Cisco 2004 Annual Report Download - page 43

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3. BUSINESS COMBINATIONS
Purchase Acquisitions
During the second quarter of fiscal 2004, the Company completed the acquisition of Latitude Communications, Inc. (“Latitude”) to
add rich-media conferencing that combines voice, video, and Web conferencing to its IP communications. During the third quarter of
fiscal 2004, the Company completed the acquisition of Riverhead Networks, Inc. to add to its portfolio of security solutions that help
customers defend against Distributed Denial of Service (DDoS) attacks and other security threats. In addition, during the third quarter
of fiscal 2004, the Company completed the acquisition of Twingo Systems, Inc. to add desktop security features for Secure Sockets Layer
(SSL) virtual private networks (VPNs) to its networking products. A summary of the acquisitions is as follows (in millions):
Purchased
Cash Purchase Assumed In-Process Intangible
Acquisition Consideration Liabilities R&D Expense Goodwill Assets
Latitude Communications, Inc. $ 86 $29 $ 1 $ 60 $ 16
Riverhead Networks, Inc. 36 6 2 25 7
Twingo Systems, Inc. 5 1 — 5 1
Total $127 $ 36 $ 3 $ 90 $ 24
The purchase consideration for the Company’s acquisitions is also allocated to tangible assets and deferred stock-based compensation.
Deferred stock-based compensation represents the intrinsic value of the unvested portion of any restricted shares exchanged, options
assumed, or options canceled and replaced with the Company’s options and is amortized as compensation expense over the remaining
respective future vesting periods. The balance for deferred stock-based compensation is reflected as a reduction to additional paid-in
capital in the Consolidated Statements of Shareholders’ Equity. The following table presents the activity of deferred stock-based
compensation, including the deferred stock-based compensation relating to the acquisition of Andiamo of $90 million (in millions):
July 31, 2004 July 26, 2003 July 27, 2002
Balance at beginning of fiscal year $ 262 $ 182 $293
Purchase acquisitions 94 227 91
Amortization (186) (131) (187)
Canceled unvested options (17) (16) (15)
Balance at end of fiscal year $153 $262 $182
The Company’s methodology for allocating the purchase price to purchase acquisitions and to in-process research and development
(“in-process R&D”) is determined through established valuation techniques in the high-technology communications equipment industry.
In-process R&D is expensed upon acquisition because technological feasibility has not been established and no future alternative uses
exist. Total in-process R&D expense in fiscal 2004, 2003, and 2002 was $3 million, $4 million, and $65 million, respectively. The
in-process R&D expense that was attributable to stock consideration for the same periods was $0, $4 million, and $53 million, respectively.
46 CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS