Cisco 2012 Annual Report Download - page 124

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Over the next 12 months, as VCE scales its operations, the Company expects that it will make additional
investments in VCE and may incur additional losses proportionate with the Company’s share ownership.
From time to time, EMC and Cisco may enter into guarantee agreements on behalf of VCE to indemnify third
parties, such as customers, for monetary damages. Such guarantees were not material as of July 28, 2012.
Insieme Networks, Inc. In the third quarter of fiscal 2012, the Company made an investment in Insieme
Networks, Inc. (“Insieme”), an early stage company focused on research and development in the data center
market. This investment includes $100 million of funding and a license to certain of the Company’s technology.
As a result of this investment, the Company owns approximately 86% of Insieme and has consolidated the results
of Insieme in its Consolidated Financial Statements beginning in the third quarter of fiscal 2012. The net loss
attributable to the noncontrolling interests was not presented separately in the Consolidated Statements of
Operations due to the amount being immaterial.
In connection with this investment, the Company and Insieme have entered into a put/call option agreement that
provides the Company with the right to purchase the remaining interests in Insieme. In addition, the
noncontrolling interest holders can require the Company to purchase their shares upon the occurrence of certain
events. If the Company acquires the remaining interests of Insieme, the noncontrolling interest holders are
eligible to receive two milestone payments, which will be determined using agreed-upon formulas based on
revenue for certain of Insieme’s products. The Company will begin recognizing the amounts due under the
milestone payments when it is determined that such payments are probable of being earned, which the Company
expects may be in fiscal 2014. When such a determination is made, the milestone payments will then be recorded
as compensation expense by the Company based on an estimate of the fair value of the amounts probable of
being earned, 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. The
maximum amount that could be recorded as compensation expense by the Company is approximately $750
million. The milestone payments, if earned, are expected to be paid primarily during fiscal 2016 and fiscal 2017.
Other Variable Interest Entities In the ordinary course of business, the Company has investments in other
privately held companies and provides financing to certain customers. These other privately held companies and
customers may be considered to be variable interest entities. The Company evaluates on an ongoing basis its
investments in these other privately held companies and its customer financings and has determined that as of
July 28, 2012 there were no other variable interest entities that require to be consolidated in the Company’s
Consolidated Financial Statements.
(e) Product Warranties and Guarantees
The following table summarizes the activity related to product warranty liability during fiscal 2012 and 2011 (in
millions):
July 28, 2012 July 30, 2011
Balance at beginning of fiscal year ............... $ 342 $ 360
Provision for warranties issued .................. 661 456
Payments ................................... (588) (474)
Balance at end of fiscal year .................... $ 415 $ 342
The Company accrues for warranty costs as part of its cost of sales based on associated material product costs,
labor costs for technical support staff, and associated overhead. The Company’s products are generally covered
by a warranty for periods ranging from 90 days to five years, and for some products the Company provides a
limited lifetime warranty.
In the normal course of business, the Company indemnifies other parties, including customers, lessors, and
parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold
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