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Table of Contents
VMWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the conversion will not affect the intended tax treatment of the distribution. In a meeting of VMware stockholders called for this purpose, the
holders of VMware Class A common stock and VMware Class B common stock will be entitled to one vote per share and, subject to applicable
law, will vote together as a single class and neither class of common stock will be entitled to a separate class vote. All conversions will be
effected on a share-for-share basis.
VMware Equity Plans
In June 2007, VMware adopted its 2007 Equity and Incentive Plan (the “2007 Plan”). Awards under the 2007 Plan may be in the form of
stock options or other stock-based awards, including awards of restricted stock. The maximum number of shares of the VMware Class A
common stock reserved for the grant or settlement of awards under the 2007 Plan is 80.0 million. The exercise price for a stock option awarded
under the 2007 Plan shall not be less than 100% of the fair market value of VMware Class A common stock on the date of grant. Most options
granted under the 2007 Plan vest 25% after the first year and then monthly thereafter over the following three years. All options granted in 2007
pursuant to the 2007 Equity and Incentive Plan expire six years from the date of grant. VMware utilizes both authorized and unissued shares to
satisfy all shares issued under the 2007 Equity and Incentive Plan.
Exchange offer
In connection with the IPO, VMware and EMC conducted an exchange offer (the “Exchange Offer”)
enabling eligible VMware employees
to exchange their options to acquire EMC common stock for options to acquire VMware Class A common stock and to exchange restricted stock
awards of EMC’s common stock for restricted stock awards of VMware’s Class A common stock based on a formulaic exchange ratio which
was determined by dividing the two-day volume weighted average price of EMC’s common stock for the last two 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
received in exchange for EMC options was determined by multiplying the number of tendered EMC options by the exchange ratio. The exercise
price of the VMware options received in exchange was the exercise price of the tendered EMC options divided by the exchange ratio. The
VMware options received in the exchange retained their original term of ten years from the date of grant. The number of shares of VMware
restricted stock received in exchange for EMC restricted stock was determined by multiplying the number of tendered EMC restricted shares by
the exchange ratio. The Exchange Offer will result in a reduction in diluted earnings per share due to the future inclusion of the VMware Class A
common shares stock issued in the exchange. VMware employees that did not elect to exchange their EMC options and EMC restricted stock for
options to purchase VMware Class A common stock and restricted stock awards of VMware Class A common stock, respectively, will continue
to have their existing grants governed under EMC’s stock plans.
Approximately 11.0 million EMC stock options (approximately 89% of the eligible awards) and approximately 4.7 million EMC restricted
stock awards (approximately 81% of the eligible awards) were tendered for exchange in August 2007. At the initial public offering price of
$29.00 per share and EMC’s two-day volume-weighted average trading price prior to the consummation of the initial public offering of Class A
common stock for the two days ended August 10, 2007 of $17.74 per share, the exchange ratio was 0.6116. There were approximately
6.7 million options to purchase VMware Class A common stock issued in the exchange with a weighted average exercise price of $19.94 and
approximately 2.9 million shares of VMware restricted stock issued in the exchange. The total incremental stock-based compensation expense
resulting from the exchange of equity instruments was not material.
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