Stock-Based Compensation

EMC Equity Plans

The EMC Corporation Amended and Restated 2003 Stock Plan (the “2003 Plan”) provides for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units. The exercise price for a stock option shall not be less than 100% of the fair market value of our common stock on the date of grant. Options generally become exercisable in annual installments over a period of five years after the date of grant and expire ten years after the date of grant. Incentive stock options will expire no later than ten years after the date of grant. Restricted stock is common stock that is subject to a risk of forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Restricted stock units represent the right to receive shares of common stock in the future, with the right to future delivery of the shares subject to a risk of forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Grants of restricted stock awards or restricted stock units that vest only by the passage of time will not vest fully in less than two years after the date of grant, except for grants to non-employee Directors that are not subject to this minimum two-year vesting requirement. The 2003 Plan allows us to grant up to 460 million shares of common stock. We recognize restricted stock awards and restricted stock units against the 2003 Plan share reserve as two shares for every one share issued in connection with such awards.

In addition to the 2003 Plan, we have four other stock option plans (the “1985 Plan,” the “1993 Plan,” the “2001 Plan” and the “1992 Directors Plan”). In May 2007, these four plans were consolidated into the 2003 Plan such that all future grants will be granted under the 2003 Plan and shares that are not issued as a result of cancellations, expirations or forfeitures, will become available for grant under the 2003 Plan.

A total of 1,022 million shares of common stock have been reserved for issuance under the 2003 Plan. At December 31, 2015, there were an aggregate of 53 million shares of common stock available for issuance pursuant to future grants under the 2003 Plan.

We have, in connection with the acquisition of various companies, assumed the stock option plans of these companies. We do not intend to make future grants under any of such plans.

EMC Employee Stock Purchase Plan

Under our Amended and Restated 1989 Employee Stock Purchase Plan (the “1989 Plan”), eligible employees may purchase shares of common stock through payroll deductions at 85% of the fair market value at the time of exercise. During the year ended December 31, 2013, EMC amended the Plan to adjust the grant and exercise dates. Options to purchase shares are granted twice yearly, on February 1 and August 1, and are exercisable on the succeeding July 31 and January 31, respectively, each year. Pursuant to the terms of the Merger Agreement, the last ESPP purchase was in January 2016. A total of 183 million shares of common stock have been reserved for issuance under the 1989 Plan. The following table summarizes the 1989 Plan activity in the years ended December 31, 2015, 2014 and 2013 (table in millions, except per share amounts):



	For the Year Ended
	December 31, 2015		December 31, 2014		December 31, 2013
Cash proceeds	$	180	$	186	$	82
Common shares purchased	8		8		4
Weighted-average price per share	$	22.44	$	22.44	$	20.08

As of December 31, 2015, $80 million of ESPP withholdings were recorded as a liability on the consolidated balance sheet for the purchase that occurred in January 2016.

EMC Stock Options

The following table summarizes our option activity under all equity plans since January 1, 2013 (shares in millions):



	Number of Shares		Weighted Average Exercise Price (per share)
Outstanding, January 1, 2013	77		$	14.39
Options granted relating to business acquisitions	1		3.29
Forfeited	(1	)	13.36
Exercised	(20	)	13.10
Outstanding, December 31, 2013	57		14.56
Options granted relating to business acquisitions	8		0.62
Forfeited	(1	)	13.55
Exercised	(24	)	13.19
Outstanding, December 31, 2014	40		12.68
Exercised	(13	)	11.38
Outstanding, December 31, 2015	27		13.20
Exercisable, December 31, 2015	22		15.75
Vested and expected to vest, December 31, 2015	26		$	13.50

Apart from options issued through business acquisitions which are discussed in Note C, there were no stock options granted during the years ended December 31, 2015, 2014 and 2013. At December 31, 2015, the weighted-average remaining contractual term was 2.8 years and the aggregate intrinsic value was $215 million for the 22 million exercisable shares. For the 26 million shares vested and expected to vest at December 31, 2015, the weighted-average remaining contractual term was 2.6 years and the aggregate intrinsic value was $323 million. The intrinsic value is based on our closing stock price of $25.68 as of December 31, 2015, which would have been received by the option holders had all in-the-money options been exercised as of that date. The total pre-tax intrinsic values of options exercised in 2015, 2014 and 2013 were $203 million, $353 million and $240 million, respectively. Cash proceeds from the exercise of stock options were $142 million, $317 million and $260 million in 2015, 2014 and 2013, respectively. Income tax benefits realized from the exercise of stock options in 2015, 2014 and 2013 were $28 million, $61 million and $45 million, respectively. Pursuant to the terms of the Merger Agreement, all outstanding stock options will vest at least 20 days prior to the close of the transaction.

EMC Restricted Stock and Restricted Stock Units

Our restricted stock awards and units are valued based on our stock price on the grant date. Our restricted stock awards and units have various vesting terms from the date of grant, including pro rated vesting over three or four years, cliff vesting at the end of three or five years with acceleration for achieving specified performance criteria and vesting on various dates contingent on achieving specified performance criteria. For awards with non-market performance conditions, management evaluates the criteria for each grant to determine the probability that the performance condition will be achieved.

The following table summarizes our restricted stock and restricted stock unit activity since January 1, 2013 (shares in millions):



	Number of Shares		Weighted Average Grant Date Fair Value
Restricted stock and restricted stock units at January 1, 2013	47		$	24.39
Granted	20		25.55
Vested	(15	)	22.61
Forfeited	(4	)	24.80
Outstanding, December 31, 2013	48		25.43
Granted	23		27.65
Vested	(14	)	24.89
Forfeited	(4	)	25.63
Outstanding, December 31, 2014	53		26.50
Granted	33		25.89
Vested	(19	)	25.13
Forfeited	(6	)	26.72
Restricted stock and restricted stock units at December 31, 2015	61		$	26.70

The total intrinsic values of restricted stock and restricted stock units that vested in 2015, 2014 and 2013 were $514 million, $388 million and $404 million, respectively. As of December 31, 2015, restricted stock and restricted stock units representing 61 million shares were outstanding and unvested, with an aggregate intrinsic value of $1,554 million. These shares and units are scheduled to vest through 2019. Of the total shares of restricted stock and restricted stock units outstanding, 49 million shares and units will vest upon fulfilling service conditions, of which vesting for 4 million shares and units will accelerate upon achieving performance conditions. The remaining 11 million shares and units will vest only if certain performance conditions are achieved. Pursuant to the terms of the Merger Agreement, all eligible outstanding restricted stock and restricted stock units will vest upon the close of the transaction.

VMware Equity Plans

In June 2007, VMware adopted its 2007 Equity and Incentive Plan (the “2007 Plan”). As of December 31, 2015, the number of authorized shares under the 2007 Plan was 122 million. The number of shares underlying outstanding equity awards that VMware assumes in the course of business acquisitions are also added to the 2007 Plan reserve on an as-converted basis. VMware has assumed 4 million shares, which accordingly have been added to the authorized shares under the 2007 Plan reserve.

Awards under the 2007 Plan may be in the form of stock-based awards such as restricted stock units or stock options. Generally, restricted stock grants made under the 2007 Plan have a three-year to four-year period over which they vest and vest 25% the first year and semi-annually thereafter. VMware’s Compensation and Corporate Governance Committee determines the vesting schedule for all equity awards. 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 monthly thereafter over the following three years and expire between six and seven years from the date of grant. VMware utilizes both authorized and unissued shares to satisfy all shares issued under the 2007 Plan. At December 31, 2015, there were an aggregate of 18 million shares of common stock available for issuance pursuant to future grants under the 2007 Plan.

VMware Employee Stock Purchase Plan

In June 2007, VMware adopted its 2007 Employee Stock Purchase Plan (the “ESPP”), which is intended to be qualified under Section 423 of the Internal Revenue Code. As of December 31, 2015, the number of authorized shares under the ESPP was 14 million shares. Under the ESPP, eligible VMware employees are granted options to purchase shares at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. Options to purchase shares are generally granted twice yearly on February 1 and August 1 and exercisable on the succeeding July 31 and January 31, respectively, of each year. As of December 31, 2015, there were 5 million shares of VMware Class A common stock available for issuance pursuant to future grants under the ESPP.

The following table summarizes ESPP activity in the years ended December 31, 2015, 2014 and 2013 (table in millions, except per share amounts):



	For the Year Ended
	December 31, 2015		December 31, 2014		December 31, 2013
Cash proceeds	$	98	$	80	$	76
Class A common shares purchased	1		1		1
Weighted-average price per share	$	65.54	$	73.21	$	65.97

As of December 31, 2015, $48 million of ESPP withholdings were recorded as a liability on the consolidated balance sheet for the purchase that occurred in January 2016.

VMware Stock Options

The following table summarizes stock option activity since January 1, 2013 for VMware employees in VMware stock options (shares in millions):



	Number of Shares		Weighted Average Exercise Price (per share)
Outstanding, January 1, 2013	10		$	34.36
Granted	1		71.53
Exercised	(5	)	28.12
Outstanding, December 31, 2013	6		44.12
Granted	2		50.91
Exercised	(2	)	35.58
Outstanding, December 31, 2014	6		50.54
Exercised	(3	)	29.44
Outstanding, December 31, 2015	3		64.56
Exercisable, December 31, 2015	2		59.31
Vested and expected to vest	3		$	63.89

The above table includes stock options granted in conjunction with unvested stock options assumed in business combinations. As a result, the weighted-average exercise price per share may vary from the VMware stock price at time of grant.

As of December 31, 2015, for the VMware stock options, the weighted-average remaining contractual term was 4.5 years and the aggregate intrinsic value was $26 million for the 2 million exercisable shares. For the 3 million options vested and expected to vest at December 31, 2015, the weighted-average remaining contractual term was 4.9 years and the aggregate intrinsic value was $43 million. These aggregate intrinsic values represent the total pre-tax intrinsic values based on VMware’s closing stock price of $56.57 as of December 31, 2015, which would have been received by the option holders had all in-the-money options been exercised as of that date. The options exercised in 2015, 2014 and 2013 had a pre-tax intrinsic value of $136 million, $147 million and $256 million, respectively. The total fair value of VMware stock options that vested during the years ended December 31, 2015, 2014 and 2013 was $60 million, $64 million and $60 million, respectively.

VMware Restricted Stock

The following table summarizes restricted stock activity since January 1, 2013 (shares in millions):



	Number of Units		Weighted Average Grant Date Fair Value (per unit)
Restricted stock at January 1, 2013	12		$	91.93
Granted	7		76.20
Vested	(4	)	83.21
Forfeited	(2	)	90.55
Outstanding, December 31, 2013	13		85.85
Granted	6		92.82
Vested	(5	)	86.27
Forfeited	(1	)	88.03
Outstanding, December 31, 2014	13		88.88
Granted	13		72.42
Vested	(5	)	90.72
Forfeited	(2	)	87.39
Outstanding, December 31, 2015	19		$	77.29

As of December 31, 2015, restricted stock representing 19 million shares of VMware’s Class A common stock were outstanding, with an aggregate intrinsic value of $1,057 million based on VMware’s closing price as of December 31, 2015. The total fair value of VMware restricted stock awards that vested during the years ended December 31, 2015, 2014 and 2013 was $379 million, $480 million and $340 million, respectively.

Stock-Based Compensation Expense

The following tables summarize the components of total stock-based compensation expense included in our consolidated income statements in 2015, 2014 and 2013 (in millions):



	Year Ended December 31, 2015
	Stock Options		Restricted Stock		Retirement Benefit Stock Match		Total Stock-Based Compensation
Cost of product sales	$	13	$	24	$	3	$	40
Cost of services	16		86		14		116
Research and development	71		313		11		395
Selling, general and administrative	70		453		19		542
Stock-based compensation expense before income taxes	170		876		47		1,093
Income tax benefit	38		192		18		248
Total stock-based compensation, net of tax	$	132	$	684	$	29	$	845



	Year Ended December 31, 2014
	Stock Options		Restricted Stock		Total Stock-Based Compensation
Cost of product sales	$	16	$	38	$	54
Cost of services	20		72		92
Research and development	79		303		382
Selling, general and administrative	78		415		493
Stock-based compensation expense before income taxes	193		828		1,021
Income tax benefit	45		179		224
Total stock-based compensation, net of tax	$	148	$	649	$	797

	Year Ended December 31, 2013
	Stock Options		Restricted Stock		Total Stock-Based Compensation
Cost of product sales	$	19	$	29	$	48
Cost of services	15		61		76
Research and development	75		282		357
Selling, general and administrative	82		372		454
Stock-based compensation expense before income taxes	191		744		935
Income tax benefit	56		170		226
Total stock-based compensation, net of tax	$	135	$	574	$	709

Stock-based compensation expense includes $59 million, $57 million and $54 million of expense associated with our employee stock purchase plans for 2015, 2014 and 2013, respectively. During the year ended December 31, 2015, stock-based compensation expense also includes $47 million related to EMC’s supplemental 401(k) matching contribution as discussed in footnote L.

The table below presents the net change in amounts capitalized or accrued in 2015 and 2014 for the following items (in millions):



	Increased (decreased) during the year ended December 31, 2015			Increased (decreased) during the year ended December 31, 2014
Accrued expenses (accrued warranty expenses)	$	(13	)	$	—
Other assets	(24		)	(19		)

As of December 31, 2015, the total unrecognized after-tax compensation cost for stock options, restricted stock and restricted stock units was $1,811 million. This non-cash expense is scheduled to be recognized through 2019 with a weighted-average remaining period of 1.4 years.

Fair Value of VMware Options

The fair value of each option to acquire VMware Class A common stock granted during the years ended December 31, 2015, 2014 and 2013 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



	For the Year Ended December 31,
VMware Stock Options	2015			2014			2013
Dividend yield	None			None			None
Expected volatility	32.0		%	36.2		%	38.5		%
Risk-free interest rate	1.1		%	0.9		%	0.9		%
Expected term (in years)	3.3			3.2			3.6
Weighted-average fair value at grant date	$	27.16		$	48.47		$	29.47
	For the Year Ended December 31,
VMware Employee Stock Purchase Plan	2015			2014			2013
Dividend yield	None			None			None
Expected volatility	30.1		%	32.3		%	32.9		%
Risk-free interest rate	0.1		%	0.1		%	0.1		%
Expected term (in years)	0.5			0.5			0.5
Weighted-average fair value at grant date	$	20.59		$	20.71		$	20.45

The weighted-average grant date fair value of VMware stock options can fluctuate from period to period primarily due to higher valued options assumed through business combinations with exercise prices lower than the fair market value of VMware’s stock on the date of grant.

For all equity awards granted during the years ended 2015, 2014 and 2013, volatility was based on an analysis of historical stock prices and implied volatilities of VMware’s Class A common stock. The expected term is based on historical exercise patterns and post-vesting termination behavior, the term of the purchase period for grants made under the ESPP, or the weighted-average remaining term for options assumed in acquisitions. VMware’s expected dividend yield input was zero as it has not historically paid, nor expects in the future to pay, cash dividends on its common stock. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options.