VMware 2008 Annual Report Download

Download and view the complete annual report

Please find the complete 2008 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 149

  • 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
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149

VMWARE, INC.
FORM 10-K
(Annual Report)
Filed 02/26/09 for the Period Ending 12/31/08
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
    VMWARE, INC. FORM 10-K (Annual Report) Filed 02/26/09 for the Period Ending 12/31/08 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://...

  • Page 2
    ... Employer Identification Number) 3401 Hillview Avenue Palo Alto, CA (Address of principal executive offices) 94304 (Zip Code) (650) 427-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange...

  • Page 3
    registrant's Proxy Statement for the Annual Meeting of Shareholders to be held in 2009. 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 ended December 31, 2008.

  • Page 4
    ... III Directors, Executive Officers, and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services PART...

  • Page 5
    ...financial statements included elsewhere in this filing. Our corporate headquarters are located at 3401 Hillview Avenue, Palo Alto, California and we have approximately 70 offices worldwide. We began shipping our first product in 1999, and today we offer multiple products from the desktop to the data...

  • Page 6
    ... of virtual machines and can only be realized by using management services that are aware of the unique flexibility and dynamism of a VDC-OS. In 2008, we announced our vCloud initiative in order to leverage our platform to allow enterprises with internal clouds to easily access external...

  • Page 7
    ... to the bare-metal products. Desktop Virtualization Personal computing and personal computing devices are undergoing change as users increasingly use multiple devices including desktop personal computers, laptop computers, thin clients, and mobile internet devices to access data and applications. In...

  • Page 8
    ...separate containers allowing quicker application delivery and reduced management costs. • • VMware also sells a range of personal client-hosted desktop virtualization products including: • • Workstation enables technical professionals to create multiple secure virtual sandboxes on a single...

  • Page 9
    ...VMware Global Support Services. We offer a suite of proactive, top-quality support packages backed by industry-leading expertise. We offer three support and subscription programs (Platinum, Gold, and Silver) on an annual or multi-year subscription basis, that include VMware support along with access...

  • Page 10
    ...end user customers. The majority of these resellers are part of our VIP Partner Program, which offers these resellers sales and product training and pricing incentives and rebates and access to the worldwide network of VMware distributors and access to the VMware Partner Central Web portal. We offer...

  • Page 11
    ... volume license offerings that provide for multi-year maintenance and support at discounted prices. ELAs enable us to build long-term relationships with our customers as they commit to VMware's virtual infrastructure solutions in their data centers. Our sales cycle with end user customers ranges...

  • Page 12
    ...include the level of reliability and new functionality of product offerings; the ability to provide full virtual infrastructure solutions; the ability to offer products that support multiple hardware platforms and operating systems; the proven track record of formulating and delivering a roadmap of...

  • Page 13
    ... and Taiwan. We also have a trademark application pending to register the VMWARE trademark in China. We have trademark applications pending to register the VMWARE FUSION trademark in Australia, Canada, China, the European Community, Hong Kong, Japan, New Zealand, the Russian Federation, the Republic...

  • Page 14
    ... recently released new versions of the server virtualization product acquired in conjunction with its 2007 XenSource acquisition and its virtual desktop offering, RedHat recently acquired Qumranet, a developer of virtual infrastructure solutions software, Sun Microsystems and IBM announced new cloud...

  • Page 15
    ... enterprise license agreements ("ELAs")), lowering prices for our products and services, reducing unit sales, decreasing or reversing quarterly growth in our revenues, reducing the rate of adoption of our products by new customers and the willingness of current customers to purchase upgrades to our...

  • Page 16
    ... and technical requirements; the timing of the announcement or release of upgrades or new products by us or by our competitors; our ability to implement and maintain scalable internal systems for reporting, order processing, license fulfillment, product delivery, purchasing, billing and general...

  • Page 17
    ... of these new offerings depends upon the cooperation of hardware, software and cloud hosting vendors to ensure interoperability with our products and offer compatible products and services to end users. Both the cloud computing and virtual desktop markets are in early stages of development. Other...

  • Page 18
    ... our products, service ongoing customer requirements, estimate end user demand and respond to evolving customer needs. Recruiting and retaining qualified channel partners and training them in the use of our technology and product offerings requires significant time and resources. In order to develop...

  • Page 19
    ... on the continued service of our key development personnel for product innovation. We generally do not have employment or non-compete agreements with our existing management or development personnel and, therefore, they could terminate their employment with us at any time without penalty and...

  • Page 20
    ... 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 21
    ... 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. Claims by others that we infringe their proprietary technology could force us to pay...

  • Page 22
    ... at some point in the future, can lengthen customer procurement cycles, cause us to spend additional time and resources to educate end users on the advantages of our product offerings and delay product sales. These factors can have a particular impact on the timing and length of our ELA sales cycles...

  • Page 23
    ... events were to occur, our ability to retain or increase market share and revenues in the virtualization software market could be materially adversely affected. Our success depends upon our ability to develop new products and services, integrate acquired products and services and enhance our...

  • Page 24
    ... to increase or maintain our international sales and operations. In 2007, we derived approximately 46%, and in 2008, we derived approximately 48%, of our revenues from customers outside the United States. We have sales and technical support personnel in numerous countries worldwide. We expect to...

  • Page 25
    ... divert management's attention and adversely affect the market's perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, financial condition and results of operations...

  • Page 26
    ... reduce our stock price. Problems with our information systems could interfere with our business and operations. We rely on our information systems and those of third parties for processing customer orders, delivery of products, providing services and support to our customers, billing and tracking...

  • Page 27
    ... or cancellations of customer orders, or the deployment of our products, our revenues would be adversely affected. Risks Related to Our Relationship with EMC As long as EMC controls us, holders of our Class A common stock will have limited ability to influence matters requiring stockholder approval...

  • Page 28
    ... our Class B common stock currently are entitled to elect 7 of our 8 directors. If EMC transfers shares of our Class B common stock to any party other than a successor-in-interest or a subsidiary of EMC (other than in a distribution to its stockholders under Section 355 of the Internal Revenue Code...

  • Page 29
    ...the master transaction agreement with respect to the limitations that are described above. 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...

  • Page 30
    ... capital, to effectuate acquisitions or to provide equity incentives to our employees, which could hurt our ability to grow. Beneficial ownership of at least 80% of the total voting power and 80% of each class of nonvoting capital stock is required in order for EMC to effect a tax-free spin-off of...

  • Page 31
    ... pricing of services EMC has agreed to provide us; arrangements with third parties that are exclusionary to EMC; business opportunities that may be attractive to both EMC and us; and product or technology development or marketing activities or customer agreements which may require the consent of EMC...

  • Page 32
    ... of the New York Stock Exchange rules, and, as a result, are relying on exemptions from certain corporate governance requirements that provide protection to stockholders of companies that are not "controlled companies." EMC owns more than 50% of the total voting power of our common shares and, as...

  • Page 33
    ...-year term, which would prevent stockholders from electing an entirely new board of directors at any annual meeting; the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors; following a distribution of Class B common stock by EMC...

  • Page 34
    ... 2007, Intel has an ownership interest in us and pursuant to Intel's right to designate a director acceptable to our board of directors, 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 relationship...

  • Page 35
    ... initial public offering of our Class A common stock to purchase our new corporate headquarters facilities in Palo Alto, California from EMC Corporation ("EMC") for $132.6 million, which is equal to the cost expended by EMC in the construction of those facilities through the date of purchase. As of...

  • Page 36
    ... joined EMC in February 2008 when EMC acquired Pi Corporation ("Pi"), which he had founded in 2003 and where he served as CEO. Pi was a software company focused on building cloud-based solutions for new ways of doing personal information management. Prior to founding Pi, he spent 14 years working at...

  • Page 37
    ... range of high and low sales prices of our common stock since August 14, 2007, the date our Class A common stock commenced trading on the New York Stock Exchange. Our Class B common stock is not publicly traded. Market Prices High Low Year ended December 31, 2008 First Quarter Second Quarter Third...

  • Page 38
    ... quarter ended December 31, 2008: Total Number of Shares Purchased Total Number Period of Shares Purchased Average Price Paid Per Share as Part of Publicly Announced Plans or Programs Purchased Under the Publicly Announced Plans or Programs Approximate Dollar Value of Shares That May Yet Be October...

  • Page 39
    ... commenced trading on the New York Stock Exchange) through December 31, 2008, 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 our common stock on August 14, 2007 was the closing sales price of $51.00 per...

  • Page 40
    ... 2008 2007 2006 Summary of Operations: Revenues: License Services Total revenues Operating income (1) Net income Net income per weighted average share, basic, for Class A and Class B Net income per weighted average share, diluted, for Class A and Class B Weighted average shares, basic, for Class...

  • Page 41
    ... 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 9.5 million shares of our Class A common stock to Intel...

  • Page 42
    to the consolidated financial statements for additional information. 37

  • Page 43
    ... software solutions technology and products, expanding our network of technology and distribution partners, increasing product awareness, promoting the adoption of virtualization and building long-term relationships with our customers through the adoption of enterprise license agreements ("ELAs...

  • Page 44
    ... acquisitions, funded through the operating cash flows generated from the sale of our existing products and services. We believe this is the appropriate priority for the long-term health of our business. In evaluating our results, we also focus on operating margin excluding stock-based compensation...

  • Page 45
    ... were allocated to us by EMC in 2007 and 2006, respectively. In 2008, this amount was not significant. 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...

  • Page 46
    ... of technical support based on the level of support purchased. Customers who are party to software maintenance agreements with us are entitled to receive product updates and upgrades on a when-and-if-available basis. Professional services revenues Professional services include design, implementation...

  • Page 47
    ... services revenues as compared to 2006. International revenues as a percentage of total revenues increased to 48% in 2008, from 46% in 2007 and 44% in 2006. Our revenue contracts with international customers are denominated in U.S. Dollars. During the last four months of 2008, exchange rates between...

  • Page 48
    ... channel partners. ELAs are core to our strategy to build long-term relationships with customers as they commit to our virtual infrastructure solutions in their data centers. ELAs provide a base from which to sell additional products, such as our application and infrastructure management suite...

  • Page 49
    ... from other products were 6%, 3% and 8% in 2008, 2007 and 2006, respectively. Our indirect channel partners obtain software licenses and services from our distributors and x86 system vendors and market and sell them to end user customers. In the first quarter of 2008, we introduced new programs for...

  • Page 50
    ..., 2008 StockBased NonCompenGAAP, As Adjusted GAAP sation 2007 StockBased Compensation GAAP NonGAAP, As Adjusted NonGAAP, As Adjusted Change Operating expenses: Cost of license revenues (1) Cost of services revenues Research and development (2) Sales and marketing General and administrative Total...

  • Page 51
    ...services revenues. Research and Development Expenses The increases in R&D expenses were primarily attributable to increased facilities, salaries and benefits expenses resulting from incremental headcount added in support of feature functionality development, sustainment of existing products, and new...

  • Page 52
    ..., we completed an offer to exchange certain employee stock options issued under the VMware 2007 Equity and Incentive Plan ("2008 Exchange Offer"). Certain previously granted options were exchanged for new, lower-priced stock options granted on a one-for-one basis. Executive officers and members of...

  • Page 53
    ... amortization for new acquisitions. The amortization expense was classified as follows in the consolidated income statements: 2008 For the Year Ended December 31, 2007 2006 Cost of license revenues Sales and marketing General and administrative Total intangible amortization expense Operating Income...

  • Page 54
    ..., the impact of accounting for stock-based compensation, the impact of accounting for business combinations under the new Financial Accounting Standard No. 141 (revised 2007), "Business Combinations" ("FAS No. 141R"), changes in our international organization, and changes in overall levels of income...

  • Page 55
    ... GAAP operating expenses and operating income can provide useful supplemental information to our management and to investors regarding financial and business trends relating to our financial condition and results of operations. Operating expenses without stock-based compensation have limitations due...

  • Page 56
    ...investment in our headquarters facilities in 2007, we purchased computer and network equipment to support increased personnel and related infrastructure requirements. Our capitalized software development costs, excluding stock-based compensation expense, totaled $90.9, $47.7, and $32.5 in 2008, 2007...

  • Page 57
    ...IPO, we received net proceeds of $1,035.2 from issuance of our Class A common stock. We also received net proceeds of $218.3 from the sale of our Class A common stock to Intel Capital in 2007. We used a portion of these proceeds to pay $350.0 of principal on the intercompany note payable owed to EMC...

  • Page 58
    ... for stock-based compensation expense. FAS No. 123R requires recognizing compensation costs for all share-based payment awards made to employees based upon the awards' estimated grant date fair value. Additionally, we applied the provisions of Security and Exchange Commission's Staff Accounting...

  • Page 59
    ... 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 of subjective variables. These variables include the expected stock price volatility over the term of the awards, the risk-free interest rate...

  • Page 60
    ... return 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. We estimate future product returns at the time of sale. Our estimate is based on historical return rates, levels of inventory held...

  • Page 61
    ... regarding when the product is available for general release. FAS No. 86 requires 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 products' total current and anticipated revenues, or the...

  • Page 62
    ...consolidated tax return of EMC. The 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 We...

  • Page 63
    ... AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange Risk International revenues as a percentage of total revenues were 48% in 2008, 46% in 2007 and 44% in 2006. Our revenue contracts are denominated in U.S. Dollars and the vast majority of our purchase contracts are denominated in...

  • Page 64
    ... 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, 2008 and 2007 Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006...

  • Page 65
    ... of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly...

  • Page 66
    ...payable to EMC Deferred revenue, net of current portion Deferred tax liability Other liabilities Total liabilities Commitments and contingencies (see Note J) Stockholders' equity: Class A common stock, par value $.01; authorized 2,500,000 shares; issued and outstanding 90,448 and 82,924 shares Class...

  • Page 67
    ..., except per share amounts) 2008 For the Year Ended December 31, 2007 2006 Revenues: License Services Operating expenses: Cost of license revenues Cost of services revenues Research and development Sales and marketing General and administrative Operating income Investment income Interest income...

  • Page 68
    ... revenue Net cash provided by operating activities Cash flows from investing activities: Additions to property and equipment Purchase of headquarters facilities from EMC Capitalized software development costs Purchase of long-term investment Business acquisitions, net of cash acquired Decrease...

  • Page 69
    ... of change in accounting principle EMC stock options issued in acquisitions Stock-based compensation Reclassification of deferred compensation Charge from tax sharing arrangement (see Note A) Dividends declared Net income Balance, December 31, 2006 Issuance of Class A common stock in IPO, net of...

  • Page 70
    ... share. The net proceeds of the IPO to the Company were $1,035.2 million after deducting the offering expenses and underwriters' discounts (see Note K). As of December 31, 2008, EMC Corporation ("EMC") holds approximately 30% of VMware's Class A common stock and 100% of VMware's Class B common stock...

  • Page 71
    ...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 held by distributors and resellers, and other relevant factors. Returns have not been material to date and...

  • Page 72
    ...not delivered, and customers will receive that upgrade or new product as part of a current software maintenance contract, a specified upgrade is deemed created and product revenues are deferred on purchases made after the announcement date until delivery of the upgrade or new product. The amount and...

  • Page 73
    ... regarding when the product is available for general release. FAS No. 86 requires 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 products' total current and anticipated revenues, or the...

  • Page 74
    ... software development costs were $128.8 million and $66.8 million as of December 31, 2008 and 2007, respectively, and are included in other assets, net. For the years ended December 31, 2008, 2007 and 2006, VMware capitalized $113.6 million (including $22.7 million of stock-based compensation), $56...

  • Page 75
    ...funds. VMware provides credit to distributors, resellers, and certain end user customers in the normal course of business. Credit is generally extended to new customers based upon a credit evaluation. Credit is extended to existing customers based on ongoing credit evaluations, prior payment history...

  • Page 76
    ... channel partner accounted for 11% of revenues in both 2008 and 2007, respectively. Accounting for Stock-Based Compensation Prior to the adoption of VMware's Equity and Incentive Plan in June 2007, VMware employees were granted stock options for and restricted stock awards of EMC's common stock. On...

  • Page 77
    ... is effective for fiscal years beginning after December 15, 2008. The impact of the standard on VMware's financial position and results of operation will be dependent upon the number of and magnitude of acquisitions that are consummated subsequent to adoption. In December 2007, the FASB issued FAS...

  • Page 78
    ...31, 2008, VMware had 89.5 million shares of Class A common stock and 300.0 million shares of Class B common stock outstanding that were included in the calculation of basic earnings per share. For purposes of calculating earnings per share, VMware uses the two-class method. As both classes share the...

  • Page 79
    ...-(Continued) D. Business Acquisitions, Goodwill, and Intangible Assets Business Acquisitions On July 1, 2008, VMware acquired all of the outstanding capital stock of a privately-held application performance management software company with headquarters in San Mateo, California, and principal...

  • Page 80
    ... 31, 2008 and 2007, consist of the following (dollar amounts in thousands): WeightedAverage Useful Lives (in years) Gross Carrying Amount Accumulated Amortization Net Book Value 2008 Purchased technology Trademarks and tradenames Customer relationships and customer lists Other Total intangible...

  • Page 81
    ... both basic and diluted earnings per share by $0.02, from what would have been reported otherwise in the year ended December 31, 2008. In August 2007, VMware used a portion of the net IPO proceeds to purchase its new headquarters facilities from EMC for $132.6 million. F. Accrued Expenses Accrued...

  • Page 82
    ... Related to Data Center In April 2008, VMware entered into an agreement to lease space for a data center facility. The lease has a term of 16 years with a termination option at the end of the tenth year and the option to take over additional building space. Significant leasehold improvements were...

  • Page 83
    ... (table in thousands): For the Year Ended December 31, 2008 2007 2006 Federal: Current Deferred State: Current Deferred Foreign: Current Deferred Total provision for income taxes A reconciliation of VMware's income tax rate to the statutory federal tax rate is as follows: 2008 $(27,524) 38,348 10...

  • Page 84
    ... to annual limitations. VMware expects to be able to fully use these net operating losses against future income. Also resulting from 2008, 2007 and 2006 acquisitions, VMware has state net operating loss carryforwards of $25.2 million expiring at different periods through 2029. A valuation allowance...

  • Page 85
    ... calculated on a separate return basis and the amount actually paid to EMC pursuant to VMware's tax sharing agreement is presented as a component of additional paid-in capital. These differences resulted in an increase in additional paid-in capital of $5.2 million in the year ended December 31, 2008...

  • Page 86
    ...in the EMC Plan. In 2008, VMware established a defined contribution retirement savings program, the VMware Inc. 401(k) Savings Plan (the "VMware Plan"), which is qualified under Section 401(k) of the Internal Revenue Code of 1986 (the "Code"). This plan is available solely to employees of VMware. In...

  • Page 87
    ... 31, 2008, VMware had outstanding purchase orders aggregating $120.9 million. While the purchase orders are generally cancelable without penalty, certain vendor agreements provide for percentage-based cancellation fees or minimum restocking charges based on the nature of the product or service. In...

  • Page 88
    ... of the IPO to the Company were $1,035.2 million after deducting the offering expenses and underwriters' discounts. In August 2007, VMware used a portion of the proceeds to repay $350.0 million of principal on the note payable owed to EMC. VMware also purchased its new headquarters facilities from...

  • Page 89
    ...these shares to EMC, increasing EMC's Class A common stock holdings to 27.0 million shares. As of December 31, 2008, Intel held 6.1 million shares of the Company's Class A common stock. Cisco Ownership in VMware Class A Common Stock In July 2007, VMware was a party to a stock purchase agreement with...

  • Page 90
    ...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...

  • Page 91
    ... September 2008, VMware completed an offer to exchange certain employee stock options issued under VMware's 2007 Equity and Incentive Plan ("2008 Exchange Offer"). Certain previously granted options were exchanged for new, lower-priced stock options granted on a one-for-one basis. Executive officers...

  • Page 92
    ... 2007, options were granted to non-employee directors to purchase 120,000 shares of Class A common stock with an exercise price of $23.00 per share. The options were exercisable immediately, subjected to termination if not exercised within one year from the date of grant, and vest pro rata annually...

  • Page 93
    ... activity for VMware employees in EMC stock options since January 1, 2006 (shares in thousands): WeightedAverage Exercise Price (per share) Number of Shares Outstanding, January 1, 2006 Options relating to employees transferred from EMC Options exchanged in a business acquisition Granted Forfeited...

  • Page 94
    ...represent the total pre-tax intrinsic values based on EMC's closing stock price of $10.47 as of December 31, 2008 which would have been received by the option holders had all in-the-money options been exercised as of that date. The pre-tax intrinsic value of EMC options held by VMware employees that...

  • Page 95
    ... (table in thousands): For the Year Ended December 31, 2007 2008 2006 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 expense, net of tax...

  • Page 96
    ...the Year Ended December 31, 2008 2007 VMware Employee Stock Purchase Plan Dividend yield Expected volatility Risk-free interest rate Expected term (in years) Weighted-average fair value at grant date None 39.3% 2.7% 0.5 $18.06 None 34.8% 4.8% 0.4 $ 6.99 For all equity awards granted in 2008 and...

  • Page 97
    ... in the EMC employee stock purchase plan up through the date of the IPO, at which time they were withdrawn from the plan. The fair value of each EMC option granted during the years ended December 31, 2007 and 2006 was estimated on the date of grant using the Black-Scholes option-pricing model with...

  • Page 98
    ...term of the stock options. L. Related Party Transactions Transactions with EMC In 2008, 2007 and 2006, VMware recognized professional services revenues of $16.9 million, $11.8 million and $1.4 million, respectively, for services provided to EMC's customers pursuant to VMware's contractual agreements...

  • Page 99
    ...the tax sharing agreement with EMC. Transactions with Other Related Parties In connection with Intel Capital's purchase in 2007 of 9.5 million shares of VMware's Class A common stock, the Company agreed to the appointment of an Intel executive acceptable to VMware's Board of Directors. In connection...

  • Page 100
    ...applications as needed. The data center products include VMware VMotion and Storage VMotion, VMware High Availability, VMware Distributed Resource Scheduler, and virtualization management products such as VMware vCenter Server, VMware vCenter Site Recovery Manager, VMware vCenter Lab Manager, VMware...

  • Page 101
    ... of Contents VMWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Revenues by class of products or services were as follows (table in thousands): For the Year Ended December 31, 2008 2007 2006 Data center products Other products License revenues Services revenues Total $ 1,112,070...

  • Page 102
    ... generally accepted accounting principles. The effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers, LLP our independent registered public accounting firm, as stated in their report which appears in Item 8 of this Annual...

  • Page 103
    ... York Stock Exchange the Annual CEO Certification required pursuant to Section 303A.12 (a) of the New York Stock Exchange Listed Company Manual. 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...

  • Page 104
    ... of Employee Benefits Agreement between VMware, Inc. and EMC Corporation Form of Real Estate License Agreement between VMware, Inc. and EMC Corporation Letter Agreement between VMware, Inc. and Mark Peek dated March 16, 2007 Form of Indemnification Agreement for directors and executive officers 2007...

  • Page 105
    ... and Sale Agreement between VMware, Inc. and EMC Corporation Class A Common Stock Purchase Agreement between VMware, Inc. and Intel Capital Corporation dated July 9, 2007 Investor Rights Agreement between VMware, Inc. and Intel Capital Corporation dated July 9, 2007 Form of Early Exercise Option...

  • Page 106
    ...Form/File Filed Herewith Date No. Exhibit Number Exhibit Description 10.34+ 10.35+ 21.1 23.1 31.1 Letter Agreement between VMware, Inc. and Tod Nielsen 2009 Executive Bonus Program List of subsidiaries Consent of PricewaterhouseCoopers LLP Certification of Principal Executive Officer required by...

  • Page 107
    ... President and Chief Executive Officer VMWARE, INC. Dated: February 25, 2009 By: /s/ M ARK S. P EEK Mark S. Peek Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on...

  • Page 108
    ... Balance at Beginning Tax Valuation Allowance of Period Tax Valuation Allowance Charged to Income Tax Provision Charged to Other Accounts Valuation Allowance Credited to Balance at Income Tax Provision End of Period Year ended December 31, 2008 income tax valuation allowance $ - $ 103 15,394...

  • Page 109
    ... payment of compensation that qualifies as performance-based compensation under Section 162(m) of the Code. Pursuant to the provisions hereof, there may be granted Options (including "incentive stock options" and "non-qualified stock options"), and Other Stock-Based Awards, including but not limited...

  • Page 110
    ... 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. "Fair Market Value" shall be the closing sales price per share of Stock for the date of grant on the principal securities...

  • Page 111
    ...iv) operating profit; (v) revenue, revenue growth or rate of revenue growth; (vi) return on assets (gross or net), return on investment, return on capital, or return on equity; (vii) returns on sales or revenues; (viii) operating expenses; (ix) stock price appreciation; (x) cash flow, free cash flow...

  • Page 112
    ... be determined in accordance with generally accepted accounting principles and shall be subject to certification by the Committee; provided that, to the extent an Award is intended to satisfy the performance-based compensation exception to the limits of Section 162(m) of the Code and then to the...

  • Page 113
    ... Plan, including without limitation, the authority to grant Awards, to determine the persons to whom and the time or times at which Awards shall be granted, to determine the type and number of Awards to be granted, the number of shares of Stock to which an Award may relate and the terms, conditions...

  • Page 114
    ... 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 115
    ... than the Fair Market Value of a share of Stock as of the date of grant of such Option. The purchase price of Stock as to which an Option is exercised shall be paid in full at the time of exercise; payment may be made in cash, which may be paid by check, or other instrument acceptable to the Company...

  • Page 116
    ... be evidenced by the applicable Award Terms (provided that any such Award is subject to the vesting requirements described herein). The vesting of a Restricted Stock Award granted under the Plan may be conditioned upon the completion of a specified period of employment or service with the Company or...

  • Page 117
    ...such credited amounts in Stock equivalents. (C) (D) Upon the termination of a Grantee's employment or service with the Company and its Subsidiaries or Affiliates, the Restricted Stock Units granted to such Grantee shall be subject to the terms and conditions specified in the applicable Award Terms...

  • Page 118
    ... in service level (for example, from full-time to part-time employment), shall cause a reduction, or other change, in an Award, and (iii) whether a leave of absence or reduction in service shall be deemed a termination of employment or service for the purpose of the Plan and the Award Terms. The...

  • Page 119
    ... 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 Awards . The following provisions of this...

  • Page 120
    ... under the Code, the rules of any stock exchange on which Stock is then listed or any other applicable law. Unless earlier terminated by the Board pursuant to the provisions of the Plan, the Plan shall terminate on the tenth anniversary of (i) its Adoption Date or (ii) the date the Plan is approved...

  • Page 121
    ... or any other guidance issued by the Secretary of the Treasury and the Internal Revenue Service with respect thereto. Any provision of this Plan that would cause an Award, issuance and/or payment to fail to satisfy Section 409A of the Code shall have no force and effect until amended to comply with...

  • Page 122
    ... of VMware. For purposes of the Plan, a subsidiary is any corporation in which VMware owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock unless the Board of Directors of VMware (the "Board of Directors") determines that employees of...

  • Page 123
    ... to the withholding account for the next option period pursuant to Section 8 below (a "rollover") may be used to purchase additional stock; further provided that the maximum dollar amount per option period shall be reduced by the amount of any rollover. For purposes of the Plan, "compensation" shall...

  • Page 124
    ... value" shall mean the closing sales price per share of the stock on the principal securities exchange on which the stock is traded or, if there is no such sale on the relevant date, then on the last previous day on which a sale was reported; if the stock is not listed for trading on a national...

  • Page 125
    ... 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 such...

  • Page 126
    ... 8, and have the balance, if any, in such account in excess of the total purchase price of the whole shares so issued returned in cash. In the event his or her legal representative) does not file a written election as provided above, any outstanding option shall be treated as if an election had been...

  • Page 127
    ... merger, consolidation or sale of assets, the Board of Directors shall either (a) return the balance in all withholding accounts and cancel all outstanding options, or (b) accelerate the exercise date provided for in Section 8, or (c) if there is a surviving or acquiring corporation, arrange to have...

  • Page 128
    ...all classes of stock of the employer corporation or of its parent or subsidiary corporation, as defined in Section 424 of the Code Internal Revenue Code of 1986, as amended (the "Code"). (b) No employee shall be granted an option under this Plan that would permit his or her rights to purchase shares...

  • Page 129
    ... during which any such option granted to such employee is outstanding at any time, as provided in Section 423 of the Code. (c) No employee shall be granted an option under this Plan that would permit him or her to withhold more than $7,500 in each six-month option period, and pro-rated for longer or...

  • Page 130
    ... 5, 2008 (the "Effective Date"), is being made to the VMware Distributor Agreement dated May 17, 2002 (VMware Contract #1322) (the "Agreement") by and between Ingram Micro Inc. ("Distributor") and VMware, Inc. ("VMware"). This Amendment shall become part of and subject to the terms and conditions of...

  • Page 131
    ... EMEA and Asia Pacific geographies through June 30, 2005. As a key employee of VMware's team, you will participate in a significant Long Term Incentive Program that is in the process of being finalized. A recommendation has been made to the EMC Executive Compensation and Stock Option Committee that...

  • Page 132
    ...or amended except by a written agreement, signed by an officer of the Company and by you. This offer expires seven (7) days from the date of this letter. We are looking forward to your continued success with VMware. Sincerely, /s/ Diane Greene Diane Greene President ACCEPTED AND AGREED TO this 31 st...

  • Page 133
    ...Should you choose to terminate your employment during the twelve (12) month period of your promotion to Executive Vice President of Worldwide Field Operations, you agree to fully reimburse VMware for the $55,000 dollars paid to you. Mortgage Assistance: The Company agrees to pay you $7,000 per month...

  • Page 134
    ACCEPTED AND AGREED TO this 31st day of May, 2005. /s/ Carl Eschenbach Carl Eschenbach

  • Page 135
    ..., and (B) VMware must fail to remedy such condition within the 30 day cure period." Please indicate your agreement with the terms of this letter by a signing a copy of this letter and returning it my attention. Sincerely, /s/ Paul Maritz Paul Maritz President and Chief Executive Officer ACCEPTED AND...

  • Page 136
    ... for termination after two years of your start date. As a key employee of VMware, a recommendation will be made to the Compensation and Corporate Governance Committee (the "Committee") of the Board of Directors that you be granted a non-qualified stock option to purchase shares of VMware Class...

  • Page 137
    ... the Company's then outstanding securities or (ii) EMC Corporation's ("EMC") distribution of the Company's shares in a transaction intended to qualify as a distribution under section 355 of the Internal Revenue Code of 1986, as amended. 2. For purposes of this offer letter agreement, the occurrence...

  • Page 138
    ... 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, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used...

  • Page 139
    ...indicate your acceptance of the terms and conditions set forth in this letter, please sign and date it in the space provided below and return it to me. A duplicate original is enclosed for your records. This letter may not be modified or amended except by a written agreement, signed by an officer of...

  • Page 140
    ... car must travel 400 miles/day) Reasonable meals and lodging For one person Homeowners - 1 Trip (7 days/6 nights) RT Economy Airfare or mileage for one car at current rate Meals, Lodging and Rental Car for employee and sig. other SELL SMART! SM Marketing Assistance Customary Closing Costs (no points...

  • Page 141
    ...Bonus Program Executive Bonus Program Objectives Among the objectives of the VMware Bonus Program - 2009 are to Overview The Compensation and Corporate Governance Committee has adopted a cash bonus program relating to performance in 2009 (the "2009 Program") under the 2007 Equity and Incentive Plan...

  • Page 142
    ..., to applicable employee referral bonuses, spot bonuses, equity awards, or Company contributions to qualified retirement or savings plans. New Hires : Bonus payouts will be prorated for newly hired participants based on the number of days they are employed during the Performance Period. Leaves of...

  • Page 143
    ... bonuses compensation paid more than three years prior to the date the applicable restatement is disclosed. At-Will Employment (US Only) This Plan does not affect the terminable-at-will status of the employment relationship. Neither the attainment of goals nor the continuous service requirement...

  • Page 144
    ... Switzerland S.a.r.l. VMware UK Limited VMware, K.K. India Delaware United Kingdom Australia Belgium Ireland Bulgaria Canada Denmark France Germany Delaware Hong Kong France Ireland Ireland Israel Italy Austria Netherlands New Zealand Singapore India Spain Sweden Switzerland United Kingdom Japan

  • Page 145
    ... 333-152582) of VMware, Inc. of our report dated February 24, 2009 relating to the financial statements, financial statement schedule, and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, California February 25...

  • 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 / P AUL M ARITZ Paul Maritz President and Chief Executive Officer Date: February 25, 2009

  • Page 147
    ... evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. b. All significant deficiencies and material weaknesses in the design or operation of internal...

  • Page 148
    ..., the financial condition and results of operations of VMware, Inc. Date: February 25, 2009 By: / S / P AUL M ARITZ Paul Maritz President and Chief Executive Officer (Principal Executive Officer) This certification "accompanies" the Form 10-K to which it relates, is not deemed filed with the...

  • Page 149
    ... condition and results of operations of VMware, Inc. Date: February 25, 2009 By: / S / M ARK S. P EEK Mark S. Peek Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) This certification "accompanies" the Form 10-K to which it relates, is not deemed filed...