VMware 2012 Annual Report Download - page 102

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
a stand-alone basis and the amount of tax calculated per the tax sharing agreement was recorded as a decrease in stockholders’ equity of $4.4
million . In 2011 and 2010 , the difference between the amount of tax calculated on a stand-alone basis and the amount of tax calculated per the
tax sharing agreement was recorded as an increase in stockholders’ equity of $7.8 million and $6.5 million , respectively.
In certain geographic regions where VMware does not have an established legal entity, VMware contracts with EMC subsidiaries for
support services and EMC personnel who are managed by VMware. The costs incurred by EMC on VMware’
s behalf related to these employees
are passed on to VMware and VMware is charged a mark-up intended to approximate costs that would have been charged had VMware
contracted for such services with an unrelated third party. These costs are included as expenses in VMware’s consolidated statements of income
and primarily include salaries, benefits, travel and rent. Additionally, EMC incurs certain administrative costs on VMware’s behalf in the U.S.
that are also recorded as expenses in VMware’s consolidated statements of income. The total cost of the services provided to VMware by EMC
as described above was $106.3 million , $82.6 million and $66.4 million in the years ended December 31, 2012 , 2011 and 2010 , respectively.
In the years ended December 31, 2012 , 2011 and 2010 , $4.7 million , $3.9 million and $4.1 million , respectively, of interest expense was
recorded related to the note payable to EMC and included in interest expense with EMC on VMware’s consolidated statements of income.
VMware’s interest expense as a separate, stand-alone company may be higher or lower than the amounts reflected in the consolidated financial
statements.
In the second quarter of 2011, VMware acquired certain assets relating to EMC’s Mozy cloud-based data storage and data center services,
including certain data center assets and a license to certain intellectual property. EMC retained ownership of the Mozy business and its
remaining assets. EMC continues to be responsible to Mozy customers for Mozy products and services and continues to recognize revenue from
such products and services. VMware entered into an operational support agreement with EMC through the end of 2012, pursuant to which
VMware took over responsibility to operate the Mozy service on behalf of EMC. Pursuant to the support agreement, costs incurred by VMware
to support EMC’s Mozy services, plus a mark-up intended to approximate third-party costs and a management fee, were reimbursed to VMware
by EMC. On the consolidated statements of income, in the years ended December 31, 2012 and 2011 , such amounts were $65.0 million and
$39.0 million , respectively. These amounts were recorded as a reduction to the costs VMware incurred. As of December 31, 2012 , the
operational support agreement between VMware and EMC was amended such that VMware will no longer operate the Mozy service on behalf
of EMC. Under the amendment, VMware will transfer substantially all employees that support Mozy services to EMC and EMC will purchase
certain assets from VMware in relation to transferred employees. The termination of service and related transfer of employees and sale of assets
is anticipated to be substantially completed during the first quarter of 2013.
In 2010, VMware acquired certain software product technology and expertise from EMC’s Ionix IT management business for cash
consideration of $175.0 million
. EMC retained the Ionix brand and will continue to offer customers the products acquired by VMware, pursuant
to an ongoing reseller agreement between EMC and VMware. During the years ended December 31, 2011 and 2010 , $14.4 million and $10.6
million , respectively, of contingent amounts were paid to EMC. These payments were recorded as equity transactions and were offsets to the
initial capital contribution from EMC. As of December 31, 2011 , all contingent payments under the agreement had been made.
From time to time, VMware and EMC enter into agreements to collaborate on technology projects. In the years ended December 31, 2012 ,
2011 and 2010 , VMware received $6.5 million , $2.3 million and $2.3 million , respectively, from EMC for EMC's portion of expenses related
to such projects.
Effective September 1, 2012, Pat Gelsinger succeeded Paul Maritz as Chief Executive Officer of VMware. Prior to joining VMware, Pat
Gelsinger was the President and Chief Operating Officer of EMC Information Infrastructure Products. Paul Maritz remains a board member of
VMware and took on the role of Chief Strategy Officer of EMC. With the exception of a long-term incentive performance award from EMC that
Pat Gelsinger agreed to cancel in consideration of a new performance stock unit award from VMware, both Paul Maritz and Pat Gelsinger
retained and continue to vest in their respective equity awards that they held as of September 1, 2012. Stock-based compensation related to Pat
Gelsinger’s EMC awards will be recognized on VMware’s consolidated statements of income over the awards’ remaining requisite service
periods. Stock-based compensation related to Paul Maritz’s VMware awards will be recognized as an expense by EMC.
As of December 31, 2012 , VMware had $67.9 million net due from EMC, which consisted of $111.5 million due from EMC, partially
offset by $43.6 million due to EMC. As of December 31, 2011 , VMware had $73.8 million net due from EMC, which consisted of $101.4
million due from EMC, partially offset by $27.6 million due to EMC. These amounts resulted from the related party transactions described
above. Additionally, VMware had a net income tax payable due to EMC of $31.9 million and $3.3 million as of December 31, 2012 and 2011,
which were included in accrued expenses and other on VMware’s consolidated balance sheets. Balances due to or from EMC which are
unrelated to tax obligations are generally settled in cash
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