Cisco 2004 Annual Report Download - page 47

The Company adopted FIN 46(R) effective January 24, 2004. The Company evaluated its debt investment in Andiamo and
determined that Andiamo was a variable interest entity under FIN 46(R). The Company concluded that the Company was the primary
beneficiary as defined by FIN 46(R) and, therefore, accounted for Andiamo as if the Company had consolidated Andiamo since the
Company’s initial investment in April 2001. The consolidation of Andiamo from the date of the Company’s initial investment required
accounting for the call option as a repurchase right. Under FASB Interpretation No. 44, “Accounting for Certain Transactions Involving
Stock Compensation,” and related interpretations, variable accounting was required for substantially all Andiamo employee stock and
options because the ending purchase price was primarily derived from a revenue-based formula.
Effective January 24, 2004, the last day of the second quarter of fiscal 2004, the Company recorded a noncash cumulative stock
compensation charge of $567 million, net of tax (representing the amount of variable compensation from April 2001 through January 2004).
This charge was reported as a separate line item in the Consolidated Statements of Operations as a cumulative effect of accounting
change, net of tax. The charge was based on the value of the Andiamo employee stock and options and their vesting from the adoption
of FIN 46(R) pursuant to the formula-based valuation.
On February 19, 2004, the Company completed the acquisition of Andiamo, exchanging approximately 23 million shares of the
Company’s common stock for Andiamo shares not owned by the Company and assuming approximately 6 million stock options, for
a total estimated value of $750 million, primarily derived from the revenue-based formula, which after stock price related adjustments
resulted in a total amount recorded of $722 million, as summarized in the table below.
Subsequent to the adoption of FIN 46(R), changes to the value of Andiamo and the continued vesting of the employee stock
and options resulted in an adjustment to the noncash stock compensation charge. The Company recorded a noncash variable stock
compensation adjustment of $58 million in the third quarter of fiscal 2004 to the cumulative stock compensation charge recorded in
the second quarter of fiscal 2004 to account for the additional vesting of the Andiamo employee stock and options and changes in the
formula-based valuation from January 24, 2004 until February 19, 2004. This noncash adjustment was reported as operating expense
in the Consolidated Statements of Operations, as amortization of deferred stock-based compensation in the Consolidated Statements
of Cash Flows, and as an increase to additional paid-in capital in the Consolidated Statements of Shareholders’ Equity. In addition,
upon completion of the acquisition, deferred stock-based compensation of $90 million was recorded in the Consolidated Balance Sheets
to reflect the unvested portion of the formula-based valuation of the Andiamo employee stock and options. The amount of deferred
stock-based compensation was fixed at the date of acquisition and will be amortized over the remaining vesting period of Andiamo
employee stock and options of approximately two years.
A summary of the accounting of the consolidation under FIN 46(R) and the subsequent purchase of Andiamo, after stock price
related adjustments, is as follows (in millions):
Amount
Cumulative effect of accounting change, net of tax benefit of $5 $ 567
Variable stock-based compensation 58
Deferred stock-based compensation 90
Net assets 7
Total $ 722
50 CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS