Cisco 2014 Annual Report Download - page 73

Other Long-Term Liabilities Other long-term liabilities primarily include noncurrent income taxes payable, accrued liabilities
for deferred compensation, noncurrent deferred tax liabilities, and certain other long-term liabilities. Due to the uncertainty in
the timing of future payments, our noncurrent income taxes payable of approximately $1,851 million and noncurrent deferred
tax liabilities of $369 million were presented as one aggregated amount in the total column on a separate line in the preceding
table. Noncurrent income taxes payable include uncertain tax positions (see Note 16 to the Consolidated Financial Statements).
Other Commitments
In connection with our business combinations and asset purchases, we have agreed to pay certain additional amounts
contingent upon the achievement of certain agreed-upon technology, development, product, or other milestones or the
continued employment with us of certain employees of the acquired entities. See Note 12 to the Consolidated Financial
Statements.
Insieme Networks, Inc. In the third quarter of fiscal 2012, we made an investment in Insieme, an early stage company focused
on research and development in the data center market. As set forth in the agreement between Cisco and Insieme, this
investment included $100 million of funding and a license to certain of our technology. Immediately prior to the call option
exercise and acquisition described below, we owned approximately 83% of Insieme as a result of these investments and have
consolidated the results of Insieme in our Consolidated Financial Statements. In connection with this investment, we entered
into a put/call option agreement that provided us with the right to purchase the remaining interests in Insieme. In addition, the
noncontrolling interest holders could require us to purchase their shares upon the occurrence of certain events.
During the first quarter of fiscal 2014, we exercised our call option and entered into an agreement to purchase the remaining
interests in Insieme. The acquisition closed in the second quarter of fiscal 2014, at which time the former noncontrolling
interest holders became eligible to receive up to two milestone payments, which will be determined using agreed-upon
formulas based primarily on revenue for certain of Insieme’s products. During fiscal 2014, we recorded compensation expense
of $416 million, related to the fair value of the vested portion of amounts that are expected to be earned by the former
noncontrolling interest holders. Continued vesting and changes to the fair value of the amounts probable of being earned will
result in adjustments to the recorded compensation expense in future periods. Based on the terms of the agreement, we have
determined that the maximum amount that could be recorded as compensation expense by us is approximately $855 million,
net of forfeitures and including the $416 million that has been expensed during fiscal 2014. The milestone payments, if earned,
are expected to be paid primarily during fiscal 2016 and fiscal 2017.
Other Funding Commitments We also have certain funding commitments primarily related to our investments in privately held
companies and venture funds, some of which are based on the achievement of certain agreed-upon milestones, and some of
which are required to be funded on demand. The funding commitments were $255 million as of July 26, 2014, compared with
$263 million as of July 27, 2013.
Off-Balance Sheet Arrangements
We consider our investments in unconsolidated variable interest entities to be off-balance sheet arrangements. In the ordinary
course of business, we have investments in privately held companies and provide financing to certain customers. These
privately held companies and customers may be considered to be variable interest entities. We evaluate on an ongoing basis
our investments in these privately held companies and customer financings, and we have determined that as of July 26, 2014
there were no material unconsolidated variable interest entities.
VCE is a joint venture that we 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 26, 2014, our cumulative gross investment in
VCE was approximately $716 million, inclusive of accrued interest, and our ownership percentage was approximately 35%.
During fiscal 2014, we invested approximately $185 million in VCE. We account for our investment in VCE under the equity
method, and our portion of VCE’s net loss is recognized in other income (loss), net. As of July 26, 2014, we have recorded
cumulative losses from VCE of $644 million since inception. Our carrying value in VCE as of July 26, 2014 was $72 million.
Over the next 12 months, as VCE scales its operations, we may make additional investments in VCE and may incur additional
losses proportionate with our 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 26, 2014.
On an ongoing basis, we reassess our investments in privately held companies and customer financings to determine if they are
variable interest entities and if we would be regarded as the primary beneficiary pursuant to the applicable accounting
guidance. As a result of this ongoing assessment, we may be required to make additional disclosures or consolidate these
entities. Because we may not control these entities, we may not have the ability to influence these events.
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