...of 90 days or less at the time of purchase. Cash equivalents consist of money market funds. Under the terms of various agreements, VMware has restricted cash included in other current assets and other assets, net. The amounts were not material in any period presented. Allowance for Doubtful Accounts...

  • Page 70
    ... 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 Note K) is presented as a component of...

  • Page 71
    ...to sales tax payable. The balances are removed from the consolidated balance sheet as cash is collected from the customer and as remitted to the tax authority. Earnings per Share Basic net income per share is calculated using the weighted-average number of shares of VMware's common stock outstanding...

  • Page 72
    ...for restricted stock awards of VMware's common stock. See Note J for further information regarding the Exchange Offer. New Accounting Pronouncements In September 2006, the Financial Accounting Standards Board ("FASB") issued FAS No. 157, "Fair Value Measurements" ("FAS No. 157"), which addresses how...

  • Page 73
    ...- 332,500 $ 0.26 $ 0.26 $ 66,775 332,500 - 332,500 $ 0.20 $ 0.20 For the year ended December 31, 2007, stock options to acquire 2.2 million of VMware Class A common stock were excluded from the diluted earnings per share calculations because their effect would have been anti-dilutive. For both the...

  • Page 74
    ...'s stock options. Acquired intangibles totaled $9.3 million and have an estimated useful life of five years. As of December 31, 2007, the excess of the purchase price over the fair value of the net assets acquired was $39.8 million and is classified as "Goodwill" on the consolidated balance sheets...

  • Page 75
    ... in thousands): Useful Lives 2007 (in years) Gross Carrying Amount Accumulated Amortization Net Book Value Purchased technology Trademarks and tradenames Customer relationships and customer lists Other Total intangible assets, excluding goodwill 5-7 5 5-9 3-5 $ $ Useful Lives 115,210 7,580...

  • Page 76
    ... in progress is primarily related to buildings that remain under development at the new headquarters. E. Accrued Expenses Accrued expenses consist of (table in thousands): For the Year Ended December 31, 2007 2006 Salaries, commissions, and benefits Accrued partner rebates Other $ 93,678 42,852 37...

  • Page 77
    ... 1,028 - 1,028 $ 28,565 For the Year Ended December 31, 2006 2005 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 35.0% 0.7% (25.0%) (4.5%) 3.1% 9.3% 35.0% 0.7% (21...

  • Page 78
    ... annual limitations, including Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), for U.S. tax purposes. VMware expects to be able to fully use these net operating losses against future income. Also resulting from 2007 and 2006 acquisitions, the Company has federal R&D credit...

  • Page 79
    ... year being 2003. Based on the outcome of examinations of VMware, the result of the expiration of statutes of limitations for specific jurisdictions or the result of ruling requests from taxing authorities, it is reasonably possible that the related unrecognized tax benefits could change from...

  • Page 80
    ... lease on the Company's Palo Alto headquarters facilities, which expires in 2057. Outstanding Obligations At December 31, 2007, VMware had outstanding purchase orders aggregating $110.2 million. While the purchase orders are generally cancelable without penalty, certain vendor agreements provide for...

  • Page 81
    ... as a holder of VMware Class A common stock. Cisco's purchase of the 6.0 million shares of Class A common stock closed in August 2007. Class B Common Stock Conversion Rights Each share of Class B common stock is convertible while held by EMC or its successor-in-interest at the option of EMC or its...

  • Page 82
    ... full days of the Exchange Offer by the IPO price of VMware Class A common stock. The Exchange Offer expired on August 13, 2007, the date of the pricing of the IPO. The Exchange Offer was structured to generally retain the intrinsic value of the tendered EMC securities. The number of VMware options...

  • Page 83
    ... 85% of the fair market value at the time of exercise. Options to purchase shares were first granted under the 2007 Employee Stock Purchase Plan on August 13, 2007, the date on which VMware's Form S-1 Registration Statement was declared effective by the Securities and Exchange Commission, and became...

  • Page 84
    ... time as the respective options vest. The following table summarizes restricted stock activity since January 1, 2007 for VMware restricted stock (shares in thousands): Number of Shares Weighted Average Grant Date Fair Value Restricted stock at January 1, 2007 Granted Exchanged from EMC restricted...

  • Page 85
    .... EMC Stock Options The following table summarizes option activity for VMware employees in EMC stock options in 2007, 2006, and 2005 (shares in thousands): Number of Shares Weighted Average Exercise Price Outstanding, January 1, 2005 Options relating to employees transferred from EMC Granted...

  • Page 86
    ... about EMC stock options outstanding that continue to be held by VMware employees and that are expected to vest and stock options exercisable at December 31, 2007 is as follows (shares and intrinsic values in thousands): Options Outstanding and Expected to Vest Weighted Average Weighted Number...

  • Page 87
    ... in thousands): For the Year Ended December 31, 2007 2006 Cost of license revenues Cost of services revenues Research and development Sales and marketing General and administrative Stock-based compensation expense before income taxes Income tax benefit Total stock-based compensation expense, net...

  • Page 88
    ...the Year Ended VMware Stock Options December 31, 2007 Dividend yield Expected volatility Risk-free interest rate Expected life (in years) Weighted-average fair value at grant date $ None 39.2% 4.9% 3.4 27.88 For the Year Ended VMware Employee Stock Purchase Plan December 31, 2007 Dividend yield...

  • Page 89
    ...proximity to the IPO. The fair value of each VMware option granted at $23.00 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Dividend yield Expected volatility Risk-free interest rate Expected life (in years) 85 None 39...

  • Page 90
    ... option-pricing model with the following weighted average assumptions: EMC Stock Options 2007 For the Year Ended December 31, 2006 2005 Dividend yield Expected volatility Risk-free interest rate Expected life (in years) Weighted-average fair value at grant date EMC Employee Stock Purchase Plan...

  • Page 91
    ... 2007, the practice was changed to purchasing from EMC at a discount off of EMC's list price. In connection with the IPO, VMware and EMC entered into certain agreements governing various interim and ongoing relationships between the two companies. The financial statements include expense allocations...

  • Page 92
    ... run multiple operating systems simultaneously on the same physical machine. The platforms products include VMware Player, VMware Workstation, VMware Server, VMware ESX Server, VMware Virtual SMP, VMware VCB and VMware VMFS products. Virtual Infrastructure Management and Automation Products . The...

  • Page 93
    ... VMware VMotion, VMware VirtualCenter, VMware Lab Manager, VMware VDI, VMware Converter and VMware Capacity Planner. Revenues by class of products or services were as follows (table in thousands): 2007 For the Year Ended December 31, 2006 2005 Virtualization platform products Virtual infrastructure...

  • Page 94
    .... Prior to December 31, 2007, we had remediated the material weakness by implementing additional formal policies, procedures and processes, hiring additional accounting personnel and increasing management review and oversight over the financial statement close process. ITEM 9B. OTHER INFORMATION...

  • Page 95
    ...later than 120 days after the close of the fiscal year ended December 31, 2007. 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...

  • Page 96
    ... Employee Benefits Agreement between VMware, Inc. and EMC Form of Real Estate License Agreement between VMware, Inc. and EMC Letter Agreement between VMware, Inc. and Mark Peek dated March 16, 2007 Form of Indemnification Agreement for directors and executive officers 2007 Equity and Incentive Plan...

  • Page 97
    ...Exhibit Number Exhibit Description Filed Herewith Date 10.12+ 10.13+ 10.14 10.15+ 10.16# 10.17 10.18 10.19 10.20+ 10.21 10.22 10.23+ 10.24+ 10.25+ Form of Option Agreement Form of Restricted Stock Unit Agreement 2007 Employee Stock Purchase Plan, as amended and restated December 10, 2007 Letter...

  • Page 98
    Table of Contents Incorporated by Reference Filed Form/File Herewith Exhibit Description No. Date Exhibit Number 31.2 Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14 (a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the ...

  • Page 99
    ... the undersigned, thereunto duly authorized. VMWARE, INC. Dated: February 29, 2008 By: /s/ D IANE B. G REENE Diane B. Greene President and Chief Executive Officer VMWARE, INC. Dated: February 29, 2008 By: /s/ M ARK S. P EEK Mark S. Peek Chief Financial Officer Pursuant to the requirements of the...

  • Page 100
    ... VMWARE, INC. 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...

  • Page 101
    ...2007 Employee Stock Purchase Plan (the "Plan") is intended to provide a method by which eligible employees of VMware, Inc. ("VMware") and its subsidiaries (collectively, the "Company") may use voluntary, systematic payroll deductions to purchase VMware's class A common stock, $.01 par value, ("stock...

  • Page 102
    ... make payment for the purchase of shares by (A) making a lump sum cash payment to the Company via check on or prior to December 31, 2007 for the amount of the purchase price for the shares being purchased (after which date an participant wishing to continue participation in the Plan must participate...

  • Page 103
    ... (a) the balance in the participant's withholding account on the last day of the option period by (b) the purchase price per share of the stock determined under Section 7, and eliminating any fractional share from the quotient. In the event that the number of shares then available under the Plan is...

  • Page 104
    ... the Plan, the fair market value of the stock at the time of the grant of the option will be the initial public offering price of the stock as set forth in VMware's Form S-1 Registration Statement. Section 8. Exercise of Options If an employee is a participant in the Plan on the last business day of...

  • Page 105
    ... of Delaware are required or permitted to close, a participant may cancel his or her option by written notice given on or prior to the last business day immediately preceding such date. Following delivery of any such notice, any balance in the participant's withholding account will be returned to...

  • Page 106
    ... dividend, stock split or combination of shares, recapitalization, merger in which the Company is the surviving corporation or other change in the Company's capital stock, the number and kind of shares of stock or securities of the Company to be subject to the Plan and to options then outstanding...

  • Page 107
    ... the time be permitted by law, provided that (except to the extent explicitly required or permitted herein) no such amendment will, without the approval of the shareholders of the Company, (a) increase the maximum number of shares available under the Plan, (b) reduce the option price of outstanding...

  • Page 108
    ... or her rights to purchase shares of stock under all employee stock purchase plans (as defined in Section 423 of the Code) of VMware or any subsidiary or parent corporation to accrue at a rate which exceeds $25,000 in fair market value of such stock (determined at the time the option is granted) for...

  • Page 109
    ..., in order to conform with provisions of local laws and regulations in foreign countries in which the Company or its subsidiaries operate, shall have sole discretion to (i) modify the terms and conditions of options granted to participants employed outside the United States; (ii) establish sub-plans...

  • Page 110
    ...to you in lieu of the EMC restricted shares that were to be granted to you as described in your March 17. 2007 offer letter. Subject to your continued employment with VMware, Inc. ("VMware") through June 7, 2010, the RSUs will fully vest on that date. However, if VMware meets or achieves the targets...

  • Page 111
    ... Beneficial Owner (within the meaning set forth in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of VMware, Inc, (the "Company") representing 35% or more of either the then outstanding shares of common stock of the Company or the combined voting power...

  • Page 112
    ..., directly or indirectly, 35% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities or (ii) EMC's distribution of the Company's shares to its shareholders in the form of a stock dividend. Person, as used...

  • Page 113
    ...stock option will vest over four years, with 25% of the shares subject to the option vesting on the first anniversary of the date of grant and monthly thereafter at a rate of 2.0833% of the shares subject to the option. The option exercise price will be equal to the fair market value of VMware Class...

  • Page 114
    ... to you pursuant to paragraphs (a), (b) and (c) above). (e) Any Top-Up Payment due to you as a result of the foregoing shall be made to you within five (5) business days following the applicable vesting date. Change In Control If there is a Change in Control (as defined below), in lieu of any other...

  • Page 115
    ... rights to any invention made during your employment at VMware and non-disclosure of proprietary information. As a VMware employee, you will be expected to abide by Company rules and regulations. Definitions 1. For purposes of this offer letter agreement, a Change in Control will be deemed to have...

  • Page 116
    ... material violation of VMware's Key Employee Agreement and/or a material violation of any other VMware policies including but not limited to the Business Conduct guidelines. The determination of Cause will be made by the Company in its sole discretion. 3. For purposes of this offer letter agreement...

  • Page 117
    ... agreement, signed by an officer of the Company and by you. This offer expires three (3) days from the date of this letter. We are looking forward to having you join VMware. Sincerely, /s/ Diane Greene Diane Greene President and CEO ACCEPTED AND AGREED TO this /s/ Richard Sarwal (Employee Signature...

  • Page 118
    ... VMware Global (Germany) VMware International Limited VMware Italy S.r.l. VMware Singapore Pte Ltd. VMware Software India Private Limited VMware Sweden AB VMware UK Limited VMware, K.K. France Delaware Switzerland U.K. Australia Ireland Bulgaria Canada Denmark Germany Delaware Germany Ireland Italy...

  • Page 119
    ... by reference in the Registration Statement on Form S-8 (No. 333-145402) of VMware, Inc. of our report dated February 20, 2008 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, California February 29...

  • Page 120
    ... 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. / S / D IANE B. G REENE Diane B. Greene President and Chief Executive Officer (Principal Executive Officer) Date: February 29, 2008

  • Page 121
    ...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. / S / M ARK S. P EEK Mark S. Peek Chief Financial Officer (Principal Financial Officer) Date: February 29, 2008

  • Page 122
    ... in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of VMware, Inc. Date: February 29, 2008 / S / D IANE B. G REENE Diane B. Greene President and Chief Executive Officer (Principal Executive Officer) This certification "accompanies" the...

  • Page 123
    ... 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 29, 2008 / S / M ARK S. P EEK Mark S. Peek Chief Financial Officer (Principal Financial and Accounting...