Cisco 2006 Annual Report Download - page 32

2006 Annual Report 35
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. We recorded a noncash variable stock compensation
adjustment of $58 million in the third quarter of scal 2004 to the cumulative stock compensation charge recorded in the second quarter
of scal 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 R&D expense of $52 million and sales and marketing
expense of $6 million in the Consolidated Statements of Operations, as stock-based compensation related to acquisitions and investments
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 to reect the unvested
portion of the formula-based valuation of the Andiamo employee stock and options. See Note 3 to the Consolidated Financial Statements.
The amount of deferred stock-based compensation was xed at the date of acquisition and was being amortized over the vesting period
of the Andiamo employee stock and options of approximately two years.
A summary of the accounting of the initial 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
Recent Accounting Pronouncement
In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
No. 109” (“FIN 48”), which is a change in accounting for income taxes. FIN 48 species how tax benets for uncertain tax positions are to
be recognized, measured, and derecognized in nancial statements; requires certain disclosures of uncertain tax matters; species how
reserves for uncertain tax positions should be classied on the balance sheet; and provides transition and interim-period guidance, among
other provisions. FIN 48 is effective for scal years beginning after December 15, 2006 and as a result, is effective for us in the rst quarter
of scal 2008. We are currently evaluating the impact of FIN 48 on our Consolidated Financial Statements.
Liquidity and Capital Resources
The following sections discuss the effects of changes in our balance sheet and cash ows, contractual obligations, other commitments, and
the stock repurchase program on our liquidity and capital resources.
Balance Sheet and Cash Flows
Cash and Cash Equivalents and Investments The following table summarizes our cash and cash equivalents and investments (in millions):
July 30, 2005
Increase
(Decrease)July 29, 2006
Cash and cash equivalents $ 3,297 $ 4,742 $ (1,445)
Fixed income securities 13,805 10,372 3,433
Publicly traded equity securities 712 941 (229)
Total $ 17,814 $ 16,055 $ 1,759
The increase in cash and cash equivalents and investments was primarily a result of cash provided by operating activities of $7.9 billion, the
issuance of debt of $6.5 billion, and cash provided by the issuance of common stock of $1.7 billion related to employee stock option exercises
and employee stock purchases, partially offset by cash used for the repurchase of common stock of $8.3 billion, acquisitions of businesses
of $5.3 billion net of cash, cash equivalents, and investments acquired, and capital expenditures of $772 million.
Effective October 29, 2005, we changed the method of classication of our investments previously classied as long-term investments
to current assets, and the balances for the prior years have been reclassied to conform to the current year’s presentation. This new method
classies these securities as current or long-term based on the nature of the securities and the availability for use in current operations
while the prior classication was based on the maturities of the investments. We believe this method is preferable because it is more reective
of our assessment of the overall liquidity position.
Management’s Discussion and Analysis of Financial Condition and Results of Operations