Cisco 2007 Annual Report Download - page 37

40 Cisco Systems, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table summarizes our contractual obligations at July 28, 2007 (in millions):
PAYMENTS DUE BY PERIOD
Total
Less than
1 Year
1 to 3
Years
3 to 5
Years
More than
5 YearsJuly 28, 2007
Operating leases $ 1,603 $ 252 $ 384 $ 294 $ 673
Purchase commitments with contract manufacturers and suppliers 2,581 2,581 — — —
Purchase obligations 1,580 1,009 308 187 76
Long-term debt 6,505 — 503 3,002 3,000
Other long-term liabilities 171 22 42 22 85
Total $ 12,440 $ 3,864 $ 1,237 $ 3,505 $ 3,834
Operating Leases We lease office space in several U.S. locations. Outside the United States, larger sites include Australia, Belgium,
Canada, China, France, Germany, India, Israel, Italy, Japan, and the United Kingdom. Operating lease amounts include future minimum
lease payments under all our noncancelable operating leases with an initial term in excess of one year.
Purchase Commitments with Contract Manufacturers and Suppliers We purchase components from a variety of suppliers and use
several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to
manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with contract manufacturers
and suppliers that either allow them to procure inventory based upon criteria as defined by us or that establish the parameters defining
our requirements. The purchase commitments for inventory are expected to be fulfilled within one year.
In addition to the above, we record a liability for firm, noncancelable, and unconditional purchase commitments for quantities in excess
of our future demand forecasts consistent with our valuation of excess and obsolete inventory. As of July 28, 2007, the liability for these
purchase commitments was $168 million. These amounts are included in other accrued liabilities at July 28, 2007 and are not included
in the preceding table.
Purchase Obligations Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the ordinary
course of business, other than commitments with contract manufacturers and suppliers, for which we have not received the goods or
services. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel,
reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.
Other Long-Term Liabilities Our long-term liabilities consist of accrued liabilities for deferred compensation and defined benefit plans,
the fair value of interest rate swaps, deferred tax liabilities, and other long-term liabilities. The future payments related to the defined benefit
plans, the fair value of interest rate swaps, deferred tax liabilities, and certain other long-term liabilities have not been presented in the table
above due to the uncertainty regarding the timing of future payments with respect to these liabilities.
Nuova Systems, Inc.
In the first quarter of fiscal 2007, we made an investment in Nuova Systems, Inc. (“Nuova”), which conducts research and development on
data center-related products. This investment includes $50 million of funding and a license to certain of our technology. As a result of this
investment, we own approximately 80% of Nuova and have consolidated the results of Nuova in our Consolidated Financial Statements
beginning in the first quarter of fiscal 2007. In April 2007, the agreements were amended to add additional product development activities
to be undertaken by Nuova. Upon the occurrence of certain events, we have committed additional funding, the amount of which was
increased by the April 2007 amendment from up to $42 million to up to $62 million.
In connection with this investment, we have entered into a call option agreement with Nuova that provides us with the right to purchase
the remaining interests of approximately 20% in Nuova. If the call option is exercised by us, the minority interest holders would be eligible to
receive three milestone payments, revised from two milestone payments by the April 2007 amendment, based on agreed-upon formulas.
The exercise of the call option, if exercised, may occur in late fiscal 2008 or early fiscal 2009. The amounts due under the milestone
payments will be recognized by us when it is determined that the exercise of the call option is probable, which may be in advance of the
exercise of the call option, and will be recorded as compensation expense based on an estimate of the fair value of the amounts that could
be earned by the minority interest holders pursuant to a vesting schedule. Subsequent changes to the fair value of the amounts probable
of being earned and the continued vesting will result in adjustments to the recorded compensation expense. If we exercise the call
option, the potential amount that could be recorded as compensation expense would be up to a maximum of $678 million, which amount
was increased by the April 2007 amendment from up to a maximum of $578 million due to compensation expense relating to additional
employees required to perform the additional product development. The potential amounts are expected to be paid during fiscal 2010
through fiscal 2012.