Cisco 2003 Annual Report Download - page 32

Purchase Commitments with Contract Manufacturers and Suppliers We use several contract manufacturers and suppliers to provide manufacturing
services for our products. During the normal course of business, in order to reduce manufacturing lead times and ensure adequate
component supply, we enter into agreements with certain contract manufacturers and suppliers that allow them to procure inventory
based upon criteria as defined by us. As of July 26, 2003, we have purchase commitments for inventory of approximately $718 million,
compared with $825 million as of July 27, 2002. These purchase commitments are expected to be fullfilled within one year.
We record a liability for purchase commitments related to on-order inventory that is in excess of our future demand forecasts. As
of July 26, 2003, the liability for purchase commitments was $99 million, compared with $238 million as of July 27, 2002, and was
included in other accrued liabilities.
Other Commitments In fiscal 2001, we entered into an agreement to invest approximately $1.0 billion in venture funds managed by
SOFTBANK Corp. and its affiliates (“SOFTBANK”), which are required to be funded on demand. In fiscal 2003, this agreement was
amended to a commitment of up to $800 million, of which up to $550 million is to be invested in venture funds under terms similar
to the original agreement and $250 million invested as senior debt with entities as directed by SOFTBANK. Our commitment to
fund the senior debt is contingent upon the achievement of certain agreed-upon milestones. As of July 26, 2003, we have invested
$247 million in the venture funds and $49 million in the senior debt, and both were recorded as investments in privately held companies
in our Consolidated Balance Sheets. We had invested $100 million of the original venture funds commitment as of July 27, 2002.
We provide structured financing to certain qualified customers to be used for the purchase of equipment and other needs through
our wholly owned subsidiary, Cisco Systems Capital Corporation. These loan commitments may be funded over a two- to three-year
period, provided that these customers achieve specific business milestones and satisfy certain financial covenants. Our outstanding loan
commitments were approximately $97 million, of which approximately $38 million was eligible for draw-down as of July 26, 2003,
compared with outstanding loan commitments of approximately $948 million, of which approximately $209 million was eligible for
draw-down as of July 27, 2002. The decrease in loan commitments as of July 26, 2003, compared with July 27, 2002, was related to
terminations and reductions of these commitments due to customers not meeting specific business milestones and not satisfying certain
financial covenants. As of July 26, 2003, structured loans were $42 million, compared with $61 million as of July 27, 2002.
We have entered into several agreements to purchase or develop real estate, subject to the satisfaction of certain conditions. As
of July 26, 2003, the total amount of commitments, if certain conditions are met, was approximately $38 million, compared with
approximately $491 million as of July 27, 2002. The decrease in real estate commitments as of July 26, 2003, compared with July 27,
2002, was due to a combination of completed real estate construction and renegotiated commitments. The payments due under these
commitments are based on the completion of construction of the real estate or the achievement of other milestones.
As of July 26, 2003, we have a commitment of approximately $130 million to purchase the remaining portion of the minority
interest of Cisco Systems, K.K. (Japan), compared with approximately $190 million as of July 27, 2002, and the payments under these
commitments are based on a put option held by the minority shareholders.
We also have certain other funding commitments related to our privately held investments that are based on the achievement
of certain agreed-upon milestones. The funding commitments were approximately $95 million as of July 26, 2003, compared with
approximately $152 million as of July 27, 2002.
Off-Balance Sheet Arrangements Based on recently adopted regulations of the Securities and Exchange Commission, our investments in
unconsolidated variable interest entities as of July 26, 2003, which we have disclosed in our previous filings, are considered off-balance
sheet arrangements. However, in regard to our investment in Andiamo Systems, Inc. (“Andiamo”) as discussed below, we are required to
consolidate Andiamo beginning the first day of the first quarter of fiscal 2004, and as a result, our investment in Andiamo will no
longer be considered an off-balance sheet arrangement in fiscal 2004.
In April 2001, we entered into a commitment to provide convertible debt funding of approximately $84 million to Andiamo, a storage
switch developer. This debt will be convertible into approximately 44% of the equity in Andiamo, subject to certain terms and conditions.
In connection with this investment, we obtained a call option that provided us the right to purchase Andiamo. The purchase price
under the call option is based on a valuation of Andiamo using a negotiated formula as discussed below. We also entered into a
commitment to provide non-convertible debt funding to Andiamo of approximately $100 million through the close of the acquisition,
subject to periodic funding.
30 CISCO SYSTEMS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS