Cisco 2010 Annual Report Download - page 67

Notes to Consolidated Financial Statements
(e) Product Warranties and Guarantees
The following table summarizes the activity related to the product warranty liability during fiscal 2010 and 2009 (in millions):
July 31, 2010 July 25, 2009
Balance at beginning of fiscal year $ 321 $ 399
Provision for warranties issued 469 374
Payments (437) (452)
Fair value of warranty liability acquired 7—
Balance at end of fiscal year $ 360 $ 321
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 the other parties harmless
against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims
made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the
amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the
Company’s bylaws contain similar indemnification obligations to the Company’s agents. It is not possible to determine the
maximum potential amount under these indemnification agreements due to the Company’s limited history with prior indemnification
claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company
under these agreements have not had a material effect on the Company’s operating results, financial position, or cash flows.
The Company also provides financing guarantees, which are generally for various third-party financing arrangements to
channel partners and other end-user customers. See Note 6. The Company’s other guarantee arrangements as of July 31, 2010
that are subject to recognition and disclosure requirements were not material.
(f) Legal Proceedings
Brazilian authorities have investigated the Company’s Brazilian subsidiary and certain of its current and former employees, as well
as a Brazilian importer of the Company’s products, and its affiliates and employees, relating to alleged evasion of import taxes and
alleged improper transactions involving the subsidiary and the importer. Brazilian authorities have assessed claims against the
Company’s Brazilian subsidiary based on a theory of joint liability with the Brazilian importer for import taxes and related penalties.
The claims are for calendar years 2003 through 2007 and aggregate to approximately $190 million for the alleged evasion of import
taxes, $85 million for interest, and approximately $1.6 billion for various penalties, all determined using an exchange rate as of
July 31, 2010. The Company has completed a thorough review of the matter and believes the asserted tax claims against it are
without merit, and the Company intends to defend the claims vigorously. While the Company believes there is no legal basis for its
alleged liability, due to the complexities and uncertainty surrounding the judicial process in Brazil and the nature of the claims
asserting joint liability with the importer, the Company is unable to determine the likelihood of an unfavorable outcome against it
and is unable to reasonably estimate a range of loss, if any. The Company does not expect a final judicial determination for several
years.
The Company has investigated the alleged improper transactions referred to above. The Company communicated with
United States authorities to provide information and report on its findings and the United States authorities have investigated such
allegations.
The Company and other defendants were subject to patent claims asserted by Network-1 Security Solutions, Inc. on
February 7, 2008 in the Federal District Court for the Eastern District of Texas. Network-1 alleged that various Cisco products
implement a method for remotely powering equipment that infringes United States Patent No. 6,218,930. Network-1 sought
monetary damages. The trial on these claims began on July 12, 2010. During trial, the Company and Network-1 settled the dispute
on terms that are not material to the Company, and the lawsuit was dismissed with prejudice on August 6, 2010.
In addition, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business,
including intellectual property litigation. While the outcome of these matters is currently not determinable, the Company does not
expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position,
results of operations, or cash flows.
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