Cisco 2005 Annual Report Download - page 35

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38
Our equity portfolio consists of securities with characteristics that most closely match the Standard & Poor’s 500 Index or NASDAQ
Composite Index. These equity securities are held for purposes other than trading. The modeling technique used measures the change
in fair value arising from selected hypothetical changes in each stock’s price. Stock price fluctuations of plus or minus 15%, 25%, and
35% were selected based on the probability of their occurrence. Our impairment charges on certain publicly traded equity securities
were $5 million and $412 million during fiscal 2005 and 2003, respectively. There were no impairment charges on publicly traded
equity securities in fiscal 2004. The impairment charges were related to the decline in the fair value of certain publicly traded equity
securities below their cost basis that were judged to be other-than-temporary.
Investments In Privately Held Companies
We have invested in privately held companies, some of which are in the startup or development stages. These investments are inherently
risky because the markets for the technologies or products these companies are developing are typically in the early stages and may
never materialize. We could lose our entire initial investment in these companies. These investments are primarily carried at cost,
which as of July 30, 2005 was $421 million, compared with $354 million at July 31, 2004, and are recorded in other assets in the
Consolidated Balance Sheets. Our impairment charges on investments in privately held companies were $39 million, $112 million,
and $281 million during fiscal 2005, 2004, and 2003, respectively.
Our evaluation of equity investments in private and public companies is based on the fundamentals of the businesses, including,
among other factors, the nature of their technologies and potential for financial return to us.
Derivative Instruments
Foreign Currency Derivatives
We enter into foreign exchange forward contracts to reduce the short-term effect of foreign currency fluctuations on receivables,
investments, and payables, primarily denominated in Australian, Canadian, Japanese, and several European currencies, including the
euro and British pound. Our market risks associated with our foreign currency receivables, investments, and payables relate primarily
to variances from our forecasted foreign currency transactions and balances.
Approximately 75% of our operating expenses are U.S.-dollar denominated. In order to reduce variability in operating expenses
caused by the remaining non-U.S.-dollar denominated operating expenses, we periodically hedge certain foreign currency forecasted
transactions with currency options with maturities up to 18 months. These hedging programs are not designed to provide foreign
currency protection over longer time horizons. In designing a specific hedging approach, we consider several factors, including
offsetting exposures, significance of exposures, costs associated with entering into a particular hedge instrument, and potential
effectiveness of the hedge. The gains and losses on foreign exchange contracts mitigate the variability in operating expenses associated
with currency movements. Primarily because of our limited currency exposure to date, the effect of foreign currency fluctuations has
not been material to our Consolidated Financial Statements. In fiscal 2005, the effect of foreign currency fluctuations, net of hedging,
increased total research and development, sales and marketing, and general and administrative expenses by approximately 2%
compared with fiscal 2004 and by approximately 2.5% in fiscal 2004 compared with fiscal 2003. The impact of foreign currency
fluctuations on sales has not been material because our sales are primarily denominated in U.S. dollars.
Foreign exchange forward and option contracts as of July 30, 2005 are summarized as follows (in millions):
 

   
    
  
   
   
Our foreign exchange forward contracts related to current assets and liabilities generally range from one to three months in original
maturity. Additionally, we have entered into foreign exchange forward contracts related to long-term customer financings with
maturities of up to two years. The foreign exchange forward contracts related to investments generally have maturities of less than
one year. Currency option contracts generally have maturities of less than 18 months. We do not enter into foreign exchange forward
and option contracts for trading purposes. We do not expect gains or losses on these derivative instruments to have a material impact
on our financial results. See Note 8 to the Consolidated Financial Statements.
Quantitative and Qualitative Disclosures about Market Risk