Cisco 2006 Annual Report Download - page 55

58 Cisco Systems, Inc.
Compensation Expense Related to Acquisitions and Investments
The following table presents the compensation expense related to acquisitions and investments (in millions):
Years Ended July 30, 2005 July 31, 2004 July 29, 2006
Stock-based compensation expense related to acquisitions and investments $ 87 $ 154 $ 244
Cash compensation expense related to acquisitions and investments 36 11 —
Total $ 123 $ 165 $ 244
For the year ended July 31, 2004, the Company recorded a noncash charge for the cumulative effect of accounting change related to
stock-based compensation expense of $567 million, net of tax. Beginning in scal 2006, stock-based compensation related to acquisitionsBeginning in scal 2006, stock-based compensation related to acquisitions
and investments is calculated under SFAS 123(R) and includes deferred stock-based compensation relating to acquisitions completed prior
to scal 2006. As of July 29, 2006, the remaining balance of stock-based compensation to be recognized over the vesting periods was
approximately $70 million. Prior to scal 2006, a portion of the purchase consideration for purchase acquisitions was recorded as deferred
stock-based compensation. Deferred stock-based compensation represented 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 was amortized as stock-based
compensation expense related to acquisitions over the remaining respective vesting periods. The balance for deferred stock-based
compensation was reected 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 for the scal years ended July 30, 2005 and July 31, 2004 (in millions):
July 30, 2005 July 31, 2004
Balance at beginning of fiscal year $ 153 $ 262
Purchase acquisitions 128 94
Amortization (140) (186)
Canceled unvested options (4) (17)
Balance at end of fiscal year $ 137 $ 153
In connection with the Company’s purchase acquisitions and asset purchases, the Company has agreed to pay certain additional amounts
of up to $90 million in cash contingent upon achieving certain agreed-upon technology, development, product, or other milestones or continued
employment of certain employees with the Company. In each case, any additional amounts paid will be recorded as compensation expense.
As of July 29, 2006, the Company has recorded $21 million of additional compensation expense pursuant to these agreements, all of which
was recorded during scal 2006.
In connection with the Company’s acquisitions of variable interest entities, the Company has agreed to pay certain additional amounts
of up to $180 million in cash contingent upon achieving certain agreed-upon technology, development, product, or other milestones or
continued employment of certain employees with the Company. In each case, any additional amounts paid will be recorded as compensation
expense. During scal 2006, the Company recorded $15 million of additional compensation expense pursuant to these agreements. As of
July 29, 2006, the Company has recorded an aggregate of $26 million of additional compensation expense pursuant to these agreements.
Notes to Consolidated Financial Statements