Cisco 2013 Annual Report Download - page 115

(d) Variable Interest Entities
VCE Joint Venture VCE is a joint venture that the Company formed in fiscal 2010 with EMC Corporation (“EMC”), with
investments from VMware, Inc. (“VMware”) and Intel Corporation. VCE helps organizations leverage best-in-class
technologies and disciplines from Cisco, EMC, and VMware to enable the transformation to cloud computing.
As of July 27, 2013, the Company’s cumulative gross investment in VCE was approximately $507 million, inclusive of
accrued interest, and its ownership percentage was approximately 35%. The Company invested approximately $93 million in
VCE during fiscal 2013 and $276 million during fiscal 2012.
The Company accounts for its investment in VCE under the equity method, and its portion of VCE’s net loss is recognized in
other income (loss), net. The Company’s share of VCE’s losses, based upon its portion of the overall funding, was
approximately 36.8% for each of the fiscal years ended July 27, 2013, July 28, 2012, and July 30, 2011, respectively. As of
July 27, 2013, the Company had recorded cumulative losses from VCE of $422 million since inception, of which losses of
$183 million, $160 million, and $76 million were recorded for the fiscal years ended July 27, 2013, July 28, 2012, and July 30,
2011, respectively. The Company’s carrying value in VCE as of July 27, 2013 of $85 million was recorded in other assets.
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 27, 2013.
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. As set forth in the
agreement between the Company and Insieme, this investment includes $100 million of funding and a license to certain of the
Company’s technology. In addition, pursuant to a November 2012 amendment to the agreement between the Company and
Insieme, the Company agreed to invest an additional $35 million in Insieme upon the satisfaction of certain conditions. As of
July 27, 2013, the Company owned approximately 84% of Insieme as a result of these investments and has consolidated the
results of Insieme in its Consolidated Financial Statements effective as of the third quarter of fiscal 2012.
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 may occur in the first half of 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 $863 million. This amount was increased from the
previous maximum of $750 million due to a November 2012 amendment to the agreement, as the parties recognized that
higher staffing levels may be necessary to perform additional product development. 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 27, 2013 there were no other variable interest
entities required 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 2013 and 2012 (in millions):
July 27, 2013 July 28, 2012 July 30, 2011
Balance at beginning of fiscal year .............. $ 415 $ 342 $ 360
Provision for warranties issued ................. 664 661 456
Payments .................................. (648) (588) (474)
Balance at end of fiscal year ................... $ 431 $ 415 $ 342
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