Cisco 2007 Annual Report Download - page 32

2007 Annual Report 35
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Research and Development, Sales and Marketing, and General and Administrative Expenses
R&D expenses increased for fiscal 2006 compared with fiscal 2005 primarily due to higher headcount-related expenses reflecting our
continued investment in R&D efforts in routers, switches, advanced technologies and other product technologies; the effect of employee
share-based compensation expense under SFAS 123(R); and the acquisition of Scientific-Atlanta. R&D expenses include $346 million
of employee share-based compensation expense under SFAS 123(R), and Scientific-Atlanta contributed $90 million of additional R&D
expenses. All of our R&D costs have been expensed as incurred.
Sales and marketing expenses for fiscal 2006 increased compared with fiscal 2005 primarily due to an increase in sales expenses
of approximately $1.1 billion. Sales expenses increased primarily due to an increase in headcount-related expenses, an increase in sales
program expenses, and the acquisition of Scientific-Atlanta, which added approximately $30 million of sales expenses. Sales expenses
also include employee share-based compensation expense under SFAS 123(R) of $337 million during fiscal 2006. Marketing expenses
include $90 million of employee share-based compensation expense under SFAS 123(R) during fiscal 2006. Scientific-Atlanta added
approximately $20 million of marketing expenses.
G&A expenses for fiscal 2006 increased compared with fiscal 2005 primarily because of employee share-based compensation
expense under SFAS 123(R), and the acquisition of Scientific-Atlanta. G&A expenses include $115 million of employee share-based
compensation expense under SFAS 123(R). Scientific-Atlanta contributed approximately $40 million of G&A expenses.
Headcount
Our headcount increased by approximately 11,500 employees in fiscal 2006. Approximately 8,000 of the new employees were attributable
to acquisitions we completed in fiscal 2006.
Share-Based Compensation Expense
On July 31, 2005, we adopted SFAS 123(R) which requires the measurement and recognition of compensation expense for all share-based
payment awards made to employees and directors including employee stock options and employee stock purchase rights based
on estimated fair values. In fiscal 2006, employee share-based compensation expense was $1.0 billion and share-based compensation
expense related to acquisitions and investments was $87 million. There was no share-based compensation expense recognized for fiscal
2005 other than as related to acquisitions and investments.
Amortization of Purchased Intangible Assets and In-Process Research and Development
Amortization of purchased intangible assets included in operating expenses was $393 million in fiscal 2006, compared with $227 million in
fiscal 2005. The increase was related primarily to additional amortization from the Scientific-Atlanta acquisition and an impairment charge
of $69 million from a write down of purchased intangible assets related to certain technology and customer relationships due to a reduction
in expected future cash flows. For additional information regarding our purchased intangible assets, see Note 3 to the Consolidated
Financial Statements.
We recorded in-process R&D of $91 million in fiscal 2006 in connection with the purchase acquisitions completed. The total estimated
cost to complete the technology at the time of these acquisitions was $95 million and the risk-adjusted discount rates for the in-process
R&D recorded in connection with the acquisitions completed in fiscal 2006 ranged from 17% to 22%. We recorded in-process R&D of
$26 million in fiscal 2005 in connection with the purchase acquisitions completed. The total estimated cost to complete the technology
at the time of these acquisitions was $11 million and the risk-adjusted discount rates for the in-process R&D recorded in connection with
the acquisitions completed in fiscal 2005 ranged from 20% to 24%.
Interest Income, Net
The components of interest income, net, are as follows (in millions):
Years Ended July 29, 2006 July 30, 2005
Interest income $ 755 $ 552
Interest expense (148) —
Total $ 607 $ 552
The increase in interest income was primarily due to higher average interest rates on our portfolio of cash and cash equivalents and
fixed-income securities. The interest expense was attributable to the issuance of $6.5 billion in senior unsecured notes, and included the
effect of $6.0 billion of interest rate swaps.