Cisco 2007 Annual Report Download - page 61

64 Cisco Systems, Inc.
Notes to Consolidated Financial Statements
Purchase Commitments with Contract Manufacturers and Suppliers
The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing
services for its products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate
component supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure
inventory based upon criteria as defined by the Company or that establish the parameters defining the Company’s requirements. In certain
instances, these agreements allow the Company the option to cancel, reschedule, and adjust the Company’s requirements based on its
business needs prior to firm orders being placed. Consequently, only a portion of the Company’s reported purchase commitments arising
from these agreements are firm, noncancelable, and unconditional commitments. As of July 28, 2007, the Company had total purchase
commitments for inventory of $2.6 billion, compared with $2.0 billion as of July 29, 2006.
In addition to the above, the Company records a liability for firm, noncancelable, and unconditional purchase commitments for
quantities in excess of its future demand forecasts consistent with the valuation of the Company’s excess and obsolete inventory. As of
July 28, 2007, the liability for these purchase commitments was $168 million, compared with $148 million as of July 29, 2006, and was
included in other accrued liabilities.
Nuova Systems, Inc.
In the first quarter of fiscal 2007, the Company 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 the Company’s
technology. As a result of this investment, the Company owns approximately 80% of Nuova and has consolidated the results of Nuova in
the Company’s 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, the Company has
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, the Company and Nuova have entered into a call option agreement that provides the Company
with the right to purchase the remaining interests of approximately 20% in Nuova. If the call option is exercised by the Company, 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 the Company 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 the Company exercises 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.
Other Commitments
As of July 28, 2007, the Company was party to an agreement to invest approximately $700 million in venture funds and $49 million in senior
debt managed by SOFTBANK that are required to be funded on demand. As of July 28, 2007, the Company had invested $616 million in
the venture funds pursuant to the commitment, compared with $523 million as of July 29, 2006. In addition, as of July 28, 2007 and July 29,
2006, the Company had invested $49 million in the senior debt pursuant to the commitment, all of which has been repaid.
The Company also has certain other funding commitments related to its privately held investments that are based on the achievement
of certain agreed-upon milestones. The remaining funding commitments were approximately $56 million as of July 28, 2007, compared with
approximately $34 million as of July 29, 2006. In addition, as of July 28, 2007, the Company had a commitment to invest $150 million for an
equity interest in VMware, Inc., which was completed subsequent to July 28, 2007.
Variable Interest Entities
In the ordinary course of business, the Company has investments in privately held companies and provides financing to certain customers
through its wholly owned subsidiaries, which may be considered to be variable interest entities. The Company has evaluated its investments
in these privately held companies and customer financings and has determined that there were no significant unconsolidated variable
interest entities as of July 28, 2007.